Strategy, Business Models, and Value Creation Explained

What Is Strategy?

Strategy represents the development of an advantageous, unique position that entails diverse activities. An ideally positioned organization, in theory, requires no strategy. At the core of strategic positioning is doing activities that competitors are not doing. If identical activities proved effective in manufacturing every product variety, accessing every client, and satisfying every need, firms could conveniently shift between them, and operational effectiveness alone would determine performance.

As Michael Porter (1996) argued in the Harvard Business Review, strategy success relies on performing a large number of tasks well and ensuring integration among them. The absence of fit between activities implies weak sustainability and the lack of a unique strategy. Consequently, management reverts to the easier task of supervising independent functions rather than thinking strategically.

Strategy implies trade-offs within competition. Its crux is deciding what to refrain from doing. In the absence of trade-offs, no alternatives or strategy are required, since any sound approach can be swiftly reproduced by competitors, leaving operational effectiveness as the only performance differentiator.

Strategy and Competitive Trade-offs

Competitive strategy deals with being different — purposefully choosing different activities in order to present a unique value mix. Strategic positioning is often obscure; its discovery requires inventiveness and intuition. Quite frequently, new entrants stumble upon unique positions that have simply been overlooked by established firms. For instance, IKEA identified a poorly served or neglected customer segment. Likewise, Circuit City Stores, identifying the demand for used automobiles, introduced CarMax, featuring comprehensive automobile refurbishing, no-haggle pricing, product guarantees, and advanced in-house customer financing (Porter, 1996).

In strategy, what an organization must do and what it must refrain from doing are equally significant. Establishing limits — a key leadership function — and selecting target clients, needs to fulfil, and product varieties, prove pivotal to strategy development. So too does deciding who not to serve and which needs or services not to offer. Strategy therefore requires open communication and continuous discipline. A well-defined, well-communicated plan guides the workforce in making choices arising from everyday decision- and activity-related trade-offs (Porter, 1996).

Management in several firms has deteriorated into deal-making and the planning of operational improvements. However, a leader has a far more significant and wide-ranging role to play. General management proves more important than individual task supervision. Its essence lies in defining strategy, communicating a distinctive corporate position, developing fit between activities, and establishing trade-offs. Leaders must provide the discipline of deciding which industry changes to respond to and which customer segments to serve, while simultaneously sustaining corporate uniqueness.

Why Strategy Matters for Leadership

Internal distractions ought to be avoided. Lower-level managers often lack the confidence and perspective needed for strategy maintenance. Continuous pressures — compromising, copying the competition, and relaxing trade-offs — will inevitably surface. Leaders must therefore educate their subordinates on the concept of strategy and its importance to long-term performance (Porter, 1996).

The goal of General Motors (GM) is to earn customers for life. This goal shapes its investment in brands worldwide, inspiring loyalty and passion, and guiding the company to transform innovative technologies into vehicles and cherished experiences. The entire corporate workforce is inspired to serve and improve the global communities in which it operates. Over time, GM aspires to become the most valued automobile firm in the world (General Motors, n.d.).

Clearly, GM has a sound corporate strategy that extends beyond profit. Entrepreneurs, as Grant (2013) notes, ought to be driven by the desire for independence, excitement, and accomplishment rather than purely personal wealth accumulation. More than eight decades ago, economist Joseph Schumpeter observed that innovators' drive encompasses the "dream to found a private kingdom, the will to conquer and to succeed for the sake of success itself, and the joy of creating and getting things done." Businesses are innovative entities that provide people with unparalleled opportunities to make a difference (Grant, 2013).

Value addition is defined as the difference between a company's output value and its material input costs. It equals the sum total of income rewarded to production factor suppliers (Grant, 2013):

GM's Corporate Strategy as a Business Model

Value Added = Sales proceeds from production − Material input costs
= Salaries/Wages + Rent + Interest + Taxes + Retained profit + Royalties/License fees + Dividends

This concept, however, often undervalues corporate value creation, since customers typically purchase services and products at a price lower than the value they personally derive from the purchase — in other words, they obtain a consumer surplus.

Corporate value creation is distributed among various entities: the workforce (salaries and wages), lenders (interest), government (taxes), landlords (rent), clients (consumer surplus), and owners (profit). This distribution may suggest that companies operate in favour of multiple parties. This represents a stakeholder perspective on organizations, wherein firms are viewed as a convergence of diverse interest groups, with executives responsible for balancing frequently divergent interests.