Business strategy is required to serve the organisation’s mission, to enable fulfilment of its journey. The nature of the journey itself is a guide to strategy.
Growth, superior financial results are measures of business success. They are outcomes of competitive advantage that result from superior customer value. Unfortunately, many firms mistakenly believe cost reduction, better quality or customer service are strategy. They are not.
Strategy is the manner in which a firm attempts to achieve competitive edge on its journey to a distant destination. It involves choosing the path it would follow. Choice implies trade-offs: if you follow one, you cannot follow another. Dynamism and adaptiveness are the other characteristics of strategy. And wisdom its foundation.
Business strategy concerns itself with winning the war of business. It focuses on how to make the firm sustainably competitive, thereby more profitable. To understand strategy one must begin with answers to three fundamental questions: where, how and what.
‘Where’ defines the destination, aspiration, the distant goal. Answers to the question ‘how’ state strategies that would help achieve stated objectives. The question ‘what’ leads us to tactics, or action plans. But these questions do not address an even more basic quest. Why are we on this journey? What kind of voyage is it?
In 217 BC, Hannibal surprised the Roman Army by crossing the Alps and took battle to the heart of the mighty Roman Empire. He won the Battle of Cannae and stayed on in Rome for thirteen years. It was a triumph of strategy. Porus gambled and lost to Alexander when his elephant cavalry was bogged down in the rain-wet battlefield. Military strategy is over two thousand years old. Business strategy, less than a hundred years in age, is an infant by comparison.
The mission of a firm is its journey. Andrew Campbell of Ashridge Strategic Management Centre, U.K. calls it the ‘purpose’: what the firm exists to do. In some ways, it is akin to an individual’s search for meaning. Human beings find meaning in their lives from the work they do, their professions, or pursuits – art, exploration, career, and so on. The firm’s mission is entwined in what it chooses to do – the nature of its journey.
The mission, or purpose is the starting point for strategy. If it is ill defined, it cannot be a guide for strategy. Creating wealth for shareholders, or serving customers and employees cannot be a useful purpose. They provide no direction for strategy. On the other hand, creating wealth and customer satisfaction from tourism may be a more useful guide. On the other hand, if the mission is defined too narrowly, it may constrain the company. For example, ‘adventure tourism in Uttaranchal’ may limit a company’s prospects significantly and keep it from exploiting opportunities, and increase its vulnerability.
At one time, Sony Corporation saw its mission in entertainment electronics. Later they redefined it as entertainment. That vital change led to the transformation of Sony into a media major with revenues from film studios, film and television production, TV channels and music. Mission can be a potent driver of strategy.
Mission statements, regrettably, are rarely crafted with an eye on their implications on strategy. They usually contain nice sounding, hard to argue with phrases. Many statements provide no indication of the business the company is in. They could apply just as well to consulting, software development, or steel making. No wonder, a fertiliser corporation forays into insurance. Or a V. K. Munot enters the mobile phone business in India. Why do certain companies rush in where angels fear to tread?
The desire to pursue growth, profitability is understandable. But can one pursue any business that appears attractive? Are profit, or growth that easy? In the haste for growth and profits, most firms forget they must be competitive in order to survive. Only then can a company hope to pursue other objectives – financial and social. Indeed, building and sustaining competitive advantage is the only road to the pursuit of all other goals. A firm is constrained to be competitive, or it will not exist. This constraint is the second guide for strategy. Every business must recognise its fundamental objective must be to create sustainable competitive advantage (SCA) in its business.
There is considerable confusion in India on how a firm can create competitive advantage. Many companies pursue quality improvement as a source of competitiveness. In the early 90s, ISO 9000 certification was seen to be a differentiator. The rush for certification certainly spawned a new breed of consultants. It is doubtful that it provided anyone with a sustained edge or improved profits. The current rush for TQM goes on.
Quality improvement is a requirement. It is what customers expect. If a firm does not pursue a programme of continuous improvement of quality, it will almost certainly be left behind. But, is a quality level, or programme difficult for a competitor to copy? In 1999, only three Indian software firms had been certified SEI CMM Level 5, the black belt of software quality. At the end of 2002, there were fifty-three in India alone!
Competitive advantage comes from creating and delivering superior value – value that is relevant and useful – to customers. The advantage is sustainable when competitors find it difficult to replicate the value chain quickly, or cheaply. Customers will happily pay a higher price for the company’s products or services, thus creating superior profitability. It is argued, therefore, that sustainable competitive advantage must lead to superior financial performance and that must be the only true measure of the firm’s competitiveness.
Many companies believe cost reduction (different from cost leadership) will give them the edge. Engineering companies are spending considerable time, effort and money on productivity improvement. They are adopting lean manufacturing, cellular production, business process reengineering, supply chain restructuring and a whole host of other initiatives to become lean and mean fighting machines. They will certainly gain some advantage if their competitors stood still. But will they remain inactive? How much time will it take rivals to catch up?
Superior quality, great customer service, lower costs and higher productivity are aimed at making processes more effective. They cannot be sources of sustainable competitive advantage because they are copied easily and quickly. A business cannot ignore operational effectiveness, says Micheal Porter. They are necessary for competitive advantage, not sufficient. They are not substitutes for strategy, or strategy itself. They are complementary. So, just what is strategy?
The Nature Of Strategy
A definition of strategy was suggested in a conference in 1963 at the Harvard Business School, “Strategy is the expression of this fit (between internal and external factors) and the goals of the leadership to exploit this fit efficiently and effectively using organisational resources.” Another definition says, “It defines explicitly, or implicitly the organisation’s mission, the product-market scope, guidelines for functional policies and the values of the leadership.”
The process of strategy creation is not merely about the best fit between internal and external circumstances, it also demands a rigorous “what if” approach. A good strategy anticipates the consequences of action of other players. It takes into account the behaviour of customers and competition besides shifts in the environment – political, social, economic and technological. The internal environment is change prone, too. If talent flees, the leadership changes, new points of view take root in the Board, strategy would need to be recast. Dynamism is the other characteristic of strategy. It needs fine-tuning and course correction every time changes occur in the internal or external environment.
Michael Porter emphasises that the source of sustainable competitive advantage lies in the activities firms perform. Sustainable competitive advantage stems from doing completely different things from competition, or doing similar activities in different ways. The firm’s choice of markets and customers determines these activities.
It is said, If you chase two rabbits, both will escape. This captures the third characteristic, perhaps the essence of strategy – making choices. It is not easy to formulate strategy because it is not only about choosing what to do, it is also about choosing what not to do. Selecting a customer segments to target is as important as deciding which to leave. Only then is the decision strategic. This crucial choice dictates the way a company would conduct its business and how it will be different from others. A company that chooses to supply electrical connectors only to OEM customers is likely to work very differently from one that supplies only to small buyers. And both will probably operate in different ways from one that serves both segments.
Making choices is making a commitment and that’s not easy. It is easier to flow with the tide, to keep one’s options open. It is also dangerous. Making choices requires strength of character that is built on values and principles, on faith and deep knowledge of what is right and what is not.
Pursuit of wealth does not take strength of character, knowing wealth is a consequence, does. Setting tall financial objectives does not speak of values, recognising that they are merely milestones does. Chasing profitability without greed is wisdom. And wisdom knows journey is the end.