In this post about what is strategy formulation, I will explain what a strategy formulation is in a simple language and also describe how to design a profitable business model.
A lot has been written about strategic management and strategic planning. So, I will not be delving into those areas in this post. My focus is on explaining what a strategy formulation is and making sure that managers understand how to design a profitable business model.
What is strategy formulation?
I would like to start by saying that every strategy formulation begins with clearly defining the mission and vision of an organization in a document called mission and vision statement and then followed by outlining the actions that will help the organization successfully deliver on those long term objectives that are captured in the mission and vision statements.
Strategy formulation acts like a compass that guides business executives in clearly defining the business of their entity, the long term goal of the entity and the strategies that will be employed by the organization to accomplish those long term goals. Business managers rely heavily on both internal and external sources of strategic information when formulating strategies – don’t be shy when you find yourself needing all the help you can possibly get.
Through strategy formulation, criterion on strategic choices are defined in such a way that it truly reflects what a business values most – core values. Critical success factors are also enshrined into the fabrics of the strategy formulation process of a going concern.
Now let us summarize all the points made above by defining strategy formulation.
Definition of strategy formulation: strategy formulation is a never ending process that starts with capturing the missions and visions of a business, explores alternative courses of actions and then chose the course of actions that will enhance a company’s chance of meeting its long term objectives.
What is a business model?
A business model in a nutshell is a tool often designed by business owners or business consultants that helps organizations of all kinds and type understand how it will generate profit and what strategic actions it must take in order to be successful over the long term. Like I stated at the beginning of this article, my aim is to help you discover how to design a profitable business model. So let’s get work.
How to design a profitable business model – simple steps
We will rely on the above definition of a business model in this section on how to design and grow profitable business model – so feel free to refer back to it and make sure you digest every single points there.
Step 1 – Profitability mindset
Various pertinent questions are asked at this stage regarding where and how a business will make profit from in a chosen industry. Recall that the bedrock of building an effective model is to have a clear understanding of what it is that a business must do to be profitable.
A very important question to ask here is; ‘as a customer, will I be willing to pay for this product or service?’
The aim here is to x-ray the industry to find out areas that profits can still be made from bearing in mind the willingness of customers to let go of their money.
Step 2 – Suitable business model
At this stage, the most important question is; ‘how can we build a suitable business model to meet our profitability demand?’.
Steps one and two above when combined gives right to profitable business model that anyone with the right motivation can pursue.
Seven Types of profitable business model
- Customer economic mining profit model: This is all about putting the customer first and then find ways to mine their economic capabilities and network. It is usually a win-win situation when done properly.
- Spoilt with choice profit model: This is a model that rely on spoiling customers with choice by having varieties of their products and services. By offering a variety of products, companies can build a product pyramids with low priced products, high volume products at the base of the pyramid while the high price, low volume products are at the top of the pyramid. The profitable cash cows are at the top while the defensive low profit margin products are at the base.
- Piggy backing profit model: This is common practice in industries where businesses have products with multiple components with varying degrees of profitability. The products with the lowest level of profits are used as a bait to attract customers and then present them with a component of the product with higher profit margin.
- Aggregator Hub model: There is profit in crowd. This is a model with the primary aim of connecting multiple sellers to multiple buyers. Amazon is a category king in this playbook. Nothing wrong with studying what they are doing and improving on it.
- Super high way profit model: There is a lot of profits to be made through speedy delivery of goods and services. The potential in this market is huge waiting to be tapped. You must be ready to constantly innovate your ways of doing things if you are to succeed in this space.
- Startups profit model: We have seen a good number of unicorns emerge from this industry. They come up with blockbuster products and services that the general public simply cannot resist. Too many mistakes have been made in this space, so, do well to be aware of these reasons why fintech startups fail and be on the lookout for symptoms and signs of overtrading.
- Hybrid profit model: This is a profitable business model that seeks to tap from all the positives of the six (6) profitable business models that have been discussed above. This takes high level expertise and experience to master. But, those manages to master it are reaping bountifully – see Apple for example. This model requires substantial investment in R&D.
Step 3 – Explore the ‘Why’
A lot of business models fail because the designers never bothered to ask series of ‘why questions’. The process asking why things happened or did not happen will reveal situations that were not initially taken into consideration.
Do you know why Blackberry started struggling and is still struggling? Do you know why Microsoft still remains a category king? The answer to these questions may or may not be contained in this article but one thing that is for sure is that the answer can be found inward your organization. Brainstorming and cracking hard nuts are major functions of modern management – task your management team on this.
Step 4 – Consider recent casualties and victors
This step is closely aligned to the above step on exploring the why. The only difference is that more emphasis is placed on figuring out solution that would have probably deterred unfortunate incident from happening and those that would help solidify strategic position.
Step 5 – Communicate philosophy
No matter how brilliant a business model is, if the rudiments behind it is not well communicated, it will end up not being fully implemented. The fifth step in building a profitable business model is to clearly communicate to the implementers of the model in a clear simple language that is devoid of technical jargons
Step 6 – Embrace continuous improvement
Even the finest business models still need continuous improvement. Things quickly become stale especially in this high frequency time that we now live in. One powerful process improvement model that I recommend for all is the Lean Six Sigma process improvement methodology.
The recent pandemic that the whole world is gradually recovering from exposed too many lapses in the business model of many ventures. My motivation for writing this piece was to provide answers to recurring question that my clients have been asking. They always seek clarification ‘what is strategy formulation?’ and ‘how can I build a profitable business model?’. I hope I have been able to do justice to the questions. Please leave your thoughts in the comment section below.