Hardly a year goes by without several new books that ambitiously outline ‘the recipe’ for organisational success. Somewhat less frequently, someone focuses on what constitutes good or bad strategy and what part strategy plays in recipes for success. It’s tempting to believe that we can quickly distinguish between good and bad strategy, especially when we’re looking at someone else’s business and there is little risk in venturing an opinion. Strategy consultants and academics do this all the time. I catch myself doing it from time to time (OK, more often than that!!) ……………but I try to remind myself that it’s easy to pass judgement on strategy with 20/20 numbers based hindsight, but it’s much harder to do it with foresight.
I like to think about strategy as a hypothesis framed by the choices an organisation makes. In attempting to assess the merits of this hypothesis in advance for any particular organisation I try to clearly identify and mentally position its underlying choices along a continuum of value creation potential. A while back I wrote a blog about organisations whose strategy sits in what I call the ‘Zone of Mediocrity’. Strategy in this ‘Zone’ is best described as ‘so so’ rather than good or bad. It’s generally been in place for some time, is conservative in terms of risk, market share & competition is relatively stable and the business is modestly profitable, sometimes for a long time, but……… at some stage there is a game changing shift in the environment and that’s when the trouble starts!
In my earlier blog I suggested three signs of strategy in the Zone of Mediocrity. The first is ‘wish list strategy’. This involves a long list of nice, fluffy platitudes masquerading as strategy. These statements confuse objectives with activities, do not spell out priorities or action plans and are usually linked to an even longer list of generally irrelevant performance indicators that are routinely benchmarked against competitors in a forlorn quest for legitimacy.
The second is ignoring the elephant in the room, often because it’s too hard to do something about it (two classic examples – many retailers ignored the impact of on line shopping on their businesses for way too long and many universities are currently ignoring the impact of open, online courses on their long term sustainability).
The third is a lack of clarity and focus in the Customer Value Proposition. Typical examples include organisations that substitute motherhood statements for CVPs (the Water Utilities provider whose purpose is “to enrich quality of life”. Just what that means is never spelled out!), that try to be all things to all customers (the ‘one stop shop solutions’ providers), or that change direction too easily and too frequently. As Lou Gerstner, former CEO and Chairman of IBM once observed “I have learned that lack of focus is the common cause of corporate mediocrity”.
So, what does strategy outside the Zone of Mediocrity look like? What are the signs to look for?
The first is a strong & distinctive focus on customer value creation. Traditional thinking encourages organisations to focus on value chain activities aimed at enhancing competitive advantage as the ultimate goal of strategy. All too often, this thinking leads organisations to emphasise internal activities, especially those where they had an edge over competitors in the past. Caught up in attempting to maintain this apparent advantage, they miss shifts in the dimensions of value important to their customers. Sohrab Vossoughi’s blog on the decline of Sony is a good example. He argues that “Sony still makes exquisite products, but fewer and fewer people get excited about them”. The problem, he suggests, is that Sony’s focus is on delivering product based technology (which is quickly matched by its competitors) rather than on delivering “powerful and resonant user experiences”. In what Vossoughi calls the “ experience economy”, customer value creation has shifted from the product itself to “what it is like to use” and Sony have not quite caught up with this change.
Rather than think about competitive advantage as the goal of strategy I suggest that customer value creation is actually the goal and competitive advantage is the means to achieve that goal. One major benefit of this line of thinking is that it focuses strategy on customers and the dimensions of value they consider important rather than on the organisation’s internal activities.
Another benefit is its broader application. The concept of value creation has multiple dimensions, both economic and non-economic, and it lends itself just as well to the for profit sector as to other sectors. It can also be readily applied to stakeholder groups other than customers. However, the concept of competitive advantage and especially the economic terms in which it is traditionally expressed are difficult to apply in social enterprises and in the government sector. Focusing on customer and/or stakeholder value creation as the goal of strategy leads to greater clarity in strategic choices and therefore to better strategy in all organisational types.
