"We're pursuing a global strategy"
"The company's strategy is to integrate a set of regional acquisitions"
"Our strategy is to provide unrivalled customer service"
"Our strategic intent is to always be the first mover"
"Our strategy is to move from defence to industrial applications"
"Our strategy is to be the low-cost provider"
These are not strategies!
The most common blunder is that managers and entrepreneurs confuse strategy with a strategic plan or a series of steps that the organization must follow to succeed. But defining strategy in this way and/or like the examples above results in the very dangerous situation where companies don’t have a strategy at all.
Here's a thought exercise. Think of something/someone/some place that, for some reason or another, seems to be superior to its competitors. It doesn't necessarily have to be in a business context. For instance, the person who always seems to attract others at a party; the restaurant that always seems to be busy every night despite its neighboring restaurants struggling to survive; the non-profit organization that always seems to attract more funding than its competitors, the car that, for some reason, becomes the car of the year and we all of a sudden see it everywhere; a place in the world considered one of the top tourist attractions; the celebrity that is on the face of so many billboards/posters, and commercials.
Now think about why this person/thing/place/other is so successful.
Strategy Is About Being Different
At its core, strategy is about understanding how and why organizations differ from one another in their ability to create value for stakeholders yet capture enough value for themselves to exceed its cost of capital. Value is created for a consumer when an organization offers a product or service at a price that is lower than what that consumer would be willing to pay. Value is created for suppliers when an organization is willing to purchase materials, products or services from a supplier at a price that is higher than what it costs the supplier to put them together. Value is created for employees when an organization offers employment benefits (e.g. pay, benefits, sense of belonging, purpose) at a higher level than employees would be able to get elsewhere. Fundamentally, the question is how an organization can create this value that competitors simply cannot or in a way that is better than the competition. Is it through a unique decision-making process? Is it through a new technology? Is it through a very charismatic CEO/entrepreneur? Is it through a strong brand?
Capturing value is a bit different in that it specifies how much of the organization’s value that it creates is in fact captured by the organization itself. At its extreme, organizations can be strategic by capturing value without creating any more value than its competitors. Here, capturing value involves trying to push the price of the product or service to consumers as close to their willingness to pay as possible. It means pushing down the price of supplier goods to as close to their cost of producing them as possible. Capturing value ultimately means that the organization is extracting value from the value chain for itself. This is where the topic of market power and sustainable competitive advantage come into the picture because they are useful in stemming the onslaught of competition that comes with high levels of captured value (i.e. profit) without the need to create new value. At the other extreme, an organization might create a lot of value but not capture any. This is often because what makes them tick is not very valued in the market or, if it is, can be easily copied or substituted for. That said, most companies create and capture value simultaneously. For example, Netflix created immense value for the market through a platform that offered many benefits (e.g. no ads, on demand streaming, wide variety of videos, etc.) at a price that was much lower than what the market would be willing to pay. At the same time, because of Netflix’s first mover advantage, they were able to capture substantial value as well. Rumours that Disney will offer a competing service will undermine their ability to capture the same amount of value but strategy is about figuring out how to confront this sort of challenge through considering the role of tradeoffs.
Strategy is About Tradeoffs
Another common blunder is that decision-makers struggle to understand that strategy is about tradeoffs. To create and capture value that will be sustained over time, it is essential to understand strategy as fundamentally about choices. That is, strategy is about distinguishing between what is of strategic value to a firm (i.e. what makes it competitively distinct in its ability to create and capture value) and what is considered table stakes activities - activities that need to be done at a certain level of competence to simply be competitive. Strategy then is as much about clarifying what the company is not focusing on strategically as it is clarifying what it is focusing on strategically. Too many companies fall victim to being “stuck in the middle”, which refers to being mediocre on too many things. Companies only have so many resources and so if it is trying to be too many things to too many market segments, it runs the risk of being mediocre and undifferentiated because the company is spending so much time being competitive across too many fronts.
Strategy is Composed of Three Things
So then, how can we determine an organization’s strategy at any given time? A firm’s strategy can be determined using three factors. First, competitive positioning goes beyond marketing and represents a unique value proposition to consumers that distinguishes the firm from its competition. Wal-Mart’s positioning is the low-cost leader while Apple’s positioning is innovativeness and high quality. Marketing is important in conveying this image to outside actors but positioning is supported by strong evidence that supports these claims (e.g. Wal-Mart’s low prices). Key here is that strategy is about positioning the organization in a location where few competitors exist or where value hasn't been created yet. Rather than competing in the lion's den with large powerful incumbents, firms want to find untapped market segments, technologies and issues/needs. Back to Netlfix, they succeeded at first not because of some profound internal competence but because they competed in a space that no one really existed.
Second, core competencies are very much about what the company does really well that is valuable and unique (its core competencies) that competitors find very difficult to imitate or find substitutes for. This might include particular individuals employed by the firm (e.g. Steve Jobs), specific decision-making processes, unique products, a strong brand, innovation practices, intellectual property, highly valuable machinery or low cost operations. Key here is that strategy is about being really good at creating value such that if competitors figured out what you were doing, they would need to spend a lot of time and resources to replicate it or, ideally, the complexity of what makes the firm unique undermines any attempt at understanding it. While Uber's competitive positioning was important for their success, a more fundamental component was their seamless technological platform.
Finally, external positioning and internal competencies must be supported by a culture and identity that transcends the worldviews of employees to the point where they see the relevance of the firm’s strategy to their daily activities, making it feel like employees live this strategy on a daily basis. Identity is critical here in supporting strategy as a tradeoff. An identity specifies not only what an organization represents but what it does not represent. On what employees are rewarded, how they are trained, how decisions are made, and company policies and mission statements all support culture, identity, and strategy. Too often I see companies put in traditional reward systems and performance indicators that unintentionally undermine or erode core competencies.
Ultimately, these three components must align in such a way that a firm’s strategy begins to crystalize. Through this exercise, firms can clarify which areas they are not aiming to be positioned (e.g. Wal-Mart is not targeting the high end consumer), which activities they are not aiming to develop as a competitive advantage (e.g. Nike in the manufacturing of products), and, correspondingly, what sorts of internal processes, systems, and procedures are necessary to develop a culture and identity to support the above two.
What is Business Strategy?
Although business or organizational strategy has been around for a long time, there is a lot of confusion about what it means. I'm always amazed when I go to executive courses, engage with entrepreneurs, read annual reports and hear or read many executives define business strategy incorrectly. Consider the following statements about strategy from a wide variety of entrepreneurs, CEOs and executives: