Email Glen Greer
Do the Right Thing or Do the Thing Right?
It's not actually a choice, but thirty years in business have convinced me that you had better work on figuring out the right thing to do, rather than focusing on operational excellence, quality, re-engineering, right-sizing -- or any of the other trendy activities for corporate executives.As Warren Buffett put it in one of his famous annual letters to shareholders, "One of the lessons your management has learned and, unfortunately, sometimes re-learned, is the importance of being in businesses where tailwinds prevail rather than headwinds."
Corporate strategy is the expression of the current hypothesis for what the corporation should be doing. It is, inevitably, a hypothesis, because we cannot get absolute data about matters like customer needs; competitor's plans; the future state of the economy
I usually spend a lot of time with my clients working on strategy, often the key part of my assignment is to provide the data and to facilitate the discussions that will result in the company having a strategy. Here is the outline that I usually start with. It helps companies who have usually succeeded to date thanks to an intuitive or experienced-based understanding of these issues. At some point in the company's growth, it becomes necessary to codify and communicate the strategy more widely.
1. Corporate Strategy
A business provides a mix of product features and services to its customers. Strategy is based on the simple principle that for a business to be profitable it must: provide a better set of features and service than its competitors or provide an equivalent set of features and service at lower cost than its competitors. It can be dangerous to oversimplify a complex subject like this, but if everyone understands that "better" means "superior to the competition as judged by customers in our target segments" and "cheaper" means "based on a sustainable cost advantage" , then we can subject all of our plans to the simple test,
"Is this going to make us better or cheaper?"
Strategic management is the understanding, planning and above all the implementation of business policies based on this principle. It means the company undertakes coherent policies to direct its actions towards those areas where market value and competitive advantage can be achieved. This note tries to describe some key approaches that should help in developing and implementing a strategic plan
1.1 Background
Before trying to construct a strategic plan there is an enormous amount of information that needs to be understood, interpreted creatively and used as the basis for action. This is a huge task, it is also one which is never finished. You can always understand customers, competitors and costs better. You can always gain new insights from existing information. And as the world changes, so strategy needs to be refined and updated. Alone, even the best CEO is unlikely to pull all these elements together and interpret them in a fresh and creative manner. So, when developing strategy, involve other people; both those inside the Organization, and, after the information has been assembled, expose it to others who can constructively criticize the approaches taken. The following section describes some basic approaches which help to identify actions which can lead to customer value and competitive advantage.
1.2 Purchase Criteria
It is surprising how few companies understand explicitly the criteria by which their customers choose to purchase a product, and how they decide who to purchase it from. But if value to the customer is to be the basis of a business, it is critical that customer values are fully, and explicitly understood.
Understanding the purchase criteria and, if necessary, getting independent verification of the criteria is therefore a key element in understanding how customer value is created.
1.3 Segmentation
Customers are not identical. Strategically they can be thought of in two ways. Different customers have different purchase criteria. And different customers require different types of activities and skills to provide the product and services they value. Where groups of customers differ from one another in terms of these characteristics, they are known as market segments. By understanding these segments a company can:
- Target a different product and service offering to different customers, thus generating greater customer value
- Gain a competitive advantage in cost or product and service by tailoring its operation to better match the needs of its customers.
By reinforcing its expertise and costs to service a segment a company can gain a structural advantage within its chosen segment
Creative segmentation is particularly important for companies that have a low market share relative to competition, where it is difficult to find a clear trading advantage. However defining a segment is not a panacea. Unless there is a structural advantage that can be gained from segmentation, the gain is likely to be short term since competition will find it easy to copy any segment based strategy.
1.4 Growth
Growth is a key element in identifying attractive markets in which to compete. And it is critical to understanding the timing and size of the investment and commitment of managerial resource that should be made.
Predicting future growth is not possible just from understanding what has happened in the past. It is necessary to know why it has happened. Extrapolation of historic trends is just not good enough.
2. Competitor Evaluation
2.1 Products/Service Offering
The key element that distinguishes strategy from marketing is the explicit consideration of competitive advantage. Just as it is critical to know what are the customer purchase criteria, it is also critical to know how our company and our competitors respond to these needs. After all it is the interaction of customer needs and competitor response that will ultimately determine who makes the sale.
Therefore as part of its strategy development a business should understand how it "rates" in terms of its satisfaction of the purchase criteria relative to each of its competitors. It is only in this way that a company can know where its current competitive advantage lies. From this it is possible to develop clear ideas as to those skills in which it can create a structural advantage over its competition, and of those areas of relative weakness that will require attention. These in turn should be linked back to the different purchase criteria for each market segment, in order to gauge those parts of the market where the business will be most competitive.
