October 16, 2015, by John Colley
Strategy briefing – Business Strategy: What is it really?
Almost everyone seems to have a strategy.
Asking business directors about their strategy may well stimulate a long list such as their procurement strategy or marketing strategy, investor strategy or workforce strategy. Indeed, almost any potential plan or course of action rapidly becomes a strategy. Perhaps the word conjures up impressions of high level thinking, or even that there is some direction in each part of the business after all.
Such approaches are not particularly helpful as use of the term strategy has little more meaning than suggesting an aspiration or at best a plan.
Adding value
A more precise consideration of the term strategy might start with the concept of adding value. To add value means being able to increase the price of a product or reduce the cost. The ability to raise prices is associated with better fulfilling the needs of the customer.
When Starbucks entered the UK coffee market how did they sell a coffee for £2 when coffee was readily available at 75p? They supplied pleasant air conditioned lounges, wifi, comfortable seating, newspapers, music and a consistently good cup of real coffee with friendly and prompt service. In short, a place you could meet friends and loiter comfortably with a good coffee. Surprisingly simple but a combination that previously was rarely available. Coffee places were often basic, service was variable and frequently untrained; coffee was often stewed or instant and there were few places one would wish to spend much time.
We are currently seeing an influx of pound shops and low priced grocery stores such as Lidl and Aldi who are growing market share at the expense of the major supermarkets. These chains offer limited ranges (3000-7000 lines) of products in less well located premises with lower rents than their higher priced competitors. The extent of product range drives costs and a large Tesco may carry between 30,000 and 50,000 different lines on large high costs sites. They also focus on cheaper brands or private labels and offer significantly lower prices.
Capturing value
Finding an attractive value proposition is one thing, retaining the value generated is quite another as many businesses have discovered.
Take English Premiership football clubs who now benefit from enormous sums of television money, which for some runs to many tens and hundreds of millions. But only two or three clubs actually make a profit over any three year period. Why one might ask? The money is extracted by the top players and however much the TV money increases each year then so do the players’ wages.
Suppliers to UK major supermarkets suffer a similar problem as most of the value they generate is extracted by the supermarkets, particularly for private label suppliers. Considering Starbucks we see comparable issues as the success of a coffee shop is largely dependent on location. Hence the rents of highly trafficked locations are very high and may extract much of the value created from a shop.
Capturing and retaining value is a critical requirement of a strategy.
Timing and environment matter
Creating a successful value proposition depends heavily on the prevailing business environment.
Starbucks launched at a time of increasing affluence so that people could afford the product and a time when public houses and bars (alternative meeting places) were in retreat due to drink driving laws and a move to home drinking. Unless one wanted an alcoholic drink they tended to be unsatisfactory for meetings as they usually served poor quality coffee in dark dingy and rather grubby surroundings with variable service and definitely no cakes! Starbucks also successfully targeted countries which drank tea and predominantly instant coffee or filter coffee. They remain largely unsuccessful in many ‘coffee’ countries such as Italy and France.
Influence of governments
Consider not only the economy, social patterns, and technology but the role of governments in the business environment.
Many industries are almost entirely dependent on government policy which if changed can destroy investment and entire businesses. Consider suppliers to the defence industry which are dependent on government spending levels and policy. Suppliers to the health, education and social care sectors are similarly dependent.
It is less obvious with some industries such as green energy generation in wind farms, solar energy and nuclear installations which cannot generate power competitively without large subsidies to reflect reduced carbon emissions.
We see this in the insulation industry in which demand for insulating products is almost entirely dependent on new building regulation or grants to retrofit insulation in homes. These are controlled by government. Governments are constantly changing policy and regulation. This results in large numbers of businesses becoming insolvent or alternatively being created to cater for the latest policy changes. Many investment houses will not invest in businesses overly exposed to government policy.
Defining strategy
We have discussed the importance of the business environment and the need to create a customer value proposition which allows a higher price to be charged (higher than the cost of the product or service) or costs to be lowered.
We have also commented on the need to capture value but what exactly is a business strategy? Michael Porter at Harvard Business School has spent much of his career considering this question. A recent book entitled ‘Magreeta on Porter’ (2012) summarises Porters latest thinking.
He contends that there are five elements needed for a strategy.
Firstly a customer segment need (not previously satisfied) must be identified and secondly a customer value proposition carefully tailored to satisfy the need. The business must then evolve and focus its value chain to effectively and efficiently meet the customer need. The extent to which a business can focus its value chain and the strategic fit between the various elements creates a barrier which determines the level of competition which can follow. There necessarily must be ‘trade-offs’ and by this Porter means that selecting one customer need segment to target means automatically that other segments will not be pursued. Finally one must assume continuity in the industry as it can take a long time to evolve an offering effectively and to develop a strong position.
An example might be the UK furniture industry. This was originally dominated by city centre showrooms with knowledgeable and highly trained salespeople selling expensive and customisable furniture ranges on 12 week lead times. The products would be delivered to homes, unpacked and assembled. Alternatives to purchase through these outlets was to buy second-hand or accept used furniture from relatives.
Ikea entered the market with a clear customer value proposition of ‘attractive low priced modern furniture’ and little else. Stores were out of town on low rent retail sites; there are no sales people and furniture ranges are limited and non-customisable. Customers collect the flat packed product from the warehouse, transport through the checkouts and then home in their own vehicles where they erect themselves. The limited range allows bulk buying to control selling prices. Store costs are low with just a few people on the checkouts and in the warehouse; there are no selling people or transport and erection costs. The customer offering of good quality modern furniture designs at low prices has expanded the market substantially through bringing new furniture within the cost constraints of people who could not previously afford new. Ikea does not customise, deliver or erect furniture, if that is required they simply do not supply.
Developing strong scale economies and a network of sites has taken over 20 years but is now difficult to compete against due to the low cost good quality approach.
Conclusions
In summary creating a specific customer proposition to satisfy a need and capturing the benefits is important and this requires a benign environment. Timing is critical. Trade-offs and a dedicated value chain to provide the benefits efficiently and effectively are also necessary to a successful strategy.
Dr John Colley is Professor of Practice in Strategy and Leadership and Associate Dean (Post-Experience Masters Programmes) at Warwick Business School. Previously John was Director of MBA Programmes at Nottingham University Business School where he taught strategy and leadership for over 7 years.
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