Strategy is creating fit among a company’s activities. The success of a strategy depends on doing many things well and integrating among them. If there is no fit among activities, there is no distinctive strategy and little sustainability. Management reverts to the simpler task of overseeing independent functions, and improving operational effectiveness, a race to the bottom.
I. How to compete?
Operational Effectivness (Going Faster) Is Not Strategy
- If there is one carrot farmer at themarket, the farmer can charge whatever the buyer is willing to pay. BUT - if there are two carrot farmers, the farmers compete with each other to the get the buyers money.
- The QUESTION is how can the farmers compete?
- Being as efficient as possible, Operational Effectivness, is important. For short periods of time, one carrot farmer can get more profit then the other carrot farmer, by being more efficient. But the other carrot farmer will soon be able to emulate the tactics of the first farmer, and before you know it the competitive advantage will disappear. Operational efficiency is not a sustailable competive strategy.
- Strategy positioning is defining how your company is different. By providing a different value, or providing the same value using different activities. For example, instead of selling carrots, the farmer can sell carrot jam. Strategic positining, is the only way to get a competive advantage.
II. What is a strategy?
Strategy rests on unique activities Strategy is deciding what you will do differently
- Example Southwest low cost air line things (all the same plane, no assignements, allows faster gate changes).
- Ikea different kind of furniture store (no sales people, self serve put together, child care)
These three approaches to positioning are often combined.
Variety based positioning
Focus on the most you can get out of a subset of products services which you can deliver most efficiently.
- This is the technologist strategy. What’s the best value I can provide from brass. I only work with brass.
- Jiffy lube, what’s the best I can do for oil changes.I only sell oil changes
- Best ROI for the provided service.
- Serves lots of customers, but doesn’t meet all of their needs.
Needs based positioning
Focus on a niche (or large market) and provide everything required to serve the niche. This is the current vogue approach used by startups and start small groups.
- Only a strategy IF the activities required to support this need are different from rivals.
- Ikea try’s to get all the needs of the home of young not rich people.
- Cheap Furniture because no sales force, and customer put together themselves
- Child care since many have families.
- Late hours since most work during the day.
- Private bank targeting customers with assets of 5M$.
- Client reps with 10 customers max,
- Experts in horses and helicopters.
- Meets most of my needs.
Access based positioning
Focus on the unique distribution strategy for these customers. For example geography, or Examples:
- Theater only operates in small towns. Competes with high school foot ball team. Needs simple theatre and managers who know the community. Customer Value:
- It’s easy for me to access
Observe, contrary to popular knowledge, positioning isn’t just demand side. For example Access and Variety strategies are supply side only. However, in practice both positioning and variety positioning approached will find differentiated needs.
III. Why is strategy a sustainable competitive advantage?
Strategic Positioning Requires Trade Offs Strategy requires deciding what not to do
Three types of trade offs:
- Inconsistent brand or reputation.
- Inconsistent activities
- Limits on internal coordination and control.
You can straddle, but there’s a huge penalty. Avoid False Trade Offs. No trade off -> No competitive advantage.
IV. Fit and sustainable competitive advantage.
- How do the unique activities interrelate and reinforce each other.
- Fit is as strong as the strongest link?
Types of Fit
- First order - simple consistency. All activities accumulate.
- Second orders - activities reinforce each other.
- Third orders - optimization effort
Activity Maps: List out critical activities. Strong positions have High order strategic themes as high fan out nodes in the middle.
Building a stronger activity map
Fit and sustainability
Copying fit is much harder then copying an activity, imagine you need 3 activities, and you copy each at .9, you end up with a copy .9^N activities.
Since there’s little value in copying a single activity, need to copy all activities which makes a BIG step function, others don’t want to take.
Operational Effectiveness over a big activity map is really hard to copy. And leaders can really pull ahead.
V. How to Rediscover Strategy?
The failure to choose
- Belief that committing is a sign of weakness
- Focusing on efficiency is concrete, actionable and measurable.
- Think Customer Focus == All needs of all customers
- Trade offs scary to big bosses, don’t make trade offs since dont’ want to look bad or make the wrong call.
The Growth trap
- Looks like trade offs can limit growth.
- Profits fall, so go after more market share, but eventually rivals come in and eat the profit in the race to the bottom.
- Make a position deeper, not broader.
- Which activities, features, or forms of competition are feasible or less costly to them because of complementary activities that their company performs.
- Deepening a position involves making the company’s activities more distinctive, strengthening fit, and communicating the strategy better to those customers who should value it.
During such periods in an industry’s development, its basic productivity frontier is being established or reestablished. Explosive growth can make such times profitable for many companies, but profits will be temporary because imitation and strategic convergence will ultimately destroy industry profitability. The companies that are enduringly successful will be those that begin as early as possible to define and embody in their activities a unique competitive position. A period of imitation may be inevitable in emerging industries, but that period reflects the level of uncertainty rather than a desired state of affairs.
In high-tech industries, this imitation phase often continues much longer than it should. Enraptured by technological change itself, companies pack more features-most of which are never used-into their products while slashing prices across the board. Rarely are trade-offs even considered. The drive for growth to satisfy market pressures leads companies into every product area. Although a few companies with fundamental advantages prosper, the majority are doomed to a rat race no one can win.
Ironically, the popular business press, focused on hot, emerging industries, is prone to presenting these special cases as proof that we have entered a new era of competition in which none of the old rules are valid. In fact, the opposite is true.”
Role of leaders
With so many forces at work against making choices and tradeoffs in organizations, a clear intellectual framework to guide strategy is a necessary counterweight. Moreover, strong leaders willing to make choices are essential.
General management is more than the stewardship of individual functions. Its core is strategy: defining and communicating the company’s unique position, making trade-offs, and forging fit among activities.
The leader must provide the discipline to decide which industry changes and customer needs the company will respond to, while avoiding organizational distractions and maintaining the company’s distinctiveness.
There will be constant pressures to compromise, relax trade-offs, and emulate rivals. One of the leader’s jobs is to teach others in the organization about strategy-and to say no.
Strategy renders choices about what not to do as important as choices about what to do. Indeed, setting limits is another function of leadership. Deciding which target group of customers, varieties, and needs the company should serve is fundamental to developing a strategy.
Indeed, one of the most important functions of an explicit, communicated strategy is to guide employees in making choices that arise because of trade-offs in their individual activities and in day-to-day decisions.