Got strategy? 27 April, 2010

Well, do you? I suppose the harder question is defining what strategy actually is. Once that's done, answering the question "Got strategy?" will probably be equivalent to answering the question "Are you prepared for how long you want to last?" Many people think it's just a synonym for planning. Some think it is the way you do something, and others have no idea. There are a few definitions of strategy. All are correct, but each offers its own perspective:

  • How you compete
  • Using and improving your competitive advantage
  • A single, detailed plan that's based off of a company's goals and competitive advantages

Before I go further, I should address some things to avoid when thinking about strategy. You can't predict the future, you can't detach planning and implementation, you can't be too formalized, and you must finish a strategy before it becomes obsolete.

There are strong advocates (Mintzberg) of informal emergent strategy who let it flow more than they guide it, and there are more formal methods like Porter's generic strategies. Although many successful strategies have emerged without much planning, having a concrete plan will help find holes as well as ensure actual implementation.

Strategy can be broken down into four distinct levels (Corporate, Global, Business, and Functional). The following describes the details of each.

Corporate Strategy
  • Answers the question "What value should be created in what industry?"
  • This can include the acquisition or divestment of other companies.

Global Strategy
  • Shows how to gain advantages over/with competition by competing internationally.
  • Helps identify strengths and weaknesses of international competition.
Porter created a theory of "Competitive Advantage of Nations" that is described by the following diagram. It introduces relationships between global factors that must be synchronized to gain global advantages.

Diamond of National Advantage
It prompts questions like:
  • Are suppliers global?
  • What are demand differences in different countries?
  • Can capabilities and resources be developed and used more effectively in other countries?
  • How does a specific international culture affect competition?
Business Strategy
This is the business model. A business model answers the following questions:
  • What does a customer want?
  • Who is the customer?
  • How are the wants satisfied?
Examples of business models include the following:
  • Razor and razor blades (cheap upfront costs, higher upkeep costs)
  • Franchise
  • Direct sales (no fixed locations, market directly to customers)
  • MLM (multi-level marketing)
  • Service model
  • Subscription model
  • Loyalty based business (iteratively better deals, or continuous improvements)

Functional Strategy
This is all about efficiency. By efficiency, I mean the ratio of required inputs to desired outputs. Some major areas where levels of efficiency can exist are:
  • Economies of scale
  • Learning in the organization
  • Project selection
  • Processes
Finally, it is extremely important to acquire feedback from all strategic levels, and send it back to the top. This is how missions, visions, values, and goals can be refined and become even better inputs to new corporate, global, business, and functional strategy.

Analyzing Environmental Information

Facts and information are necessary resources when making decisions and setting a direction. How does one acquire the facts? A common thread is to look at both external and internal environments. Interestingly enough, even though external factors seem like they would be much more expansive, I believe they can be summarized without too much trouble.

Internal analysis identifies distinctive competencies that an organization has. Distinct competencies are broken up into two categories:
  • Capabilities
  • Resources & the ability to use them

These competency types determine:
  • The value a customer is getting
  • The price the customer will pay
  • The price of the value creation

The resulting internal analysis helps determine whether an organization should adapt to the external environment, or change the external environment. There are Macro and Micro external environments. The macro environment is comprised of social, legal, environmental, political, and technological factors. This is known as a SLEPT analysis, although other acronyms like PEST, PESTEL, STEEPEL, and others exist. Picking one of these acronyms is usually sufficient because as it is, an issue could fit into more than one bucket (eg. social and environmental). The important thing is not what buckets you use or where the items go; It's that you see all the items.

A SLEPT Example

The micro environment is comprised of a framework coined by Michael Porter from the Harvard School of Business. It's called Porter's 5 Forces. Porter believes that the micro external environment is driven by a small number of critical determinants which he refers to as forces. These forces include the threat of new entrants, current rivals, the power of suppliers, the power of buyers, and the threat of substitutes. Many people have added to this list government policy and compliment products.

Porter's 5 (sometimes 6) Forces

I think the definitions and short descriptions given of macro and micro analysis are sufficient to get started with the collection of facts.

A Porter's Forces Example

The internal environment however, is a little more complex and harder to explain. There are several methods that include a resource based view, functional based view, building blocks of competitive advantage, value chain, and Hamel and Prahalad's competency matrix. All of these except two are different.

These are not the only methods. Other ways to evaluate environments include looking at the industry's maturity in its life cycle and growth curves for a type of product. Given a reasonably finite amount of time however, only certain evaluation techniques can be used to make decisions and plan. If too much time is taken, opportunities will pass by and threats will overwhelm. Let us now look at these evaluation techniques in detail.

