A pragmatic approach to validate your company's strategy.
In the history of modern management, the concept of strategy is probably one of the most misunderstood and abused at the same time. Although, in effect, there are multiple decisions of a strategic nature in our companies, it is also true that countless actions are usually labeled with that term that are rather operational tactics or others whose justification is not totally clear.
While many of these topics such as continuous quality improvement, process redesign, advertising campaigns and technology acquisition among others are highly relevant to management, they are not strategies by themselves and do not necessarily create competitive advantage.
In this article we will establish a clear concept of strategy and study the three groups of decisions that must be addressed when defining a strategy. For these purposes we propose a conceptual framework that we have called "The three vertices of competitive strategy". Some examples will help us to illustrate it in a way that allows any entrepreneur or manager to determine if their organization really has an effective strategy.
The concept of strategy.
Arnold C. Hax, professor at the Massachusetts Institute of Technology business school and one of the most recognized authors on the subject, collects the work of other great managerial thinkers of our time when he says the following:
The strategy can be seen as a multidimensional concept that encompasses all the critical activities of the company, providing it with a sense of unity, direction and purpose, while facilitating the necessary changes induced by the environment. ”…“ The essence of strategy it consists of an intentional change management towards the achievement of competitive advantages in each business in which the company is committed. "
This definition establishes a tremendously important association: when you talk about strategy, you talk about creating competitive advantage. In other words, strategy must always be understood within a competitive context, figuring out how to beat the competition in the race to gain the preference of customers and the market.
Hence, the first foundation of our approach is to unify the concepts of "Strategy" and "Competitive Strategy" indifferently understanding them as the conscious search of an action plan that allows an organization position oneself in your industrial sector so that you obtain a sustainable competitive advantage that allows you to achieve a superior return in the long run.
Let's take a closer look at this definition.
Competitive Strategy: It is the search aware of an action plan that allows an organization position yourself in your industrial sector in such a way that you get a sustainable competitive advantage with which I, in turn, achieve a superior return in the long run.
First, strategy is a conscious search. Although it can be said that all companies have a strategy (since throughout their history they have been shaping the way in which they compete), the problem is that most of the time these are not explicit and remain in the mind of the owners, shareholders or the president of the company. At the other levels of the organization, the search is not consistent because the objective and the dimensions of the search are not clear either.
On the other hand, an explicit strategy reveals the assumptions and premises about the environment and the particular industry that were adopted in its formulation, it also allows identifying inconsistencies in actions and priorities throughout the entire value chain of a company and provides the basis for effective organizational alignment around a complete and clear message.
Second, the strategy must create for the company a unique position and difficult to imitate within the industrial sector in which it competes. As we will see later, this has two implications: number one, it must be well defined and understood in which industry (industrial sector) the company competes and number two, it means making a decision about the general approach that all the activities of the organization will have.
Third, the goal of any strategy should be to develop a sustainable competitive advantage for the company. This is achieved by developing a mix of actions, business models and business skills that, aligned with the chosen strategic positioning, will not only allow the company to outperform its competitors in the long term, but will also make it difficult for them to emulate such dimensions.
Finally, the strategy and its competitive advantage have an ulterior objective that is to achieve superior returns on investment for shareholders. Achieving results superior to competitors in the long term is not only the best indicator of a sustainable competitive advantage, but also the source of prosperity for all groups that have interests in the company, among which are shareholders, employees, partners of businesses and even the social environment in which they are immersed.
The three vertices of a competitive strategy.
Being clear about the concept of strategy is a fundamental step but it is only the first step in developing successful strategies. The next stage is to formulate the strategy itself, for which we must understand what a competitive strategy looks like in practice, what questions it must answer and what decisions must be made in its formulation.
In our research, academic and practical experience, all decisions regarding the definition of a competitive strategy fall into three broad categories:
- Where should the company compete?
- How should you compete?
- How should you implement and execute these decisions?
These three great decisions constitute the competitive strategy itself and therefore become the most important task for corporate strategists to solve. As Figure 1 shows, if we visualize the strategy as a triangle, the vertices that precisely determine its geometry are the answers to these three questions.
The first two vertices define the strategic positioning of the company and the type of competitive advantage that it must develop. The third, for its part, deals with the way in which that positioning should be implemented.
The rest of our article will deal with explaining, based on these three vertices, that strategy is fundamentally about positioning and how to implement it.
