Good leaders know that a strong company vision and purpose are essential for engaging and motivating staff in pursuit of overarching goals. But to actually achieve those goals, we need a strategy. So what makes a good strategy and what can having one help us to achieve?
Imagine a young ironworker who identifies that a better way to run the family construction firm is to move from a promotion-through-nepotism system to one that is merit-based. As a result, he succeeds in uniting a previously disparate and unruly workforce into a single powerful company. And that company thrives.
So far so good. Until we understand that ‘ironworker’ is a loose translation of Temüjin; the birth name of Genghis Khan, one of the most ruthless conquerors in history.
It’s true that Genghis Khan reformed Mongol tradition with a merit-based system and that he united many tribes into a single unified Mongolia. Yet there’s something troubling about typing ‘best strategist in history’ into a Google search and finding a list topped by a warmongering sociopath, known as much for boiling alive his enemies as for amassing the largest land empire in history.
Still, while the choices of Genghis Khan may horrify us, the unequivocal way he made them can still teach us a valuable lesson about what lies at the heart of effective strategy.
What makes a good strategy?
A strategy is a set of choices that help us accomplish a highly complex problem.
We don’t need a strategy to boil an egg, for example, as there is clearly a single ‘correct’ way to do it (hold the heckling, Heston Blumenthal…). However, we do need one to accomplish a more complex task, such as boiling our enemies – or growing a business. Strategic thinking therefore comes into its own in the areas defined as complicated or complex by the Cynefin model (which we encountered in the Decisions Module) – i.e. where there are as many potential right answers as wrong ones.
In his highly regarded book, Good Strategy, Bad Strategy, UCLA business professor Richard Rumelt says that the kernel of a good strategy comprises three important parts:
- A diagnosis – that defines or explains the nature of the challenge
- This sets out to simplify often-overwhelming complexity by identifying certain aspects as critical; the one or two ‘pivot points’ that, with concentrated energy, can lead to a cascade of favourable outcomes.
- A guiding policy – for dealing with the challenge
- This is an overall approach chosen to cope with or overcome the obstacles identified in the diagnosis. “Many people call the guiding policy the strategy and stop there,” says Rumelt, but this is a mistake as “the kernel of a strategy must contain action”.
- For example, a doctor faced with a set of symptoms and a medical history may diagnose a disease, and choose a specific therapeutic approach to treat it, in effect, a guiding policy. However, without taking action to prescribe specific medication, the patient could still become very sick or even die. And the same can happen to organisations that know what is wrong and how to address it, but that don’t follow through with a co-ordinated set of actions.
- This is an overall approach chosen to cope with or overcome the obstacles identified in the diagnosis. “Many people call the guiding policy the strategy and stop there,” says Rumelt, but this is a mistake as “the kernel of a strategy must contain action”.
- A set of coherent actions – that are designed to carry out the guiding policy
- These are steps that are co-ordinated with one another to work together in accomplishing the guiding policy.
Essentially then, good strategy is about making choices; of deciding what the problem is, choosing what to do about it – and also what to not do. And as this involves an element of risk, it can make us feel exposed and uncomfortable.
None of us can be 100% sure in advance which path is the right one to take. Indeed, as we saw in the Decisions Module, two brilliant and highly capable strategists faced with the same data and aspirations may not agree. Plus, it’s tricky to set aside the lens of hindsight when determining whether or not a choice was enlightened or foolhardy.
Take the example of Apple’s visionary leader, Steve Jobs…
Cutting Apple to the core
In September 1997, Apple was just two months from bankruptcy. Co-founder Jobs agreed to return as interim CEO, but what he then chose to do was both obvious and unexpected.
Jobs cut Apple’s 15 desktop models back to one and all portable and hand-held models back to a single laptop. He also moved manufacturing to Taiwan, cutting the inventory by 80%, and opened a new online store, selling products directly to consumers, and cutting out distributors and dealers.
