What is Strategy?

“Strategic thinking is the art of outdoing an adversary, knowing that the adversary is trying to do the same to you.” “It is also the art of finding ways to cooperate, even when others are motivated by self-interest, not benevolence. It is the art of convincing others, and even yourself, to do what you say. It is the art of interpreting and revealing information. It is the art of putting yourself in others shoes so as to predict and influence what they will do.” The Art of Strategy, Dixit and Nalebuff, W.W. Norton, 2008.

Strategy Strategy is planning that allows you to delight your customers. Strategy is about getting customers and keeping them. Drucker: “The purpose of a business is to create a customer.” Product first, not profits

Strategy The process of strategy includes: Analysis Formulation Implementation

Strategic Planning and Analysis Planning how to delight customers requires these steps: Scanning the overall environment Scanning and researching the industry environment Researching direct competitors Researching your organization's skills and resources Analyzing current strategy And, most important, knowing what will delight your customers before they know it

“The Five Competitive Forces That Shape Strategy,” Michael Porter, Harvard Business Review, January 2008.

Before the Internet Michael Porter wrote the initial model for the Five Forces in 1979. He wrote “What Is Strategy” for HBR in 1996, his seminal book Competitive Strategy in 1981, and Competitive Advantage in1985. Before the Internet (BTI) Before Google Before Napster, iTunes, and the iPod, iPhone, and iPad Before craigslist.com He didn’t consider how to compete with free.

Before Behavior Economics Porter made his major contributions to strategy theory before behavioral economics research. BE research has shown that people do not make rational decisions (emotions dominate) and that markets are not rational. That success is more often the result of luck (randomness) than carefully planned strategy. Delighting customers with awesome products is the key now, not having barriers to entry.

Randomness People are not wired to understand randomness. We are wired to see patterns and causality; can’t accept randomness. Can’t plan for luck. But can be nimble and take advantage of lucky breaks.

Operational Effectiveness Is Not Strategy Concentration on core competencies and competitive positioning via benchmarking can lead companies down the path toward mutually destructive competition. Companies must distinguish between operational effectiveness and strategy and not confuse them. “What is Strategy,” Michael Porter, Harvard Business Review, November 1996, Reprint # 96608

Operational Effectiveness Is Not Strategy Operational effectiveness is necessary to compete but not sufficient to win. A company can outperform others and win only if it can establish a difference that it can sustain – a differential competitive advantage. In the past barriers to entry were the primary competitive advantage. Now, it's better products and service. Operational effectiveness means doing things better than competitors, strategic positioning means doing things different from competitors and having better products and service.

Strategy Rests On Unique Activities The essence of strategy is choosing to perform activities differently than rivals do. Strategic positions can be based on customers’ needs, customers’ accessibility, or the variety of a company’s products or services. Porter’s concept of fit is no longer valid. Change is happening too fast. Remember, “structure follows strategy”

Generic Strategies There are three generic (primary) strategies: Differentiation Focus (niche marketing) Cost leadership These definitions characterize strategic positions at the simplest and broadest levels.

Secondary Strategies Within the three basic strategies, there are several secondary strategies: Defense: Block competition to avoid losing market share. Offense: Attack competition head on. Flanker Brand: Establish new position. Fighting Brand: Create a new brand to compete with competitive new brand. Guerrilla Marketing: Force competition to respond with small resources. Ambush Marketing 25

Profitable Niche Measurable, sizable, reachable Niche strategy advantages: Flexible, can adapt to new needs, small range of needs. Efficient for promotion, distribution. Reduces competitive pressure. With few competitors, can be highly profitable. 26

Niche strategy disadvantages: Few economies of scale Success breeds competition. When new competitors enter the niche, strategy must change. To thrive in most businesses, must be #1, #2, or get out (find a new niche). Get out in the long tail. Innovate with new products. 27

Differentiate By Benefits Sought By Consumers Grocery buying segments Location - 39.0% Price - 30.2% Service - 12.1% Selection - 9.5% Quality - 4.4% 28

A Sustainable Strategic Position Requires Trade-offs Tradeoffs are essential to strategy. They create the need for choice and purposefully limit what a company offers. Remembering that a valuable position will attract copycats. Can’t be all things to all people. Be best at doing a few things. Then expand on those core competencies. Apple Google Amazon

Determining Strategy To determine strategy, answer the following questions: Which of our products/services are the most distinctive? Which of our products/services are the most profitable? Which of our customers are the most satisfied? Which customers, channels, or purchase occasions are most profitable? Which of the activities in our value chain are the most different and effective. How can we make everything better? Now!

Profit is Important Profit is the key to a successful strategy, not growth. Compromises and inconsistencies in the pursuit of growth will erode the competitive advantage a company. Keep an eye on profitable growth.

Potential Traps Meaningless differentiation Getting greedy Groupthink Alfred Sloan Throwing money at a problem Lack of commitment Innovation stagnation

Perceptual Problems “All the kids are above average…” Jim Collins lists five basic management perceptual mistakes that lead to five stages of decline: Stage 1: Hubris Born of Success Stage 2: Undisciplined pursuit of more Stage 3: Denial of risk and peril Stage 4: Grasping for Salvation Stage 5: Capitulation to Irrelevance or Death Jim Collins, How the Mighty Fall, Harper Collins, NY 2009.

The Role of Top Management The role of top management in an organization is: Defining an organization’s position and strategy Making trade-offs Forging fit among activities Building an innovation machine And strategy may have to change along with major structural changes in an industry -- flexibility is vitally important.

Organizations Must have a visionary, meaningful mission statement. Must have a clear and simple strategy. Must define how to delight customers. Must be committed to strategic moves and signal commitment to competitors. Must continually innovate.

The Strategy Focused Organization * Mission: “Why we exist” Core Values: “What we believe in” Vision: “What we want to be” Strategy: “Our game plan (how to win)” Goals For Implementing Strategy (Metrics): “What we need to do” OUTCOMES Satisfied Shareholders Delighted Customers Effective Process Motivated and Prepared Workforce * The Strategy Focused Organization, Robert Kaplan, David Notron, Harvard Business School Press, 2001