So what is business strategy anyways? You hear it all the time, but what does it actually mean? Well, I'm going to break it down for you.

In the world of business, think of it like this. There are a million options that you could pursue, but we have limited resources, time, energy, capital, employees, et cetera.

So strategy is all about making an interrelated set of choices, choices that connect about what you're going to say yes to, what you're going to say no to, so you can ultimately win. And now winning comes in multiple forms, but strategy should ultimately increase your company's firm value.

Now, some people come to me and they're like, Steve, we don't have a strategy. I'm eager to learn what this is all about. This may be you, but check this out. Every business has a strategy, whether it's written or it's not written, you're pursuing some type of strategy.

You're making choices every single day in your business, but the companies that win are those that can follow a framework. And that's what I'm going to show you is I'm going to break down the framework that I've used over and over again to turn around and grow companies generating over a billion dollars in value in the process.

But I could tell you early on in my career, I wasn't following some framework. I was just going out there and relying on sheer grit and heroics to make things work. And guess what? I left a ton of money on the table.

So you may be wondering, where do you even start? Right? So that's what we're going to get into. And I'm going to provide you, like I said, with the framework that you can apply in your business today. So you can have a formalized strategy and a system to drive higher profits, more cashflow, and ultimately increase the value of your company.

Does that sound good? Yeah. I'm sure you're nodding your head right now. Okay. So let's get into it.

What is the main purpose of strategy? I think the main purpose is to ensure that the company and everybody in the company has focus and they have clarity because check this out.

If you don't, everybody's going to be pursuing their own self-interest within the firm and you'll have divisional leaders. You'll have profit center managers, however your company is structured, and everybody will have their own set of goals.

But if it's not cohesive, imagine a bunch of kitty cats running around and you're trying to hurt all these cats. It's very difficult.

And if you have scattered attention, especially nowadays, you're dead because all it's going to take is for a more focused, more disruptive company to come along. And if they have a good strategy and if they follow framework, they're going to be laser focused on the things that matter the most.

They're going to be really good at solving their strategic problem. They're going to deliver value to their customers in unique ways, and they're going to crush you.

All right. That's not to discourage you. I'm just pointing out what happens when you don't have a strategy. And that's the whole purpose is a strategy provides clarity and it gives you a system to operate from so you can increase value in your business.

What's the difference between a business plan and business strategy? Yeah. So that that's probably the biggest misconception that exists out there is a lot of business owners, they get into this planning mode and so they call it strategic planning.

And I don't know what happened along the way, but somebody thought planning wasn't sexy enough. So they're like, all right, planning is boring. It's for the nerds. So we're going to add strategic to it.

And then all of a sudden here comes strategic planning. So a lot of businesses, especially towards the end of the year or at the end of the quarter, they'll get together and they'll engage in what strategic planning.

So here's planning. Planning is all about creating a list of actions that you're going to do. It's a to-do list.

In other words, strategy on the other hand, allows you to make decisions about how the company's going to position itself, what that operating model even looks like, what those returns will be, and whether or not that option is a good choice.

Planning is just jumping in and saying, okay, we're going to do this and this and that. So in other words, think of it like this, planning as it relates to your house, because I think most people can relate to a house, planning is walking around your home and going outside and just making a list.

So you have like a piece of paper and you're making a list, right? Okay, I need to paint the fence. All right. I need to replace the carpet. I'm going to plant some flowers here, et cetera.

And you just make a list of all these things to do. And a lot of leaders feel really good about planning because the actions are more concrete. You can set an action and then you can make it a smart action. It's specific, it's measurable, it's actionable, it's relevant, timely, and you can check off the list and you can feel really good.

But strategy requires a lot more creativity. Instead of walking around the house and making a to-do list, you're deciding whether you even want to live in that house and whether that neighborhood is the best neighborhood to raise a family in, whether that house is going to appreciate, right? And it's going to be a good investment.

Those are the strategic decisions that I'm talking about. So if you just get into planning mode, you're like, okay, we're going to paint the fence. We're going to replace the carpet. We're going to plant some flowers.

And then a year goes by and you realize we're in the wrong neighborhood. The neighborhood's going down. We're losing money on our home. And then you decide to move and guess what? You just wasted all that time, all that effort, all that energy on the wrong thing.

And I think that's where a lot of businesses get into trouble is they just jump into planning mode right off the bat. So strategies aren't planning.

Is it tactics or is it different? Yeah, it's different. See, planning is the act of coming up with the tactics or the actions. Strategy is more about stepping back and making choices about where you're going to compete, how you're going to compete and ultimately how you're going to win.

