Does Strategy Enhance Business Performance?

Part II: How to De-Complicate Strategy

Strategy shouldn’t be something so complex it requires a weekend and a highlighter to comprehend. It also shouldn’t be left on the shelf, locked away in paragraphs upon paragraphs and pages upon pages of well-written and carefully crafted sentences. Yet, unfortunately, this is often the case.

Strategy too often becomes a theory, a concept, maybe even a motivational tool for the company, but not something which is integrated into day-to-day operations. Part I: How to Turn Strategy into Action of the Does Strategy Enhance Business Performance? series explored what it means to execute strategy and the four main barriers which stop strategy from becoming sustainable bottom line growth.

1. A lack of clarity and understanding about exactly where the company is going and how it will get there
2. An inability to make strategy everyone’s job
3. A separation and disconnection between planning, budgeting and the reality of daily operations
4. An inability to test and monitor if plans are achieving desired results and how plans need to be adapted or changed

Companies experience a lack of clarity and understanding in different ways. In some, the destination is always simply more – more customers, more revenue, more profit; how is not so important. In others, there is a how (a strategy), but it isn’t fully developed and cannot be easily explained. Disagreement at the executive level about the strategy leaves employees uncertain about priorities. Urgent tasks and inevitable problems replace important initiatives.

Discussions of strategy are rife with clichés. “If you don’t know where you’re going, how are you ever going to get there?” “You need all oars in the water, all pulling in the same direction.” “You must have a road map to arrive at any destination.”

While all of the above are true, the trick is putting these words of wisdom into practice. It’s a question of how.

Strategy is not about what a company is, it is about what a company wants to become. Strategy is how a company stretches, reaches and achieves its aspirations.

What can you do, in practice, to achieve strategic clarity? How can you create an easy to understand strategy which can be communicated clearly throughout your company?

To begin with, establish a quantifiable Strategic Destination. For the company to work toward success, success needs to be simply defined, whether it’s net profit, return on investment or another measurable financial outcome. An aim to be exceptional, outstanding, exciting or one of the best may be motivational, but it lacks the substance to be the foundation of a strategy.

We now need to determine the Value Gap, the difference between where the company is today and where it wants to be. Put another way, the Value Gap defines the difference between a company’s targeted and current financial performance and therefore how much change needs to be accomplished. The essence of strategy is how to close the Value Gap.

Financial performance can be improved in two ways. A company can sell more or spend less, preferably both. The Value Gap is therefore closed by a combination of productivity (spend less) and revenue growth (sell more).

Companies grow revenue by selling to new customers (acquisition) and selling more to existing customers (retention). For strategic clarity, a company must know what drives acquisition and retention. Generally speaking, companies differentiate themselves by one of three generic strategies, originally described by Treacy and Wiersema in The Discipline of Market Leaders.

1. Total Low Cost – The primary focus of a company’s activities is productivity and operational excellence to be able to provide their product or service at the lowest total cost while maintaining industry acceptable standard on quality and customer service. Companies which employ a Total Low Cost strategy are often seen as providing great value for the money.
2. Product Leadership – The primary focus of the company’s activities is on innovation in order to provide the best product or service in their market. The company must maintain industry acceptable standards for customer service but customers are willing to pay a premium for the best.
3. Customer Intimacy – The primary focus of the company’s activities is on relationships and in knowing and meeting all of their customers’ needs.

Products and services won’t be the most innovative and the cost will be at or above average, but the customer will have their needs met.

A generic strategy serves as a starting point, a basic outline, from which you construct your company’s individual strategy.

In summary, to begin to take strategy from ambiguous big ideas to understandable actions

1. Set your Strategic Destination
2. Determine the Value Gap
3. Decide on your Generic Strategy

The goal should be to communicate to everyone where to focus their efforts. Stay tuned for future installments in this series that will address, in detail, practical steps to enhance your company’s performance through strategy and principals centered on a measurement, management and communication system.