The second sign is a clear, simple and focused business model, one that is both understood at all levels of the organisation and underpinned by a distinctive logic in terms of integration, execution and economics. There are multiple ways to describe business models. Tim has previously outlined eight “models of business models.” While I have my preferences, it doesn’t really matter which model you use as long as you can clearly define what value the organisation is aiming to create, who the target customers are and how this value will be created in no more than a couple of sentences. This is a really tough, but invaluable exercise, one that really focuses an organisation. Consider Pixar’s aim “to combine proprietary technology and world-class creative talent to develop computer-animated feature films with memorable characters and heart warming stories that appeal to audiences of all ages.” The clarity, simplicity and focus is obvious!
It’s especially important to ensure that the ‘how’ of value creation is clearly defined and understood in terms of a distinctive, integrated and execution oriented system of activities that link back to the ‘what’ and the ‘who’. Ikea is a good example. Product design, manufacturing, supply chain management, flat pack packaging, big box stores, self-help store layout, staff training, self-assembly……………….all of these elements come together into a unique system where the fit and the cause and effect linkages can be clearly identified and understood throughout the organisation. This system delivers (1) a wide range of well designed, functional home furnishings at such low prices that as many people as possible can afford them; and (2) volume driven economic performance for the organisation itself .
The third sign is continuity and/or adaptability. By continuity I mean stability over time in the Customer Value Proposition, in the ‘what’ and ‘who’ of value creation, even in the face of environmental turbulence. This stability is important in that it affords the time for an organisation to develop a unique integration and execution oriented system of activities. However, this stability does not mean that innovation is unimportant. Continuity in the CVP should be matched by strong innovation in how that value is delivered. Consider Ikea again. Although it was hit hard by the GFC Ikea did not change course. Instead it reinvigorated its low cost operations, so that it could offer its wide range of home furnishings at even lower prices, maintaining its margins while driving up volume at the same time.
By adaptability I mean moving into adjacent new markets by modifying the business model to new contexts. In these cases the ‘what’ and ‘who’ of value creation may change but the ‘how’, the capabilities, routines, priorities and principles that define integration and execution logic, remain consistent. Chris Zook and James Allen refer to these capabilities, routines, priorities & principles as ‘non-negotiables’, arguing that they are central to repeatable business models. They use Nike as an example. Nike has been able to adapt its business model to different sports markets by relying on several non-negotiables – “performance, and design of materials, and the brand, and their supply chain to Asia and above all being superb at signing contracts with top athletes of the world, like Roger Federer.”
The key difference between strategy outside and inside the Zone of Mediocrity is that the former involves clear choices on what to do and especially on what not to do. It also involves a mindset that strategy is a work in progress guided by an iterative, formal and informal routine of Strategic Conversations that recognises and acts on changing dimensions of customer value in advance of its competitors. These conversations are more than systematic feedback from customers, operations and frontline employees. They involve what Donald Sull, in his book The Upside of Turbulence, calls the ‘agility loop’. This loop involves four steps: making sense of a situation, making choices on the ‘what’, ‘who’ and ‘how’ of value creation given this situation, making things happen on the ground to deliver this value, and making changes in light of ongoing interactions between the organisation and its shifting environment.
In my consulting and teaching I recommend that Strategic Conversations should occur not only at senior management and/or board level but also throughout the organisation. But, engaging in Strategic Conversations often proves difficult for organisations, especially engaging in the right conversations at the right times. Attempts at Strategic Conversations often turn out to be more form than substance – annual strategy workshops that rubber stamp what the organisation has been doing for years (even if it is flawed), mission/vision statements that are largely platitudes, and strategic planning that is really annual budgeting in disguise. Alternatively organisations default to operational conversations that are focused on the usual suspects – how can we boost sales next month, what can we do to improve margins by 1%, what does the latest competitive benchmark survey look like and so on. Don’t get me wrong, these operational conversations are important but they are only a partial contributor to strategy outside the Zone of Mediocrity.
Strategic Conversations should focus on areas such as customer value expectations, the business model to deliver these expectations, executing this business model and making mid-course corrections where appropriate. Strategic Conversations are critical and require considerable effort and rigour – unless, of course, you want to sit in the Zone of Mediocrity!