The order in which the three fundamental strategy decisions must be addressed is not necessarily linear but rather an interactive and interrelated process along which, as the arrow in the figure suggests, one vertex can feed back from the others up to produce consistent and robust decisions. However, it is important to decide the strategic positioning of the company and then define how to develop it in practice.
The first vertex: competitive field of the company
A first vertex is what we call the Competitive field, or in other words, the "stage" in which the company will compete. The first thing that the strategy must answer clearly is in which industrial sector will the company compete?
In our experience, few companies have explicitly defined their business and the industry in which they compete, rather, most start from the assumption that everyone in the organization views the business in the same way.
However, this definition depends on the entire subsequent approach to strategy and industrial analysis that will allow us to fully understand, among other transcendental things, who the potential customers are, who we compete against, what is the structure of that particular industry, the main competitive forces within it and what is required to be successful Competitive Field: Once the industry has been defined and understood, the strategy must choose the market segments, the line of products and services, as well as the degree of scope vertical, horizontal and geographic that the company will have
We give an example of the above. For years a business had been engaged in the retail sale of household appliances and furniture and more recently had begun to import lines directly.
At one point he saw the opportunity to set up a wholesale operation that would sell both to his own retail chain and to third parties. When both businesses were analyzed separately, it was determined that although both were within the home appliance marketing business, they were located in different industrial sectors.
Not only were these two consecutive stages of the commercial chain, in each operation they really faced very different competitors, they served customers with dissimilar behaviors, characteristics and objectives.
On the one hand, the retail chains were had as clients and on the other the final consumer. The skills to successfully serve each market also turned out to be different and all this led to the design of a particular strategy for each business with all the implications that, as we will see, this entails.
Once the industry has been defined and understood, the strategy should choose the markets or market segments to be served, the line of products and services to be offered, as well as the vertical, horizontal and geographic scope of the company (see Figure 2).
Selection of market segments it is a particularly delicate task. Although, when defining the industry, all potential market segments will be identified, in its strategy the company must make a conscious choice of those segments that it wishes or is convenient to serve. Many times, the most difficult thing is to decide to which customer groups the products and services will not be sold, as this defies conventional corporate behavior.
The Skil Corporation case fully illustrates this decision. In the early 1980s, Skil took a radical turn in its strategy by deciding not to market its power tools through traditional mass consumption channels such as large chain stores and department stores.
Rather, Skil decided to market them through hardware stores and specialty stores targeting the professional user segment.
The initial result was hundreds of millions of dollars in lost sales, but soon Skil repositioned itself in a less price-conscious segment and its tools acquired not only a professional image but the loyalty of channels that no longer had to compete with the big boys. warehouses. In the end, all of this paid greater dividends to the company than lost sales.
The second big decision that defines the competitive field of the company is about what should be sold to the chosen segments, that is, the line of products and services. Regardless of its current offering, the company must focus on what its target markets demand or may demand.
This of course requires a deep knowledge of these markets, but it is very likely that this knowledge can only be generated over time and, for now, the selection must be made based on the best information available without falling into the paradox of analysis- paralysis.
The product line decision also has to do with the degree of horizontal integration that is convenient for the company, that is, the expansion of the current business towards lines of products and related or complementary services that add synergy either from the point of view of supply (the skills of the company) or from the perspective of demand (the needs of the market served).
On the other hand, the choice of segments has definitive implications and correlations with two other dimensions: the degree of scope or integration of the company vertically and geographically.
The vertical integration It will be easier to define when you understand where the critical resources and assets of a business are and these, in turn, make sense when you have a thorough understanding of the industry, its structure, market segments and their needs, relationships power and future trends.
The other aspect of the scope that the strategy must define is that of the geographic territories that the company will serve. For this, it must align all of the above and determine, until then, the true opportunities that new territories represent.
Strategic positioning: the heart of competitive strategy.
The second vertex of the strategy is the selection of a generic strategy. This is perhaps the most important decision since up to now the company has defined its field of action but does not enjoy any competitive advantage. The generic strategy is what makes the big difference between traditional strategic planning and the formulation of a competitive strategy.
In the first approach, you usually define a series of goals, objectives and plans to achieve them. You can even define the issues related to the competitive field, however, it is not necessarily possible to create competitive advantage.
On the contrary, and as we explained at the beginning, at the heart of the strategy lies the competitive advantage, which is what will allow the company to obtain superior returns on investment. In our experience, we have found that this conceptual framework developed by Michael Porter is highly valid because it provides great clarity to a complex decision.
