Open any book about strategy and you will read how product-focused companies have succeeded. You can learn, for example, about how Japanese cars beat the US giant auto manufacturers at their own game or how Microsoft came to dominate the market for PC software. The trouble is, though, most of the economy is driven by service businesses, which are almost always harder to manage than the sorts of organisations described in strategy books. It is particularly difficult to develop strategy in a law firm where everyone is intelligent, articulate and where, all too often, people have conflicting ideas about where the firm should be heading.

Part of the problem is around the meaning of the word 'strategy'. It is one of the most overused in business but among the least understood. Frequently it is used without any specificity to convey a vague aura of importance or as an excuse not to get involved in detail. What we mean by strategy, though, is very simple – it is the plan that a firm adopts to achieve its goals.

In a corporate environment, the goals of the organisation typically revolve around maximising shareholder value. While most law firms have a different concept of shareholders, the overall principles of strategy development are the same. At its heart, a strategy should answer three very basic questions: what is the current position of the firm, where should it be heading in the future and what should it do to get there? However, because a law firm's owners are also its managers and its most senior tier of workers, the strategy development process typically needs to involve and engage a much wider cross-section of people. This can make the process more drawn out than in other types of organisation, but it is critical for success.

Understanding the firm's current position

You cannot get to where you want to be without knowing where you are, so developing a strategy should start with a thorough, objective view of the firm's current position. This should address questions such as:

- which markets does the firm serve?;

- how successful has the firm been in the markets it serves?;

- how successful is the firm at attracting and retaining the people it most values?;

- who are the firm's competitors?; and

- how do competitors compare with the firm along a range of measures, such as financial performance, client satisfaction, reputation and success in recruitment and retention?

In answering these questions there can be a great temptation to analyse every piece of data to death. This can be fruitless and will almost certainly be exhausting and expensive. The trick – and it is one that usually only comes with experience – is to do enough work to have a clear view of the situation, without spending too much time on analysis that will have little impact on the final strategy.

Defining where the firm should be going

Once the firm has an accurate view of its current position, it can start to think about where it should aim to be in the future. This will be shaped by four factors. First, the changing nature of the markets in which it operates. This will depend on the type of firm being considered: a regional UK firm may care little about the declining dominance of US capital markets, but every City firm should take a keen interest in the implications, such as the increasing appetite of many Wall Street firms to expand overseas. As well as looking at their markets at a macro level, firms should consider how client behaviours are changing so that they understand, for example, how procurement departments are increasingly important in determining companies' choice of law firm, the implications of smaller panels and the extent to which legal work may be brought in-house in future. The impact of future regulations, such as the Legal Services Act, should also be taken into account.

Second, the firm should consider how its competitors will respond to changes in the markets in which it operates – not only in the market for clients, but also the market for the most talented lawyers and support staff.

Third, the firm should consider the ambition of the people who own and run it – the partners. Even if a firm could head in a particular direction, there is no point in doing so unless the destination is aligned to what the partners want the firm to be. For example, the Wall Street firm Wachtell Lipton Rosen & Katz could grow much more quickly than its historic rate of about 8% per year – it reportedly turns away many potential clients as well as some of the world's best lawyers. But the partners there are more committed to working in a highly-focused environment with very low leverage than in a more broadly-based and faster-growing firm, which is why it has the smallest number of lawyers of any of the world's hundred largest firms by quite a significant margin. And with an average profit per equity partner of just under $4m (£1.94m), its strategy is hard to argue with.

By bringing together market trends, the future position of competitors and the ambitions of partners, it should be possible to define a number of future options for the firm, which can be narrowed down further by considering the fourth factor: the assets and capabilities of the firm – including the abilities of its lawyers and management team, the strength of its brand and its ability to invest – that will be needed in moving from its current position to its desired future state.

Taking all four factors into account enables a firm to develop an intelligent, informed choice of its future direction, in terms of the sorts of work it will do, the way it will present itself to its target clients and employees, the geographies in which it will operate and its investment priorities. In developing its future direction, the firm should choose a way to position itself in the market that is distinctive, otherwise the only way to win work will be to charge lower fees than its competitors and the only way to hire people will be to pay higher salaries – hardly a compelling recipe for success.

In a market as crowded as the legal market, real differentiation can be hard. Only a few firms will ever be part of a truly global elite; for most a focus purely on scale is unlikely to be successful. Instead, firms need to consider how they should best position themselves with prospective clients, where they need to target growth and whether this is best achieved through organic or inorganic growth.

So far, this might sound a rather deterministic process. However, while it is true that strategy development means rolling your sleeves up to get involved in detailed analysis, it also requires careful judgement, particularly around the inherent uncertainties associated with any projections of the future. Some organisations deal with this by considering a range of possible future scenarios, developing possible strategies for each and determining which direction to follow depending on how reality unfolds. Even if such an approach is not formally pursued, a firm's senior management team needs to recognise the potential risks that may arise from pursuing a particular strategy and be willing to change tack if necessary.

Implementing the strategy

No matter how elegantly thought-out, a strategy is useless if it is not implemented effectively. Indeed, by far the majority of effort expended by the organisation should be on implementing the strategy rather than defining it. Consequently, the strategy should link to a number of specific actions, each with responsibility assigned to a named member of the senior management team, with clear timelines and measurable targets. It is important, though, to keep the actions focused on those that are likely to make the biggest difference – too many initiatives can divert the organisation from its real job of serving clients.

Implementation will involve change, which inevitably makes people in an organisation feel uncomfortable. Effective communication of the strategy, therefore, is critical to help people in the firm understand which direction the firm will be heading in and the rationale behind it. And communication is not just about telling people what to do, it is also about getting their buy-in to the changes required by clearly demonstrating how the results will be in their interests. In communicating the strategy, senior managers should not only focus on the overall direction of the firm but also relate it to the changes that will be required in each individual at the firm. We often find that a very significant difference can be made by focusing on a small number of changes in behaviour, which can be achieved through incentivisation, training and the development of new tools for partners and staff.

Traditionally, strategy development has not been a major concern at many law firms. However, large law firms are now very significant organisations in their own right and they need to be run like major corporations. The process set out in this article can be a major exercise. But get it right, and the investment will be repaid many times over. Get it wrong, though, and your clients and partners will not be around to tell you.

David Hawley is a director at Deloitte.