So I'm going to break down the framework here in just a minute, but that's an important thing to understand is that tactics are not a strategy because you, like I said, you could be pursuing the wrong type of tactics and you can be checking off the list, but you're heading down the wrong path.

So let me walk you through the framework here so you can understand like what we actually do when it comes to working with businesses. The first thing we do with strategy is we like to define the strategic problem that the company is facing.

So strategic problem is the number one thing. It's the number one constraint, the number one obstacle that's preventing your company from achieving its desired results.

Now notice I say strategic problem in a singular manner because sure you have multiple problems in your company. Every business does, but I'm talking about narrowing down what is the one problem your company is facing.

So when I'm working with business leaders, oftentimes they'll say, well, Steve, we have three things going on. We have issues with employee retention and morale. We're losing customers and we're having product quality issues, whatever it may be.

I just made this up. So then what I would do is I'd step back and say, okay, what's the one problem out of those three that you just listed out? If you don't solve it, we'll crush your business.

And then they'll say, well, if we don't get our product, right, we're going to keep losing customers. And that's why our employees, you know, feel so disengaged because morale's down because customers are always complaining and they don't feel good about the product we're putting out.

And it's like, okay, then the strategic problem is the product. And that's what needs to be fixed first.

Another way to figure out what your strategic problem is, is you can use the five Y framework. So I can't remember who made it up, but I learned this in lean construction. You ask five Ys or you ask Y five times in other words.

So you'll say, okay, we're having problems with our product. And you'll say, why? You say, well, because we're not receiving our products or raw materials on time from our suppliers.

Why? Because our ordering system is broken and we don't know when to order products. So we don't run out and have stockouts or excess inventory.

Why? And you just keep asking why and why and why until you reach the root problem. And that's a good way to figure out what your strategic problem is.

But strategy starts with defining the strategic problem. So here's another way I like to approach business strategy. I like to follow the scientific method instead of a business method to formulating and designing strategy.

So let me explain. With the scientific method, if you remember back to grade school or middle school, whenever you took science, the first step in the scientific method is identifying the problem. And I think so many companies, they never really define the problem.

And there's multiple reasons for that, but I'll get into that here in just a second, but it's defining the strategic problem first. And then the next step in the scientific method is formulating a hypothesis of how you think you're going to solve that problem. And then you go run experiments, right? Those are the tactics or the actions.

Then the next thing, you know, the business scales because you're solving the constraint of your business and then a new problem emerges. And that's the process of strategy. You're just constantly doing this over and over again.

The reason why we don't follow a lot of the business approaches out there is because oftentimes they're not timeless. There's like the new flavor of the day all the time. It's like, all right, we got this new business strategy framework over here. We got this, that, this, that EOS traction, seven S's SWOT analysis, mission, vision, values, all these different frameworks that float around out there, but it really comes down to starting with the strategic problem.

All right. So that's the first step. Now getting back to why do business owners and why do leaders and why do teams not do a good job with defining their strategic problem?

Well, they're very smart. They're very capable. They know their business really well, but I think there are a few reasons why number one is who wants to admit there are problems, right?

So I don't know about you, but it's not fun to say, yeah, I suck. I'm terrible over here. I have this problem over here.

So a lot of times when I'm working with companies, we'll get into the strategy room and we started talking about the business and they'll throw out some things. It's like some softballs. It'll be like, oh, the, you know, our problem is this, or our problem is that I'm like, no, it's not.

I saw your financials. I saw like the results of the surveys. We did phone interviews. We know exactly what's going on here. We talked to some customers, but they don't want to admit it or they bounce around. They skirt around the real issue.

So we spend a huge amount of time with companies just defining the strategic problem, because if you don't, and if you get the strategic problem wrong, then you're going to be pursuing a strategy that isn't even solving the constraint at hand.

So that's the first step, the strategic problem. Then imagine a box broken into four sections. And at the center is a circle at the center is the customer.

This is your ideal customer, and they should be at the very core of your strategy. And the reason why having the customer at the core of your strategy is so important is because you want to be able to deliver exceptional value to them.

And I was working with a company years ago, and they had this huge retreat. They flew in all their executives and they're in the room and they're talking all day, presenting their plans, right? Getting into the planning part.

They spoke about operational excellence, things that are going to improve with their operations, new systems they're going to implement, new technologies they're going to adopt. And they went through the entire day.

And then at the very end, I was the keynote speaker and I was there to talk about strategy because they wanted to do things differently. And I brought a chair on stage and I said, this chair represents where your customer is sitting.

I said, where is your customer? Who invited your customer? Because I didn't hear any of you talk about your customer all day. They're just talking about themselves.

