“Strategic direction is more important today. It's about providing a framework for managers to navigate through the fog of complex chokes. No company can avoid this."

– C.K. Prahalad –

PoS Oct 2012 | Does your company have an effective strategy?

Last month I had asked if you could articulate your strategy briefly. You can do that only if you have one. Do you?

Managers may answer in the affirmative yet most firms struggle with strategy. Sustained superior profitability is the outcome of a good gameplan. If your Company trails industry profitability, it may be the first sign that you don’t have an effective strategy, if you have one at all.

A good strategy demands that you focus on one or more clearly defined customer segments, and shun others.

Nirma makes washing products for economy conscious Indian households; they have stayed away from premium products. Asian Paints targets household customers. Starbucks pursues customers that wish to enjoy good coffee in a sociable and leisurely atmosphere. Although they serve takeaway customers, their principal target remains people who enjoy the coffee experience. All three companies are leaders and enjoy high profitability.

Focus on a few segments facilitates conduct of business activities in ways that deliver superior value to target customers. By shunning others the firm avoids incompatible activities. Customers recognise superior value and prefer to do business with them rather than others.

Sigma-Aldrich, the US specialty chemicals company, targets laboratories, research establishments and others that require high purity chemicals in small quantities. They studiously avoid industries that need bulk production chemicals.

At the heart of their production system is a proprietary demand forecasting software. Plants produce flexibly and quickly to meet demand and replenish the large finished goods inventory. Trained salespeople provide detailed technical information to customers besides working with them to develop new products.

Sigma-Aldrich hires highly reliable international logistics companies that guarantee swift pickup and timely delivery of 200,000 products to 1.3 million customers in 40 countries. Finely tuned activities enable them to ship 98% of orders on the day they are received. The result: enviable profitability – PAT-to-sales ratio of over 15% (18% in 2011) for more than ten years.

Making hard choices – what to do and what not to do – is a signature characteristic of companies that make good strategy. Most businesses have a me-too strategy because they shy away from difficult choices.

Does your Company have an effective strategy?

V.N. Bhattacharya
Business Strategy Consultant