Strategy Secrets of Successful Companies, Part II

WHAT IS STRATEGY?

Part one of this series presented the hard truth about good strategy: almost no one gets it. In this installment, we address the need for basic strategy education by looking at what strategy is and what it is not.

So what is strategy? Strategy is the gradual, nonrandom process by which organizations build more or less competitive advantage in a market as a function of the choices of their leaders. Good strategy builds unique and valuable positioning in a market, enabling the organization to realize its vision, and ultimately to fulfill its mission. Vision is what the organization aspires to become in the intermediate term. Mission is why the organization exists; its long term reason for being.

Strategy has a universal structure in three parts: goal, advantage, and activity set.

Goal is the choice of what precisely the strategy is designed to achieve during a chosen time frame. For example, managers could choose “to grow to $5 million in net sales by 2015,” or “to grow to 100 sales reps by 2020,” or “to grow to 2 global partnerships by

2014.” There is no one right answer here. Managers have considerable discretion in setting the goal, and choosing an appropriate one for the strategy is crucial as it will drive the kinds of investments managers make during the strategy’s time frame. It’s important to note that the goal of the strategy shouldn’t be to “maximize shareholder return” or a similar measure of economic value creation. While ultimately all strategic choices are made against the backdrop of maximizing return on invested capital (ROIC), the goal of any given strategy is not that. Rather, the strategic goal is set according to what managers believe will drive economic value creation during the selected time frame. So, if you are starting a quick-service restaurant and believe that the best way to create value is to grow through franchising, then it could make sense to select a goal of reaching a certain number of franchisees by a certain date.

Furthermore, a good strategy has a single goal, and this should not be confused with the various metrics that companies use in parallel. Managers often get this wrong and confuse metrics, which should track the progress of the business towards meeting the goal, with the goal itself. Accountants and control experts have muddied the waters here by offering tools that create dashboards of metrics that track all kinds of things, but give no guidance as to how to make tradeoffs among them to fulfill the goal of the strategy (Balanced Scorecard anyone?). Choose one goal and stick with it. Remember: multiple objectives is no objective!

The length of the time frame can vary, but building a positioning takes time and thus, it is wise to choose a time frame that is longer than one planning cycle. A good rule of thumb is to set a horizon for the goal of between 5-10 years, but it could be shorter depending on the situation faced by the business. 

Advantage is a clear articulation of what makes a company’s product or service offerings different from competitors’. This is captured by the company’s value proposition: the features and benefits of the company’s offerings that deliver unique value for target customers. For example, New Strategy Group’s value proposition is: “Only New Strategy Group empowers your managers to discover their competitive advantage for themselves by creating an immediate breakthrough in their ability to think and act strategically—at high speed and at a fraction of the cost of strategy consultants.” This value proposition is a statement of how we are different in ways that matter for our target customers, and is designed to move target customers to act: to want to know more about our offerings and ultimately to engage with us. Crafting the value proposition is a complex task involving the identification of certain problems the enterprise will own on behalf of its customers, the type of customers targeted, the geographies that contain them, etc. Each company needs a strong value proposition as a core element of its strategy.

Note that a value proposition is not the same thing as a marketing tag line, although in some cases, a value proposition can do double duty. For example, YouTube allows users to post video clips of themselves to a worldwide audience at no cost. Their value proposition for those who want to share themselves can be properly stated as “Only YouTube allows you to broadcast yourself to the world for free.” Not coincidentally, their marketing tagline is “Broadcast Yourself.”  When crafting strategy, however, it is essential for managers to define their own value propositions before they engage with marketing and advertising experts to create specific tag lines that communicate the value propositions to their target customers. Often, because managers don’t “get” strategy, they try to outsource the definition of the value proposition to those who are in no position to do so.

Activity set refers to the investments that managers make to build a set of interlinked activities inside or connected to the firm that are distinctive in that they make the firm’s value proposition(s) real. So to follow our example, if we make the claim that “Only New Strategy Group empowers your managers to discover their competitive advantage for themselves by creating an immediate breakthrough in their ability to think and act strategically—at high speed and at a fraction of the cost of strategy consultants,” then if we looked inside the company, we would expect to find a set of activities that enable us to do just that (and you would). Otherwise, value propositions are merely empty marketing slogans—and thus bad strategy. Here you can see the danger of outsourcing the creation of advantage to advertisers and marketers, who cannot be expected to understand your business well enough to craft good strategy for it.

An activity set also encompasses the degree of vertical integration of the enterprise: which activities will be done in-house and which will be outsourced. In the language of strategy, this addresses the specifics of a firm’s value chain: the discrete steps in the sourcing, production and distribution of goods and services the firm does itself, and which it contracts or partners for.

Competitive advantage—a much used and abused term—grows from the degree to which the activities in the set fit together; that is, the degree to which they are consistent with and reinforce each other. So, in building competitive advantage, it’s the set that matters, not any one activity in isolation. In the case of New Strategy Group, it’s not just that we are less costly than strategy consultants, it’s the whole set of activities inside the company that bring our entire value proposition to life.

What strategy isn’t

So strategy is the integrated set of choices managers make to differentiate their enterprise from competitors in their markets. In this sense, strategy is not a plan. Rather, strategy is choice in action expressed as 1) a goal in a stated time frame; 2) a unique and valuable advantage for target customers; and 3) a set of activities (investments in research and development, labor, technology, equipment, partnerships, distribution networks, etc.) that are undertaken cooperatively by all human beings employed by or related to the enterprise. The degree to which the activities in the set fit together and reinforce each other connotes the firm’s competitive advantage.

In the end, strategy is what a company actually does, without regard to what it says it does or will do (i.e., its plan). Strategy is the observable set of choices managers and employees make about the business each and every day. So, that’s the structure of strategy. Stay tuned for part three in this series, which will address the chronic lack of discipline shown by managers in crafting good strategy day-to-day.

Lawrence Fagan

Leave a comment