So anytime we craft a strategy, we put the customer at the very core, at the very center, right? So then there's four other boxes. I'm going to walk you through here real quick, and then I'll be done with the framework.

In the first box, we have the shared aspiration. In other words, what does winning look like for the business? What does success look like if the strategy is successfully implemented?

So you have to start with that. You have to define what does success actually look like in the business.

Once you have that, you move to the next box. And the next box is going to include your market focus and position. What customers are you going to go after? What geographies you're going to compete in?

What channels you're going to use to get to those customers? What stage of production you're thinking about, et cetera, right? So that's your market focus and position. That's your go-to-market strategy.

In other words, you have to be very clear on where you're going to compete and how you're going to win wherever you decide to compete. So there's so much more to it, but just from a high level, that's the second box.

The next box underneath that box is your competitive behavior. This is how you're going to compete. This is your operating model.

This is the technology you're going to use. This is your offer for your business. These are all the processes and the entire system of your business.

All the activities you're going to perform in order to deliver value to your customer and ultimately make money. So this is a really important step.

And if you think about Michael Porter, he kind of speaks on competitive behavior in this frame. He says there are three generic strategies, cost leadership, differentiation, and focus.

So those are three forms of competitive behavior, but you have to go even deeper than that. You have to get into the operating model and the activities on a grassroots level.

Then after you have your shared aspiration, your market focus and position, and your competitive behavior, you move on to the last box. And that is resources and returns.

In other words, if you pursue this path, this strategy, what resources will you need? Talent, capital, et cetera. And what will be the returns on this strategy?

And this is where strategy and finance connect. I talk about this all the time because strategy without finance is just a wishlist or it's a spreadsheet. It's not strategy, but this is where it comes together because when you make these choices, you decide, and then you model it out, you could determine, okay, if we go down this path, it's going to likely return 15%.

But with our cost of capital and all the risk we're going to take on, maybe the spread isn't big enough to make it worth it. And then you go back to the drawing board and you have to go through all those quadrants once again.

So that's how we look at strategy and that's how it's an iterative process and that's how it connects back to finance. But that's why it's so much different from a plan. You have to make those choices from a high level before you can decide, okay, what are you going to do next?

So what if I didn't want to follow all the parts of that process? Can I just copy my competitor's strategy? Yeah. And I think that's where a lot of people, they are constantly looking for the shortcut because they want strategy in a box.

They want to do strategy in one day or over two days. They want to get away, do a retreat, and they want to come back with a formal strategy and say, we are done. But strategy is an ongoing process.

It's an iterative thing. It never ends. And in fact, when I tell executives that, I say, look, your strategy will never be done. They kind of get this angst. They're like, oh, what? How's it not done? We need to put a bow on it, Steve.

So your strategy's never done. You can't create a 10-year plan, even a five-year plan. The world changes so fast. And going back to your question, if you go out there and you just copy a competitor's strategy, your situation is completely different.

You have different talents, capabilities. You're in a different position, a different geography. And what works for somebody doesn't necessarily mean it's going to work for you.

And plus, I think the name of the game in business nowadays is personalization and differentiation. I mean, the world is so noisy out there. And if you think about the businesses that have been really successful, they're the ones that have differentiated themselves from their competitors.

So if you think about like Walmart and Target, Walmart, like you go into Walmart, they're known for their low prices, but you also go into their store, they have linoleum floors or just concrete floors, the bare minimum fluorescent lights up above. They're cheaply built. You can't find help.

If you ever need to find something at a Walmart, it's like impossible to find help. But they do this intentionally because they're trying to be the cost leader, because they want to keep their prices low. That's their promise to their customers.

That's their entire strategy. And that carries through all the way to decisions they make with their logistics, with their warehouses, with their shipping, with their website, whatever it is, all those choices are cohesive. That's what I was talking about before.

And that's what makes Walmart successful. And then you think about Target, you go into their stores, it feels a little bit more upgraded, right? And the products and brands that they carry are a little bit more elevated, but so are their prices. It's a completely different strategy.

So think about if Target said, we're going to copy Walmart and we're going to lower our prices, but all of their infrastructure stayed the same. Well, guess what? They would go bust because their cost structure is going to be different. Their capabilities are going to be different and therefore they're not going to be able to serve their customers well.

So what if my business is already successful? Why should I reassess the strategy that's been working for the last five years? Yeah, I think there are a lot of businesses out there that are successful and they don't even have a strategy. They only have a formal strategy. So let's address that first.

And then let's talk about the businesses that may use SWOT or some other form of strategy, so-called strategy, or maybe they just do strategic planning that I was referring to, and maybe they're successful. So first of all, I think there are some businesses out there that don't have a formal strategy and they can still be successful.

