Why everyone should understand business strategy

The best way to learn business is building a business

When talking to many mid-level Digital Marketing “professionals”, one thing is clear, a good number don’t understand how businesses operate. It could be the problem caused by “specialization”. Historically, the Brand Manager was the Marketing professional that understood the whole business or atleast good brand managers understood that. As the advertising industry goes all in on digital, jobs are now focused on platform usage, achieving vanity metrics and reporting to clients/upper management.

The problem with not understanding overall business strategy results in ineffective results. Not getting the best return on investment and although there is growth, but this growth could be accelerated 2-10x with proper execution.

The best way to learn is by doing. The only way to build a strong work ethic is getting your hands dirty.

Alex Spanos puts it best. The best way to learn about business strategy is by running a business, scale does not matter but a business that generates over $2000 in annual revenue can give a good understanding of key business concepts.  As businesses grow the concepts get stronger, thought process widens.

During the early stages of a career, getting exposed to business strategy is hard. Unless working in consulting, investment banking, corporate strategy or Private Equity/Hedge Funds/Venture Capital. That is why these careers are a great starting step for many fortune 500 CEO’s and executives.

Strategy

Not understanding business objectives is the first hurdle. Businesses have a number of goals, a good starting point for any company is checking the management information circular. The document sets the goals for the senior management, this could be EBITDA, Revenue Growth, EPS, this is the financial incentive that shareholders (owners) expect.  

How does the business achieve these goals?

This can be through various initiatives that help achieve the goal.

  • New Product Development: Offering new products/services to existing or new customers
  • Geographical Development: Selling products at new locations (includes digital products)
  • Accelerating high potential products: Products that have high margins, easier customer adoption, lower churn.

Understanding what needs to be done, the ability to move swiftly and pivot to achieve business KPI’s and keeping track of those achievable and realistic KPI’s is a strategy used by fortune 500’s – it works.  

Finance

There is a difference between revenue, gross profit and net profit. Products might have low costs of acquisition but high cost of goods sold (the variable cost to produce a product)  this is called a Low Margin  product. It brings revenue but doesn’t help profitability – perfectly fine if the goal is to increase revenue only (a goal many Venture Capitalists) look at, hoping for economies of scale to help improve margins over time.

On the other hand, if the goal is profitability, most publicly traded companies try increase this and focus on profitability. Either a high EBITDA or Net Income, these help drive shareholder value. The goal would be aiming to sell high margin products.

A simple explanation, (these concepts are taught at most business schools and end up staying in business school text books).

Goal: Achieve Gross Profit of $70.

Product A = $100 at a 30% (low margin) gives a gross profit of only $30 – Revenue to achieve Gross Profit = $235

Product B = $100 at a 70% (high margin) gives a gross profit of $70  Revenue to achieve Gross Profit = $100

High Margin products are the drivers of efficiency when trying to achieve EBITDA or Net Income.

Sales

Unless working for a consumer brand, most brands are business facing. Here “sales” doesn’t happen immediately, but often takes weeks or months of negotiation – but once the deal is sealed it’s often much large dollar amounts and recurring revenue for products that are depreciate or perish fast.

Marketing bring in awareness and engagement with these businesses by targeted advertising, then hand off all “inquiries” also known as qualified leads to Sales. The team that’s sole goal is to convince prospects that they have the best product or service at that price point.

Understanding what the Sales goals are both from a revenue and margin perspective (normally derived from the business strategy) should help drive other aspects such as product development, marketing campaigns, etc…

Product

Choosing what products to prioritize is where product managers fit into place. Most product development should be led by business goals, from the idea to adoption the key thought should be how does this product help the business?

It might be a great idea developing or enhancing a product line that has great customer adoption. But low margins (assuming a business aims on net profit). This could trigger every other business unit, meaning the whole company struggles to achieve business goals. Marketing and Sales will waste efforts in promoting a product that doesn’t help the business succeed.

Everything Else

Every team in an organization should be aligned on the business’s goals. From the legal team thinking on how laws can hinder the businesses goals, to HR in attracting the best talent, and Operations teams keeping everything running smooth and pushing the goals forward.

Final Thoughts

Some of the best companies were built with the goal of achieving profitability. Unfortunately, many aspiring founders forget about that, or employee’s at companies stick to “useless” metrics that have no help in achieving business results.

For success in any role, even at the lowest level thinking strategically will help in making better decisions.   The US President Dwight D. Eisenhower supposedly once said: ‘The most urgent decisions are rarely the most important ones’.

Eisenhower was considered a master of time management, i.e. he had the ability to do everything as and when it needed to be done. His method helps distinguish between what is important and what is urgent.

Whatever the job, begin by breaking it down according to the Eisenhower method and then decide how to proceed.

We often focus too strongly on the ‘urgent and important’ field, on the things that have to be dealt with immediately. Ask yourself: When will I deal with the things that are important, but not urgent? When will I take the time to deal with important tasks before they become urgent?

This is the field for strategic, long term decisions.

Another method of organising your time better is attributed to the multimillionaire Warren Buffett. Make a list of everything that needs to be et done today. Begin with the task at the top of the list, and continue only when it has been completed. When a task has been completed, cross it off the list.

Better late than never. But never late is better

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