The Guide on How to Write a Strategy (Part 2) - Core Strategy
TLDR: The core strategy is where the key decisions of the strategy document are made, namely which market to address, what law of attraction to cater towards, and what particular competitive focus to take. It needs to serve the purpose of creating focus, look at demand first and foremost, have the right granularity, and balance ambition and feasibility.
As you can infer from the title, this is the second part of a series on strategy. You might want to read the first part if you haven’t already done so.
The core strategy is the centerpiece of the strategy document. It is the purpose of a strategy to focus the organization. The core strategy is where this focus is defined. Everything else in the strategy document is just there to provide background, explanation, and tangibility to it.
The core strategy is very short. 1 or 2 sentences are usually enough. These contain the decisions that frame where and how to win.
“Winning”, however you define it, will normally depend on generating a certain amount of revenue: more revenue than any competitor, enough revenue to become profitable, or enough revenue to finance your growth targets. Revenue is what customers (businesses, professionals, or consumers) willingly pay you. And so inevitably the core strategy is about the customer and their needs and wants.
Where you want to win and how could then be drafted as follows: “This is the market we have chosen and we will do better in this market than our competition because we will solve this customer need/desire better than anybody else and because of that, customers will choose us”. But a much shorter version might suffice to say the same thing. By way of example, the core strategy of a bicycle manufacturer could be as short as this: “We will build the best bicycles for daily commuting”.
The choices of the core strategy
This sounds simple enough when you read it. But to get here a couple of choices needed to be made that are not easy to make. Three choices to be specific, which are the basis for every core strategy:
1. choosing the market in which to be competitive = what kind of customers with what kind of problems and desires will you address
2. choosing the core revenue driver to cater towards = what you have identified as being the law of attraction or core business mechanic that has the biggest impact on the choices that these customers make
3. choosing the particular competitive focus (within the core revenue driver) to reach your goal faster than your competition = what you believe will matter most to these customers so that they choose you over your competition
Distinguishing between a core revenue driver and the competitive focus is not a common practice. In fact, I might be the only one to recommend this. It’s worth doing because there is a risk of prematurely jumping to a product/customer perspective. This is particularly true if your business idea revolves around solving a problem you know well: "I’ve been cycling to work for years. I know exactly what I want from a bicycle. Hence my strategy is to build the best commuter bike based on my experiences.” But there are markets - and big ones - where focusing on building the best product is not a great strategy. And in fact, bicycles might be one of them (what I call an Amateur Market). And so thinking through what motivates customer decisions in your market first is good practice. If this does not immediately convince you or if you want to know more about markets that don’t favor a product strategy read on here.
the 3 decision contained in the core strategy
In our example, the choices made were
1. to address the market for commuting bicycles - and not, for example, the market for race bicycles or e-bikes or public transportation,
2. to cater towards the core revenue driver of product - and not, for example, brand or marketing, distribution (Tupperware of commuter bikes), or a particular payment model (subscription, commuter bikes as a service) and
3. in particular to compete on product quality (and not, for example, price or looks).
Goals
You may have noticed that our draft does not contain an (explicit) goal such as “we want to become the Nr. 1” and that’s just fine. The core strategy does not have to include a goal. Business is an infinite game and hence “winning” cannot be about an end result but only about continuing to play in a competitively good position. On the other hand, though, human beings are not good at dealing with infinites and we like working towards a goal. And so including a goal is also just fine, provided it does not interfere with the nature or purpose of the strategy. This means the goal must be ambitious and motivating but at the same time feasible (see also below), it cannot be “off-strategy” or de-focussing, and reaching it can not jeopardize the competitive position of the business. Financial goals usually don’t make this cut and are thus generally unsuitable (but they of course make sense as part of the financial planning).
Success theory and focus (again)
If you’ve been reading my other texts about strategy: forgive me if I’m sounding a bit like a broken record when it comes to focus. But if you haven’t: this paragraph is important.
The core strategy choices are uncomfortable. As they must be. A strategy is a success theory. In our case, it’s the theory that customers value the best product quality in commuter bikes so much that they will choose us (and not our competition that builds cheap low-quality bikes instead, or our competition that has the shiny sports brand, or our competition that offers commuter bicycles by way of a subscription price model, or our competition that spends all its money on advertising). Also, it’s the theory that there is a specific market for commuting bicycles (people spend money on this class of bicycle and not just for more generically usable bicycle types) and that it is big enough.
