Much has been said and written about business strategy. But how much of it is true – or even coherent?
As a senior in-house lawyer, you may have a role in setting your organisation’s strategy. At the very least, you’ll have to align your department’s function to it.
Strategy – time for straight talking
The word ‘strategy’ is so ubiquitous in business that its meaning has become confused and nebulous.
We often see it used in a confusing mix of exhortations, slogans and high-sounding goals that mask an absence of substance. In many cases, corporate strategies are nothing more than statements of desire with goals that contradict one another.
What strategy is not
Contrary to what you may have been told, a strategy needs more than merely:
- Mission and vision. Lofty statements may motivate employees and customers, but they provide no guidance on how to achieve them;
- Annual goals. Plans to enter emerging markets or launch new product lines are short to medium term aspirations, not definitions of a strategy;
- Operational effectiveness. Managers spend most of their time on this, yet concepts like lean, six sigma and total quality management are not corporate strategy; and
- Agility and innovation. Much in vogue and undoubtedly crucial to competitiveness, these are only small elements in a corporate strategy.
Bad strategy is long on goals and short on concrete policy or action. It assumes goals are all that’s needed. It puts forward incoherent and often unworkable objectives. It ignores choice, trying instead to accommodate conflicting demands and interests.
And, too often, it uses high-sounding words and clichés to mask these failings.
Worst of all, some strategies are nothing more than imitations, derived from competitors, especially market leaders, who may be expanding, acquiring or launching new products.
So what is strategy?
Michael Porter of Harvard Business School provided an enduring definition of business strategy. He said:
‘Strategy is a set of choices that defines a company’s distinctive position (or approach) to competing and the competitive advantage on which it will be based.’
The key words here are ‘choices’ and ‘distinctive’. Leaders must be willing to say no to various options, and even reject profitable opportunities if they’re not compatible with the organisation’s operations.
Strategists must also define what makes their organisations unique.
Good strategy is not just about what a company doing, it’s also about the why and the how. It should comprise these three elements:
- Diagnosis. The organisation needs to establish and validate a set of beliefs about its market sector using its experiences and acquired intelligence;
- Guiding policy. This states where and how the organisation will create sustainable value for shareholders and overcome obstacles identified in the diagnosis. It marks the organisation’s direction, but not the details of the journey; and
- Coherent action plan. This outlines the policies, resource commitments and actions necessary to enact the guiding policy.
No strategy, however successful, will last forever. Insights into the marketplace and customer behaviours eventually become obsolete and economic and technological forces continually change the external environment. So, companies must keep their strategic antenna attuned and be ready to adapt.
What is a value proposition?
Being best has no place in strategy. The Ferrari 458 California is a highly desirable car, for many people, the best in the world. However, it’s quite useless to a low-income, single parent working in a crowded city with a strict emissions policy.
In strategic thinking, superior means ‘most suited to the customer’s needs’. And we can measure this by examining these three elements of an organisation’s value proposition:
- Customers: who is the organisation targeting, and through which channels?
- Needs: what products and services is the organisation offering? and
- Price and revenue model: how has the organisation priced its offering, and how does that compare to its rivals?
It’s still possible to build defensible fortresses in competitive markets.
Google dominates the search market because it built a database of completed searches called the Knowledge Graph. This allows it to answer both natural language queries and complex, compound searches more effectively than any other software company. It uses this capability to sell search query-related advertising and create a self-reinforcing model that extends its leadership. Any realistic rival to Google must build a better search algorithm and their own version of the Knowledge Graph to understand what users are really looking for.
This is something Microsoft found to its cost when building its near monopoly in desktop operating systems.
Technology and economics have changed the sources of competitive advantage. But they haven’t eliminated it.
Principles of strategic positioning
The four key principles of strategic positioning are:
- Clear value proposition. A good strategy serves the specific needs of specific customers. Too many companies prioritise consensus building when setting strategy. This contorts the company’s purpose, possibly creating confusion among its target customers. The watchwords for good strategy are clarity and focus.
- Distinctive value chain. A good strategy involves being different to the competition, or, at the very least, doing the same thing in a different way. Doing the same things leads to price competition, which, in most unregulated industries, leads to lower profitability across the sector. Similarly, blindly adopting best practice involves little more than copying others, which makes the bad simply average. So competitive benchmarking is largely misguided. The right benchmark for an organisation’s operations is not the competition, but its strategic objectives;
- Organisational fit. A good strategy brings all the activities of an organisation into alignment, making them mutually reinforcing. Luxury car showrooms are fitted out with high specification furnishings and high-end coffee machines. When a new car is delivered, a bottle of fine wine or a bouquet of expensive flowers is usually included. Every element of the customer experience, no matter how small, reinforces the others and provides a prestige retail experience. Operational excellence, by contrast, is usually a euphemism for cost-cutting. It rarely has anything to do with improving an organisation’s performance; and
- Continuity and consistency. While accommodating the external environment, a good strategy maintains continuity and consistency in the diagnosis and guiding policy. Many organisations fall into one, or both, of the traps at the opposite ends of the planning continuum. Some chase every opportunity and every new customer segment in a bid to maximise revenue. This leads to muddle and compromises their brand and market positioning. Others just do the same as last year, plus or minus 5%. This approach can work in stable sectors, but in most industries, it’ll fail.
The strategy paradox
The most profitable strategies are extreme. They commit organisations to significant products differentiation and/or fundamental cost leadership. At the same time, these positions increase organisations’ exposure to bankruptcy by increasing their strategic risk. So, the strategies likeliest to succeed are also those likeliest to fail. This is the strategy paradox.
Managers, overwhelmed by short tenure expectations, mechanical performance reviews and skewed compensation packages, are encouraged to adopt a defensive decision-making mindset, which is not conducive to good strategies. Instead of playing to win, they play not to lose by imitating competitors.
Or, as the American management expert, Dr Gary P. Hamel, put it: ‘hyper-rational managers produce hyper-boring products’.
This problem is exacerbated by the behaviour of capital markets. They tend to reward short-term results, with horizons seldom stretching beyond the next quarterly reporting cycle. Analysts, who like to compare companies using standardised benchmarks, encourage operational convergence. Despite this, organisations that hold fast against these pressures usually provide the greatest long-term reward to their investors.
Three principles for strategic competition
Strategy isn’t like cooking. There’s no recipe for guaranteed first-time success. Every challenge is situational and it takes repeated practice over time to develop the intuition necessary to solve problems.
However, the findings from long-term academic research give us three guiding principles worth following:
- Better before cheaper. Compete on differentiation and distinctiveness, rather than price;
- Revenue before cost. Focus on growing revenues as much as cutting costs; and
- Price before growth. Look for ways to increase prices as opposed to simply increasing sales volume.
Unfortunately, many boards devote, on average, nine times more attention to counting and spending cash flows than they do developing and increasing new revenue streams. Yet competitive success is based on discovering value through insight, rather than efficiency through effort.
Like any inexact science, business strategy is the subject of many opinions, myths and often, indecipherable language. However, by focusing on clarity of purpose, differentiation of offering and alignment with your industry sector, it’s possible to simplify business strategy, create a distinct offering and achieve financial goals.