So I was working with a company not too long ago, earlier in the year, and here's a business owner and he's just been focusing on design and high quality output with his company during construction and landscaping, in effect. And he hasn't had a strategy for the entire business, like a formal strategy, I should say. And he's been very successful.

He's built a company, it's scaled, it's profitable. They've won a lot of awards. Their work is amazing. They've retained some really great talent.

So one may argue, well, why do they need a strategy? So here's the thing though. There's survivorship bias. So think about this.

You may look at Facebook, for example, or Instagram or TikTok, and you're like, wow, that's crazy. They're so successful. But how many social media platforms have started and they haven't been successful? Or think about YouTube and influencers out there.

You may say, wow, this influencer has a million subscribers. They're so successful. Well, think about everybody else who creates YouTube videos and they don't have a million subscribers.

They may only have like a hundred or a thousand subscribers. So I think the same thing is true with business is that, sure, some companies may not have a strategy and they may get away with it, like a formalized strategy, that is, and they may be successful.

Also working with this business owner, one of his biggest regrets and one of the biggest things that gives him anxiety in his company is the fact that he doesn't have a strategy. He talks to me all the time. He's like, Steve, I need to have a better process because we're starting to see cracks in the system. Things are falling apart, competitions coming in and eating their lunch.

So I think that's really important to understand that whole survivorship bias thing. Now let's shift focus and talk about the businesses that are successful right now. And maybe they use a framework that seems outdated, or maybe they just do strategic planning and they just list out a bunch of things and they've been successful up to this point.

I think that's great. That's great for them. Once again, it's the rare exception. In other words, it's the exception rather than the rule that these businesses are successful because I've worked with a lot of companies that fail because they don't have a strategy.

65% of companies are going to be gone in 10 years. 65%. Think about that. That's crazy.

So you can get away perhaps with coming up with actions or tactics or doing planning for a while, but where the world is going, talent is becoming more scarce. We have disruptions that we don't even know how they're going to play out with AI, et cetera. And I just think businesses need to make better choices at the top about their positioning, about their operating models.

It'll make all the difference in the world because you can only go along for so long with razor thin margins before you run out of cash and you disappear.

So you're talking about disruptions in the marketplace. How is it possible to create a long-term strategy with all the changes in the market that are so unpredictable? Yeah. And I think that's key because what I teach companies is it's not about prediction strategy.

In other words, I don't sell prediction strategy. If I sold prediction strategy, in other words, if I went around to companies and said, look, I'm so smart. I'm such a genius.

I have access to these reports or to this data, and I can help you predict where the market is going. And let me help you craft a strategy. And then you're going to have this huge competitive advantage and you're going to make all this money.

I'd be full of garbage. And think about like if I was doing that in 2018 or 2019, I'd be giving companies some terrible advice based on what was about to come with COVID because COVID came in and just crushed companies. And it's like, wow, I never saw that coming.

So we can't predict the next disease outbreak, the next war, the next economic crisis. Sure. We can kind of have a hunch that things are happening, but we have no clue what's coming down the pipe.

So what you should do instead is follow that framework that I introduced to you earlier. Define your strategic problem, your shared aspiration, your market focus and position, your competitive behavior, and the resources and returns. And then ask yourself, okay, is this desirable? Is it practical? Is it economical? And if yes, go down that path.

Then you start coming up with initiatives, actions, and results. That's how you're going to execute your strategy, right? You're going to define what are initiatives, what are the baby steps, the actions we're going to pursue in order to advance those initiatives, and what are the results that we want to get out of executing the strategy.

Then when you follow the system and you're doing this over and over again, then you make adjustments on the fly. So something pops up and you're like, wow, our strategic problem just shifted. Well, now you have a system to follow in order to solve that problem.

And it becomes a capability in your business to do strategic thinking and to get really good at solving that constraint. And if you do that over and over again, then it doesn't matter what comes our way. We're going to be better equipped.

It doesn't mean we can avoid all risk, right, in business, but we're going to be better equipped and there's going to be a higher probability that we could survive what comes our way.

So is there one key that makes a business strategy successful or is it just variable for each business? I think, you know, a lot of people stress out because they don't feel like they're creative, right? And I was talking about strategy being this creative type of work. And let's face it, some people aren't creative.

I know a lot of business owners are very successful. They start, for example, a construction business and they come up from the field. They're engineers. Then they start building projects.

Then they become a CEO. And next thing you know, they have this successful company and they're like, I'm not creative. I'm just really good at executing. That's what they'll say to me.