Because we don’t know how our future customers will decide, these theories contain risk. That is something to be aware of because we usually like to avoid risk, but here we can’t. It feels much safer to say: “Customers will choose us because we’ll be the most trusted, loved, and well-known brand and because our products are superior and offer great value for money, and also because we’ll have a great online shop and a super competitive wholesale distribution system, and our marketing is clever and likable” but it makes for a disastrous strategy. If your success theory is that you can be better than the competition at everything you are guaranteed to fail. Because this would either require you to invest more resources than your competition into everything or it would require you to be so much smarter that you can do everything more efficiently than them. Neither is remotely realistic.
What is even worse: thinking this way takes your focus away from the now and the market feedback that you are getting. “It will work if we add these three other things” means that you prioritize the hypothetical demand of your future customers higher than the actual feedback of your customers now. This does not make any sense.
The contrary is right: in the complex/unpredictable environment that is customer choice your best modus operandi is to bring what you believe is your best shot at making customers love you to market as quickly as possible, collect feedback, adapt and go at it again. The more goals you pursue at the same time the more time it takes to get market feedback. Nothing burns cash and time faster than that. This sounds a bit like the agile mantra “fail fast” but there is a difference: Your strategy is not to fail fast. Your strategy is “Customers will choose us because we do this one thing better than anybody else”. You do not try to fail fast, you try to learn fast and adapt your strategy. Failing fast without a strategy is stupid.
What focus means in real life
“Focus, I get it” I hear you say “but what does it mean? A bicycle company cannot only focus on building the best product. It also needs to get the pricing right. And it needs to do marketing and sales … and a lot of other things, right? Why does your example strategy have nothing to say about that?”
This is a valid question because you are right: the core strategy sets a focus that is way narrower than the requirements of a real running business. But it is also right that the strategy is silent about these. This is important to understand: strategy only decides what matters the most. It does not decide how much resources you can invest in it at any given point in time and it does not decide what else there is to do. These are management decisions. As the necessary counterpart to a strategy they are not discretionary but need to follow a working principle along the lines of: we do all that is necessary to not disappoint our customers and keep the lights on but only to the minimum extent. And we focus all our remaining energy on what matters the most to our customers as set out in our strategy. Or in short: We do what is necessary not to lose and focus on what is our best chance at winning. Making sure this working principle is known and applied stringently across the organization and deciding every day what exactly “necessary” means (what to work on and when to stop) is just as important - if not more - to achieve focus than the strategy itself.
Balancing focus and execution space
Let’s get back to our example core strategy. Besides containing the 3 choices on how to compete, the wording embodies a particular granularity or detail degree. It focuses more narrowly than just “building the best bicycles for any purpose”. But not as narrow as to say what the most important aspect of building the best bicycles for commuting is, e.g.: “building the best foldable bicycle” or “building a maintenance-free bicycle for daily commuting”.
What is the right level of detail?
This is another good question and unfortunately, one that I’ll have to answer in typical lawyer fashion: it depends. Mostly on where you are and how far or clearly you can see.
In our example, I’d say the degree of detail is right if we imagine the business is still in its early phase.
- A broader, less qualified wording like “Building the best bicycles” does not make sense, because if you target everybody who wants or needs a bicycle then the requirements of your potential customers are so varied that it will be impossible to build the best bicycle for them. You would have to build many different bicycles. And that is not a good go-to-market approach. But suppose we imagine the business is already an established bicycle manufacturer with a powerful production line. In that case, a broader wording like “building the best bicycles” might be ok granularity-wise (though a bit too generic for my taste). And if we imagine it to be a big sporting goods conglomerate, the strategy would need to be even broader and more encompassing - a, possibly quite vague, umbrella strategy combined with portfolio goals. Something like the “tent poles” that Apple uses to give focus to several particular and often unrelated activities.
- A more specific wording, on the other hand, can be appropriate if our imaginary business already knows that it wants to address a more specific market such as the market for high-end commuting bicycles (probably unwise due to its microscopic size) or that there is a predominant customer problem and how it can solve it, e.g. with a foldable bike that will be particularly good if commuting includes public transportation. But if it is likely that some pivoting on the way to the perfect commuting bicycle will still be necessary, then the more generic “With our bicycles our customers will have the best commuting experience” is just fine.
By way of a generally applicable rule of thumb: everything that you believe is likely to change within the next 6-12 months is too granular. Such details are much better dealt with in a planning artifact than in a strategy document. Adapting to the day-to-day challenges of your market is the job of the people working in your company. It is not the job of the strategy.
This elderly gentleman is Helmuth Karl Bernhard Graf von Moltke, who in 1885 wrote a military book called “Führungsgrundsätze für die höheren Truppenführer”, which is surprisingly modern in its take on how much freedom there must be in delegation - or in his case: command.
In this book von Moltke advises amongst other things „not commanding more than is strictly necessary, nor planning beyond the circumstances you can foresee (as) … circumstances change very rapidly, and it is rare indeed for directions which cover a long period of time in a lot of detail to be fully carried out”.
