And strategic direction involves us rethinking effective competitive strategies. In addition, we also need to map external opportunities and threats and relate them to internal strengths and weaknesses. Thus, the strategic plan we develop is by context.
Then, we break down the strategic plan into a lower level, namely the business function. For example, in the marketing department, we determine which markets we will compete in and which products we want to offer. Then, we map out the marketing activities and strategy decisions we need to make to achieve our marketing objectives.
Why is strategic direction important?
Companies evolve over time in what they do business, where they compete and what they offer customers. The dynamic business environment requires them to continuously change their strategic direction to achieve sustainable competitive advantage.
For example, the company decides to strengthen its position in the existing market. They then developed organic and inorganic growth strategies. For instance, they build new distribution channels to expand marketing. Or they acquire competitors.
Strategic direction is important because it gives us focus on where we are going. That allows us to better prepare the company. With a clear direction and purpose, we make decisions around it. Likewise, we prepare resources and strategic steps according to the direction we want to go.
How to write a strategic direction?
Developing a strategic direction involves some work. First, it requires us to identify the problem with the current strategy. Is our strategy right to direct the organization to the company’s vision and mission?
Second, we analyze externally using PESTEL analysis to map threats and opportunities in the business environment, both current and potential, to occur in the future. Then, we relate them to the environment (weaknesses and strengths) through SWOT analysis. Both are important to make the strategic direction we build relevant to the context.
Third, we analyze the competition and customers in the market. So, we can determine which strategy is the most effective to face the competition and attract customers.
- Does the company need to develop new strategies to support a sustainable competitive advantage?
- Or is the company continuing its existing strategy and sharpening it?
The first alternative generates a new strategic direction. Meanwhile, the second is more about sharpening and improving existing strategies.
Fourth, we break down the chosen strategy by breaking it down into smaller tactics and targets for shorter periods. Finally, we also set goals for each business function, from the production department to the finance department.
For example, in the operations department, we set direction regarding outsourcing decisions, whether the company should do all activities internally or outsource to an external party. We plot several activities or tasks based on two criteria: how much they contribute to operational performance and how strategically they contribute to value creation. For example, we outsource less strategic activities to external parties and focus on core activities.
Meanwhile, we can use the Ansoff matrix to map and develop marketing strategies in the marketing area. For example, are we focused on the current product and market? Or do we focus on the new?
How is the Ansoff matrix related to strategic direction?
The Ansoff matrix underpins the direction we want to go considering the products we offer and the markets in which we compete. The matrix categorizes directions into four, namely:
- Market penetration
- Product development
- Market development
Which one we adopt depends on various factors such as company competence, brand value, and available resources. For example, when the company’s customers are loyal, it may be our reason to pursue product development. As a result, we launch new products around existing products. And brand loyalty makes it easier for us to sell new products and generate more revenue.
Market penetration means we focus on existing products and markets. We try to sell as many products as possible to increase market share.
How to increase market share? The key is to generate higher sales growth compared to the average competitor. This can be done by encouraging existing customers to continue buying the product. Or we acquire new customers.
A more intensive promotional strategy may be a way to attract new customers. And we can also improve advertising to remind old customers to repurchase. And lowering the price is another way.
Market penetration is the least risky compared to the other three alternatives because we already know and understand the market and the product. However, although the risk is low, the reward for our success may also be low. Moreover, when all the companies in the market adopt this strategy, the competition becomes more intense through advertising wars.
Product development requires us to create new products to sell to existing markets. This strategy is riskier than market penetration because the new product may not appeal to consumers. As a result, their sales did not live up to expectations.
To reduce risk, we may focus on developing products around existing products. In other words, the new development complements the existing product. And then, for example, we bundle a new product with an old product in sales.
In addition to low acceptance, product development also requires substantial investment, money, time and resources, and others. In addition, this strategy requires us to focus on innovation, research, and development.
Market development means selling existing products to new markets. For example, we sell products to foreign markets. The most common way is to export. Another method can be through franchising or direct investment.
In addition to selling to foreign markets, product development can be done by targeting new customer segments with existing products.
Since we don’t have experience with new markets yet, we have to make sure the new markets are profitable to work with. In this case, we aren’t only looking at its current size but also its growth potential. The competitive landscape is also a consideration. In addition, we must also examine whether customer behavior in the new market is similar to the existing market.
Then, choosing a new market also requires assessing our internal strengths and weaknesses. For example, are our resources and competencies sufficient to cover new markets? For example, a new market may not be viable because it requires a significant investment to build new competencies and resources.
Diversification is the riskiest strategy. We offer new products to new markets. And for this reason, we have little or no knowledge and understanding of new products and new markets.
Although risky, diversification can offer new growth opportunities. We can reduce our dependence on one market and product when we succeed. And this strategy becomes essential when the market and existing products have reached a mature stage.
Mature markets offer low growth opportunities. In addition, competition is also becoming more intense as players can only grow higher than the market average simply by snatching customers away from competitors. Thus, we must pursue growth in other markets to survive.
Diversification can be done with two alternatives. First, diversification is related. We develop new businesses that are related to existing businesses. Thus, markets and products have essential similarities to those that exist today. The Walt Disney Company acquiring ABC Inc. for $19 billion is a good example of where the two are in the entertainment business.
Second, diversification is unrelated. The old business and the new business bear no resemblance, and as such, this strategy is riskier than related diversification. For example, Coca-Cola, a soft drink company, purchased Columbia Pictures, a film production studio, in 1982 for $750 million.