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Ten Tenets of Strategy

by Larry Pendergrass, Principal

 

Introduction
Tenet #1: Your core competencies are not your strategy.
Tenet #2: Compete on core capabilities.
Tenet #3: Make hard choices.
Tenet #4: Focus on customer outcomes.
Tenet #5: Analyze and design for the industry forces.
Tenet #6: Understand the landscape of customer needs.
Tenet #7: Know your competition and their strategy… well.
Tenet #8: Diversify around your core capabilities.
Tenet #9: Balance the stakeholders.
Tenet #10: Strategy is dynamic. Adjust as necessary, but with caution.
Conclusion


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Introduction

The right strategy, even in a mediocre industry can make you a winner. And the wrong one can make your life unbearable. Far more important than any specific service or product you offer is how you choose to compete. Strategy is the collection of decisions that you make that defines your firm’s unique value to the customer. It determines how you will return value to your stakeholders. And it is at least as much about what you will not do, as it is about what you will do.

There is no absolute right strategy for your firm. But there may be one that is a best fit considering all other constraints. Determining the “best fit strategy” is a matter of understanding the industry forces, trends in the marketplace, your competitors’ strategies, your firm’s strengths and weaknesses and the passion that drives your value-creation engine. With these assets and constraints in mind, your firm can set a direction and build competencies for a business that can be defended and expanded upon over the long term.

Through years of personal experience and discussions with key thought leaders, I have crystalized the

following Ten Tenets as guidance for the development of your strategy. These tenets can be applied to your corporate strategy, product or service strategy or at any level in the organization where strategic decisions are being made.

  • Your core competency is not your strategy.
  • Compete on core capabilities, your set of business processes integrated throughout your value chain.
  • Make hard choices. Decide what you will not do.
  • Focus on customer outcomes. Design your strategy through the customers’ eyes.
  • Analyze and design for the industry forces.
  • Understand and analyze the landscape of possible customer outcomes.
  • Know your competitors and their strategy profoundly.
  • Diversify around your core capabilities.
  • Balance the stakeholders.
  • Strategy is dynamic. Adjust as necessary, but with caution.

Tenet #1: Your core competencies are not your strategy.

Most companies have one or more core competencies of which they are proud. A core competency is anything that a company is able to do or deliver better than or as well as any other company in the world. Examples may include the ability to design low noise amplifiers, or to develop software with intuitive user interfaces.

It is all too frequent that business leaders think that their company’s strategy – or even its mission – is determined by its core competencies. Their strategy becomes protecting and enhancing this core competency. Their strategy has, in effect, been defined by their core competency.

But having a core competency is not the same as having a strategy. Your firm’s core competencies need to flow from and support your strategy, not define it. Overprotection and over focus on core competencies can cause you to lose sight of the importance of changes in the industry or market, making the firm’s offerings of less value over time to customers as the competitive advantages of those competencies diminishes.

Additionally, it is far easier for a competitor to copy a core competency than it is to duplicate an entire strategy as manifested in a business capability, or full value chain. In fact, it is easier than ever to buy a core competency these days. With the advent of better communication, better tools and better understanding of how to utilize the global workforce, you can buy your core competency by shopping the world. Open Innovation, the process of opening your innovation sources to more than just your internal R/D teams, has significantly changed the competency landscape.

Your core competency is not your strategy. Create your strategy and let your core competency needs flow from that strategy.

 

Tenet #2: Compete on core capabilities.

Your long-term defensible differentiation is your set of core capabilities, the set business processes that are integrated throughout your value chain to deliver a unique customer outcome. This is not the same as a core competency. To illustrate:

  • Your ability to design low noise circuits: A competency
  • The result of the processes you set up throughout your value chain to deliver cutting edge technology first to the market: A capability
  • Your ability to create the industry-leading inventory control system: A competency
  • The result of the processes you set up throughout your value chain to assure shelves are always stocked with the most popular items for purchase: A capability

Competencies are “point focused” where capabilities are the set of processes used throughout the value chain to deliver a unique and highly desired customer outcome.

Starting with the core capabilities you need, and then finding the core competencies is much more powerful, harder to duplicate and easier to defend. In fact as we will discuss, a better beginning is to understand the industry and competition, then design your strategy with customer in mind, identifying a unique and valued customer outcome. From this point, compete by creating core capabilities that support your strategy, and only then focus on the competencies needed.

 

Tenet #3: Make hard choices.

Strategy is at least as much about what you will not do, as it is about what you will do. One of the biggest failings I have seen over my career is the inability to decide what not to do.

There are several problems that can bring a business down if trimming is not done in time, and continually. The first is the real cost of keeping projects, products and services that don’t fit with the primary strategy. Mainly it’s the cost in materials, labor and overhead to keep the business and projects going. But there are also many hidden costs that could overshadow the visible costs. Perhaps the more significant hidden cost is the opportunity cost due to the loss of key personnel’s attention and time outside of the company’s core value creation processes.

