Lesson 2: Strategy

Introduction

According to Professor Michael Porter of Harvard Business School, a strategy can be defined as “the creation of a unique and valuable position, involving a different set of activities.” Porter claims that the worst strategic decision any business could make is to compete with a rival based on similar dimensions.

Think of a strategy as a map. The role of that map is to lead your business towards sustainable success and unlock potential as you go along. While none of us are able to predict the future, a strategy can set a way forward for the business. A strategic plan allows a business to review the company’s future and profitability and put intentional steps in place to drive the business towards specific goals.

No single strategic model fits all organisations, but the planning process includes certain basic elements that can be used regardless of whether you’re a startup or an established organisation. A good strategic plan achieves the following:

  • Reflects the values of the organization
  • Inspires action to achieve a big future
  • Explains how you’ll win in the market
  • Clearly defines the criteria for achieving success
  • Guides everyone in their daily decision making

As a business owner or manager within a large corporation, you can’t afford to just sit back and hope that you succeed. As we will learn in the next module, effective leaders are proactive and anticipate what might happen ahead of any given time – which they can do thanks to a strategic plan. Surprisingly, though, an astonishingly large number of people avoid strategic planning and development altogether.

According to the Balanced Scorecard Collaborative:

  • 95% of a typical workforce doesn’t understand its organization’s strategy.
  • 90% of organisations fail to execute strategies successfully.
  • 86% of executive teams spend less than one hour per month discussing strategy.
  • 60% of organisations don’t link strategy to budgeting.

A large portion of the workforce seems to avoid developing a strategy or – worse – develops one and doesn’t implement it. This may be because a strategy is viewed as too complex, costly, or time-intensive; no matter what the reason, it’s distressing. Strategy development doesn’t have to be costly, and when done properly, it is very straightforward.

Historically, strategy was viewed as a fairly formal, rigid process for the execution and efficiency of business. Today, though, businesses are implementing strategies that are flexible, rapid, and focused on much more than just operational effectiveness. Operational effectiveness and management are not strategies in and of themselves, but are rather elements within a strategy.

Because of constant disruption and increased competition in the marketplace, businesses have to create and implement tools that allow for the agile development of startups and create new business models that deal with the forces of continual disruption. This increased competition makes strategic positioning more important than ever.

Trade-offs

A business cannot attain a sustainable competitive advantage simply by choosing a unique position in the marketplace. Competitors are always watching, and while imitation is the sincerest form of flattery, it’s also the quickest way for a business to fail. According to Porter, competitors imitate a valuable position in one of two ways:

1. A competitor can choose to reposition itself to match the superior performer.

2. A competitor can seek to match the benefits of a successful position while maintaining its existing position (known as straddling). Straddling is usually an indication that the  organisation has not made a clearly defined choice on how and where they want to operate.

For example, a high end artisanal cafe could try to mimic the drive-through option provided by McDonald’s Cafes. 

For a strategic position to be sustainable, you have to make trade-offs with other positions. The very best businesses implement robust strategies with multiple trade-offs at almost every step in their value chain.

Trade-offs involve choosing what not to do. They often occur when activities are incompatible – when more of one thing necessitates less of another.

For example, Kulula is an affordable no-frills airline that has chosen not to serve meals on their flights and instead offers guests the option of purchasing snacks. By not serving their own meals, they have reduced costs and improved turnaround time. They have deliberately chosen not to do something in an attempt to position themselves in a specific way. Adding inflight meals without increasing their flight prices simply wouldn’t make sense for their strategic positioning.

Another business that has implemented a specific trade-off is the well-known Swedish home furniture store IKEA. IKEA’s value proposition is to provide well-designed and functional home furniture at a low price. Most of their furniture comes as a flat-pack and requires assembly post-purchase. Their target market is people with a “thin wallet” – i.e. those who don’t have excessive amounts of cash to spare. By choosing a specific kind of value and the activities required to deliver this value, IKEA has accepted a specific set of limits and trade-offs. They know they don’t meet the needs of everyone, and that’s okay!