The competitive advantage consists of appropriating a unique position within the chosen industry or business. This Strategic positioning It should be based on multiple dimensions and factors so that it is difficult to repeat or emulate by competitors, but at the same time it will respond to a general approach with which all critical activities of the company's value chain will be addressed and designed. For this reason it is also known as a generic strategy.
According to this approach there are two basic or generic types of competitive advantage (see Figure 3):
- Low cost or low delivery cost leadership
- Differentiation or high perceived value
Additionally, these generic strategies can be directed to the entire industry in which it participates or to a specific segment.
The second vertex: The low-cost generic strategy
Low-cost leadership involves an arrangement of activities that ensures the company delivers a service or product at the lowest cost within its industry. It is not just the lowest cost of production or raw materials or supply or administration, but the sum total of costs.
This of course involves identifying cost-critical activities and developing the best industry expertise in them or delegating them to those who can do them that way.
A strategy of this type will demand resources and skills such as the design of products focused on facilitating their manufacture, skills in process engineering, most likely an intense supervision of the workforce, low-cost distribution systems and, by their association With the achievement of economies of scale and the use of intensive technology, it will require constant capital investments and, therefore, easy access to capital.
Some sources of cost advantage can be sought at the structural or design level of the business model. Among them are scale and volume; sharing activities with other companies (for example, the supply of a raw material of significant importance); a reduced scope in the product line and a limited set of related services; concentration on the number and type of segments served; process and information technology.
Other sources lie in the way in which activities are carried out, for example excellence or high operational efficiency, quality management and its impact on reducing the cost of quality, high utilization of installed capacity, exploitation of the link with suppliers and / or clients through alliances.
Finally, there are sources of advantage external to the company at the government level, for example, that although they have been losing relevance in the face of globalization, have been decisive in the past and present of many companies due to their impact on achieving a privileged location, access to cheaper inputs, regulation of the number of competitors, etc.
As can be seen in Figure 4, the objective of this strategy is to achieve a superior return on investment on the cost side. That is, given a market price that is difficult to influence for products and services, achieving a higher margin than the competition through a lower total cost of delivery (ie throughout the entire value chain).
The case of Southwest Airlines (SAL), an airline that offers flights between cities in the United States that compete directly with automotive transportation, is a classic example of a total cost leadership strategy.
How does SAL achieve those prices and become profitable?
The answer is simple and complex at the same time. It is simple on the one hand, because the general nature of its competitive advantage lies in the low cost of service delivery and, on the other, it is complex because obtaining that low cost is the result of multiple strategic dimensions aligned and interrelated with that objective.
For starters, SAL promises its customers limited service at very low prices. For this reason, it does not provide food service on its flights, which together with the high productivity of the work teams on the ground and at the gates has a direct impact on aircraft readiness time (rotation at the gate is only 15 minutes) and of course in the rate of use of these, which are the most expensive resource of an airline.
This staff productivity responds to investment in training, compensation above the industry average, participation in shares, flexible union contracts, among other things. On the other hand, SAL has standardized its aircraft fleet with great impacts on the learning curve of pilots, maintenance personnel and spare parts. Limited service offers ticket vending machines in exchange for very limited use of travel agents, does not transfer luggage or make connections with other airlines
All this allows you to offer frequent and reliable departures, one of the most important satisfiers of the business traveler. In the end, SAL's "product" makes sense only for short trips but allows it to guarantee its promise of being "the low-fare airline."
Differentiation or high perceived value.
At the opposite extreme, we have a strategy fully committed to delivering customer value.
As we saw with SAL, a low-cost strategy must also deliver the value that the customer expects, the difference is that in the case of differentiation A level of value must be delivered that the client appreciates more than the cost that it represented for the company to provide it. In other words, the customer perceives a value for which they are willing to pay more than the actual cost of creating it.
This value can be in physical aspects such as increasing the performance of the product for the buyer, lowering the total cost of its life cycle and achieving a recognition of superior quality in its category.
It can also be in delivery aspects such as a higher level of customer service, advance and delivery time, location, convenience, customization of the deal, product or service or a wide line of complementary products.
The value can also be, from the customer's perspective, in indication criteria such as reputation, brand image, packaging and presentation, the type of customers served, market share and even the price, which can be set. more freely than in the previous case, attending to an indication of status or distinctive quality.
In differentiation, the skills and resources required are very different from those required at low cost. Here a strong commercialization and marketing skills are necessary, which can include an effective cooperation with the distribution channels for the best satisfaction of the final customer.
