How many wrong assumptions have you made that have led to bad decisions? You’re not alone; many people need a broader view.
Strategy frameworks are a way to expose why we think the things we do. Why are these customers seemingly more attractive than others? Are bigger customers really better? How much do the best and worst customers cost?
While frameworks can bring rigour to your thinking, a model won’t stop you falling into traps. Here are four all-too-common strategy snares.
Some revenues aren’t worth chasing. You need to ask, “What is the real profit pool here?” and not simply, “Is this a large, growing market?” Frameworks like Porter’s ‘Five Forces’ model can help you understand the strength of your current competitive position as well as your potential one. If there are 60 other companies doing the same thing, even if it’s a healthy, growing market, your future margins will be squeezed. If that’s the case you must decide whether growth is sensible in that area. Equally, if a market is shrinking, the best way to make money may involve abandoning aggressive growth targets altogether. The UK retail market for DVDs is a good example. As demand for an in-store offering declined, one leading retailer, HMV, bought competitors to beef up its market share. But as customer habits continued to shift, the company’s position became untenable. Stationery store WHSmith took a different approach. Over the past 10 years, it shrunk its business by focusing very carefully on what its customers wanted and therefore created more value by becoming smaller. It’s unfashionable for companies to shrink their way into value. Growth and size are important, but managers are inclined to exaggerate both.
It’s unfashionable for companies to shrink their way into value.
Sometimes people love their own services or products so much that they create add-ons irrespective of their customers’ needs. Improvements must add value. Take the functionality of a typical spreadsheet; 99.9% of people use less than 1% of what it can do. If a user won’t pay more for it (because it’s irrelevant to their needs) what’s the point? Often however, there are incremental improvements that seem just too simple to the savvy product designers – say, to put a flag at the top of the sheet to show it’s the top – but that would add value to the customer.
Smart companies can stumble into this insidious mind trap by thinking, “This problem doesn’t affect us”, or, “Only 2% of our customer base is unsatisfied”. But markets can shift quickly so just because an issue doesn’t seem a threat now, doesn’t mean it won’t be in the future. There are many Accelerated Development Programme participants who say, “We’ve seen the warning signs for years, but we haven’t done anything about them. We didn’t feel the emotional tug, the danger didn’t seem imminent.”
Take the case of a high-quality European producer selling in China. It knew that Chinese producers were selling poorer variations at lower prices but did not see them as direct competitors. It did not adequately recognise the threat. Then with a small adjustment one Chinese supplier increased the value of its offering just enough to create a breakthrough. The European company’s differences were almost worthless. This problem pervades many western, well-established, quality companies. They retreat into adding more bells and whistles but sometimes it’s just not worth it. Firms need to take a genuine look through their customers’ eyes.
Whenever there’s a new market opportunity people invariably get excited – sometimes without good cause. What they should be asking is, “Will this support a profitable industry?” Or, “Could this end up being a cutthroat battleground where everyone loses money?” People dive straight in. The primacy of size, novelty and revenue growth takes focus away from viable strategies that could make much more money, even if they seem ‘boring’.
So these are some of the strategy traps. What’s the framework to follow?
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