Hello!
Defining internal strategy is straightforward in theory. The problem is if you ask five people about it, you’ll likely get five different responses. You will also find answers swapped with industry lingo that’s difficult to understand. However, if you dive into it and filter out all of the business jargon, you should end up with an attempt to identify a high-stakes challenge and design a plan to overcome it. This should position your company to achieve sustainable profitability through value creation. Of course, breaking down a complex topic into a single sentence is challenging enough. Translating that into a winning strategy is something entirely different.
Steps:
According to UCLA Anderson School of Management Professor Richard P. Rumelt in his book Good Strategy, Bad Strategy, three vital steps need to be considered to overcome the aforementioned challenge:
A diagnosis of the challenge
· A guiding policy to overcome the obstacles which have been defined in the diagnosis
· A set of coherent actions to carry out the guiding policy
Diagnosis of the Challenge
The first step of diagnosing the challenge is looking internally, specifically at customer pain points and how your business solves them. Do you do something that solves a problem for your current or potential customers? What specifically gives your company a competitive advantage? Don’t fall into the trap of saying something similar to “I have something people want”, “This is a new and exciting product/service” or “We have a strong brand.” You need to dig deep if you want to truly understand your advantage and why customers need what you’re offering. This is the foundation your business will be built on, and to be successful you need to solve a problem better than everyone else. Your competitive advantage should link to your vision and this vision should directly link with your competitive advantage.
There are a few basic questions you must ask yourself first:
· What pain point does my product/service address?
· Does my business have the lowest costs?
· Does my business offer some sort of differentiation?
· Does my business offer a mix of both?
Can you outline your distinctive strengths or unique selling proposition? How do your assets, knowledge, or organizational structure create superiority over others? Well, there are a few questions to ask to dig a little deeper.
Does my business offer:
· superior efficiency?
· superior quality and customer responsiveness?
· superior innovation?
Superior efficiency
Defined as outputs/inputs, efficiency boils down to having fewer inputs to produce some sort of output. This can be in terms of labour, capital, or other resources. If one company can spend $1 to make a hamburger and another company must spend $2 for the same quality, the former is clearly showing more efficiency. We saw this for example with Ford’s Model T which become the first affordable car in the early 1900s. Ford standardized the automobile to make it faster and cheaper, which were the most important attributes to their target market.
Of course, there are many ways to achieve better efficiency:
· economies of scale
· lower fixed costs
· learning effects (creating efficiency by learning how to do something better)
· lowering the experience curve (having more experience and thus creating value more efficiently)
· automation
· supply chain management
Lowering your costs in terms of products and labour is only part of the equation. Marketing also plays an important role in your company’s efficiency. Acquiring customers is expensive. You can lower your acquisition costs by taking care of the customers you already have. Lowering your defection rate and increasing your brand loyalty is just as, if not more important, as anything else. Not only do more sales come from your loyal customers, but these customers are an important part of your brand. Make no mistake, no ad can deliver a message as strong as one delivered by a friend, colleague, or trusted advisor. So how do you create a stronger bond with these customers and transform them into brand ambassadors? Superior quality and customer responsiveness.
Superior quality and customer responsiveness
Quality is determined by how functional your quality control management works. It directly affects your reliability. If steps are not taken to ensure high quality and to limit mistakes, you can be assured your brand will achieve little to no loyalty. The attributes necessary to achieve excellence vary from business to business and customer to customer. These will have to be determined by what customer problem you’re hoping to solve.
It’s certainly possible that you’ll need to think about more than one or even more than the ones listed but to get you started, here are some attributes to think about:
· form and features
· performance
· durability and reliability
· style
Your customer responsiveness can take a variety of shapes. You’ll need to think about how you can focus on your customer’s needs. What is it they need?
· Lowest possible price?
· The most innovative product available?
· Customization?
· Short response time?
· Quality customer service?
This list just scrapes the surface of what you’ll need to think about as every industry will have specific needs. You’ll also need to narrow down the deeper individual needs of your customers.
· Why do they demand the lowest price?
· Why do they want the most innovative product?
· Why do they need customization?
Once you’ve figured out why they want something, you’ll feel that you know them better and can narrow your focus on how you can be more competitive. Why, for example, do new parents buy disposable diapers? To allow the baby to sleep and feel comfortable longer, which creates less stress for the baby and the parents. The fundamental idea is that parents have an easier life with them as opposed to other options. If your customers demand a more sustainable option, however, disposable is probably a negative attribute. Clarifying the why of your customer will give you a better idea of their deeper desires and what drives their purchases. If you haven’t gotten there yet, keep asking why until there is nowhere to go!
