Professor of Strategy and Entrepreneurship; Robert P Bauman Chair in Strategic Leadership; Subject Area Chair of Strategy and Entrepreneurship
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Why do so many companies still struggle when making strategic decisions?
An organisation’s strategy is about making difficult choices, but why do so many companies get it wrong? Costas Markides, Professor of Strategy and Entrepreneurship at London Business School (LBS), talks about two fundamental truths of strategy
Developing strategy is essentially about making choices, which sounds easy enough. But those decisions are difficult to make and they are the difference between success and failure. When making a decision, it’s unclear whether you’re doing the right thing – it could ultimately turn out to be a mistake. Nevertheless, there is no excuse for failing to make choices.
Take London Business School (LBS): should it target Europeans or the developing world? I guarantee you there are arguments for and against both strategies. But knowing which option to take isn’t clear. So in that situation, people ask themselves, ‘What am I going to do’? And instead of making one difficult choice, they say, ‘I will invest a little bit in this market and little bit in that one’ and by doing that, they dilute their very limited resources.
This is the first truth about strategy: one of the biggest mistakes companies make when looking to grow is to dilute their resources by not focusing enough. I cover this issue when teaching on the Developing Strategy for Value Creation programme at LBS.
Companies are afraid to choose one type of customer. They invest in one type and a few years later say, ‘Whoops, I made a mistake, I should have gone for the other one’, and they try that. They put a bit of their resources here, a bit there, and don’t focus them enough. It’s a common trap that businesses fall in to.
Companies should focus on the ‘who-what-how’ model when making strategic decisions: who the customer is, what you can and can’t offer them, and how to develop and distribute your products and services.
1. Who is your customer?
Ideally, you want everybody in the world to buy your product or service, but you don’t have the marketing budget to advertise to everyone, so ask yourself who the most likely customer is. Who’s willing to pay the most for your product? That will help you decide which customer segments to go after and which ones to ignore. And once you decide which customer segments to focus on, you have to think about the countries or geographic regions you’ll focus on.
2. What are you offering? And equally important, what aren’t you offering?
You can’t offer everything to everyone, so what’s your value proposition? Why should the customer buy from you and how will the product or service benefit them?
3. How do I develop and distribute the product?
Once you have defined which customers to target and what to offer them, you need to decide how to produce and market your product or services.
Enterprise Rent-A-Car is a good example of a company that succeeded by making the necessary choices. Whenever people are asked, ‘Which is the biggest car rental company in the US?’ they always say Hertz, Avis, Europcar, Sixt or Alamo. The biggest one is actually Enterprise, a family-owned company based in St. Louis, Missouri.
The company’s success stems not only from making difficult choices based on the ‘who-what-how’ model, but also from differentiating itself from its competitors. And this is the second truth about strategy: you can’t just make choices, you need to make ones that allow you to stand out from the crowd.
Hertz and Avis target people who need to rent a car when travelling between cities or countries. Their strategies are based around travellers, so they developed business models that cater for these customers by opening offices at airports or using travel agents to push their services. In contrast, Enterprise goes after a different customer and takes a different approach.
Enterprise caters for people who need a rental car while their own vehicle is in the repair shop. Will those people travel to the airport to rent a car? No. Enterprise has developed a network of offices spread all over a given city, so the company picks you up and takes you to your car when it’s ready. It uses insurance companies and mechanics—rather than travel agents—to push its service to the consumer.
Everybody has heard of Hertz and Avis, but Enterprise grew quietly by concentrating on a smaller market with bigger margins. The company has succeeded by choosing a ‘who-what-how’ model that makes it distinctive. That’s the essence of strategy: it’s about making choices that differentiate you from your competitors.
When developing your strategy, you need to assess your market, capabilities and resources and be honest with yourself. But how can you identify opportunities? More importantly, how do you know if you’re investing wisely in a new customer segment or geographic region and not diluting your resources by losing focus?
As well as analysing your decision, you can also use your gut feeling. But the best way to know whether you’ve made the right choice is to experiment. Try things out in a limited, low-cost way. If it works, expand and if it doesn’t, don’t. Don’t attack things head-on and never commit too much in one go. Spend less at first and experiment in your market.
There are no simple solutions, formulas or shortcuts for developing your strategy. It’s about making judgement calls as you go along and treating strategic decision-making as an art. Good artists don’t necessarily follow the rules, copy other artists or take advice blindly. They improvise and they innovate. They spend their lives searching for inspiration, experimenting and going with their gut instincts, which is a lesson for us all.
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