How To Create A Strategy In 3 Simple Steps

Strategy answers two fundamental questions: (1) where to play and (2) how to win.

But how to go about answering these two questions exactly? A Hollywood hero will simply look for a great opportunity and pursue it. There will be obstacles and a few betrayals on the way but sheer determination will eventually win the day.

Alas, we are not in Hollywood. While determination matters, there is a smarter way to go about this. The harsh reality is that no matter how you answer the two questions, there will always be trade-offs. To prepare for them, you should start with a careful analysis of your own resources and the competitive environment you play in. Once you have done so, you are ready to go into action mode. Here is how to go about this.

Step 1: Analyze your resources

I recommend you start with a realistic assessment of your own strengths and weaknesses. You might think that you are the only one spotting a gap in the market but this is pretty unlikely. Most entrepreneurs (as well as established businesses) win because they have a unique value proposition. And this is due to the unique set of resources they have. Let me explain how you can map out your resources. I will use Cirque de Soleil as an example.

Start creating a list of all your resources by asking what enables you to offer great products. For Cirque de Soleil this will probably include e.g. directors, artists, capital, partnerships (with the MGM hotel group), physical assets like tents, and the brand.

Next, you need to asses these resources based on four criteria. Jay Barney, a Brigham Young Professor first identified these criteria that enable companies to create competitive advantage.

1. Valuable: Does a resource generate value by increasing the willingness of customers to pay or helping the company to keep costs low?
2. Rare: Is this resource rare compared to your competitors?
3. In-imitable: Can others copy this resource easily?
4. Non-substitutable: Is it possible for another company to use a different resource to achieve the same outcome?

All of your resources will be scored from 0 to 5 (5 being good). For Cirque de Soleil could look something like this:

So for example directors who create a unique show are really valuable and pretty rare in the circus industry. You have to lure someone away from Broadway. This makes it very difficult to imitate for smaller circuses. For Cirque a director might be attracted by the brand and can also expect good remuneration. Can you substitute for a director? Not easily. Maybe the artists can collectively come up with something?

In a final step you can display your resources in a matrix. One axis represents value generation and the other one sustainability (in terms of value generation). The resources in the top right corner are your strategic resources. Whatever you decide to do later should be backed up by them. Here is how Cirque’s matrix looks like, using the examples we scored above.

Step 2: Analyse the competitive environment

There are a number of tools around to do this. Check out a short video where I explain Porter’s Five Forces and an explanation of PESTEL analysis here.

My personal favourite is a trend radar. Rather than having fixed categories you chose those most appropriate for your company. A broad definition could be areas like market and competition, technology, consumers and society, macroeconomics and environment, political and regulatory trends etc. But as I said, pick whatever is most appropriate.

Next, you formulate a long list of hypotheses in each category. Hypotheses are in essence statements capturing something that might happen. It’s important that they are very concrete. For example, in the car industry a hypothesis could be: “by 2035, the biggest margin in the automotive value chain will belong to software providers.”

Once you have your list of hypotheses, you decide how probable it is for each of them to be true (0-100%). You can then display the hypothesis in a trend radar where those at the centre are most likely to become a reality.

Here is an example of what this could look like from an exercise I once conducted with students at a US Ivey League school. It represent their collective responses, trying to identify important trends in higher education. So for example they thought that it was very likely that online courses will become more prevalent while they did not think that a video game company could become an important player in this industry.

Step 3: create an action plan

Now it is time to decide where to play and how to win. The previous two steps armed you with an understanding of your own resources and your competitive environment. Ask yourself what you can offer that is unique, addressing a true need from customers. To better understand their pain points, go full anthropologist rather than just asking them. In other words, observe them. Realize their pain points!

One final point: most strategies fail during execution. To avoid this, involve those whom you expect to implement the strategy in the strategy making process. You can set up a workshop constructing a resource matrix and you can easily have everyone in your company vote on the trends. Opening up your strategy creates psychological ownership.