Now you can change directions and figure out how to connect with current and potential clients. Are they likely to comment on an Instagram post or answer a survey? Do they take the advice of brand influencers or like to watch television commercials? Getting their attention is hard. There are thousands of marketing companies, influencers, and advertising agencies that specialize directly in selling products to the world. You’ll have to dig deep to gain the best possible advantage over your competitors, and now that you know your customers better, you’ll be a step ahead.
Superior innovation
Being the most innovative company around isn’t always possible and isn’t always needed. Many companies take ideas from others after the expensive R&D process is over. If your company, however, is defined by your innovations, it can be the most important aspect of your strategy. You’ll have to think about how to innovate existing products or create new ones while limiting failure as much as possible. To give yourself the best possible chance of success, there are some questions you can ask yourself before diving in too deep:
· What are my customer’s needs (remember to dig deep and keep asking why?)
· Can this design be manufactured efficiently?
· Can I design a way to keep costs under control?
· What would be considered a timely manner for development?
· How can I integrate my R&D, manufacturing, marketing, and other aspects of my business?
A Guiding Policy to Overcome The Obstacles Which Have Been Defined in The Diagnosis
Now that you have diagnosed your challenge, it’s time to create a policy to get closer to your goals. You are looking at why a customer purchases a given product or service (what problem does it solve) and how your competitive advantages can deliver superior results to any potential competitor.
Overall competitive theme:
Now it’s time to position yourself to benefit from your competitive advantages. You have looked at what you do well and what you do better than others. Do you have a low-cost advantage or a differentiation advantage? At this point, it’s okay to have a bit of both. Companies like Dell Computers benefitted from having a semi-customizable personal computer for a lower price than most other companies. They were able to create better value with lower costs. It’s a classic example of superior efficiency and widening the efficiency frontier.
Market segmentation:
Using your internal competitive advantage diagnosis, determine how you want to segment your customers. There are three classic approaches:
· Standardized
· Products/services developed for certain segments
· Focused
There are several ways to look at how to develop this strategy. Perhaps you’re in an industry that relies on customization. It’s possible to be an efficiency leader and use this to your advantage. It’s also possible that you’re in a standardized industry and your company has differentiation advantages. The important thing is to use your strengths in a way that creates value better than your competitors.
A Set of Coherent Actions to Carry Out The Guiding Policy
Now that we have diagnosed the challenge and created a guiding policy, it’s time to put everything together. Before we do, let’s look at some things not to do:
· Create a list of unrealistic or general goals
· Focus too short term or too long term
· Use any set of numbers to build a strategy
These are just a few mistakes companies make. Setting goals such as 10% growth or 20% customer satisfaction are not efficient coherent actions. One should ask: How do I reach 10% growth or achieve a 20% increase in customer satisfaction by utilizing my competitive advantage? Do I need to decentralize my company? Do I need to invest in R&D? Should there be more communication between departments? This will vary with industry or company. The important thing to remember is exactly how you are going to achieve superior results.
There are a few ways to get started. Let’s use an example of a small marketing firm that is attempting to raise its profitability by 10%. First, this is a goal with no foundation, so we will adjust it and think about what they do better or cheaper than anyone else. If content marketing is their answer, then that’s where they should focus. If you believe you can create an advantage in another area, you may need to make an investment. For example, you can focus on employee training in a particular area or hire externally. What’s important is that you need to be able to demonstrate to your customers that you can do something better or cheaper than everyone else. Even more importantly, you and all your employees need to believe it.
So what is it that you do better than everyone else?
· Low cost?
· Differentiation?
If it’s low cost, it’s a little more straightforward. They could add automation, hire students as interns, have employees work from home, take advantage of online meetings, or develop software that may have a high fixed cost but will save money over time.
If it’s differentiation, then let’s think about how to deliver more value to the customer. Maybe opening an office internationally with local staff will allow your company to gain insight into local customers. Perhaps hiring or training employees for specific skills will create more value. Maybe it’s using more case managers to work with important clients or more flexible teams. It will depend on the problem you’re trying to solve and your industry but the important thing is to do it better than anyone else.
