Strategy – Overview
Business strategy is changing. Researchers tell us that we must change the way we think about business strategy content and the business strategy process.
But what do they mean?
When researchers talk about strategy content they are talking about how an organisation’s strategy makes it different from the competition. In other words the content of the strategic plan itself. The strategy process however, is concerned with how strategy is created and implemented.
In this briefing I will explain the key changes in both these dimensions.
Strategy Content – The Challenge
Since the early 1980s strategy has been perceived as being based around product uniqueness or the firm’s underlying cost position. Across industries, strategies have been carefully crafted around these two dimensions to build three broad strategies:
* Differentiation. Here, the characteristics of the product itself act as the primary source of competitive advantage. It is difference in the features of the product that sell it and generate value for the organisation.
* Cost leadership. Instead of relying upon the features of the product to generate a sale, the strategy is based upon having a lower cost profile than the competition. Hence, the organisation can deliver a cheaper product than its competitors. It secures the sale by having the cheapest price.
* Focus/Specialism. The organisation doesn’t take a general view of the market, but seeks out a specialist niche where there might be fewer competitors for example.
So, we have three basic or generic strategies. These are shown in the illustration below:
But we have some problems. Whilst this technique has been taught in business schools since the beginning of the 1980s and has been a landmark in strategic thinking, it is starting to come under pressure.
The main source of pressure emanates from the fact that the strategies are focused only around products, not services or other benefits that the organisation may provide either to the end customer of other members of the value chain involved in helping to deliver to the end customer an offering. (I use the term “offering” here to embrace both the product and any other surrounding benefits that are conveyed).
But the use of products as the primary focus of defining strategy is becoming problematic. Why? Well, we now live in the internet age. In the early 1980s (when Professor Porter at the Harvard Business School defined the three “generic” strategies mentioned above), very few of us had heard of the internet, let alone grasped its ramifications for business strategy. The fact is that many organisations are finding that open systems, increased information availability and outsourcing (particularly product development processes) are eroding the competitive advantages that their products possess. Quite simply, competitors are finding it easier to emulate products and development times are shortening.
The result? In many industry sectors products are becoming commodities.
So if our products are becoming commoditised, where do we seek new forms of competitive advantage that will, in turn, form the the basis for the content of our strategy?
The answer is thorough a relationship based strategy.
But there are problems.
This is only a partial approach to defining relationship based management. It fails to recognise (as does the “generic strategy” model discussed above) that we are all part of a value chain. It is highly unusual for there to be only two parties to the value chain – the supplier and the customer. More usually there is a complex chain of suppliers, manufacturers and distributors. And this applies even in the provision of intangible products and services such as insurance.
So, any relationship based strategy must acknowledge the existence of other members of the value chain and articulate ways in which competitive advantage can be gained.
When working with my clients I do this by adding another two dimensions to a the relationship strategy schema.
The first is how we plan to reduce the transaction costs of working in the value chain for other chain members. What are we doing to reduce the costs of our partners – for example suppliers in the value chain?
The second is to think about how we can enhance the competencies of our partners in the value chain and services that they provide.
So, as I show below, we have four dimensions to a relationship based strategy. If you apply a measurement based scale to each you can use this as a positioning tool to position your offerings against those of your competitors.
Used in conjunction with the traditional product based definition of strategy, we have a powerful tool to conceive future strategies. In reality, it can help you create strategies that are “stickier” – by “stickier” I mean that it will be more difficult for both your customer and other members of the value chain to move away from you.
The Strategy Process
We’ve shed some light on new ways of thinking about strategy. But how about the way that strategy is conceived, developed, implemented and monitored?
Traditionally, there has been a very clear Strategy Process in organisation – it’s called the business planning cycle. It has a number of distinguishing characteristics:
* It happens once a year (usually starting in September and ending in early January)
* It follows a logical step by step process
* It is largely in the domain of top management – staff within business units that actually do the work have very little say.
* It creates a very clear framework for the top of the organisation to control the bottom.
* It tends not to be communicated very well across the organisation (particularly to the most important part – the business level).
Many organisations are finding problems with this approach namely:
* The environment – not just the competitive environment but the global environment – is too unpredictable to follow a detailed plan set from the top of the organisation. Drucker’s words that “it is pointless trying to predict the future” are coming true.
* Markets are fragmented. Top managers don’t have the detailed local knowledge to produce clear effective strategies.
* Customer needs are fragmenting. One big strategy doesn’t fit all.
* Employees are increasingly demanding a greater involvement.
These are the problems. So what are the leading organisations doing?
Well, they are taking a number of steps, some of which I will turn my attention to in other briefings. The main steps can be summarised as follows:
1. Increasingly, competitive plans and strategies are being built upon experimentation. Organisations are getting very good at experimenting with new ideas in new markets. This is controlled experimentation, exploring and probing and is designed to create a knowledge and experience base. More formalised strategies are built upon the basis of the results of this probing and experimentation.
2. The future is difficult to predict. This doesn’t mean that you shouldn’t try to forecast the future. Agreed views of the future (note “views” in the plural) are required. It is now increasingly common for organisations to have three future scenarios and a strategy for each. The first scenario consists of a view of the most likely shape of the future competitive environment. The second is a view based on where the organisation is weakest – what would it do for example if a key customer or supplier went bust or simply deserted to a competitor? The third scenario is bleaker – what would the marketplace look like if there was a prolonged downturn in the global economy for example? Using these scenarios the organisation develops three response strategies. As it has covered the spectrum of likely competitive environments it can move quickly whatever happens.
3. Organisations still have plans to guide actions but they are not detailed, specific action plans. The role of plans has changed from detailing precise actions to defining the purpose of the organisation.
4. Whilst plans may be becoming less detailed and prescriptive, control and information systems are becoming more sophisticated. The emphasis is moving away from business plans as a control tool towards performance measurement systems that inform top management of the quality of decisions and actions being taken to implement the organisation’s more broadly defined strategic direction.
The changing face of business strategy is an issue that I will pick up again in future briefings. For now, the principal conclusions are:
* Don’t think about business strategy just in terms of your core products. Think about how relationships with the end customer and your partners in the value chain can be used to create advantage.
* Think about a range of future business scenarios and develop a strategy for each. This will help you move faster in an uncertain world.
* Performance measurement systems may be a more important component of business strategy implementation than the traditional, detailed business plan.