But look, you don't have to be a creative genius. It's all about just following a system and then staying consistent in your business and communicating exactly what you're doing right with your team. So there's clarity and focus.

And I think if you're constantly solving the constraint that's before you, and then you're measuring everything, then you're going to be successful when it comes to strategy. I think the biggest thing that's missing is that connection back to finance.

I think a lot of practitioners out there, they talk about strategy, which is really fun. Mission, vision, values. They dream about the future and they do all these things and they're not bad.

I'm not papooing any of those things. But when they don't connect it back to, okay, well, how much cash do we need to execute on this strategy? What is going to be our return on invested capital? What's our cost of capital?

And when they're not including these things into the conversations, then you just have strategy over here. You have spreadsheets over here and there's no connection and strategies oftentimes fall flat.

So how do you know if your strategy is actually working? I think that's a great question. And oftentimes it's really easy to make strategy this black box and overcomplicate it. So let's just keep it very simple.

So check this out. Two questions to ask. Do you have a competitive advantage and is your strategy allowing your company to maximize value? Those sound very vague.

You're like, what is competitive advantage and what is value? So let me break it down for you. When it comes to competitive advantage, it's really simple.

If you pull an income statement, so pull a P and L for the last year in your business, go down to the very bottom line and look at your profit and divide your profit by your revenue.

So that will tell you what your profit percentage is. And then if you compare that to the industry average, you'll know immediately, are you earning above industry average returns?

So think about it. Let's say you're a plumbing company and the average profit for a plumbing company is, let's say 8%, but your business is earning a profit margin of 3%.

Well, guess what? It doesn't matter how flashy your brand is, how great your website is. If you're not earning above industry average returns, if you're not at least average, then your strategy is not working. You don't have a competitive advantage.

And if you're wondering, okay, well, what are the benchmarks? Good news for you. You can go to coltivar.com our website, and I'll put a link down below. And we have a page with all the benchmarks.

It's completely free. It's for the trades. And it's a good starting point. If you're outside the trades, if you're a service-based business, you can just look at the average, I'd say at least 10% for companies, but go onto our website, check out the benchmarks.

Also, if you ever want us to look at your numbers, you can apply for a free financial review. Like we'll look at your numbers completely free, no obligation, and we'll give you our feedback.

And it's going to come from a CFO's perspective. So I'll offer that to you. But that's one of the first things you're going to want to do is understand, are you earning above industry average returns?

The second one is a little bit more complicated, but it's just simple math. You just have to do a little bit more searching with the numbers. And that is, are you earning a return on your invested capital that beats the market?

So let me explain. Return on invested capital is to get a little nerdy on you. It's your net operating profit after tax divided by all the invested capital you have in your business.

That's your working capital and all the investments in your net property plant and equipment, your trucks, tractors, trailers, your building, all that stuff. Plus your working capital, that's your invested capital.

So if you look at how much profit am I earning after tax compared to how much money I have in the business, invested in the business. And if you look at that percentage and then you compare it to the S&P 500. So think about the S&P 500, it's returned on average, let's say 9%, 10% over the last 50 years.

If you're earning below returns, just like with your competitive advantage, guess what? Your strategy is not working because if you're earning a 5% return on your invested capital, I'm not telling you to do this, but you can sell everything in your business and put all that money in the stock market and earn a 10% return.

And you don't have to worry about employees and headaches and customers and product returns and all this other stuff that goes along with business. Now I'm being dramatic. Like I said, don't go and sell all this stuff because there are a lot of other benefits to your business.

But think of it like that. You want to be earning a return that is at least equal with what the market's returning.

If your strategy and your finances and your business, if they're not aligned, if your strategy, in other words, doesn't make sense financially, you can lose everything. Let that sink in, everything.

And I don't mean to scare you or to discourage you. That's why I'm so passionate about this topic. 65% of businesses, like I said, gone in 10 years.

If you lose everything, you don't just lose your business and your money. You lose your credibility. You may lose your position in your community, right? Your reputation.

You may get a divorce. You may lose friends. What about your self-worth, your confidence? All this stuff goes down the toilet.

That's why I'm so passionate about this topic is because when you have the right strategy in your business and when your strategy is working well, it's allowing you to make choices with clarity. It's giving your team focus.

And when you do that, then you could achieve incredible things. I've seen companies that do it really well. I've seen companies that struggle.

And even those that struggle, if you're struggling right now, the good news is it doesn't take a whole lot. You just have to follow the right framework. And all of a sudden, things will start improving in your business and your life.

And that's what inspires me. So there you have it. That's the strategy framework you can follow in your business to increase your odds of wild success.

I'll see you in the next one. Cheers.