Everyone knows what strategy means but what purpose does it serve for businesses and more specifically, for consultants?
This article is designed to help consultants think about this purpose of business strategy and consider some of the ways they might improve existing strategies.
I looked at this question briefly in our analysis of management v strategy consulting. (well worth a read!) But I wanted to go a bit deeper.
In this post, I’ll look at:
- What is the purpose of a business strategy?
- What contributes to a business strategy?
- Competitive advantage – how this links to business strategy purpose
- Trade-offs – and how they link to business strategy purpose
What Is The Purpose Of A Business Strategy?
When consultants go into a firm, this is one of the first things they will establish. Some businesses have great strategies, but many have almost nothing.
Some have a generic strategy, but no real purpose behind it.
A 2006 McKinsey survey reported that over 75% of the 796 companies polled had a formal strategy.
So not only do 25% of companies not have strategies, but many of the 75% have pretty rubbish ones.
David J. Collis and Michael G. Rukstad cited Edward Jones’s Strategy Statement as an example of a good strategy in a recent article:
To grow to 17,000 financial advisers by 2012 by offering trusted and convenient face-to-face financial advice to conservative individualApril 2008, HBR
investors who delegate their financial decisions, through a national network of one-financial-adviser offices.
It is specific, it has boundaries and it have has a method. Another good example is that of Leeds University:
“By 2015, our distinctive ability to integrate world-class research, scholarship, and education will have secured us a place among
the top 50 universities in the world.”
What Contributes To Business Strategy Purpose?
They say that a serious strategy needs a range of things.
These are an objective, scope, and competitive advantage. If possible, a strategy will illustrate a company’s position in the ‘sweet spot’.
“Scope” is fairly self-explanatory. Nonetheless, many executives still answer the scope question by saying ‘as big as possible’.
While this may be true, it actually isn’t useful for the company’s development. It does not relate to any tangible goal or method of achievement. Instead, geographical and temporal scope is an important requisite.
“Objective” is a bit more complicated.
The majority of the real objective goes without saying.
The objective of making [more] money obviously sits at the top of this objective tree. Then there are shorter-term strategic objectives that develop this overarching goal.
Companies usually articulate this objective with reference to values.
For example, Whole Foods states its core values—including “Selling the highest quality natural and organic products available,” “Supporting team member excellence and happiness,” and “Caring about our communities and our environment”.
These values contribute to the objective of profit but are increasingly objectives themselves. Corporate responsibility is crucial to all companies’ marketing strategies.
Competitive Advantage – And How It Links To Business Strategy Purpose
This is really the make-or-break point for any business. Why is this business, not that business? This is the crucial part of strategic thinking.
A business strategy is the flip side of operational effectiveness. i.e. the planning and the execution.
“Operational effectiveness and strategy are both essential to superior performance, which, after all, is the primary goal of any enterprise. But they work in very different ways.”Michael Porter, Harvard MBA Professor
Operational effectiveness can be immensely successful without too much strategic thinking.
For example, in the printing industry.
The major players all compete in terms of pure speed, quantity, and quality of output. Competitive advantage is simply a case of generating more, better products for less. The only thing that matters is efficiency.
The importance of operational effectiveness v strategy depends on industry structure. The printing example is increasingly rare.
For example, privileged relationships and interdependencies in an industry would demand more strategy. Similarly, regulations and technology both have the potential to offset the balance of the industry.
Within this structure, there are a number of variables, depending on the actions of the market’s participants. These are summarised by Porter’s Five Forces, which has also been reworked for use in case studies!
This beckons the need for competition strategies, not just industry-based strategies, which is what we will look at more closely in the next section.
Position – And How It Links To Business Strategy Purpose
In order to achieve a competitive advantage, companies need to position themselves carefully. Most industries are more complex than printing and have a much greater need for planning in order to beat the market with ideas and foresight.
This is what we call taking a position.
For example, Southwest Airlines Company beats the market with its very unique value offer. The company runs short-haul, low-cost, point-to-point service between midsize cities and secondary airports in large cities.
Almost no other airlines do that.
Southwest avoids large airports and does not fly great distances. It, therefore, caters to very specific customers like business travelers, families, and students.
Their budget or convenience strategy clearly found its niche.
A similar example is the Vanguard Group. They are leaders in the mutual fund industry.
Vanguard provides a selection of stock and bond funds that offer very predictable performance and low expenses.
The company, therefore, speaks directly to a specific type of investor.
One who wants slow but steady returns and probably wants to understand the ways that his money is invested.
By meeting this requirement, Vanguard often sacrifices the chances of an incredible performance in some years, for the promise of low risk.
This is a sub-point of positioning.
As you might have guessed, Vanguard made a series of trade-offs to offer the service they do.
This is a crucial element of strategy. It is impossible to be the best at everything.
In order to guarantee a longer-term or sustainable advantage, a company may have to sacrifice certain revenue streams.
For example, in order to become known as one of the great publishers, Penguin barely publishes any new literature anymore. To secure its reputation as a leviathan of classic literature, it focuses on older books for which people already have a fondness.
Another example of this phenomenon is Neutrogena.
Instead of developing a huge range of products or products at different price levels, it focuses on high-value ones. Its trade-off is that it is scientifically elite and so it doesn’t dabble with less expensive products.
Neutrogena advertises in medical journals, sends direct mail to doctors, attends medical conferences, and performs research at its own Skincare Institute.
The firm also uses a slow, more expensive manufacturing process to mold its fragile soap.
In order to secure its reputation and market position in this sense, it has sacrificed other opportunities.