- Michael Hilb
The Art and Science of Strategy
Strategy development is a core process of corporate development. A structured approach can help in efficiently configuring the process and also in making it value-adding in the long term.
No other aspect of corporate management receives so much attention, yet is also so firmly defined by the individual business experience, as strategy development. Nevertheless, or perhaps precisely because of this constellation, strategy development remains one of the major challenges. The strategy compass, a structured approach, can assist in tackling the strategy development challenge, while optimally taking into account one’s own experience.
Around 1480, Christopher Columbus took up an idea of Aristotle and decided to explore the western route to India. Prior to presenting his proposition to potential financial backers, he found himself facing a diversity of strategic questions: Should he position his mission as a political act of the Spanish crown, or as an economic campaign? Would it not be wiser to recruit his own seamen, or to charter a ship with a crew? Should he undertake the project himself, or bring other partners on board?
The implementation of any vision needs strategic orientation aids. In the thicket of differing opinions, a compass is needed that provides orientation while also indicating potential directions, but without committing to dogmatic recommendations that subsequently often prove misleading (Rosenzweig 2007). Determining that orientation and defining the route to reaching it is a core task of all management bodies. In that context, the compass must ensure that all aspects are considered, the individual elements are properly linked, and that the entire concept has a clear overview and remains pragmatic. In business terminology, the potentially successful compass fulfills the four Cs: comprehensive, consistent, combinative and concise.
The strategy compass differentiates between the inner, middle and outer strategy spheres. The inner sphere defines the positioning by answering the question of: How do I position myself compared to the competition, in order to maximize customer benefit? The middle sphere clarifies issues of the business logic: How do I organize and structure my business to optimize value added? The outer sphere, finally, establishes the parameters for developing competencies. Here, core questions are: With which internal resources and external partners do I operate my business in order to strengthen my corporate competencies?
As a rule, the company management has broad experience as well as visions in all three spheres, which need to be complemented with scientific insight.
The capacity of a company to create value for its customers determines its positioning in geographic markets, market segments and customer groups. For existing customers, that value manifests itself in high product quality or in low prices (Porter, 1980). In this context, the strategy might comprise a combined approach, i.e. low costs and high customer benefit, thereby creating a new market and gaining a head start over the competition. Identifying new value creation potentials is among the major challenges when developing a positioning strategy. Hence, it is critical to think outside the conventional industry „boxes“ (Kim & Mauborgne, 2001). The core question, therefore, is what value-added can be generated for new customer groups? In this process, experience from other branches can be essential. Not infrequently, innovative ideas can be derived from analyzing less-related industries. Moreover, possible reactions from the competition cannot be ignored, whereby competitors are to be considered not only as business rivals, but also as complementors (Brandenburger & Nalebuff, 1996).
When defining the business model, it is vital to reassess the business logics within the various functions along the value-adding chain (Porter, 1985), to align them with a clear logic and to structure them coherently (Chesbrough, 2006). This, in turn, raises the question of who shall provide that benefit, the company or third parties. In this regard, both the strategic significance and the proximity of the sector to the core business of the company play a role (Prahalad & Hamel, 1990), as does the ratio of economic benefit to supervision costs (Caroll & Teece, 1999). Total focus on core competencies can also have negative consequences that need to be considered. In addition to the loss of direct control, there is also the risk of offloading segments that, in conjunction with other functions, might provide a decisive competitive edge. For example, a distribution network that, in combination with customer after-sales operations, might develop into a successful service strategy.
Finally, it must be established with which internal resources and external partners the strategy is to be implemented. Key in this respect is the development of the necessary competencies, which is a fundamental criterion of long-term corporate success (Teece, 2007). Competencies that are unique, difficult to imitate and valuable generate the greatest value-added (Barney, 1981). The precondition for such levels of value-added is the ability of an organization to learn and continuously renew itself (Senge, 1990). A key success factor here is the integration of the external stakeholder groups into the learning process, in order to create scope for open innovation (Chesbrough, 2006). Stakeholder groups can be integrated within the framework of an institutionalized process such as open sourcing, but also indirectly by, for example, exploiting customer data in a targeted manner.
Creating competitive advantages through coherent differentiation
Understanding the individual strategy spheres and optimal strategy principles do not, however, automatically lead to a viable, long-term strategy. A unique positioning in itself does not create value over the longer term if the supporting business model or the implementation competencies are lacking. The same applies to the business model and competence spheres. Leadership in one of the two, but no coordinated approaches in the complementary spheres will, at best, lead to value preservation. Rather, considerations need to be made well beyond the limits of the strategy spheres. Hence, two rules need to be taken into account: the differentiation imperative and the coherence imperative.
Differentiation imperative: Distinguish yourself in at least one strategy sphere: Long-term value-added can only be achieved when the company stands out from its competitors in at least one of the spheres. When benchmarking, it is vital not to relate exclusively to the company’s traditional competitors, but to consciously redefine them in the course of defining the strategy. Hence, defining the industry is a core aspect of successful differentiation.
The choice of spheres depends primarily on the industry, the competitive environment, but also on the competencies of the company. In industries with a pronounced customer focus, it is evident that aspiring to leadership in the positioning sphere must have priority. In other industries with complex structures and strongly integrated value-added chains, differentiation via the business logic may be feasible. Companies in an industrial sector that is heavily innovation focused, can stand out against competitors through a competencies development strategy. The tougher the competitive environment, the more radical the steps will be that are needed to achieve sustainable differentiation.
Experience shows that there is usually consensus on the need for greater differentiation. The primary challenge, however, is to achieve agreement on the reference parameters of such differentiation. This definition process must not be underestimated; whereas it is central, it is also controversial because the choice of reference industry already incorporates an initial orientation decision: Should the company operate near the current center of that industry or on its periphery? Useful in this decision process is an open discussion on trends in various industries, but with the discussion specifically divorced from one’s own strategy. Only then in a second step should the agreed insights be transferred to one’s own strategy.
Coherence imperative: Optimally coordinate the other strategy spheres with the differentiation sphere: Straightforward differentiation alone is not sufficient to create value or to secure it over the long term. The actual core of all strategic value-added is the interaction between the spheres. It is precisely this interaction that is difficult for other firms to imitate, whereas possibly, individual differentiation strategies can be relatively easily adopted. Consequently, the coherence imperative fulfills two functions: it facilitates and secures value-added in the medium term.
When structuring the coherence imperative, ensure that the principles in the complementary spheres are oriented towards the differentiation spheres - and not vice versa. This can mean that principles have to be revised, and that approaches which may appear logical when viewed in isolation, need to be reassessed. Experience shows that it is essential to strictly maintain the sequence of the discussion. Structuring the coherence imperative may only begin once the design process of the differentiation sphere has been concluded.
Compass does not replace the need for steering a course
If Christopher Columbus had had a compass in 1492, would he have landed in India rather than in America? Probably not. Because Columbus’ problem was not primarily one of not knowing where he was headed, but rather his limited vision. Had he first presented the discovery of a new continent to his financial backers as a strategy, he would probably have received far more capital that the modest sum that his friends lent him for his mission.
Much the same is true for strategy development. A well structured framework is no guarantee for a successful strategy. Rather, there is a need for a competent captain (CEO), a maneuverable ship (Organization) and a creative imagination (Vision). Without a compass, however, there is a danger that the ship will be steered in the wrong direction for too long, or – far more serious – will run the risk of capsizing when conditions are rough.
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This article appeared in German in the IO Management in 2008.