To have a solid strategy that will allow your organization to become passionate, aligned and efficient at execution, you need to identify and communicate what you are not going to do as clearly as what you will do.

 

Tenet #4: Focus on customer outcomes.

The only activities that produce long-term success for any business are those that result in visible and valuable differences to its customers. Your strategy is defined by the unique customer outcome you are trying to deliver through your set of business processes. From this strategy, the rest of your objectives, activities and value delivery plans should flow.

Customers in all industries have minimum sets of requirements that must be achieved by any successful supplier. It is beyond this minimum set where differentiation takes place, and sustainable businesses are built.

Prof. Sayan Chatterjee of Case Western Reserve University has written extensively on this topic. He uses the acronym COAR to remind the business leader of the proper order of thought in building their business processes:

  • C: Customer outcomes
  • O: core Objectives
  • A: key Activities
  • R: critical Resource

Taken in that order, one should flow naturally from the rest. For example, a unique customer outcome would be “First access to new technology” or “Best ‘up time’ for equipment” (i.e. most dependable service and highest quality).

Design your strategy with the unique customer outcome in mind. It is essential to understand the industry, itemize the many ways to produce a unique and valuable customer outcome, and know your competitions’ choices.

 

Tenet #5: Analyze and design for the industry forces.

Michael Porter wrote of 5 industry forces of which you must be aware before setting out to form a strategy. They are:

  • The power in the hands of the customers
  • The power in the hands of the vendors
  • The barriers to entry and to exit
  • The competition
  • The substitutions for your product or service

(Personally, I would add a sixth, that of government regulation.) Before you can set out to build your strategy, you need to understand this landscape and plan accordingly. You need to know where the power lies.

If the greatest power is in the hands of your customers (say shelf space in a major supermarket) you need to develop a strategy that will address this. If the greatest power is in the hands of the vendors (due to limited or constrained supply of raw materials like natural diamonds) your strategy will need to take this into account. Some of the most successful business processes respond to industry forces better than the competition.

Industries vary wildly from each other in this regard. And although there are some unique aspects to a set of industry forces for all time, these industry forces tend change as the industry matures. So your strategy will also have to adjust.

 

Tenet #6: Understand the landscape of customer needs.

Now that you understand the industry forces (as discussed in Tenet #5) you should outline the landscape of possible customer outcomes. This should come before you choose the customer outcome that you will deliver; that differentiable and defensible core that will drive all of your strategy. As you create this landscape of possibilities, try to expand beyond the obvious. You may be surprised at the unusual choices rival companies can and will make, and how they turned these choices into a successful business!

Take for example the “most comfortable while you wait” customer outcome. You may know how this outcome works in the car industry, as we see the difference in the waiting areas in a luxury car dealership compared to budget-oriented dealers. What would this outcome look like in a business-to-business high-tech capital equipment industry? A company that chooses this as a cornerstone of its customer outcomes might include the following as objectives:

  • Provide loaners
  • Early access to prototypes
  • Access to equipment through a customer network
  • Full service in performing the task for which the equipment is designed

In order to decide on the “best fit” strategy for your firm, you will want to diverge to gather ideas before you converge on the answer. First lay out as many different winning customer outcomes as you can imagine for your industry. Then identify the choices your competitors have made.

Choosing the customer outcome you will deliver is one of the most pivotal decisions you will make in your strategy, driving all other aspects of your business. Don’t make these choices lightly, or without fully understanding the landscape of possibilities. And don’t settle on a set of customer outcomes without understanding what sets your competitors have chosen and how they will deliver them.

 

Tenet #7: Know your competition and their strategy… well.

Having a clear picture of the landscape of possible customer outcomes, you need to map your competitors’ choices onto this space. What have they chosen? Why would these choices be right for them? What advantages does this give them and where are the weaknesses? Use the COAR model discussed in tenet #4 to then describe the objectives, activities and resources a specific competitor must have in order to deliver this customer outcome.

What actions, processes or resources have they put in place that minimizes the impact of industry forces? For instance, maybe your competition has a more vertically-integrated supply chain, their strategic response to the powerful supplier forces in the industry. As a result, this competitor will feel the impact of supplier power less than your firm.

Use a variety of visual aids to look at the competition. Learn from different ways to picture your competition. The well-described and widely used SWOT analysis (Strengths, Weaknesses, Opportunities and Threats) will give you one valuable picture, but look for others. For instance, one visual aid in understanding your competitive landscape is the Marimekko (or Mekko) chart used by most Fortune 100 companies. These charts can illuminate market share in the industry in a single picture.

Mekko charts give an important view. They tell you the result of strategies. But they don’t describe the strategy itself. They tell you who is being successful, but you need to dig to understand why, and to see what holes are left for your firm to wedge into and begin to take market share.
Understand your competitions’ choices, and speculate concerning their reasoning and their probable next moves. Then choose your own.

 

Tenet #8: Diversify around your core capabilities.