Also key, among other things, are product engineering, creative instinct, a business reputation for quality or technological leadership, which in turn demand strong capabilities in basic research.
The overall goal now is to beat the competition in creating that customer perceived value either because it is unique or because it is achieved at a lower cost. Figure 5 illustrates the above.
At the beginning of the 90s, Café Britt entered the business of packaged coffee with the first gourmet coffee available to Costa Rican consumers. With this, he not only created a non-existent market segment at the time, but also transformed the habits of the consumer and the local industry completely.
Although high quality and flavor were the spearhead of the differentiation, the company had to develop multiple factors that come together to position it as a leader in the market of consumers who are willing to pay a significant premium.
These factors include the meticulous development of a brand that today is synonymous with gourmet coffee inside and outside the country; specialized distribution channels; I associate with the tourism industry that produces the effect of an export coffee on the local consumer on the one hand and, on the other hand, earns the loyalty of a tourist who can then be served directly through their website with small but highly profitable orders.
The global vision required in the Café Britt gourmet coffee business is cultivated by integrating mostly bilingual Spanish-English personnel into the company and giving them a high degree of freedom of action. Today the company has extended its brand to other products that are related to coffee only at the level of the distribution channel (nuts, macadamia) and even owns the main souvenir shops at the international airport in Costa Rica, thus reinforcing its image versus your target segments.
The reader will be able to clearly notice that the necessary skills, as well as the business design decisions and even the choice of customer segments and the definition of a product line are diametrically opposed between one and another generic strategy. Since the resources are not unlimited, the strategy demands an exclusive commitment from them in the long term. For this reason, a company cannot search for both positions simultaneously.
The third vertex: the implementation of the strategy
Once the strategy is formulated, it must be converted into action, translated from paper into a process that manages to close the gap between the current situation and that chosen strategic position. As seen in Figure 2, the implementation of the strategy is the vertex that closes the triangle and has to do with the following 4 areas of action.
- Structure and Organization: These actions are usually undertaken at two levels. A level of business organization at which it must be determined whether businesses will be managed within a single business unit, specialize in two or more separately managed businesses, or whether a corporate organization is appropriate.
The other level is that of the organizational structure of the resulting company or companies. That is, the definition of functions, responsibilities and necessary interrelationships within the company, taking into account all the implications of strategic positioning and competitive advantage.
In this particular, companies that follow low-cost strategies are usually organized according to a rigid cost control, well-defined and structured responsibilities, strong supervision and incentives based on achieving strictly quantitative objectives.
On the other hand, in a company with a differentiation strategy it is common to see less structured relationships between functional areas, R&D departments, product development and marketing or marketing maintaining close coordination, a strong motivation to join highly capable, scientific or highly skilled workers. creative.
- Policies, processes and systems: The company must rethink its corporate policies, especially of a strategic nature such as the level of leverage, retention of profits, sources of financing, executive compensation and human resources policies in a way that reinforces the dimensions of its positioning.
In addition, the company must ensure that it achieves superior expertise and excellence than the industry in those processes identified as critical to competitive advantage. Likewise, work systems and information technology must support the achievement of said excellence by responding to the key aspects of the redesigned value chain.
- Strategic investments and divestments: Third, the strategy must be used as a filter to determine which are the tangible or intangible assets that the company must ensure to control and, on the other hand, which are no longer central because they do not add value or take it away from the focus of the new business.
After defining the strategy, it is usual to undertake processes for the sale of assets, related companies and non-critical resources or, on the contrary, purchase, joint venture, merger or strategic alliances that ensure said control.
- People, culture and leadership: Last but not least, a fourth area of implementation relates to the human resource that needs to be attracted, the culture that needs to be developed, and the type of leadership required.
These are no longer initiatives that respond to fleeting fashions or immediate needs to respond to the requirements of the business environment, skills and competencies demanded by the competitive advantage sought.
In closing, two very important corollaries. The first is that there are no right or wrong strategies. Given that it is totally feasible to have different readings or conclusions from the analysis of the same industry, what can be talked about is well or badly implemented strategies, that is, strategies more or less consistent in the multiple actions that these four areas of implementation imply. .
The second corollary is that competitive advantage erodes over time, it is neither permanent nor permanent. Although this is achieved in the long term, companies must be attentive to the analysis of their environment and their industry to determine the need to rethink their competitive advantage or any of its dimensions.
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