What Business Strategy Is (and Isn't): A Guide for Small Firms

Ask ten small-business owners what their strategy is and you will hear ten different kinds of answers: a revenue target, a list of projects, a slogan, a description of hard work. All of those matter, but none of them is a strategy on its own.

That isn't just a matter of vocabulary. If you mistake a goal or a to-do list for a strategy, you end up working hard in every direction at once, and the business drifts toward looking like everyone else in your market.

This guide explains what strategy means in plain terms, the most common things people mistake for it, and a short test you can apply to your own business this week.

Strategy is a set of choices about how you will be different

Harvard Business School professor Michael Porter's 1996 Harvard Business Review article "What Is Strategy?" offers a definition that still holds up: "Strategy is the creation of a unique and valuable position, involving a different set of activities." The key words are unique, valuable and activities. A position is what you offer and to whom; activities are the things you actually do every day to deliver it.

Porter also argues that a position only lasts if it involves trade-offs, meaning that doing more of one thing requires doing less of another. In his words, "The essence of strategy is choosing what not to do." A small business that tries to be the cheapest, the most personal, the fastest and the most customized all at once has not made a strategy; it has postponed one.

Richard Rumelt, a strategy professor at the UCLA Anderson School of Management, makes a similar point from another angle. In a 2011 McKinsey Quarterly article, he writes that bad strategy "ignores the power of choice and focus, trying instead to accommodate a multitude of conflicting demands and interests."

What strategy isn't: four common stand-ins

Most of what passes for strategy in small businesses falls into one of these traps.

1. Doing things better. Porter calls this operational effectiveness: "performing similar activities better than rivals perform them." It is necessary, and you should keep improving. But he notes that best practices spread quickly, so competitors copy them, and the more everyone benchmarks against each other, the more they look alike. Being a little more efficient than the shop down the street rarely protects you for long.
2. A goal. Rumelt describes a chief executive whose plan was 20 percent annual revenue growth and a 20 percent profit margin. That is an ambition, not a strategy, because it says nothing about how the business will get there or what advantage it will build on. Rumelt calls this "mistaking goals for strategy."
3. A long list of initiatives. Rumelt also warns against what he calls a "dog's dinner" of goals. A long list of things to do, he writes, "is not a strategy. It is just a list of things to do." His example is a small city's strategic plan with 47 strategies and 178 action items.
4. A plan or budget. In a 2014 Harvard Business Review article, Roger Martin, former dean of the Rotman School of Management, argues that planning "arguably makes for more thorough budgets, but it must not be confused with strategy." A plan schedules work; a strategy decides which work is worth doing.

The kernel: diagnosis, guiding policy, coherent action

Rumelt offers a simple structure he calls the kernel of good strategy. It has three parts:

• A diagnosis: an explanation of the challenge you face. Rumelt says a good diagnosis simplifies a complicated situation by identifying which aspects are critical.
• A guiding policy: the overall approach you choose to deal with that challenge.
• Coherent actions: steps that are coordinated with one another and support the guiding policy.

For example, imagine a hypothetical two-location bike shop. Its diagnosis might be that online retailers now win on price for standard bikes and parts, while local riders still struggle to get bikes fitted and repaired quickly. A guiding policy could be to compete on service and fit rather than on price. Coherent actions would follow from that choice: training staff in bike fitting, offering a guaranteed repair turnaround, carrying fewer low-margin entry-level bikes, and scheduling service by appointment. Notice that each action supports the others, and that the policy rules things out, such as a price-matching promise.

Fit: why the pieces have to work together

Porter's article spends a lot of time on fit, the way a company's activities reinforce one another. He argues that competitive advantage "grows out of the entire system of activities," and that it is much harder for a rival to copy a whole interlocking system than a single feature or tactic.

This is good news for small businesses. You may never outspend a larger competitor, but you can build a set of choices that make sense together for a specific kind of customer: your hours, your hiring, your pricing, your suppliers and your marketing all pointing the same way. Harvard's Institute for Strategy and Competitiveness sums it up this way: strategy "is about doing things differently, not simply doing them better than everyone else."

Good strategy involves bets and some discomfort

If your strategy feels completely safe, it may not contain any real choices. Martin's article puts it bluntly: "Discomfort is part of the process." He argues that strategy is about making bets, focusing on customers and spelling out the logic behind your choices, rather than trying to eliminate uncertainty with more research.

Porter adds a caution about changing course too often. He argues that strategic positions should have a horizon of a decade or more, not a single planning cycle, because frequent shifts force a company to rebuild its activities and confuse its identity. A small business may need to adjust sooner than that, but the underlying point applies: change your tactics freely, and change your basic position only for a good reason.

A quick test for your own strategy

Try answering these questions in a sentence or two each. If you can't, that is where to start.

• What is the most important challenge or opportunity facing the business right now, stated plainly?
• Which customers are you choosing to serve best, and which are you willing to disappoint?
• What do you do differently from your closest alternatives, not just better?
• What have you decided not to do, even though it would bring in some revenue?
• Do your main activities, such as pricing, staffing, marketing and service, support the same choice, or pull in different directions?
• Could a new employee explain the strategy back to you after a week on the job?

If your answers mostly describe targets and effort, you have goals. If they describe choices, trade-offs and how your activities fit together, you have the beginnings of a strategy. Two other guides in this section go deeper on the biggest choices: Competitive Advantage: Porter's Generic Strategies for Small Firms, and Choosing Your Target Customers: Where to Compete and Where Not To.

Key takeaways

• Strategy is a set of choices about how your business will be different and valuable, not a target, a slogan or a list of projects.
• Doing the same things more efficiently than rivals is important but, as Porter argues, rarely a lasting advantage on its own.
• Rumelt's kernel is a practical checklist: a clear diagnosis, a guiding policy and coherent actions that support it.
• Trade-offs are a feature, not a flaw: deciding what not to do is what makes a strategy work.
• Activities that fit and reinforce each other are harder for competitors to copy than any single tactic.

Sources

• Michael E. Porter, Harvard Business Review, What Is Strategy? (November–December 1996)
• Richard Rumelt, McKinsey Quarterly, The perils of bad strategy (June 1, 2011; Internet Archive copy)
• Roger L. Martin, Harvard Business Review, The Big Lie of Strategic Planning (January–February 2014)
• Harvard Business School Institute for Strategy and Competitiveness, Operational Effectiveness vs. Strategy