Insight on strategy: A definition

2by2 ABInsights UpdatesInsight on strategy: A definition
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Strategy is about choice

Ultimately, strategy is about choice. It is about choosing the company you want to be by choosing which market you want to play in and choosing how to compete in that market. A company that formulates its strategy effectively can reap great benefits, since a good strategy is sure to deliver bottom-line results. Those companies that are not so effective will, in the best-case scenario, end-up with a fancy slogan that marketing can use in just any corporate campaign and in the worst case, simply go out of business.

Strategy can be defined through a simple statement: “A company’s choice of competitive edge in the market.”

It is a simple statement, yet it has major implications for companies attempting to formulate a strategy.

A company’s …

The company needs to be defined as part of the strategy. This includes aspects such as defining at a high level the products and/or services that the company will bring to the market, and how the company intends to earn its revenue; that is, its revenue streams. This is about asking fundamental questions about what kind of company you aspire to be and making the necessary choices related to that. For example, do you intend to earn your money from the products you provide to the market or with the services that you intend to deliver in addition to the products?

Hewlett Packard (HP) is a good example of a company that managed to define its business in order to figure out how to have different revenue streams work to its advantage. The Image and Printing Group (IPG), one of seven major business units within HP, is structured into three different areas: Commercial Hardware, Consumer Hardware, and Supplies. Hardware develops and sells printers and scanners, while Supplies develops and sells LaserJet toner and inkjet printer cartridges.

HP made a conscious decision to earn money on supplies rather than on hardware. This decision has allowed them to become very competitive on hardware prices while also building up a significant business based on providing Supplies. In 2009(1), IPG represented 21 percent of HP’s total revenue, but 32 percent of its total earnings from operations. Close to 90 percent of IPG’s earnings come from supplies business, which represents a USD16 billion-plus business with estimated earnings from operations of approximately 23 percent – not bad at all.

… choice …

One of the key benefits of a strategy is that it allows a company to remain focused, in terms of aspects such as what the organization does, how scarce resources like capital are allocated, and how marketing messages are prioritized.

However, in order to get to a point where the strategy helps retain focus, the strategy must involve some choices, such as choosing which markets and customer segments to be involved in, which products to deliver, and which revenues streams to bet on.

For example, Apple was a relatively small player when it entered the mobile handset market with its iPhone back in January 2007(2). One of the key factors behind the success of Apple’s market entry was its ability to focus by making deliberate decisions. The company chose to enter the market with only one product, when most of its competitors were operating with portfolios of 30–40 products. Furthermore, Apple chose to enter the premium segment of the market, while most of its competitors were playing cross all the segments of the market. Without the explicit choices that allowed Apple to remain focused on its effort to grow a presence in the mobile handset industry, it would likely have spread itself too thin across too many segments.

… competitive edge …

The essence of strategy is competiveness; a good strategy should allow you to effectively beat the competition. It is as simple as that. In order to do this, however, you need to fully explore and understand the sources of competitive advantage in an industry, decide how you want to be unique, and then differentiate your company from your competitors.

The reason why Google became such a popular Internet search engine probably has less to do with the quality of the search result it delivers to its users. Few users are in a position to tell whether Google delivers search results that are any better than those from Microsoft’s Bing, for example. The reason why Google outgrew the other search engines from the beginning was related to its advertising model, which allowed them to offer companies an attractive way of placing advertisements on the Internet. In the beginning, no other company was able to offer the same kind of service and by the time competition caught up on the model, Google had captured a majority of the Internet search market and went on to find an even more sustainable competitive edge to explore.

Today, Google processes a billion searches globally every day (3), runs one million servers (4), and accounts for more than 65 percent of the searches in the US (5). All of this is done at an operating margin of above 35 percent (6), which makes it easy to understand why the competition has had difficulty catching up.

… the market

Finally, the market you intend to serve needs to be clearly defined as part of the strategy. Which segments do you intend to serve? Which segments should you not serve? Who are your customers? What needs are you trying to meet?

Strategy takes analytics and guts

In theory, strategy can be simple and intuitive to grasp. In reality, experience tells us that many companies fail to leverage their full potential due to poor strategy development and realization capabilities. In essence, anyone attempting to strategy will need to leverage outstanding analytics skills in order to draw insights from facts, and will need the guts to dare to make difficult strategic choices.

It would not be correct to say that strategy is an art form, since art is subjective and the beauty lies in the eyes of the beholder. Successful and effectively implemented strategies are deemed to deliver hard results, a bottom-line impact that can be measured in monetary terms. Although this makes strategy much more objective than art, it is surely beautiful to look at.

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About Insights on Strategy

Strategy is one of the most overused and misused words in the business community. It is a word that everybody loves to use, but few dare to explain. 2by2 publishes Insights “On Strategy” to help companies improve their ability to create value through strategy by better understanding what strategy actually is, by learning how to spot the difference between a good strategy and a not-so-good strategy, and by gaining perspectives on the most common pitfalls when developing a strategy.

  1. Hewlett Packard Annual report 2009
  2. macworld.com, 2007-01-09, http://www.macworld.com/article/54769/2007/01/iphone.html
  3. cnn.com, http://politicalticker.blogs.cnn.com/2009/12/18/google-unveils-top-political-searches-of-2009/
  4. Pandia Search Engine News, pandia.com, http://www.pandia.com/sew/481-gartner.html
  5. ComScore, http://www.comscore.com/Press_Events/Press_Releases/2009/12/comScore_Releases_November_2009_U.S._Search_Engine_Rankings
  6. Google finance, google.com, http://www.google.com/finance?q=google

11 comments to “Insight on strategy: A definition”

  1. Hej Jonas!

    Kloka ord! Om man vill förstå “strategi” och dess sammanhang ytterligare rekommenderar jag varmt Richard Whittingtons bok “What is Strategy – and does it matter?”. Kanske något att diskutera över ett glas någon gång när du är i Lund eller jag har vägarna förbi vår vackra huvudstad?

    Hälsningar
    Dr B

    1. Martin,

      Thanks for your comment, and thank you very much for your book recommendation. It would definitely be good to get together again when I am heading south next time.

      Regards,
      Jonas

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