What is Strategy?

Strategic thinking is the art of outdoing an adversary, knowing that the adversary is trying to do the same to you. It is also the art of finding ways to cooperate, even when others are motivated by self-interest, not benevolence. It is the art of convincing others, and even yourself, to do what you say. It is the art of interpreting and revealing information. It is the art of putting yourself in others shoes so as to predict and influence what they will do.
The Art of Strategy, Dixit and Nalebuff, W.W. Norton, 2008.

Strategy

Strategy is planning that allows you to get more than your fair share. Strategy is about getting customers and keeping them.

Drucker: The purpose of a business is to create a customer.

Build it and they will come.

Strategy

The process of strategy includes:

Analysis Formulation Implementation

Strategic Planning and Analysis

Planning how to get more than your fair share involves:

Scanning the overall environment Scanning and researching the industry environment Researching direct competitors Researching a firms skills and resources Analyzing current strategy

The Five Competitive Forces That Shape Strategy, Michael Porter, Harvard Business Review, January 2008.

Before the Internet

Michael Porter wrote the initial model for the Five Forces in 1979. He wrote What Is Strategy for HBR in 1996, his seminal book Competitive Strategy in 1981, and Competitive Advantage in1985. Before the Internet (BTI)

Before Google Before Napster, iTunes, and the iPod Before craigslist.com

He didnt consider how to compete with free.

Before Behavior Economics

Porter made his major contributions to strategy theory before behavioral Economics research. BE research has shown that people do not make rational decisions (emotions dominate) and that markets are not rational. That success is more often the result of luck (randomness) than carefully planned strategy.

Randomness

People are not wired to understand randomness. We are wired to see patterns and causality; cant accept randomness. Cant plan for luck. But can be nimble and take advantage of lucky breaks.

Operational Effectiveness Is Not Strategy

Concentration on core competencies and competitive positioning via benchmarking can lead companies down the path toward mutually destructive competition. Companies must distinguish between operational effectiveness and strategy and not confuse them.

What is Strategy, Michael Porter, Harvard Business Review, November 1996, Reprint # 96608

Operational Effectiveness Is Not Strategy

Operational effectiveness is necessary to compete but not sufficient to win. A company can outperform others and win only if it can establish a difference that it can sustain a differential competitive advantage.

In the past barriers to entry were the primary competitive advantage.

Operational effectiveness means doing things better than competitors, strategic positioning means doing things different from competitors.

Strategy Rests On Unique Activities

The essence of strategy is choosing to perform activities differently than rivals do. Strategic positions can be based on customers needs, customers accessibility, or the variety of a companys products or services. Porters concept of fit is no longer valid. Change is happening too fast.

Remember, structure follows strategy

Generic Strategies

There are three generic (primary) strategies:

Differentiation Focus (niche marketing) Cost leadership

These definitions characterize strategic positions at the simplest and broadest levels.

Secondary Strategies

Within the three basic strategies, there are several secondary strategies:

Defense: Block competition to avoid losing market share. Offense: Attack competition head on. Flanker Brand: Establish new position. Fighting Brand: Create a new brand to compete with competitive new brand. Guerrilla Marketing: Force competition to respond with small resources. Ambush Marketing

Profitable Niche

Measurable, sizable, reachable Niche strategy advantages:

Flexible, can adapt to new needs, small range of needs. Efficient for promotion, distribution. Reduces competitive pressure. With few competitors, can be highly profitable.

Niche strategy disadvantages:

Few economies of scale Success breeds competition. When new competitors enter the niche, strategy must change.

To thrive in most businesses, must be #1, #2, or get out (find a new niche).

Get out in the long tail.

Differentiate By Benefits Sought By Consumers

Grocery buying segments

1 2 3 4 5

Location Price Service Selection Quality

- 39.0% - 30.2% - 12.1% - 9.5% - 4.4%

A Sustainable Strategic Position Requires Trade-offs

Tradeoffs are essential to strategy. They create the need for choice and purposefully limit what a company offers.

Remembering that a valuable position will attract copycats.

Cant be all things to all people. Be best at doing a few things.

Then expand on those core competencies.

Apple Google

Sustainable Competitive Advantage

Unique competitive position for a company Activities tailored to strategy Clear trade-offs and choices vis--vis competitors Competitive advantage arises from fit across activities.

And sustainable barriers to entry

Sustainability comes from the activity system, not the parts. Operational effectiveness a given Constant innovation a must

Determining Strategy

To determine strategy, answer the following questions:

Which of our products/services are the most distinctive? Which of our products/services are the most profitable? Which of our customers are the most satisfied? Which customers, channels, or purchase occasions are most profitable? Which of the activities in our value chain are the most different and effective. How can we make everything better? Now!

Profit is Important

Profit is the key to a successful strategy, not growth. Compromises and inconsistencies in the pursuit of growth will erode the competitive advantage a company. Keep an eye on profitable growth.

Potential Traps

Meaningless differentiation Getting greedy Groupthink

Alfred Sloan

Throwing money at a problem Lack of commitment Innovation stagnation

Whom To Attack

Weak management Weak financial resources Weak execution Weak corporate commitment Weak/old technology, design, and/or functionality Weak innovation

Perceptual Problems

All the kids are above average Jim Collins lists five basic management perceptual mistakes that lead to five stages of decline:

Stage Stage Stage Stage Stage

1: 2: 3: 4: 5:

Hubris Born of Success Undisciplined pursuit of more Denial of risk and peril Grasping for Salvation Capitulation to Irrelevance or Death

Jim Collins, How the Mighty Fall, Harper Collins, NY 2009.

The Role of Top Management

The role of top management in an organization is:

Defining an organizations position and strategy Making trade-offs Forging fit among activities Building an innovation machine

And strategy may have to change along with major structural changes in an industry -flexibility is vitally important.

Organizations

Must have a visionary, meaningful mission statement. Must have a clear and simple strategy. Must define how to get more than a fair share. Must be committed to strategic moves and signal commitment to competitors. Must follow through on commitments continually and retaliate quickly and aggressively to counter moves. Must continually innovate.

The Strategy Focused Organization *

Mission: Why we exist Core Values: What we believe in Vision: What we want to be Strategy: Our game plan (how to win) Goals For Implementing Strategy (Metrics): What we need to do OUTCOMES Satisfied Shareholders Delighted Customers Effective Process Motivated and Prepared Workforce

* The Strategy Focused Organization, Robert Kaplan, David Notron, Harvard Business School Press, 2001