We look at these decisions now and think ‘of course’, he redesigned the business around a simplified product line. But at the time, this kind of focused action was far from the norm. Then Jobs did something even more surprising; he chose to wait for ‘the next big thing’. It took another two years for this to come along in the shape of the iPod and then the iPhone. But what made Jobs smart and not just lucky was an understanding that, in his industry, so many new technologies were just around the corner that it was wiser to wait than to simply ‘move fast and break things’.
Jobs’ decision was fraught with risk. He might well have been wrong. He could have destroyed Apple and been pilloried for it. In the same situation, many of us might have been tempted to instead try one of the ‘101 Ways to Save Apple’ featured in a 1997 edition of Wired Magazine, such as ‘sell yourself to IBM or Motorola’, or to partner up with Sony or Hewlett Packard, as some Wall Street analysts hoped for.
However, if we fail to take educated risks, guided by our own skill and judgement, and instead seek only to do what is expected of us, we will never reap the type of success sowed by Jobs’ courageous choices. Instead, we face a bland and mediocre future. And as business management expert Michael Raynor says, it’s mediocrity and not failure that is the true opposite of success.
Jobs knew it, just as Genghis knew it; to succeed you have to be prepared to make the bold choices that may also fail. It’s comforting to know that death via decapitation is no longer the result if we do.
Keeping moving to stand still
So, if good strategy is all about making the choices that will help us to solve problems and achieve our goals, what should we be aiming for?
This is where things start to become a little more complicated – and apparently contradictory.
On the one hand, there’s a more traditional school of thinking that makes the case for a single point of competitive advantage. And on the other, a more contemporary view that success lies in constantly changing.
In a way, both are correct. Because to thrive today we need both a constant view of who we are and what we uniquely offer to the world and the ability to constantly adapt how we deliver that ‘truth’ at an executional level.
This ability to blend agility and a static sense of self is something that strategist and Basic Arts founder Alex Smith refers to as “keeping moving to stand still”.
Take Tesla, for example. It has never veered from its core premise of electric cars as high performance luxury vehicles. But with other premium brands such as Audi and BMW now muscling in, it can only maintain its position through ahead-of-the-curve innovation. To stand still, it has to keep moving.
This highlights the ambidexterity required of us as leaders today. We must be capable of being constant and ever-changing, just like a snake endlessly shedding its skin. And it’s not the only contradiction we must master.
Gaining a competitive advantage
We can’t introduce the topic of competitive advantage without mentioning the American Academic Michael Porter.
In the 1980s, Porter led a prominent school of thought which proposed that success was about finding and protecting a sustainable competitive advantage. He identified three ‘generic strategies’ that businesses can use to gain such an advantage over their competitors and devised a popular Five Forces tool to help them maximise the potential profitability of their chosen strategy.
The three generic strategies outlined by Porter are:
Cost leadership strategy – delivering a product or service of the same quality but at a lower cost than the competition. This may require a company to find a lower cost base for key resources such as labour, materials or facilities.
The classic example here is mega-multinational Walmart. Its competitive advantage strategy is based on selling branded products at low prices to the largest number of customers possible. It achieves this through automation and technology, by minimising spend on human resources, by working closely with suppliers, and by owning its own trucks and trailers. It has also championed its penchant for price slashing through advertising slogans such as ‘Always Low Prices’.
Differential strategy – delivering goods or services that are attractive and stand out from the competition. This may require a company to invest in aspects such as research, development or design.
“Don’t be the best, be the only,” says Srinivas Rao, who interviewed more than 500 trailblazers on his Unmistakable Creative podcast. Finding a unique niche is especially important in our internet age, where shopping around is so quick and easy. In other words, if you can’t stand out in a crowd of yoga teachers, become a goat yoga teacher. Or better still, train a chinchilla and truly own your niche.
Focus (or segmentation) strategy – aiming at a few target markets rather than trying to reach everyone. This may require a company to engage more closely with its customers to determine how its products or services could improve their daily lives.
For example, a number of companies have focused on the ethical consumer, those who want to see their own values reflected in the brands they buy from. One example of this is shoe company TOMS, founded in 2006 on a platform (no pun intended…) of social and environmental stewardship. The basic premise is simple; for every product you purchase, TOMS will help a person in need. Among other ‘paybacks’, TOMS has already provided more than 10 million pairs of shoes in more than 60 countries.