The value chain's purpose is to analyze how hand-offs between functions or resources are handled and what interactions take place between them. Specifically, the value chain's purpose is to make sure each hand-off actually adds some sort of value to the overall process.

The Value Chain

H&P's Matrix is really just four quadrants with one axis being old to new markets, and the other axis being old to new products. It is meant to determine what kind of innovation is taking place.

The H&P Competency Matrix

The resource based view and functional based view has you list out either all the resources or all the functions and state whether each are valuable, rare, imitable, or fit the organization (VRIO).

The Resource Based View (RBV)

The Functional View

The building blocks of competitive advantage method has you state whether efficiency, quality, innovation, and response to customers fits in a low-cost, differentiation, niche low-cost, niche differentiation, or hybrid (best value) category. This is based on Porter's generic strategies. The generic strategies introduced by Porter attempt to identify a few main areas in which a company can decide to compete in how they positions products and services to the customer.

Porter's Generic Strategies

The building blocks method helps identify which of Porter's generic strategies an organization is currently aligned with by looking at several concrete operational areas (Efficiency, Quality, Customer Responsiveness, and Innovation).

The Building Blocks View

So, as you can see, even though the external environment may be much larger than the internal, the internal seems to be more complex to analyze. I believe this is because most of the time you can only watch the external environment, while you have the opportunity to drastically change the internal environment.

That is how you get the facts. We still however, must turn to making those facts useful. This takes the form of two popular frameworks: SWOT and scanning.

SWOT(Strengths, Weaknesses, Opportunities, Threats) looks at the external facts to determine threats and opportunities. It then looks at internal facts to identify strengths and weaknesses. You then have several options for the four lists you just made. You can compare strengths to weaknesses and opportunities, weaknesses to opportunities and threats, etc. One option is to match strengths to opportunities so you know what you should emphasize. Another option is converting weaknesses and threats into strengths and opportunities, but this usually means you're focusing on playing catchup to the competition. Creating a SWOT is really where you begin to see some lines created as to what should be focused on, and what should be filed away for later.

Scanning is simpler and less formal. It involves finding and ranking opportunistic areas by asking, surveying, and creating hypotheses. You then work backwards, finding proof to back up your ideas.

Once areas that require focus have been identified, either creating an in-depth implementation plan, or using scenario analysis (evaluating multiple alternatives) are the next steps. This is where the best strategy is discovered and its implementation becomes the focus.

These ways of getting the facts have evolved from faculty, textbooks, trends, and experience. They're really the best way to do it.

Ethics & Corporate Social Responsibility 22 April, 2010

So, what exactly does it mean to be ethical? Shouldn't the answer be easy? Many people assume that knowing what is right is the easy part, and it's the implementation that comes at a higher cost. Obeying the law is pretty obvious. I'm going to say that agreeing on what is right is the difficult task. Everyone has their own definition of right and wrong and people can put everything into these categories. The problem exists because everything they put in the 'right' category is what they believe to be ethical, and although there may be a universal standard, not everyone accepts it. Honesty and integrity are fairly standard, but creativeness is something that can walk a fine line.

So what does this mean for a business? Here are my thoughts. The purpose of business is to cater to society's wants. But what is a business without uniqueness? A business generally has a mission and set of values that set them apart, even if they aren't explicit. These values denote the moral obligations that it has, and the values should act as helps to make decisions when no explicit policy exists. Now, there are some responsibilities that happen as a side effect of running the business like sustainability, licenses to operate, and reputation, but these are usually just side effects. The moral obligations derived from a company's values are the only things the company will still pursue in difficult times. However, Peter Drucker has said that it is irresponsible to promote a noble motive that is beyond what is economically feasible for a company. Martyrdom can only happen once, and it is often better to steadily create value for society than to make one single and final attempt at perfect ideology.

There are right vs. right decisions where there are two competing ethical needs, but choosing one forces you to ignore the other. Les Miserables is a case in point. Another example is differences in bribes. Is bribing to sway decisions for personal gain any different than bribing to sway decisions to be what they ethically should be?

I suggest that making sure ethics are addressed on all issues (a go/no-go analysis for a project for example) can remind everyone that it does matter. People would be prepared to make the correct decision if a gray area alternative ever arose.

Although profit is thought to be the major motivation for organizational action, the value provided to customers is a far better indicator of future success and profits. This value to customers should not include corporate social responsibility (CSR) if its costs are high and the CSR does not directly apply to the industry or area of expertise for the company. Usually it is best to CSR that is within a company's competency domain. In the end, this is actually beneficial to a company because it keeps them from having to scramble later on should regulations be put in place to force the behavior.

Bowen, Carrol, et. al may have said it best: A company should act like a good citizen.