In contrast, we could look at a local homeware store like Weylands. Weylands provides customers with locally and internationally sourced pieces of furniture, no assembly required. With an in-store design team, deli, and artisanal coffees for sale, the in-store experience is vastly different from IKEA – and so is the price. Once again, we have specific trade-offs at play, with Weylands knowing and accepting that they don’t meet the needs of all customers.
 

IKEA vs. Traditional Furniture Retailers

Why do trade-offs arise?

Trade-offs arise when specific activities are incompatible. This could occur for three reasons.

1. Incompatible product features

A company known for delivering one kind of value that tries to provide a product or service that delivers a different kind may lack credibility and end up confusing customers. If the company attempts to deliver two inconsistent things at the same time, they inevitably end up undermining their reputation.

2. Activities

Different positions require different product compositions, equipment, systems, management skills, and even different staff behaviours. Value is often destroyed when one of these activities is over- or under-designed.

3. Limits of internal coordination and control

Electing to compete in one way and not another means that management is making its organisational priorities clear. Companies that try to be everything to everyone not only confuse their customers, but place huge amounts of pressure on their staff, systems, and processes.

Not only do trade-offs create the need for choice amongst consumers, but they protect a business against straddlers and those who want to reposition themselves.

Fit and Continuity

Fit

When we talk about “fit”, we mean the activities a company chooses to perform, how these individual activities are configured, and how they relate to one another. Strategic fit focuses on locking out imitators. Because of the link between activities, fit is at the very centre of the competitive advantage of a business.

Continuity

Strategic positions need to have longevity and not be pushed aside after a single planning cycle, for two reasons:

1. Continuity promotes improvements in individual activities and reinforces a company’s identity

2. Too many and too frequent shifts in strategy are potentially costly and tend to lead to organisational dissonance and inconsistencies across function

Businesses that fail to develop a strategy without looking at fit and trade-offs have a limited chance of success or sustainability.

How can entrepreneurs leverage traditional business mindsets? They:

  • Have a naturally competitive edge
  • Are unencumbered by a long history in the industry
  • Possess the creativity and innovation to create strategic positioning
  • Can occupy a position a competitor once held but has ceded through years of imitation and straddling

Red Oceans and Blue Oceans

The environment in which most organisations operate today is pressurized and cutthroat to the point that people will do almost anything to gain market share. Typically, when a product or service comes under pricing pressure, the organisation’s operation will very likely come under threat. This usually occurs when businesses are operating in a saturated market with defined competitors and operational processes and procedures. “Red Ocean” describes a market like this, where the cutthroat fighting and competition (the metaphorical chaos and frequent feeding frenzies) turn the water a bloody red.

Conversely, some businesses view this limited space for growth and decide to make the leap to new verticals or avenues. These areas of uncontested growth are what researchers Chan Kim and Renee Mauborgne call “Blue Oceans”.

Kim and Mauborgne based their Red Ocean and Blue Ocean theory on a study of 150 strategic moves, spanning more than 100 years and 30 industries. They found that lasting success does not come from battling competitors, but from creating blue oceans – untapped new market spaces ready for growth. Blue oceans exist when there is potential for higher profits and the competition is either nonexistent or irrelevant.

Implementing a blue ocean strategy means capturing a new demand and making any competition irrelevant by introducing a product or service with superior and unique features – all without having to trade off on price.

Differences between red ocean and blue ocean strategies

As an entrepreneur, you shouldn’t view a blue ocean strategy as “just another theory”, but as a platform for your own strategy-development process.

Let’s examine some of the core principles that epitomize blue ocean strategies, according to Kim and Mauborgne.

Differentiation

A blue ocean strategy is not an “either-or” strategy where you have to choose between differentiation and low cost. Instead, blue ocean strategies focus on the simultaneous pursuit of differentiation and low cost.

While conventional wisdom argues that companies can only focus on creating greater value for customers at a higher cost or creating acceptable value at a lower cost, blue ocean strategies push onwards to break the value-cost trade-off. They achieved this by eliminating or reducing factors a specific industry competes on, while at the same time raising and creating elements the industry has never offered in the past. Kim and Mauborgne call this value innovation.

Value innovation enables organisations to identify what a set of consumers might commonly value across the traditional boundaries of competition and then reconstruct key factors across market boundaries. They thereby achieve both differentiation and low cost while simultaneously creating a leap in value for both buyers and the company.