You understand the industry forces and your competitors’ choices in customer outcome and strategy. You have chosen your own customer outcomes, have built your strategy around your core capabilities, and have seen success in your business. And now you may choose to grow through diversification. But carefully note the risks in diversification, and pay attention to the lessons of history, lessons from companies that diversified in ways not congruent with their core capabilities.

Before its financial collapse in September of 2004, Enron’s core capability was in developing and managing the financial vehicles to understand and own a market while maintaining an asset-light position. If they had to invest in physical assets at all, they tended over time to sell those assets and then focus on the financial vehicles of “swapping” and “hedging” to make their money. This was their core capability.

But in the rush to continue growth for the company, Enron delegated the responsibility for growth without a clear message to grow through this core capability. The result was growth into areas that seemed adjacent, but didn’t capitalize on this capability.

As a result, Enron had no competitive advantage in this new area. Ultimately, forays into other markets caused Enron to be less competitive and over-extend.

You must fully understand what has made you successful before you can repeat this success. Look to your core capabilities, not your core competencies for this answer. Your diversification should be into areas where your core capabilities can be parlayed into a competitive advantage.

 

Tenet #9: Balance the stakeholders.

The obsession of corporations on increasing shareholder value is relatively recent, occurring within the last 30 years or so. Today the principal is taught in virtually every business school on the globe: all executive management and board members have one fiduciary responsibility and that is to the shareholders. Top executives are incentivized to insure an ever-increasing stock price in the short term, often sacrificing employee good-will, customer service and vendor partnerships. Decisions are made that optimize quarterly stock price while often turning a blind eye to the long- term health of the company.

Today, there is a considerable debate in academia and the media concerning the cost of this hyper-focus on near-term shareholder value. Steve Denning, in forbes.com, recently wrote an article entitled “The Dumbest Idea in the World: Maximizing Shareholder Value”. Articles and books have been penned by the likes of Lynn Stout (Law Professor at Cornell University) not only pointing out the cost to society and the economy, but challenging the idea that this focus improves a company’s performance, and showing the fallacious assumption in the legal underpinnings of this myth.

You risk your long term business with a hyper-focus on short-term stock price. If you wish to build a company for the long term, you must balance five stakeholders.

  • Shareholders
  • Customers
  • Employees
  • Suppliers
  • Society

Strategize with this balance in mind. Incentivize based on this balance. To do so will unleash your full potential in building a solid, differentiated business that can be well defended. Set a strategy and manage a business without this balance at your long term peril.

 

Tenet #10: Strategy is dynamic. Adjust as necessary, but with caution.

Your competitors change. Your customers change. Your suppliers change. The available pool of talent from which you employ key resources changes. Technology, a proxy for the wide universe of possibilities and risk, also changes. At times, and in some industries, this pace of change can be very slow, while in others, by contrast, the change can seem impossibly fast. One thing is for sure… change is not likely to happen on the cadence of your strategic planning cycle.

Through the typical annual strategic planning process, well-meaning people drive the process to be tighter, less messy, and have fewer surprises and holes. Managers learn over time that uncertainty, surprises, and holes will not get you a good grade in strategic and annual planning, and may be career limiting. As a result, these practices often become extended, laborious, and degenerate into report-giving rather than really managing the business. Strategy planning becomes a self-sustaining annual exercise that demonstrates the ability of a business manager to check a box, rather than generating important discussions about business changes in a timely manner.

The issues above are addressed through

  • good people management
  • keeping your processes light, revamping them occasionally
  • making sure your people know you care about critical thinking and content over format, and good debates about the essential issues over pretty slides and tidy answers

But additionally, while the annual strategic planning process plays a key role (in setting a minimum cadence for careful examination of your business, marking successes and failures, and aligning the organization) what firms often lack are the processes, roles and responsibilities for continually scanning the industry and market for changes that will impact strategy, and then responding to those changes quickly. Plans tend to be set once a year and any news that would disrupt these plans would have to be dire news indeed. Annual plans are not agile.

Truly agile businesses assign people to investigate and report on changes much more frequently then annually. Savvy business organizations have methods to collect and respond to the latest information. Your business processes, including your strategy setting processes, must be built to address this needed agility.

As always, the key to maximum success is to avoid the extremes and strike the proper balance. Possess too little agility and you may only address key issues in your annual planning process. For most industries, this pace is too slow for many emerging problems. However, if a firm changes its plans too frequently, the likely result is little to no useful output.

Strategy is dynamic. Adjust as necessary, but with caution.

 

Conclusion

In this paper I have related ten tenets or key principles in setting up and maintaining your strategy. These tenets are not meant to be a step-by-step process. Nor are they an exhaustive list of all considerations in designing your strategy. Space has been limited and words brief. But I contend that these core principles, these ten tenets, are essential for developing a strategy for building a sustainable, defensible business.

 


Note that competencies and capabilities are not the same. We will define these terms in the upcoming Tenets.

 See Failsafe Strategies by Sayan Chatterjee

See The Shareholder Value Myth by Lynn Stout

 

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