A single analytical tool does not make a strategy. Business strategy is designed by carrying out a sequence of outside in, and inter-related, analyses. The insights are then brought together. This results in the selection of a profitable position in the market. It takes into account customer needs, wants and behaviours, and how other organisations compete in the same arena. Subsequently, a sequence of initiatives is identified, where each one gets the business closer to its selected position. The outcome successively increases profits produced at successively lower costs. Above the line optimisation creates a more sustainable business than optimising the business model.
Strategy is rarely implicit and should not be. In contrast, a well communicated, explicit strategy helps customers to clearly distinguish between competing offers. It also provides direction and particularly anchoring for internal functions such as marketing, IT, HR, digital and channel strategies and even the corporate culture.
Culture is contextual and the strategic qualities and logic provides that context. Clearly articulating what needs to be done, but more importantly what must not be done, minimises drift in the business towards an unwanted position. It also minimises potential conduct risk. It explains position, sustainability and ethics to customers, regulators and shareholders.
Every organisation has competition. In fact if no competition is present, a market may not be present either. However that aside, all businesses are in fact in five markets. These are the market for customers, the market for funds, the market for employees, the market for regulation and the market for suppliers. Numerous competitors may exist in any one of these arenas. An inability to compete in each market represents a business risk.
This sounds like a load of high risk ventures. It also shows a lack of detachment from the reality of the business world. First, we assume these programmes were created to move the organisation towards a certain position, but this may be the case. Even so, most industries work in cycles which can be measurable. These represent how fast different elements of the industry evolve. So customer size and needs may evolve in eighteen months as they frequently do in the IT sector. Competition may change every year, supplier products may evolve every three years, new staff skills may be available every four years, regulation may evolve every two years, technology may come along every two years. With these kind of changes a five-year programme may lose touch with the reality of the business. The length of programmes and initiatives are only relevant when these exist within the industry cycle or if they are planned to be redefined in the cycle timeframe.
Strategy has to be revisited annually to incorporate any industry changes. This is precisely for reasons identified in Myth 5.
By definition this is not a business strategy at all. First, in a country like the UK which is predominantly a service economy, the majority of the cost in businesses (65-75 per cent) are people costs. If the number of people employed by a business is reduced, for example to downsize and recover costs in line with demand in a particular business area, then surely a growth strategy elsewhere in the business can redeploy them. After all it costs more to recruit new people than to retrain existing ones. Second, if the cost reduction is due to greater automation, this must be strategic enough to attract new customers and so grow the business. So why release people?
Benchmarking is not a strategy; it is more strategy abdication, and a lack of aspiration and stretch on the management’s part. It says we will follow and do what a key organisation is doing, but we will not take a risk. We have to remember that risk is related to rewards. Organisations that follow will be low margin businesses, giving up the main portion of the pie to the lead competitor. They are letting themselves be driven by the fortunes of the sector. The management’s pay-packet needs to reflect the lack of ambition, survivability and innovation in these businesses.
Is it to move or defend a specific and profitable position? For your business and with the customer and products that you have, and the prices you charge, has the customer and prospect base said that this is what they need? What additional value will this improvement accrue for your business? Will it attract more of the selected customer groups? Will it reinforce your difference, increasing sales? Answers in the affirmative dispel this myth.
Not quite. Optimising above the line -- e.g. many sources of revenues, differentiation, pricing and branding -- produces more sustainable business than running a lean business model below the line. The true arbiter of value is the customer spending money (income above the line), and not supply-chains, smart technology, regulators or shareholders (expenses below the line).
The business model and the related organisation structure reflect the Critical Success Factors (CSFs) and the strategic execution for the positioning or business strategy. These CSFs help fulfil customer needs and the company stay ahead of the competition. For example, if fast product development is a CSF, then product development must be represented at board level to ensure it receives priority. The business model must also reflect the delivery of differentiation. For example, if quality is a CSF as it is for the retail chain John Lewis, then budgets allocated to this activity must reflect this capability. Similarly if distribution is the key CSF, as is the case for Coca-Cola, than this must be discernible in the budgets allocated to this task. This is why cost reduction destroys value above the line. Finally, the CSFs and strategic execution shape how the connection between strategy and the business model are measured.
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