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What is 'Strategy' and have you got one?

“Strategy” is a fashionable word in business circles.  Just tune into a conversation in your office or in the bar after work and you’ll keep hearing that strategy word.  You will hear about Human Resource strategies, outsourcing strategies, insourcing strategies, acquisition strategies, diversification strategies, operations strategies.  But the truth is that we are in danger of forgetting what strategy really is all about.

In this article, we will learn that strategy is a word with a very special meaning and it deserves a very special place in the organisation.

So What Is Strategy?

When I talk to organisations about strategy, the first point that I try to get across is that there’s a business war going on out there.  Success in business in the long-term is about being better than your key competitors.  A simple statement, but one that we may have lost sight of over the last decade.

The last ten years or so have been dominated by management panaceas such as business process re-engineering and outsourcing which in turn have bred an almost hypnotic focus upon cost reduction as the centre piece of the business plan.  This has led, in some cases, to degradation in the quality of our strategic thinking.  We have become inwards thinking in the focus of our attention.  We need to re-establish an outward visionary, market-led perspective.

Why?  Well, as I have just said there’s a business war going on there.  Success or failure is largely determined by how well, in the long-term (note the use of the words long-term), your business is better than your key competitors at serving the needs of its customers.  Therefore, strategy is an integrated concept of how your organisation will outmanoeuvre the competition in order to create value for your shareholders, employees and other stakeholders.

In your organisation, the use of the word “strategy” should be reserved for this one purpose – how the business will achieve its objectives in the competitive battlefield.  Actions that important supporting and functional areas take to support the strategy are plans, not strategies.  An organisation only has one strategy.  It is the formula for achievement of its long-term objectives

So, at this stage, we have noted that “strategy” is:

• The unique way that the business as a whole will gain competitive advantage in the marketplace.
• A long-term issue.
• Not about individual functions or departments.  Individual functions and departments have plans to support the strategy.
• Based upon a vision of the future competitive marketplace and how the organisation will gain advantage in it.

A Little More Detail

But what does strategy consist of?  Now we know what it is, what are the essential elements of a successful strategy?

Well, as illustrated below, there are seven essential components:

Component 1 – Visions of the Future.  This is the most important part of the strategy configuration.  It is the foundation stone.  It is your responsibility to ensure that a leading-edge view of the future marketplace – a scenario - is produced.  This is a difficult process that is frequently omitted from many of the business plans that I see.  Producing a scenario involves considering the inter-relationships between a number of variables that can separately or together shape the future marketplace.  These variables include:

• New entrants
• Supplier power
• Distributor power
• Customer power
• Technology
• Demographic shifts
• Economic environment
• Political changes on both the national and international fronts
• National and international stability

But note that we are talking about visions of the future.  In a climate characterised by unprecedented levels of global instability, we need to consider at least three scenarios – one representing the most likely evolution of the marketplace, the second and third foreseeable extremes.

Component 2 – The Arena.  Quite simply a clear definition of the marketplace and its segments that you will choose to operate in.  Be as specific as you can about defining products, potential customers, geographic area and distribution.  As we shall see later, the success of a strategy is largely influenced by how efficiently it can be communicated. So we need detail here.

Component 3 – Competitive Superiority.  This is the area in which I feel that we have really regressed.  In the introduction I made the point that strategies have become inward looking.  Cost reduction has become an overly popular option.  Remember, that we are talking here about how the organisation plans to gain competitive advantage in the marketplace – and that involves being better than the future competition.

When I help organisations develop strategies, I spend a lot of time helping them to define who will be the key competitors of the future and what sources of competitive superiority the key competitors will attempt to deploy.  This type of approach makes it easy for my clients to define their sources of competitive by positioning themselves against the competitors of the future and identifying how they will be different in at least the following dimensions:

• Product
• Product supporting services
• Relationships with the end customer
• Relationships with other (such as suppliers and distributors) in the value chain.

This process will generate a clear statement of competitive superiority.  But the problem is that in practically all the plans I see the issue is fudged.  There either isn’t a clear definition or management fall back on cost reduction.  The problem is that reliance on cost reduction will probably result in failure in the medium to long-term as:

• It’s not a sustainable source of superiority, at some point in the future all major competitors will reach the same cost levels and
• More importantly, cost reduction can have severe impacts upon the innovative capability of the organisation and its most important resource – people.  For a discussion of these downsides see my briefing Outsourcing – Strategic Advantage or Strategic Stalemate?

Component 4 – Generating Value.  You have got to explain why your strategy will generate profits.  This is really an explanation of how the financial budgets will come to life.  This should fall directly out of the competitive superiority analysis.  Ultimately, the drivers of profit should emanate from one or more of the following sources of competitive superiority:

• Product
• Product supporting services
• Relationships with the end customer
• Relationships with other (such as suppliers and distributors) in the value chain.

Component 5 – Getting There.  This is all about the route that will be taken.  Are we talking about:

• Organic growth?
• Acquisitions?
• Mergers?
• Licensing?
• Franchising?

Component 6 – Milestones to Success.  This is the implementation plan.  How the organisation must act and change to implement the strategy and hence achieve the organisation’s objectives.

Remember, that a holistic set of actions is needed.  You need a clear sequence of activities AND associated KPIs and milestones to demonstrate that you know how to keep implementation on course.

Component 7 – The Story.  This is the central component.  It’s what makes things happen.  To work, a strategy must be communicated.  But it’s more than that, to win, the strategy must engage the minds and motivation of all who will be involved.

The problem is, many organisations aren’t very good at communicating their strategy and engaging their staff.

To do this, the strategy needs to be distilled and simplified into something that I call a strategic story.  A strategic story has the following characteristics:

• It’s simple.  It’s something anyone can understand.  You don’t have to be an industry expert to get to grips with the strategy.  It’s something that you can talk about and engage people’s interest at a drinks party for example.
• It contains a concise vision of the future.  What the mega changes will be.
• It communicates how your organisation will be superior in the tomorrow’s marketplace.
• It gives simple guidance on the major things that the organisation has to do to be superior.

And by the way, it should take no longer than 5 minutes to get across.

What Next?  A Test

Now that we have reviewed what a strategy really is – how does your strategy shape up?

If you want to find out, answer these questions:

1.   Do you have a clear view of the future marketplace?

2.   Have you defined the characteristics of your future key competitors?

3.   Have you defined how you will generate competitive superiority?

4.   Have you defined the competencies you need to generate competitive superiority?

5.   Have you defined how you will develop the remaining resources that your organisation needs to generate competitive superiority?

6.   Can you explain how your strategy will generate value?

7.   Can you tell the strategic story?

How did you do?

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References and Further Reading

The ideas in this article have been based upon the work of Donald Hambrick and James Frederickson.  You are recommended to read the following paper:

Hambrick, D C and Frederickson, J W (2001) Are you sure you have a strategy? Academy of Management Executive, November 48-59