For decades, many companies did very well with the sustainable competitive advantage approach, especially traditional manufacturing industries, such as those making cars and steel. Some still do – including IKEA, which is defending a very strong position, armed as it is with a full complement of SNIGLAR and UNG DRILL.
Rather like Walmart, IKEA has few, if any, direct competitors. To beat it would require similar excellence across every link in the chain – that is, another company would have to design its own integrated furniture lines, carry large inventory in its own stores, and advertise it in its own catalogues. To do just one of these things now would not be enough to provide genuine competition to the blue-and-yellow behemoth. Success would only have come with a similar model launched at the same time and run more efficiently. And nobody succeeded in doing that.
However, while the idea of sustainable competitive advantage has merit, the world has changed significantly since Porter developed his generic strategies. For example, the lines between industries have blurred, the start-up economy has boomed and digitisation has exploded. And this has brought certain tensions to the fore – as evidenced by a rather public spat between investor, tycoon and philanthropist Warren Buffet and Tesla and SpaceX magnate Elon Musk.
Of moats and men
Buffet echoes Porter in his use of the term ‘moat’ to describe barriers to imitation designed to stave off competition and defend a competitive advantage. However, Musk describes moats as “lame” and instead posits that “what matters is the pace of innovation”. When Buffet defended his (defensive) position, Musk took to Twitter, posting that he was going to “build a moat & fill it w candy” so that “Warren B will not be able to resist investing!”.
This may be rude. But he has a point…
In today’s world, disruptions are coming much closer together. Even strong incumbents can be quickly disrupted by an emerging technology that enables a whole new way of doing business – hello Uber, Airbnb and Amazon. So what may seem like a sustainable advantage can in fact be transitory. As a result, strategy has become less about the need for ‘clever thinking from the boffins at the top’ and more about the need to adapt quickly – and often.
According to management scholar and Columbia Business School professor Rita Gunther McGrath, “the presumption of stability creates all the wrong reflexes.” It’s therefore vital that we make a distinction between “where we should be playing a defensive game and seeking efficiency (with moats), and where we must be playing for growth and seeking opportunity (with innovation)”.
And here comes our old friend ambidexterity, once again. As McGrath suggests, we must be capable of optimising existing products, services, processes or business models while, at the same time, exploring ways to subsume and replace them.
Braving the new world of transient advantage
In her book The End of Competitive Advantage, McGrath argues that in today’s high velocity world, we need to move from the idea of a single sustainable advantage (“the holy grail”) to “a portfolio of advantages” that can be built swiftly, exploited simultaneously and, if necessary, quickly abandoned – a process she describes as shape-shifting.
To do this, we must learn how to rotate through the lifecycle of competitive advantage – moving from ‘launch’, through ‘ramp up’, ‘exploit’ and ‘reconfigure’ to ‘disengage’ more speedily than ever. And McGrath helpfully sets out an eight-point strategy for companies that wish to create their own portfolio in line with these principles. Here are the highlights:
1. Think about arenas, not industries
Number one on McGrath’s list is the need to move beyond the traditional boundaries that used to differentiate one industry from another and to instead think in terms of ‘arenas’, which take in a combination of customer segment, offer and geographical location.
In a world where Walmart is edging into healthcare, Google is moving into phone operating systems, and Amazon is not just selling books but making and streaming movies, our competitors may not be who we think they are – and they may look nothing like us. For example, if we’re selling motorbikes, our competition may not be the Harley Davidson our customer could choose to buy instead of our model, but the conservatory they may choose to buy instead of a motorbike.
McGrath likens her arenas strategy to the Japanese game of Go, in which the goal is to capture as much territory as possible, rather than chess, where we seek to checkmate our opponent with a single unassailable advantage. Fortunately, however, this conquering of territory requires foresight and agility rather than the terror and mass extermination employed by Genghis Khan.