This is good advice for the granularity of the core strategy.
Market of Choice
This part of forming a strategy is sometimes overlooked, because when a company sets out to define its strategy the question of the market often seems to be already decided by the original business idea: “We are a XYZ business and so we are in the market for XYZ businesses”. But it’s worth taking a step back though and having an open-minded look at the space you are competing in.
Often there are similar markets to the one you think you are in. These can be adjacent markets, but also bigger or smaller versions of your market. These markets may have different rulesets or business conditions and these might suit your company better.
When I was “Geschäftsführer” at idealo we were in the market for product price comparison. Our customers were people who wanted to compare product offerings and find the best price. Our competitors in that market were other price comparison services and we were the market leader. But what if we had chosen our target market to be eCommerce instead? Our customers would then be people who want to buy something which means their expectations would not stop at finding good prices but also include receiving products (and possibly returning them) without fail. We would have had to build a much more complex product to serve them. We would have had a whole new set of competitors and we would no longer be the market leader but a challenger and not a big one. And yet our core value proposition “save a lot of money when you buy things” would have been just as attractive in this new market and we would have had a much bigger market to address and much more room to grow.
However, when you start your business you should generally start with the smallest possible market - your first market – and try to solve the customer demand or customer problem in this market. Again, strategy is all about focusing your resources and if you start with a market vision that is too big you will have a much harder time deciding what the most important aspects of your business are to serve this market. So start small and focus. You can always adapt your strategy at a later stage.
The same is true if you want to go international. If at all possible, start with one market because that allows you to focus on fewer problems and is much easier in terms of organizational setup and legal and tax framework. You can always change your territory at a later stage. Keep your strategy focused on what is most relevant now. If you feel that it is necessary to explain your broader vision to hire great people do it, but be very clear on the fact that the greater vision is a vision and that the focus will be a different one for the next 1-2 years or you will create expectations that will backfire.
Demand over technology
A common mistake is to base the strategy on what you can do better than your competition, e.g. some technical or operational capabilities that you have mastered and that give you an edge. It is understandable: you have worked super hard on a problem and you’ve figured it out! It’s something to be proud of. But alas, your customers don’t care. And trying to convince your customers that they need your solution is much harder (and more expensive) than giving them what they want. Sony is a good case in point: they had the best video cassette format, they had the best digital music codec, and they had a superior optical storage system that you could even write to. And yet: Betamax, ATRAC, and minidisc were market failures. Nobody cared that they were technologically superior because Sony has failed again and again to make sure they are solving a customer problem first. Amazon does better, at least according to its CEO Andy Jassy, who in its 2023 Shareholder Letter stated that putting customer challenges before technology is one of Amazon’s core success principles.[1] And Apple does a marvelous job right now in the way they introduce AI into their ecosystem: through small, easy to digest and easy to use functionalities. They do not care for the most advanced AI. They provide the most usable AI.
Disruption vs. Difference
Disruption is a much-used term that needs to be carefully examined. The theory of disruption was populated by Clayton M. Christensen’s book “The Innovator’s Dilemma” and in his seminal paper “Disrupting Technologies: Catching the Wave”[2]. Essentially Christensen describes how incumbent companies ignore new technologies that don’t serve the current needs of their customers or fit within their existing business models. And how these new technologies eventually take over the market because they excel on completely different things than the incumbent’s products.
I believe the pattern described by Christensen exists. But I also believe that a lot of times when people speak about disruption they talk about something else: difference. Difference is the small and mostly useless cousin of disruption.
In my mind, disruption has two requirements
- A change in utility that is so cataclysmic that it profoundly flips the demand or behavior of the majority of customers in a market
- and at the same time is so foundationally different in its principle of operation that existing products or services can only be adapted with considerable cost and delay.
If the first one is missing the new thing is just an expensive barrel burst. And if the second one is missing the new thing will not disrupt the competition or throw off the incumbents.
The iPhone is a good example of disruption. By application of new hardware manufacturing technologies (display, casing) and software technologies (having a complete computer-like operating system on a palm-sized device) it fundamentally changed how people interacted with their phones because it was much more intuitive and … fun and that was far more important than a somewhat reduced typeability compared to the hardware keyboards of other phones. That technology change was so fundamental that it required a complete change to the production chain on both hardware and software for other handset manufacturers.
What’s the point in this theoretic definition-crafting you ask? The point is this: difference is sexy. And that is dangerous. It seems much more exciting to be different from the incumbents than just better. It feels more radical and also more dynamic. But if you try to win by focusing on being different and you miss the mark of disruption, because the change that you introduce is simply not big and radical enough, you will have a very hard time.
