Strategy for Dummies

Definition

Strategy is the direction and scope of an organization over the long term, which achieves advantage in a changing environment through its configuration of resources and competences with the aim of fulfilling stakeholder expectations. Strategy is a set of actions that makes the business and organization look and perform DIFFERENTLY AND SMARTLY so to face the NEW ENVIRONMENTAL CONTEXT and create WEALTH.

Strategy as difference and smartness

1. Doing things differently - Is it different in eyes of customer, competition etc.? -> NEW DIRECTION

2. Sustaining the difference -> SUSTAINABLE COMPETITIVE ADVANTAGE -> PBIT, return on asset, operating margin averaged over time

3. Monetizing the difference -> WEALTH CREATION

Strategy as hypothesis of future – it is a connection between resources (that cannot be substantial change overnight), environment (that cannot be controlled - may be hostile) and the opportunity (that can be grabbed).

Strategic decisions

Freezing the Context

Strategy is always applicable in a "context" (i.e. constraints) and so context need to be frozen first and then find the antidote for the same. Strategy comes under following hierarchy of organization mission:

MISSION -> It is a prime purpose of existence. It's a constraints on things that you want/can & won't/can't do. It does change but very slowly. VALUES comes under MISSION.

VISION -> It is an ambition - Where you want to GO. It's about keep-on raising the bar. Vision move VERTICALLY. It does change but less slowly than mission. It’s generally quantitative.

GOAL -> It’s a (broad) qualitative statement that you want to achieve in far future.

OBJECTIVE -> It’s a quantitative statement close to today and linked to future.

STRATEGY-> ROAD (DIRECTION) to reach where you want to GO

Three levels of Strategic thinking

1. PAST to PRESENT: Data analysis to get insight:

a. Where the organization is at the moment?

b. What has happened?

c. Why has happened?

d. Why something else has not happened?

2. PRESENT: Are there some signals referring to how things will shape up to come -> DO

3. PRESENT to FUTURE: No data analysis but it’s about thinking and interpreting the same to come with foresight & point of view (POV). Note: Point of View (POV) is personally held, but multiple POV lead to one collective held foresight. Every POV (personally held) is a foresight (collectively held), but every foresight is not POV.

a. What going to happen?

b. Why will this happen?

c. Why will not something else?

d. How it will get there?

Levels of Strategy

Corporate-level strategy (Portfolio strategy) is concerned with the overall purpose and scope of an organization and how value will be added to the different parts (business units) of the organization. Portfolio strategy offers variety of choice to the consumer and at the same time in the back-end utilize the resources by economy of scale i.e. maximize common resources and minimize dedicated resources.

Business-level strategy is about how to compete successfully in particular markets. Organization need strategy on following sourcing, conversion, innovative segmentation and delivery.

A strategic business unit (SBU) is a part of an organization for which there is a distinct external market for goods or services that is different from another SBU.

Operational strategies are concerned with how the component parts of an organization deliver effectively the corporate and business-level strategies in terms of resources, processes and people.

Strategic Management

Strategic management is a continuous process of strategic analysis, strategy creation, implementation and monitoring, used by organizations with the purpose to achieve and maintain a competitive advantage. It includes understanding the strategic position of an organization, strategic choices for the future and managing strategy in action. In essence, it focuses on:

1. Where to compete? -> Market selection -> target customer groups and target competition -> being DIFFERENT. Blue ocean strategy is to find uncontested market.

2. How to compete (i.e. how to win orders)? -> Core value proposition relative to price and competition -> being DIFFERENT

3. How to deliver what being promised? -> Value delivery model -> resources, network -> being SMART. It affects fixed cost, fixed asset, variable cost and working capital

1 & 2 are nothing but Revenue Model and all three together are the Business Model. Success of a Business Model depends on how DISTINCT and UNIQUE is the model vis-à-vis other w.r.t above mentioned three dimensions.