2. Set broad themes, and then let people experiment
This shift to arenas means that simply analysing data in search of answers is no longer enough. Instead, McGrath advocates for advanced pattern recognition, direct observation, and the interpretation of weaker signals in the environment to set broad themes, and then freeing people to try different approaches and business models within those themes. For example, Cognizant’s theme, ‘the future of work’, clearly spells out the chosen competitive terrain while providing people on the ground with considerable latitude.
3. Adopt metrics that support entrepreneurial growth
As the pace of change accelerates, conventional metrics can effectively kill off innovation and cause companies to underinvest in new opportunities. An alternative is to use the logic of ‘real options’ to evaluate new moves; a small investment that conveys the right, but not the obligation, to make a more significant commitment in the future, opening the door to leaning by trial and error.
4. Focus on experiences and solutions to problems
As barriers to entry tumble, product features can be copied in an instant, says McGrath, adding that what customers crave – and few of us provide – are well-designed experiences and complete solutions to their problems. For example, the Australian supply-chain logistics company Brambles delighted its customers – and its customers’ customers – by designing plastic bins that can be filled by growers right in the fields and then lifted directly from pallets and placed onto grocers’ shelves. This made it quick and easy to restock, reduced labour costs and, with less ‘manhandling’, the fruit and veg was also in a much better shape, which pleased consumers. Talk about a win-win.
5. Build strong relationships and networks
Strong relationships with customers can be a profound source of advantage, and many companies have begun to invest in communities and networks as a way of deepening ties. For example, Amazon and TripAdvisor both make the added value of community contributions a core part of their offering. Social networks also have the power to enhance or destroy a firm’s credibility in seconds. Think German appliance manufacturer Miele’s International Women’s Day faux pas of a tweet: “May all women… embrace what makes them unique!”, with an image of four white ladies smiling next to a washing machine; or Adidas’s hopelessly misjudged “Congrats, you survived the Boston Marathon” email to runners. In 2013. Needless to say, building and preserving important relationships must be a matter of priority.
6. Avoid brutal restructuring; learn healthy disengagement
Sometimes, downsizing or sudden shifts can’t be avoided, and according to McGrath, the challenge then is to disengage from a business in the least destructive, most beneficial way.
Preparing customers to transition away from old advantages is a lot like getting them to adopt a new product, but in reverse, says McGrath. Not all customers will be prepared to move at the same rate and forcing them to do so may enrage them.
7. Get systematic about early stage innovation
If all advantages eventually disappear, it makes sense to have a proper process for filling our pipeline with new ones. Companies that innovate proficiently typically set aside a separate budget for innovation and allow senior leaders to make go or no-go decisions about it. These companies also tend to hunt for opportunities beyond the boundaries of their current practice and R&D department, attempting to figure out what customers are trying to accomplish and how the company can help them do it.
8. Experiment, iterate, learn
A big and common mistake among companies is planning new ventures with the same approaches used for more-established businesses. Instead, we need to focus on experimentation and learning, and be prepared to make a shift as new discoveries appear. All too often, in the rush to gain commercial traction, companies speed through the discovery phase and, as a result, the products that emerge have critical flaws.
Planning to learn versus learning to plan
Business superstar and ‘Manager of the Century’ Jack Welch said: “If the rate of change on the outside exceeds the rate of change on the inside, the end is near.” And if change is necessary for survival, it stands to reason that every company – from fleet-of-foot start-up to established multinational – must keep its strategy under constant review and be prepared to change it if it wishes to retain a competitive advantage.
For example, the multinational IT company Infosys reorganises every two to three years, with a view to breaking up the inertia and complexity which can grow inside any organisation over time. “The cost of reorganising the company is nothing compared to the growth potential it unleashes,” says Head of Planning Sanjay Purohit. “We work out what our next axis of growth will be, then reorganise the company to deliver to these axes.”
Think of it like going to the gym. We may be fit but if we want to stay that way, we have to keep working out.
