One of the topics I’m passionate about is Strategy and how successful entrepreneurs define and execute effective and unique strategies for decades to create and capture extensive value. However, the more I learn about it, either from other people or getting practical experience, the more I realize the importance of the basics. I’ll never forget when I saw this quote from Steve Jobs in my 1st week in business school.
Let’s take the bookseller history of a few years ago as an example. If you wanted a high-value-added experience, you’d go to fancy bookstores where you’d find almost any book you wanted, smell the hint of vanilla coming from the wood-based paper of the fully loaded infinite bookshelves and discover new authors or recently launched titles. If instead, you were a price-sensitive customer, you’d go to second-hand bookshops and get your sample for a much lower price, most likely having to search in different stores if you were looking for a less prestigious author. But to be honest, I cannot remember the last time I went to a bookstore, because Amazon found a way to deliver more value at lower costs, so now we can get basically any book we want to be delivered to our door in a few hours or a couple of days max.
A successful company can either deliver more value to customers (fancy bookstores), deliver the same value at a lower cost (second-hand bookshops), or ultimately deliver more value at a lower cost (Amazon). Cost is generated by performing the hundreds of activities required to deliver the product or service a company sells. Operational Effectiveness means performing similar activities better than competitors, whereas Strategic Positioning means performing different activities than competitors.
💡 Although Operational Effectiveness is necessary for superior performance, it is not sufficient.
What is not Strategy?
For many years, managers were focused on improving operational effectiveness, applying programs such as total quality management, benchmarking, continuous improvements, etc. However, competitors can easily imitate these approaches and use consultants as catalysts for the proliferation of Operational Effectiveness techniques. So, although it produces short-term improvement for all companies implementing it, it leads to relative improvement for no one.
Competition based on operational effectiveness alone is mutually destructive since the more benchmarking companies do, the more best practices they exchange, and the more rivals imitate one another’s improvements, resulting in converging strategies and competition races down identical paths no one can win. Driven by performance pressures but lacking strategic vision, companies have no better idea than buying up rivals.
In 2018, I worked as a management consultant helping a large multinational food company to identify and implement operating effectiveness in their manufacturing facilities in the US. It was a clear example of a corporate culture focused on operational improvements that acquired the largest competitor leading to one of the largest deals in the industry. Although the project was considered a success and they did implement the cost-saving opportunities using all the tools widely spread at that time, the company lost momentum in innovation, couldn’t launch new successful products, didn’t adapt to change in behavior in society towards healthier food, and lost market share. Despite all the efforts on the cost efficiencies initiatives, the company lost 40% of its market cap in 1 year.
💡 Gradually, managers have let operational effectiveness supplant strategy, resulting in a zero-sum competition, declining prices, and pressure on costs that compromise companies’ ability to invest in the business for the long run.
What is Strategy?
To go beyond the myopia of operational effectiveness and be strategically competitive, a company should choose a different set of activities to deliver a unique mix of value.
Strategic Positioning
Strategic Positioning is not only about carving out a niche. A position emerging from any of the sources can be broad or narrow. Focused competitors thrive on groups of customers who are over-served (also overpriced) by more broadly targeted competitors or under-served (also underpriced) for one-size fits all solutions. The most traditional strategic positioning is “needs-based positioning,” in which a company will target a specific segment of customers. This position arises when there are groups of customers with differing needs, and a tailored set of activities can serve those needs best.
“Strategy is about setting yourself apart from the competition. It’s not a matter of being better at what you do. It’s a matter of being different at what you do.” - Michael Porter
A valuable positioning will attract imitation by incumbents, they can reposition themselves to match the superior performance or they match the benefits of a successful position while maintaining their existing position.
Trade-offs
To avoid imitation and sustain a strategic position, a company makes trade-offs with other positions. The idea behind trade-offs is basically the understanding that a company can’t be all things to all people. A low-cost airline makes a trade-off when it chooses not to serve meals to reduce costs and time at the gate while accepting losing some premium non-cost-sensitive customers. Apple makes a trade-off when it prices the iPhone at such a high-end price to enhance the sense of exclusivity and differentiation for their customers while accepting not to tackle massive price-sensitive customers in many countries leaving those customers to the competition.
💡 Trade-offs create the need for choice and limit what a company offers
Reasons for trade-offs:
Inconsistencies in image or reputation (lack credibility and confuse customers)
Different positions require different product configurations, equipment, employee behavior, skills, etc.
Limits on internal coordination and control (confusion to employees in day-to-day activities)
If such concepts are Strategy 101, why do so many companies fail to have a strategy? Why do managers avoid making strategic choices? That’s a topic for the next post. Subscribe to receive it in your inbox.
It is easy to get lost in the complexity of turbulent times, but going back to the basics helps us remember what really matters. To learn more about the basics, I suggest the classic article “What is Strategy?” by Michael Porter.