This article is authored by Grace Lui (Valuation and Transaction Services Director, Nexia TS)
Strategy, a concept very familiar to most executives, is often what gives our business the competitive advantage over our peers. Interestingly, as not many of us might know, strategy is also a term that comes from the Greek term ‘strategia’, meaning “generalship”. Some say leading a business is like warfare – the deployment of troops (resources), navigating terrain obstacles (business challenges), countering enemy tactical manoeuvres (competition), and ultimately, winning the war with minimal casualties (monetary loss) in the quickest time possible (efficiency) to meet the objectives (can be profit or non-profit goals).
Business is dynamic, fast-paced, and requires an effective and efficient use of scarce resources. As the case with major business decisions, before jumping head on into deploying the adopted business strategy as soon as possible, it might be worthwhile to take a step back and relook at the overall game plan to ensure that it is well-defined, aligned with clear resource prioritisation and recognise the possible trade-offs from pursuing the desired course of action. This step might prove to be invaluable to fine-tune our stratagem.
Michael Porter, a renowned management expert defines the essence of strategy¹ as “Choosing a unique and valuable position rooted in systems of activities that are much more difficult to match”. In this regard, Porter traces the economic basis of competitive advantage down to the level of the specific activities a company performs. Essentially, business strategy defines what needs to be fulfilled with the prioritisation of relevant resourcing to execute an enterprise-wide activity plan with clear goals, direction and what not to do (ie trade-offs). Using Ikea² as a case study, he shows how making trade-offs among activities is critical to the sustainability of a strategy.
Strategy might come across as a frequently-used term in today’s business environment. Management consultants, as well as senior business leaders alike rave about their “long-term strategy” or their latest “growth strategy”. However, just what is strategy? The concept has been used frequently in so many different contexts that its meaning has become watered down and somewhat vague. Therefore, this article aims to provide a deeper discussion on its construct, its application to counter competition and in growing the business.
To begin with, operational effectiveness, although necessary for performance, has often been mistaken as a business strategy. While both are equally essential to an organisation, they are markedly different. Operational effectiveness entails generating greater speed, quality and productivity from current business activities. Think Total Quality Management, Kaizen techniques or time-based competition. Simply put, while operational effectiveness is about achieving excellence in each activity, strategy is about combining activities.
While being highly productive has its advantages, the problem with focusing purely on operational effectiveness is that such techniques can easily be copied by competition. Improvements in operational effectiveness can offer businesses a competitive advantage if other firms are operating far from the productivity frontier – this holds true for companies who are ahead of their pack, especially in the early market entry phase. However, if the majority of market players catch up in the productivity game, then the market leaders will need to find other ways to distinguish themselves further besides doing well in the productivity game. The more companies focus on operational effectiveness, the more similar and homogeneous they become. For many companies, this state of affairs is simply not sustainable.
Arguably, it might very well be the case where most companies approach strategy in the following manner: Do what everyone else is doing but better (spend lesser resources doing it), or do something no one else can do (differentiation). While either approach can be successful, the two are not the same. Competing in the efficiency game alone, for example, pricing, just shrinks the overall pie everybody is getting their hands on – as a result, profitability declines for the entire industry.
Alternatively, businesses could expand the pie by staking out a unique market position or advantage. For example, this is clearly evident in the airline industry, where most airlines “compete to be the best,” as Porter puts it³, fighting over a very stingy pie indeed, while Southwest, among a handful of other airlines, built far more profitable businesses with a completely different approach, which targeted a different customer (people who might otherwise drive, for example) with a cleverly efficient set of interdependent activities, thereby expanding the entire market.
At its core, strategy entails performing different activities or performing related activities in different ways from other competitors. This is in contrast to operational effectiveness, which seeks to perform related activities in better ways. Therefore, settling on an optimal strategic positioning and constantly adjusting it to meet the demands of the competitive landscape is key to operating in a challenging market environment.
According to Porter, there are three different types of strategic positioning⁴:
1. Variety-based Positioning:
This is suitable for businesses who can provide a subset of an industry’s product or services which are better than their competitors. Usually, firms who adopt such a positioning can reach a wider pool of customers due to their speciality but will be able to satisfy only a portion of their needs.
2. Needs-based Positioning:
This is suitable for businesses who can serve all or almost all the needs of a specific group of customers. For such a strategic positioning to be sustainable, the set of activities being performed should be different from other competitors.
3. Access-based Positioning:
This is suitable for companies who can cater to the similar needs of customer segments who are accessible in different ways (geography, scale, or other differentiator that requires customising of activities to reach this group of customers). For example, accessing rural customers as opposed to cosmopolitan urbanites will require different sets of business activities.
It is important to note that a company’s strategic positioning can be a combination of any of the three types of positioning. Nonetheless, any sustainable strategic positioning will require a business to configure its operational processes such as marketing, logistics or after-sales support so as to ensure that the business as a whole is geared towards a unique set of activities which reinforces strategic positioning. It is certainly not ideal, much less impossible, for a company to be all things to all customer segments. However, if competitors notice their rival’s success and start to copy its business strategy, they will have to first deal with a number of trade-offs when they change course to embark on a different strategy.
There are two main types of trade-offs:
1. Brand Dilution:
If a firm is known for delivering a certain type of good or service, for example, mass market products, attempts to deliver higher end products run the risk of confusing its existing customers and therefore diluting its brand through dissonance between the original brand attributes and the new premium product attributes. In general, the smaller the perceived fit between the extension and the original brand, the more probable it is that the brand image will deteriorate.
2. Different Activities:
Different strategic positions will require different activities to reinforce the respective strategic position. Operational processes, equipment, employee skillset as well as management command and control will have to be re-configured. If a firm were to attempt to straddle two different strategic positions, the resources invested as well as opportunity cost incurred may prove detrimental.
Having determined the appropriate strategic positioning and having thought through on the necessary trade-offs, a business leader’s next task should be to forge a fit among the firm’s various activities, and by doing so, it will be harder for competitors to imitate that strategic positioning, thus promoting the sustainability of the competitive advantage.
According to Porter, there are three types of fit⁵:
1. Simple Consistency:
First, the activities a firm undertakes has to be consistent. At the bare minimum, a company should not be undertaking activities which are inconsistent with the firm’s strategy. For example, to align activities with a low-cost approach in its low-cost strategy.
Second, business leaders should think about how the various activities reinforce and strengthen one another. For example, the subtle enhancement of a product’s upscale brand image by distributing its products only at luxury hotels.
3. Optimisation of Efforts:
Third, in line with the company’s overall strategy, there may be activities that can be jettisoned so as to minimise costs.
Achieving such a strategic fit through a system of inter-locking activities, which has taken into account the necessary trade-offs, is key to deterring imitation and sustaining a strategic position. At its core, strategy is about planning how to win. Having the right strategy takes time, reflection, effort and discipline.
¹ ⁴ ⁵https://hbr.org/1996/11/what-is-strategy
For more information, please contact:
Ms Grace Lui
Valuation and Transaction Services Director