Once you’ve created these actions, pitch them to your staff or other advisors. They may have on-the-ground insights. Some of the best suggestions will come from people who interact with your customers daily. More importantly, let them speak first and listen with an open mind. They will have ideas that can and will help. If you go first, they may be reluctant to speak their minds. It’s not to say that you must use every suggestion and you may even have push back, but allowing others to be a part of your strategy will create a sense of importance throughout the company. Everyone has to be on board with the message developed at the top and this set of actions must be clear throughout the organization.
Case study: Mcdonald’s
Here is an example from McDonald’s’ corporate website. “Our mission is to make delicious feel-good moments easy for everyone.” McDonald’s has assumed that by pulling on the heartstrings of the public, they can combine feel-good jargon with a business idea. Including “delicious” gives you an idea of what the company is about but other than that, there isn’t much to go on.
This type of generic vision does not give employees, investors, or even customers an idea of what the business is trying to do. However, if you look at an annual report, you get a little closer to what this company is about.
Here is a short segment: “By leveraging ‘the System’, McDonald’s can identify, implement and scale ideas that meet customers' changing needs and preferences.” A lot of jargon again, yes, but it does get closer to defining its competitive advantage.
McDonald’s refers to a combination of franchises, supply chain, and other advantages as “the System.” Relying on an amazingly strong supply chain allows them to standardize certain products around the world while also allowing customization in certain areas. The company can do this at a rock bottom cost. Basically, we are looking at an unbeatable supply chain and the lowest costs. It’s no wonder the company has been so successful and it’s also easy to see why McDonald’s can charge a few dollars for their products while smaller businesses must charge much more.
Still, we would almost like to see something along the lines of “Putting a McDonalds’ product on the plate of everyone around the globe once a week for the lowest possible cost.” Although incredibly ambitious, this kind of statement creates direction. It is something everyone in the company can strive towards and should be what the CEO is talking about in the boardroom.
Every conversation now starts with “How can we get people to eat more burgers and keep the lowest cost?” This isn’t meant to pick on McDonald’s and if you look at almost any company, you’ll see the same type of generic vision. So, let’s step back and take a look at a company that was once seen as a small start-up with an ambitious goal.
Case study: Microsoft
Back in the 1980s, Microsoft was still establishing itself as a software company. With a team of intelligent business people and engineers, the company had the vision to put "a computer on every desk and in every home." Ambitious? Yes. Possible? Not too far off.
Microsoft in the 1990s seemed unbeatable. Through non-exclusive licensing and pushing for a market of third-party programs and accessories, Microsoft was able to create high switching costs for consumers who have already invested in compatible software and accessories. Because of this, they were able to take advantage of the up-and-coming PC clone market. Furthermore, by bundling programs such as Word, Excel, and Internet Explorer with Windows, the company was becoming a one-stop-shop for anyone interested in using a computer.
Creating this software was and still is expensive. Software development (at that time) was more of a fixed cost, meaning that Microsoft could then sell their programs at scale with low variable costs for their products. For example, let’s say they develop software for $1 million. The cost of the first product sold is approximately $1 million per unit.
After the second is sold, the cost goes down to $500,000 per unit and so on. This means that, unlike other industries, there is no limit to how many can be sold and that after each unit is sold, costs go down. If Microsoft sold $1 million copies, the cost per unit is just $1.
This is a very basic example of how this strategy works and is not intended as an exact science by any stretch of the imagination. Google later used a similar strategy by basically giving away programs such as Chrome, Android, and other types of software to develop scale to mine information and sell advertising.
Although this isn’t exactly an apples-to-apples comparison, it shows how both companies used the strategy of getting their products in the hands of as many people as possible no matter the cost. Having a specific strategy kept departments aligned with the overall vision and helped create two of the most successful companies in history.
Building a Strategy and Implementing it
It’s not easy to develop a strategy and it takes time. We didn’t even really touch on an external factor or an analysis of competitors, which are equally of importance. But first, let’s nail down the internal factors and this is done by asking question after question. If you don’t ask enough questions, you’ll never really get to a point where you’ll be able to start building the foundation of your strategy.
Microsoft started with a vision of "a computer on every desk and in every home." Ambitious? Yes. Achieved? Well, at one point…almost. But with this in mind, the company was able to build a strategy around achieving this target and everything they did was specifically aimed at getting there.
You may have ambitions just as big or something a bit smaller, but that doesn’t mean you don’t need to focus on your company’s strengths to build your strategy. This is just a starting point and now it’s time to dig in and find out what sets you apart from your competition. Start with “What do we do better than everyone else” and build from there.
Thank you!
Subscribe to our newsletter! Join us on social networks!
See you!
