In my previous blog I explored the purpose of strategy: the creation of a sustainable competitive advantage. In Buffet’s terms, it is about building a moat wide enough and deep enough that marauding invaders cannot bridge the gap.
So that’s the purpose of strategy. But what is strategy[i]?
Porter did us no favours when he argued that there are only two generic strategies: low cost or differentiation[ii]. We still teach this in MBA strategy programs. But it is an entirely inadequate expression of ‘strategy’. It is intellectually correct and practically inadequate.
Walmart and Aldi are both low cost providers. But their strategies are fundamentally different. To be fair, Porter’s generic strategies incorporated a narrow vs. broad market dimension (Aldi v. Walmart) but that’s still not enough.
Strategy is a coherent set of choices around the business model – the fundamental organisational architecture of creating, delivering and capturing value – designed to create sustainable competitive advantage. The business model comprises two elements: a market model and a business activity system.
The market model identifies the ‘who?’ and the ‘what’. Who is the customer? What does the customer value? And this shapes our expected revenue model. This is a fundamental choice of scope for the business.
The challenge of strategy lay in the designing the business activity system. It is what we do and how we do it that makes us different. The expression of our intended target markets and value propositions is just ‘intent’ until we create a business activity system which can deliver on that promise. And it is in the design of this business activity system which will determine whether we have a competitive advantage, and whether this advantage is sustainable.
What is the scope of choices an organisation might make around the business activity system? The following list is indicative, not exhaustive:
- the operating scope … which parts of the value chain or ecosystem will we play in?
- the technologies[iii] … what are the core ‘production’ technologies?
- the strategic asset configuration … are we asset heavy, or asset light? And where will we locate our assets?
- Distinctive capabilities … what are the distinctive capabilities which are core to our point of differentiation
- Systems and processes – what management systems do we need to enable this to work?
- Culture … what is the ‘look and feel’ of an organisation we seek?
Underpinning each of these decisions is a coherent logic – the underlying business thesis – that links these into a series of tightly interconnected choices. If this underlying thesis is not embedded in the mental models of your leadership team and the broader workforce, if it is not deeply embedded in your culture, your strategy becomes diffuse and confused.
Given that, the challenge of strategy making is to assess whether your existing business model is delivering competitive advantage; and will it continue to do so into the future?
There are only two outcomes that can come of this evaluation:
- Your business model is competitive but it will require continuing deliberate, targeted investment in capability and capacity building to deliver competitive advantage; or
- Your business model needs transformation which will require a redirection of investment to shift from the current to a stronger business model.
Both demand investment of time, energy, effort and funds (TEEF). And both have their risks.
One risk of building on the existing is that complacency, hubris or ‘status quo risk’ has resulted in a ‘false positive’. And you will continue to invest in a business model which is rapidly passing its use by date. The result will be continuing strategic drift until near failure galvanises a new leadership team (by this time the existing leaders are usually on their way out). The other is that you fail to maintain the level of constant innovation required of even the best business models to maintain competitive advantage. Organisations are prone to ‘door knob polishing’ rather than replacing the door.
A major transformation risk is that organisations tend to over-estimate their ability to pull it off. Successful transformation requires a quality of leadership which isn’t all that common in organisations. The other risk is that we are too timid. It is a truism of change that organisations tend to change as little as they must rather than as much as they should.
In either case, the end result must be a deliberate choice to make an investment. And then the execution risk remains: how do we infuse this mindset and choice across the broader leadership team to allow us to create competitive advantage through execution capability?
This is very much reflective of the ‘positioning’ school of strategy. It presumes that strategy is the result of some grand design. It also has an ‘espoused theory’ feel to it. But is this how strategy is lived in organisations?
The practice of strategy – lived strategy – is much messier than this suggests. This is my next blog.
DDB ... a strategist's view
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[i] I am talking here of strategy at the business unit level. Above this sits a corporate strategy; below it the operational and functional strategies
[ii] ‘Low cost’ refers to a structural (production) advantage which enables the firm to deliver the same value at a lower cost. Differentiation reflects either a product innovation advantage, or a customer intimacy advantage.
[iii] Technologies here incorporates intellectual property protected through patents etc. Technologies reflect what we call ‘core competence’. It is ‘what’ we do.