And of course, strategy doesn’t just need to keep up with a changing world; it also needs to reflect human realities. As author and philosopher Robert Rowland Smith highlights in his book The Reality Test, a strategy based solely on projections and assumptions (rather than human insight) can’t deal with the messy reality of life. Or as Smith puts it, “Reality eats strategy for breakfast.”
Key to this understanding is that a lot of humans hate change and would rather ‘just get on with it’. And whole organisations can also be fearful and risk averse. As leaders, we must therefore create a learning culture, one which values a questioning mindset, attracts curious people and continually tries out exploratory approaches.
Failure can pave the way to success
The Canadian academic and author Henry Mintzberg observed that many of the strategies that arise within organisations are not formally planned. Instead, they result from numerous small actions taken individually by many people over time, often in response to changing situations, new ideas or improved practices.
To describe this, he coined the term ‘emergent strategy’.
In many instances, emergent strategies only become apparent when a deliberate strategy fails to produce the desired results. And in this instance, we can flip the script by adapting our plans to take advantage of these emergent strategies, which are often developed by frontline workers who recognise patterns and – if we empower them to do so – submit ideas about how to improve a process.
Think of the early IKEA worker, constantly having to remove the legs of LÖVET tables in order to fit them into customers’ cars. It may take several steps to get from that worker’s ‘aha’ moment to a future built on flat pack. But, as Mintzberg says, “Anyone can come up with the idea that becomes the vision.”
Emergent strategies give us an opportunity to better meet the needs of our customers, to adapt to new situations, to weather financial hardships and to discover new applications for our products. They also remind us that being responsive to the market is just as important as trying to lead it. However, an intended strategy is still needed at the outset as by its very nature, an emergent strategy cannot be planned.
Holding onto purpose
While the ability to adapt can be an important factor in growing a portfolio of competitive advantages, no company can be all things to all people.
Whether or not we agree with Simon Sinek that “people don’t buy what you do, they buy why you do it”, there is definite value in being able to marry company strategy to company purpose.
This has nothing to do with giving a saccharine backstory to a carton of orange juice on Facebook or being able to follow a tub of margarine on Instagram. It’s about maintaining that all-important coherence we touched on earlier. It’s also about encouraging people to pull together in a common direction and understanding where our limits lie. For example, while the market may accept Harley Davidson’s move into electric vehicles, the Harley Davidson cake-decorating kit licensed by Bakery Crafts was immediately voted ‘worst brand extension’ – right up there with Virgin Brides and Zippo perfume.
Dolly Parton offers valuable advice in her observation: “Find out who you are, and then do it on purpose”. Leveraging the unique niche we can authentically call our own is often a much more successful approach than simply trying to steal an advance on our competitors by doing the same things they do, but better, cheaper or faster.
And yes, we can take this authentic self into new areas and new markets, just like Dolly can write classic hits, run Dollywood and found the Imagination Library to help kids develop a love of reading. They are all different, but all Dolly. Just like Amazon is still Amazon, whether it’s entertaining us with books or with digital content.
Bad strategy and how to avoid it
With thinking around strategy constantly evolving, the three markers of ‘good’ strategy set out by Richard Rumelt remain a useful reference point. And he helpfully identified four hallmarks of bad strategy too, as a guide for what to look out for. These are:
Failure to face the challenge
“If the challenge is not defined, it is difficult or impossible to assess the quality of the strategy. And, if we cannot assess that, we cannot reject a bad strategy or improve a good one,” says Rumelt.
In other words, if the plan doesn’t mention the real problem you are trying to solve, it doesn’t matter how rich in detail it is; it will not help you. An understanding of the fundamental obstacles is essential to good strategy.
Mistaking goals for strategy
To succeed, it’s not enough to ask a workforce to keep pushing to achieve a goal. A leader must create the conditions that will make each push effective.
Rumelt uses the example of a quarterback whose only advice to his teammates is “let’s win”. The ambition, vision and values embodied by that statement may initially cover up its failure to provide useful guidance, but wishful thinking is not the same as a good strategy.
This has maybe never been clearer than during World War I, when the appeal for “one last push” after the battle of the Somme led to the loss of an entire generation not the decisive gaining of ground that the top brass hoped for. “The slaughtered troops did not suffer from a lack of motivation,” says Rumelt, “but from a lack of competent strategic leadership.”