Competition

For a blue ocean strategy, the competition is irrelevant. While traditional strategies emphasise the need for organisations to define their industry and ensure they are best within that specific industry, blue ocean strategy forces businesses to break beyond those boundaries and redefine how they compete. As an entrepreneur, you need to look beyond the commonly accepted competitive boundaries in search of new and uncontested market space.

Risks

A blue ocean strategy maximises opportunities and minimizes risks. While risk is always present regardless of whether you’re implementing a red or blue ocean strategy, blue ocean strategies provide a robust mechanism to mitigate risk and increase the odds of success.

Kim and Mauborgne developed a framework called the Blue Ocean Idea Index to help make this happen. The Blue Ocean Idea Index allows entrepreneurs to test the commercial viability of their blue ocean ideas. It explains how to refine specific ideas to maximize the upside of a business while minimizing downside risks. The index allows you to answer four key questions:

1. Is there a compelling enough reason for people to buy your product or service?

2. Is your product or service priced to attract the mass of target buyers, so they have a compelling reason to pay for it?

3. Can you develop your product or service at a strategic price and while still making a worthwhile profit from it?

4. In rolling out your product or service, are there any adoption hurdles you need to mitigate for, and have you addressed these already?

The first two questions address the revenue side of your business model and ensure that you create a leap in net buyer value. The third question reinforces the profit side of your business model. The final question addresses any external threats you might not have thought about.

For a startup, the blue ocean strategy offers the best chance of success. You should absolutely aim to adopt a dual focus of increasing customer value while driving down costs.

How to identify blue ocean strategies

If you want to identify a blue ocean strategy, you’ll need to do four things:

1. Eliminate: Look at the factors the industry takes for granted and eliminate them.

2. Reduce: Assess what factors you can reduce well below industry standards without compromising on safety and quality.

3. Raise: Identify which factors need to be raised well above industry standards.

4. Create: Decide which factors should be created that the industry has never offered before.
 

Developing your Strategy

Everything always works better with a plan – especially when you’re running your own business. Developing a strategic plan for your business means looking at everything your business could do and narrowing it down to the things it is actually good at doing. It also helps to determine where to spend time, human capital, and money.

While developing a strategic plan might seem overwhelming, breaking it down into smaller pieces makes it a lot easier to tackle.

Let’s look at the five steps you should take to develop your strategy.

1. Assess where you are.

This is not as simple as it seems, especially as we all want to be further along in our journey than we might actually be. A lot of startups get caught out here, thinking that they’re doing a lot better than they actually are. For a more accurate idea of where your business is, you should conduct external and internal audits to fully understand the marketplace, evaluate any competition, and evaluate your organisation’s competencies.

2. Articulate what is important.

Decide on a specific time frame and focus on what you need to take you there. This allows you to set out the direction of the business over the long term while clearly defining your mission (markets, customers, products/services) and vision (what the future of your business should or could be). By outlining these elements, you should be able to determine what is a priority and what isn’t. As a general rule of thumb, a strategic plan should focus on the key priority.

3. What do you need to achieve?

Determine what the expected objectives are and clearly state how your business intends to achieve these as well as any additional priority issues.

4. Determine who is accountable.

To achieve your objectives, you’ll need to decide who is responsible for what. In a startup, you might be working alone, but think about what elements you could outsource and who you could outsource them to. If you have more than one person in your startup or work in a larger organisation, think about who the best person for the job might be. In your plan, you should articulate what amount of time will be allocated for each task, what the budget might be, and what the priority areas are.

5. Review. Review. Review.

As we said earlier, a strategy needs to be ongoing and reviewed continuously. If you want to ensure that your plans are running accordingly and on schedule, hold regular formal reviews (at least once a quarter) to analyse the process – and refine it, if necessary.

Unsurprisingly, one of the biggest reasons most startups fail is down to their inability to grow financially.  A successful strategy should guide an organisation towards profitability and growth. In the next section of this module, we’ll be examining the financial side of building a startup. While it’s not necessarily the most exciting area, it’s probably the most important.

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