Because different oftentimes means that the customer will have to change their behavior. Different for your customers translates as complicated and cumbersome. And so different raises the bar for the product value you have to create to make up for the additional complication and still win over the customer. And even if you do, if you succeed in finding customers taht like your different product you add risk to your strategy. Because by educating the users you have just paved the way for any competition in your wake. It will be much easier for them to build momentum and much cheaper to get to where you are and they will eventually use these advantages to overtake you.
I’m not trying to stop you from radically rethinking your market. What I’m trying to say is – start with the customer. Being different in itself does not matter to your customers - being better does. Making their lives easier and less complicated is a lot less difficult than educating them on something new. But if you must take the hard path because you are convinced that you have found something so powerful that it will change the way customers behave in your market, make sure that it is even harder to follow in your wake.
USPs and moats
Of course, we cannot talk about core strategy without mentioning the Unique Sales Proposition (USP) and the moat (lowercase in case you’re wondering, it’s not an acronym).
Having a USP means that your product has a quality that is so unique that it substantially sets your product apart from the competition. It’s great if you have one because it will generate product value without comparability, which means you can afford to be weaker than your rivals in some areas. Also, it makes your product less price sensitive / more price inelastic. But a USP is not necessary. A Convincing Sales Proposition can be enough.
A moat – a term coined by the famous investor Warren Buffet – on the other hand refers to a sustainable competitive advantage of a business that makes it difficult for any competition to nibble at its market share. Scale (which can be a core revenue driver) is probably the most relevant moat, not only on the revenue side but also on the cost side. Patents can dig a moat. Also any kind of exclusivity through supply contracts or licenses. Or a very strong brand or image. Again it’s great to have a moat because it reduces competitive pressure (which is why investors love it) but a moat is not a condition for a great strategy.
Common strategy frameworks
There are a lot of frameworks that help you assess some aspects of your core strategy: Porter’s Five Forces, BCG Matrix, SWOT analysis, Value Stick, Kano, and RICE just to name a few.
They all have their strengths and weaknesses. The BCH Matrix is great when you want to assess a portfolio of products and decide what to do with them but it is not so useful if you only have one product. Porter’s Five Forces is great in identifying the main competitive threats but it does little to help you understand your customer demands. Kano and RICE are good for the categorization and prioritization of product features. Etc.
Look at them, use them – they help you sort out your thoughts and uncover blind spots. But please see them as tools that serve to help your thinking and not as rulesets that define a correct way of doing things. None of these form a strategy just through their application.
Ambition/feasibility and downsides
A strategy must not only be well considered it must also aim high. If it’s not ambitious, if the prospect of achieving its goals is not exciting, you are aiming too low. A strategy that does not aim at a meaningful change from the status quo will neither motivate nor will it generate focus. Only if you have to load up for a big step you need concentration and intensity.
But your strategy should also not be unrealistic. Because that will cause it to lack credibility and chasing it will generate frustration. A strategy must be feasible.
Balancing feasibility and ambition is the volume button for your strategy.
Of course, figuring out a good strategy will automatically include thoughts about feasibility. But to hit the right volume, it can be helpful to take a 2 step approach. Think first about ambition as an optimist: what would be a totally amazing outcome in a perfect world (but not a totally unrealistic outcome in a fantasy world)? And when you have envisioned that (and maybe even gotten a little excited) feed your inner realist and think about how the probability of success increases with lowering your aspirations.
Separating ambition and feasibility is particularly helpful when you develop your strategy together with other people from your organization (which is something that I wholeheartedly recommend): work on core strategy and ambition in a small and strategically oriented group (your senior leadership team) and only involve a bigger group including more operational stakeholder when you figure out feasibility. This allows you to involve the right mindset for the right task.
Last but not least: building a strategy is never complete without having a clear view of the downsides. Your strategy is a theory. What happens if it doesn’t work out the way you thought it would? When will you be able to see that? Are you then in a position that would allow you to adapt or even pivot easily or have you worked your way up a one-way street? What will the sunk cost be and how many shots will you have left? Is that an acceptable outcome for you and your shareholders? I think being very honest to yourself here will usually not change your strategic direction but it might make you think about a lighter approach or how you can set up gateways to understand if you are moving in the right direction at an earlier point in time.
et voila - we’re done
I hope you’ve found this helpful. Again, if you want to get a bit deeper into other core revenue drivers than product and the markets that they exist in, continue reading here.
[1]“our … deeply held principles: …solving real customer challenges, rather than what we think may be interesting technology;” https://www.aboutamazon.com/news/company-news/amazon-ceo-andy-jassy-2023-letter-to-shareholders
[2] Which you can find here – sadly behind a paywall: https://hbr.org/1995/01/disruptive-technologies-catching-the-wave