Bad strategic objectives
Another sign of bad strategy is a long list of objectives which cloud the main issue. These often emerge from planning meetings with multiple stakeholders who each suggest things they would like to see accomplished, rather than focusing on what really matters.
This highlights why the ability to make choices and ‘kill your darlings’ is so important. Sometimes we have to sacrifice potentially worthwhile and noble projects in favour of doing fewer things well; something Steve Jobs understood, even when he upset the Apple cart (and several employees) by choosing to close down a number of highly promising technological pilots that didn’t fit in with his very specific vision.
Leaders should also look out for the ‘flurry of fluff’ which may be deployed to hide the absence of thought; often a restatement of the obvious, combined with a generous sprinkling of buzzwords that masquerade as expertise.
“Good strategy almost always looks simple and obvious,” says Rumelt, and it “does not take a thick deck of PowerPoint slides to explain”. At the same time, there should be no need to dress up a strategy in what Rumelt calls ‘Sunday words’, those designed to create the illusion of high level thinking.
He gives the example of a major retail bank, which states: “Our fundamental strategy is one of customer-centric intermediation”. ‘Intermediation’ means that the company accepts deposits and then lends them to others. In other words, it is a bank. ‘Customer-centric’ could mean that it offers better terms or better service, but on examining its policies, Rumelt found no distinction in this regard. In other words, when you delve beneath the fluff, what you’re left with is the reality that the bank’s fundamental strategy is… being a bank.
And fluff isn’t the only villain of the piece. Guff is also rife, despite the best efforts of FT writer Lucy Kellaway, who spent nearly a quarter of a century “telling businesspeople to stop talking rot”. Take this example from Cisco CEO John Chambers, whose stated aspiration was to “wake the world up and move the planet a little closer to the future”. Imagine the actions required for that…
Flip, but don’t flop
In summary, then, to make a good strategy, leaders must be able to make a careful assessment of the situation, to chart a course based on educated judgement, and to change that course as new opportunities are sought out and new threats arise. And we must be able to do all this while holding onto the core idea of what makes us ‘us’, in order to maintain consistency through every change.
This can be challenging as it often requires us to walk the edge between the known and the unknown and to have the courage to change our minds. It may even mean that on occasion we have to choose to wait. Even Genghis Khan knew patience. If his forces could not reduce a city or fortress, they often built a counter fortress to blockade it and simply waited until the enemy succumbed to hunger or agreed to a diplomatic settlement.
However, while choosing to change our minds or apparently ‘doing nothing’ can be strategically wise, it can still be perceived as a sign of weakness. For example, politicians frequently get accused of flip-flopping on policy priorities and are parodied for it.
The term was also used extensively in the 2004 US presidential election campaign to attack John Kerry, who was accused of ‘flip-flopping’ on several issues, including the ongoing war in Iraq. During a now-famous appearance at Marshall University, Kerry tried to explain his vote for an $87bn ‘supplemental appropriation’ for military operations by telling the crowd, “I actually did vote for the $87bn, before I voted against it.” In the 1970s, UK Prime Minister Edward Heath was similarly accused of making a U-turn when he abandoned the free market economic policies previously set out in the Conservative Party manifesto and nationalised Rolls-Royce. This later led to one of Margaret Thatcher’s most famous phrases: “You turn if you want to. The lady’s not for turning.”
As leaders, we have to be able to set these perception to one side and to see through our choices. While it may seem easier to carry on with the same-old same-old, simply trying to shore up an existing advantage, rather than taking decisive action in response to emerging market conditions, will not pave the way to success. Instead, companies that settle for this route may soon find themselves on a growing list of former market leaders – from Borders to Blockbuster – for whom failing to act in the right way at the right time ultimately meant acting to fail.
A little more purposeful chopping and changing might have proved judicious. As the economist J.M. Keynes once said in defence of frequently changing his opinions, “When I find new information, I change my mind; what do you do?”.
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