What Is Business Strategy?

Why strategy is about making choices, including choosing what not to do, and how it differs from simply running a business well.

Every business must decide where to compete and how to win. These choices are its strategy.

Strategy versus doing things well

In a famous 1996 article, What Is Strategy?, Harvard professor Michael Porter made a key distinction:

Operational effectiveness means doing the same things as rivals, but better: faster delivery, fewer defects, lower waste. It matters, but rivals can copy good practices quickly, so advantages fade.
Strategy means doing different things, or doing similar things in a different way, to create a unique position.

Trade-offs

Porter argued that real strategy requires trade-offs: choosing what not to do. A company that tries to serve everyone with everything ends up with no clear advantage.

For example, a budget airline chooses to offer no free meals, a single aircraft type and quick turnarounds. These choices keep costs low, but mean it cannot also offer luxury service. A full-service airline makes the opposite choices.

Fit

A strong strategy has activities that fit together and reinforce each other. When every part of a business supports the same position, it is much harder for rivals to copy, because they would need to copy the whole system, not just one piece.

Key strategic questions

Where to play: which customers, products and regions?
How to win: lower cost, better quality, unique features or convenience?
What capabilities are needed?
What will we not do?

Why economists care

Strategy connects directly to economics: market structure, competition, costs and pricing. The rest of this module uses economic ideas to explain why some strategies succeed and others fail.

Two tea shops

Two tea shops sit on the same street. One offers quick, cheap cutting chai to office workers in a hurry. The other offers a comfortable space, speciality teas and snacks for people who want to sit and talk. Both can succeed, because they have made different choices about whom to serve and how.

Thinking strategy means having a mission statement

A mission statement describes aims. Strategy is the set of concrete choices about where to compete, how to win and what to give up.

Key takeaways

Strategy is about choosing where to compete and how to win.
Operational effectiveness is necessary but easy for rivals to copy.
Real strategy involves trade-offs: choosing what not to do.
Activities that fit together make a strategy hard to imitate.