Strategy Process

1. Strategic Analysis

a. Political, Regulatory, Economic, Social, Technological Analysis PREST -> Opportunity & Threat

b. Industry and Competitive Analysis ICA -> Industry is structurally unattractive [low profit potential] when all five forces are high

i. Porter’s 5 Forces Analysis -> Opportunity & Threat

1. Power of customer

2. Bargaining power of supplier

3. Threat of substitute products

4. Possibility of new entrant

5. Competitive rivalry within industry

ii. Industry Economic Analysis: For performing the industry economic analysis, analysts has be define the industry first. It always the analysts’ choice. Industry could have multiple industry space though and in one industry one, you want to operate. The outcome of this analysis yields two outcome:

a. Average & sigma of operating margin (= PBIT / revenue), and,

b. Average & sigma of ROCE (=PBIT / Capital invested) for the industry

iii. Competitive Strategy -> cost leadership, differentiation

iv. Industry evolution

c. Resources and Capability Analysis RCA -> Strength & Weakness

d. Organization and Culture Analysis OCA -> Strength & Weakness

e. Stakeholder Expectations Analysis SEA -> Goals

i. Triple bottom line: 1. economic profit -> profit, capital efficient & sustainable, 2. social profit -> social sensitive, 3. environment profit -> environment compatible

2. Development of strategic options, evaluation and choice

a. Positioning -> just defend the company from the five forces

b. Influencing -> offensive move to change the five forces

c. Anticipating -> influencing the future state of the industry

Strategic choices must be defined on all the following dimensions

a. Core business strategy

b. Business growth strategy

c. Methods for strategy development -> Organic v/s inorganic

3. Strategy Execution

Sources of Competitive Advantage

Three important areas of (deep sustainable) competitive advantages:

1. Customer value expectation and Core value propositions. Customer has a need and is ready to pay for a product or service to fulfill that need. The value is the perceived benefits of the product or service in the eyes of the customer. To sell the goods or services in the market, the perceived value MUST be greater than the price than that of the competitions. i.e.

value divided by price > competitions

Core value propositions can be:

1. Price based differences is a Low-cost strategy. Based on the price market can be segmented into Economy, Mass (high volume), Premium and Luxury market.

2. Benefit based differences is a differentiation strategy. It is based on offering benefits/feature differentiation and charge premium price.

3. Hybrid -> It is based on offering some benefits but still at maintain low price.

4. Niche -> low cost

5. Niche -> focused differentiation

Note that the ability to communicate the value proposition to the customer is inversely proposition to the awareness/knowledge of the customer.

PDSE (Product + Delivery + Solution + Experience) is just a carrier of customer value. In today’s era, Product & Deliveries (PD) taken for granted and become increasing commoditized. Customer is more interested in SE part and so the companies has to frequently revisit following questions to increase value for customer:

a. What attributes to eliminate?

b. What attributes to reduce?

c. What attributes to increase?

d. What attributes to create (add new)?

2. Competitor's Capabilities and strategic options available to them -> competition value & options

3. Firm's Capabilities to create value in a unique way that is valuable to customers. Capability is a set of resources (tangible/intangible) and competencies (process/activities) of a company in action to create value for the customer.

a. Resources are tangible assets e.g. people, other resources etc. and intangible assets e.g. reputation, value network etc.

b. Competence is a process and activities that connects tangible assets with the intangible asset to create an output. It is a starting point as it’s most-basic to create value.

Capabilities = competencies (process/activities) + resources (tangible + intangible)

Note that all capabilities are competencies but only those competencies are capability which are appreciated and valued by customer while placing the order. Also, all capabilities are not strategic capabilities of an organization, only those capabilities are strategic capabilities which customer sees as distinctive competitive advantages. The unique resources, core competencies, value network, organization are the strategic capabilities, other are just the threshold capabilities of the organization.

Value network is the network comprises of in-house and out-sourced capabilities that are managed by a company in such a way to create the DELTA (increment) of PDSE for the customer. The crux is the network is put together in operation (without losing control on the capabilities) to create the value for the customer. The value network need to be continue reinventing to maintain the competitive advantage.