Strategy frameworks begin with two phases: strategic planning and strategy execution. While my work falls more into the execution side of things, I have been able to see top leaders focus their efforts on envisioning business innovation and transformation. Planning is an essential foundation as it relates to strategy execution, which relies heavily on portfolio/project management skills. Dusting off my old copy of Michael Porters’ HBR article titled, “What is Strategy?” I sought to get the founder’s opinion and renew my understanding of the subject. As you may know, Porter is a world-renown consultant and is considered the father of modern business strategy. I recall studying his work on competitive advantage and the infamous, Porter’s Five Forces in my Strategic Management course in business school. If one is to study strategy, he is the best resource to start with! Below is a summary of the key ideas presented in the article.
Strategy means different things to different organizations. Some believe strategy to be the activities that you are going to perform the next day. Others believe it is the way you perform the task. Yet other might define strategy as multi-elemental process. During my work, I have been fortunate to be a part of strategic planning session in four organizations, and I can attest to the differences that exist. Some require more robust discussion and thought whereas others take on more of a strategy review feel. The larger the organization the more moving parts are considered and more robust the discussions can become. However, at the most basic level, one way to look at strategy is understanding how to move an army in the same direction- no matter if the team is 2 or if its 10,000. When leaders are able to organize a team toward the same vision, an organization can increase it’s competitive advantage, impact on its workforce and remain sustainable longer.
I recall from my Strategic Management course, three levels of Strategic consideration: Corporate, Business, and Functional. Leaders may utilize consultants and a combination of frameworks such as the SWOT, PESTLE, Porters Five Forces, VRIO, and BCG Matrix at each level.
I believe there are five questions that identifies the need for change. Are we in the right business and why? Second, what is truly driving the economic engine of the organization. This forms the basis of Jim Collins, Hedgehog Concept in his book “Good to Great”. Third, what transformation will be required to reach the vision and why is it not in alignment currently. Finally, factoring in the people part of the analysis is who will be impacted, and will its value reach the right people. As one may surmise, there are many moving parts.
Strategy has been initiated throughout the centuries. As countries grew and threats from the outside ensued, leaders needed the ability to instruct massive armies toward one goal– to protect the kingdom. Often businesses and entrepreneurs try to be all things to all customers instead of being the best in one are. As they chase revenues, they risk confusing the staff as they try to make day to day operating decisions without a clear framework. Ultimately, confusion among the customers and stakeholders catches up.
In his paper, Porter indicates that proper foundation to strategy concerns three premises:
- Positioning is essential to strategy.
- Strategy requires trade-offs.
- Strategy ensures fit.
Positioning is essential to strategy.
Strategy is much more than operational effectiveness. Operational Effectiveness is about delivering the best value while executing the particular activities. The limitation is that everyone can compete an operational front. Every company can reduce costs, change suppliers, pursue the same donor, etc. When this happens, one sees competitive convergence. This is a lose-lose scenario. Cost cutting may not be the right strategy for a smaller company as it might be for a larger conglomerate that can buy using the concept of economies of scale. It ends up becoming a race to the bottom fast. However, when one engages in activities that are not easily replicable, the development of a strategic positioning is in motion. This is hard, and requires a deep understanding of industry, and a strong network where one can understand the big picture, look forward, and anticipate change.
Porter posits that positions can be broad or narrow; however, each consists of a set of activities based on:
- Needs: Supporting a segment of customers with similar needs.
- Variety: Building a greater array of choices among products and services.
- Access: Providing service to customers who are accessible in different ways and/or locations.
Strategy Requires Trade-offs.
Having a sustainable strategic position requires trade offs. One has to be discerning of the activities in which the company will engage. Having a strong strategic position will attract imitators for sure. There are two ways competitors imitate: 1) repositioning to match the top performers and 2) straddling to match the benefits without changes to their current strategic position. Tradeoffs occur when existing activities are incompatible. Tradeoffs typically occur with cost and quality. Adding features in one area, may cause a reduction of service another. Strategy here is choosing what not to do.
Trade-offs can arise due to:
- Inconsistencies in image or reputation.
- Different positions require different configurations and ways of doing business.
- Limits on internal coordination and control.
Strategy Ensures Fit
One must understand how the activities the company choose to participate in relate with one another. It would not make sense to enter buy a diamond mine, if you want to be the top gold seller. Now, unless your position is now to become the top precious metals miner, then, by all means dig away. But you may not be able to use the same equipment or the same process. An essential function of strategy is combining activities. One activity’s value can be enhanced by other activities. For example, if diamond mining become profitable, and it allows you to purchase exclusive gold mine which becomes profitable, you have a good fit in the precious metal’s space. While this is a broad example, even discrete activities often affect one another. There are three types of fit:
Types of Fit
- First order Fit – There is simple consistency between each activities and the overall strategy.
- Second Order Fit- When activities are reinforce one another.
- Third Order Fit – Optimization of effort to reduce excessive inventories or various levels of work (via outsourcing)
Conclusion
As one can imagine, strategic development or planning is an ongoing process. There are economic challenges leaders must be aware of they seek to re-position their organizations. They must work to identify what activities are going to position the company most effectively. They must understand what work the organization wants to involve itself in ultimately. There will be trade-offs that occur as one makes the decision to change ways of doing business. For example there are trade off of moving from a product focused model to service focused model. There will be activities that must be eliminated or reinforced with another activity. Lastly, the activities the organization decides to engage in must fit together in a clear an concise way. Once these elements have been studied, leaders will be well on their way to creating a competitive advantage, superior profitability, and sustainable impact.
