Designing An Effective Strategy
Three tips for successfully creating competitive advantage.
In our previous article, we gave an overview of what business strategy is. This article builds on the lessons drawn in the previous article. Here, we touch on some basic principles you can follow in designing an effective business strategy.
Every well-thought out strategy attempts to put the company under consideration in a more favorable position than rivals. What a business strategist does for a company is to help the company deliver greater value to customers either by offering lower prices or providing superior products/services that justify higher prices. This is called ‘competitive advantage’ - Having an advantage over your rivals. When you have a competitive advantage, it establishes you as better than your competitors in the minds of your customers. Competitive Advantage can be achieved in several ways. However, it is generally accepted that the two fundamental ways to think about creating a competitive advantage are through cost leadership or differentiation. While cost leadership attempts to compete using lower prices as an advantage, differentiation focuses on creating products and services that provide an extra benefit to customers that your competitors do not currently offer.
From the previous article, we remember that having an advantage is not good strategy if that advantage can be easily duplicated by your competitors. Good strategy is the result of good design. Effective strategies do not just happen. They have to be carefully constructed. Companies that are to be successful in the long term must skillfully build within their strategy-duplication barriers. A company can only outperform its rivals if it can sustain the differentiation that gives it an urge. To sustain a competitive advantage, a strategy must have the timeless characteristics of trade-offs, coherence and focus:
A good strategy is one that comes with trade-offs. Good strategies deliberately drop vital elements or activities competitors are involved in. Remember that strategy work involves selecting the set of activities that the company can do extremely well. The oxford dictionary defines trade-off as ‘a balance achieved between two desirable but incompatible features; a compromise.’ When competitors realize that you are gaining market share because of your unique positioning, they would attempt to copy your strategy. This is where trade-offs become powerful.
Let’s use a hypothetical example to better explain this. Imagine there is a bus transport industry and in this industry, all bus companies travel long distances only. This is because customers are willing to pay more for long distances. Let’s say an average trip is 7 hours and costs each traveler GHS95.00. A start-up company comes up with an innovative strategy. Against conventional wisdom, They decide to travel only short distances. Let’s call this new company Fast Point. Fast Point only travels on journeys with average duration of two hours and costs the traveler GHS35. Fast Point buys relatively smaller buses that are more fuel efficient than those of the other companies. The brand of buses Fast Point uses are at least twice as efficient. These buses have relatively less spacing between seats than the usual long-journey buses, but customers don’t mind because the trip isn’t very long. So, Fast Point is able to carry almost the same number of people per trip as the other companies. Additionally, Fast Point keeps drivers on a roster instead of assigning them to buses. Therefore, drivers change per trip for the same bus. As a result, each Fast Point bus does an average of five trips a day, producing revenue of GHS175 a day. All of these are crowned by an efficient online ticketing system that drastically reduces wait time at stations. The traditional buses usually wait for customers to fill up the bus before leaving the station. This wait time can take up to three hours because travelers on traditional buses do not have to book in advance. The buses only move when the last seat is filled.
Due to its superior strategy, Fast Point becomes a dramatic success story. And as predictable as ever, one of the traditional bus companies, Big Boy Buses, begins copying Fast Point by offering shorter journeys. Big Boy soon realizes the power of trade-offs. After they start their short distance journeys, they realize that their buses are just too big (and consume much more fuel) to charge the low prices being charged by Fast Point. As if that’s not enough trouble, drivers begin complaining. The reason? They feel they are being overworked. Since each driver is assigned to a particular bus, they are unable to keep up with 5 trips a day. So, you see, Big Boy cannot continue to operate the way it has been operating for years and still try to compete with Fast Point. Big Boy would have to get a new fleet of more efficient buses and significantly change its internal processes and systems. If you know anything about business organization, you would know that it is very hard to change structures, systems and culture that have been built over years.
As seen in our bus example, the influence of trade-offs in industrial competition is a very potent concept. It involves deliberately dropping elements that are key to the success of competitors and adopting new approaches in your own business design.
2. Fit & Coherence
Every good strategy is built upon a unique set of activities. However, these unique set of activities must be coherent in a way that buttresses the company’s strategy. The activities of the strategy-oriented company would not contradict. Harmony of activities is vital in strategy creation. Its importance cannot be overemphasized. Activities must fit with the strategy and complement each other. If the various activities do not fit, the strategy is being undermined. We saw how all the elements of Fast Point Buses complemented each other to achieve their short distance strategy. There must be coherence. Apple’s strategy with its iPhone is to create high quality, premium products that offer superior performance. Over time, Apple succeeded at creating value through this strategy, allowing the company to charge relatively higher prices. In 2013, Apple veered off its strategy that had made the iPhone an envy to competitors – they introduced the iPhone 5c. The 5c was a cheaper, lower quality iPhone, made largely of plastic. The problem with the 5c was that it was way too inferior to the other iPhones and the image the brand carried. The 5c did not fit with the overall strategy of the iPhone at that time. It is generally believed that the 5c was an attempt to respond to Samsung’s cheaper range of smart phones. However, a cheaper, low-quality smartphone did not fit into the established activities Apple had built into its strategy. We realize here that trade-offs and fit are closely related. Competing in the low-end smartphone market was a trade-off Apple had to make because the 5c and the required activities to sell it do not fit with Apple’s strategy. In 2015, the tech giant announced that it would be discontinuing the 5c.
A unique set of activities coupled with trade-offs and fit give rise to a focused organization. A strategic business is always focused, no matter how large they are. Only difference is that large and well-financed companies can focus on a relatively more diverse set of customer segments. But there is always a focus. Large businesses successfully focus on various, sometimes divergent projects, by building small, relatively autonomous business units to focus on each project. However, for small businesses, it is advised to focus your energy on where you would make the most impact. Bill Aulet, Professor of Entrepreneurship at MIT Sloan School of Management put it beautifully, “One of the pitfalls of start-ups is ‘selling to everyone,’ which is the idea that you, as a fledgling start-up with little or no resources, can make products that fit the needs of everyone.” Even though Aulet was speaking directly about start-ups, this is a timeless business lesson that all businesses must understand. You simply cannot serve every customer and not every business opportunity is strategic. Strategic business people know how and when to say no to a seemingly rewarding business opportunity if it is not in line with the company’s chosen strategy. Strategic businesses need to have the discipline to choose and focus.
While there are several more factors that contribute to a winning strategy, trade-offs, fit and focus are the foundation principles for creating a sustainable competitive advantage. A sustainable competitive advantage is a business advantage that is difficult to duplicate. It puts you ahead of the competition. When analyzing client strategies at Workshed, we always test to ensure the presence of these three qualities before moving on to other strategic moves. Incorporating trade-offs and achieving coherence in your operations lead to a laser sharp focus of your company and its people. Companies, especially small businesses who apply these principles set themselves up for enduring prosperity.