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Can you define exactly what makes up a firm strategy? Some citizen say no, but we think you can.

In fact, we believe a valid firm strategy has five components:

Your company's current or desired core competencies A description of how you will differentiate vs. Competitors The business or industries in which you intend to compete The initiatives you plan to implement in the areas of marketing, operations, information technology, finance and organizational development A financial forecast that shows how your plans will meet stakeholder requirements over the next 3 to 5 years
Let's look at each of these components.

The first component of a valid firm strategy is a clear description of your company's current or desired core competencies.

You may be thinking, "Great, but what's a 'core competency?'" While there are many definitions, here's a good one from Wikipedia:

"Acore competency is something that a firm can do well and that meets the following three conditions:

It provides buyer benefits It is not easy for competitors to imitate It can be leveraged widely to many products and markets.

A core competency can take assorted forms, including technical/subject matter know how, a reliable process, and/or close relationships with customers and suppliers. It may also consist of product development or culture, such as worker dedication."

For example, we could say that Southwest Airlines is a reliable airline that offers low fares. But in order to contribute those benefits, it has to have determined "core competencies," prominent capabilities that enable it to have low fares and to be reliable. We believe that Southwest Airlines has four core competencies that it executes so well that it ordinarily beats all other Us airlines in terms of profitability.

These core competencies are:

The bottom operating costs per plane An economical point-to-point airport network A fanatical culture focused on customer aid and cost savings An quality to keep planes in the air more of the time than its competitors.

Southwest airlines couldn't offer the benefits of low prices and reliable aid if it didn't master these core competencies. What key benefits do you want to offer your customers? What core competencies do you need to master to contribute them?

The second component of a valid firm strategy is a description of how you differentiate vs. Competitors.

In our experience, differentiation is about being the best at something. This should be encapsulated in your mission statement - what are your company's aspirations and how are you going to beat the competition? We just talked about how Southwest Airlines differentiates -- what are you going to offer customers that will make them select your products or services so that you can grow your business?

It takes a lot of hard work to come up with a great talk to this examine and even more work to make that differentiation real. It's easy for us to say that Southwest is the best low-cost airline in the Us, but it's extraordinarily difficult for them to pull it off.

The third component of a valid firm strategy is a description of the business or industries in which you intend to compete.

You need to be able to define just what kind of firm you are - are you a furniture manufacturer? A gift card retailer? A consulting firm, a bearings distributor, a toy importer, etc.? This step sounds easy but we find that clubs are often so implicated about getting too narrow in their focus that they fail to come to be in fact clear about what they want to do. A firm with a good firm strategy will have plan through these issues and made the hard decisions primary to account for its identity. If it has, it can in fact pass the litmus test of identifying the business or industries in which it operates.

The fourth component of a firm strategy is the set of initiatives you plan to implement in the areas of marketing, operations, information technology, finance and organizational development.

These are the plans that guide your company's focus and resource budget over the next any years. If your firm strategy is exact sufficient to be relevant, you will have detailed plans in all of these areas.

The fifth component of a firm strategy is a financial plan that forecasts the results you expect to get from your plans and illustrates how they will meet stakeholder requirements over the next 3 to 5 years.

Your strategic planning process cannot be separated from your every year budget process. In the vast majority of companies, if it's not in the budget, it doesn't exist. That's why you have to have a very senior financial man on your strategic planning team, preferably the Cfo. During the planning process, your team must compile a financial plan that estimates the results of implementing your strategy. This plan needs to earn the approval of your company's administration and board and should be reviewed on a quarterly basis to track results and make refinements.

So - those are the five components of a valid firm strategy. Good luck planning your success. And succeeding because you plan.