This interaction of purchase criteria and competitive offering should be apparent from the growth of the different companies involved. If it is not it is likely that something is wrong with the analysis. So it is important to test that historic company growth reflects market perceptions. If it does not, think again.
2.2 Costs
Ultimately competitive advantage depends on the ability to offer customers the best possible response to their purchase criteria. However, such an advantage can be transitory, because competitors can imitate such a product/service offering. (A good example of this would be in the computer industry where IBM has been responsible for very few new technical developments, but has been able to deliver better products and services than those introduced by competitors).
It is only where a fundamental cost advantage exists that a better competitive position is sustainable in the long term. It is therefore critical to understand one's costs relative to competition. These can be based on a number of factors. Understanding and building structural cost advantages is now critical to creating and sustaining a successful strategy.
2.3 Costs/Profitability
Successful strategy leads to increased profits. Therefore the successful strategist should be able to demonstrate that the success of the chosen plan from its profitability. This is already often apparent from the company's current trading, (though often obscured by inaccurate costing systems based on averaging and allocation). These are some of the elements that go to make up an understanding of the background on which to base a strategic plan. Each should be understood before embarking on a plan, and many other elements may be required to produce a comprehensive background. This is likely to be a long process. Good strategic thinking can take years to develop. However, if data is not available, it is important that working hypotheses be developed that explicitly address the questions posed. These can then be tested as time and resources allow. With such a background if it is then possible to create exciting options for a business based explicitly on customer value and competitive advantage.
3. Business Options
3.1 Generating Options
The objective of this process is to create as interesting a set of options for the business as possible. A business option is one that is of major significance to the business and that requires that a definite decision be made. "Improve marketing" is unlikely to be a business option. "Attack the French market by opening a warehouse and hiring ten salespeople" is.
The work involved in understanding a company's strategic position is long and difficult. It tends to narrow the focus of one's thinking. This can prevent the generation of exciting differentiated options for the business. Therefore the process of option generation is a creative one that tries to break any deterministic analysis that may have entered into the work. It is unlikely to be very successful if it is attempted individually. Creative ideas are more likely to be "brainstormed" out of a group. Equally, you may find that outsiders are able to help generate interesting options that are not obvious to people inside the company.
When you have spent some time generating options you should have a list of at least half a dozen clear commitments that the business should make, that can be evaluated either separately or together (in the case of complementary options). It is one (or some) of these options that will be the strategy that will determine the success of your business in the future. Therefore the creativity that can be brought to bear at this stage is of real importance in determining your company's future. Option generation is not a static process. It is something that should be constantly at the back of your mind as you seek new and creative ways to satisfy customer demands and gain competitive advantage.
3.2 Option Choice
The option generation process is one that is designed to avoid tunnel vision, to promote creativity, and to make explicit the different alternatives available to a business. However, only one strategy can ultimately be pursued. In choosing options we are therefore deciding which options will be pursued. There are two important points to bear in mind about this process. First the chosen options should be consistent and complementary. Second, that those options that have been rejected should be rejected explicitly. If you have gone through this process you should never be surprised by the question 'Why don't you do this?"
Most options can be rejected on qualitative grounds. others will require some analysis to decide if they are worthwhile or not. In each case, remember to ask the two fundamental questions "How does it create customer value?" and "How does it create competitive advantage?". And try to assess explicitly the return and risk associated with each option.
Ultimately, the chosen option(s) will be transformed into a budget. In rejecting alternatives it is a useful discipline to do a "draft" calculation of what the budget would look like for the most attractive alternative strategy. Clearly, if the alternative strategy produces greater profits, the choice was wrong!
4. Implementation
Strategy only creates value if it is implemented. Otherwise it is just a time consuming intellectual exercise. Strategy must therefore be turned into action. To do this, two processes can help. First everyone in the Organization should understand broadly the company strategy, and what it means for their actions. This will ensure that the actions that they take day to day are geared towards the company's strategic objectives.
Secondly, each individual should be charged and evaluated with undertaking key actions that will further the company's strategy. "Improve distribution" is not an action on which someone can be easily evaluated, whereas, "Ensure 99.5% on-time delivery for the second quarter is". This might be one of the actions for the marketing manager. The manufacturing manager might have an action to "introduce flexible manufacturing and stocking to ensure 2 day lead time for top 200 items'. These managers in turn would give appropriate tasks and actions to their subordinates.
These key actions should be limited in number, in order to ensure they are manageable. And they should form at least one of the bases for performance evaluation at the year-end.
Implementation, translating strategy into action is the last, and most important aspect of company strategy. If it is done correctly you will create an Organization that is devoted to the creation of customer value and competitive advantage.
