Strategy does not exist in isolation, nor can it be developed or realized in isolation. In order to successfully leverage strategy as a mean for driving profitable growth, it is important to understand the context in which strategy must exist. Based on our experience, the context of strategy also creates confusion with regard to the concept of strategy, which makes it even more important to understand. This insight on Strategy specifically intends to digest the strategy context and examine all of its components.
Components in the strategy context
The corporate context of almost any strategy includes a large number of co-existing components. When they are used effectively, these components can reinforce each other and help a corporation evolve in the direction that its senior management wishes it to. When the components are not in sync, however, they create counterproductive forces that can prevent corporations from evolving swiftly enough and/or force an evolution in the wrong direction.
Everything to start with a strategy
The strategy is fundamental in the sense that it must set the direction in which the company wishes to head, a direction that allows the company to compete effectively in a market and earn revenues beyond the level of the competition. A clear, unambiguous and well-articulated strategy is a prerequisite for being able to create cohesion in the other components of the corporate context. Without this strategy, it is more usually coincidental if the remaining components remain well aligned.
Targets, objective and KPIs make the direction concrete
Targets, objectives and KPIs are sure to be an important component of the corporate context of a modern business.
Targets typically represent goals that can be quantified (for example, a five-percent market share in the SoHo business sector by June 2012).
Objectives, on the other hand, represent goals that typically cannot be quantified; that is, qualitative targets. An example could be to be recognized as the most prestigious restaurant in Paris in which to work.
Key Performance Indicators (KPIs), are indicators that should show whether you are on your way to reaching your targets and objectives. KPIs can be effective tools with which to achieve great improvements, but a few prerequisites are necessary in order for that to happen:
- Use simple KPIs that are easy to measure
- Focus on just a few KPIs (if numbers tend to grow, structure them in a hierarchy)
- Communicate KPIs broadly and frequently
- Assign clear responsibility and accountability for each KPI
- Run a proper performance improvement process (measure, root-cause analysis, assign actions, follow-up on actions, recognize improvements that have been made)
Financing & investment plan puts numbers behind the strategy
The financing and investment plan is an important component in the corporate context of any strategy. First of all, all businesses require capital; some more and some less. Consequently, a financing plan should stipulate how that capital should be secured; for example, through debt, shareholder equity, retained earnings, corporate bonds, etc.
Furthermore, all businesses require investments, although the level might vary depending on the industry and type of business. The investment plan needs to make the necessary investments fully transparent.
Governance articulates how to steer towards goals
Every company must be able to operate in a dynamic business environment; nothing is sustainable in a long-term perspective. Therefore, it is instrumental to make proactive decisions about how the business should ultimately be governed; this should be clarified through a corporate governance model.
Offerings management defines how products are developed and how the portfolio should be managed
Offerings management is an important part of the execution of any company. It defines how a company should develop and refine products and services over time; for example, through focused in-house efforts, by acquiring white-labeled products from the market, etc. It should also articulate how to manage the investments in the portfolio over time; for example, which segments should generate the cash and the segments of the portfolio in which investments should be made.
Demand management clarifies the go-to-market approach
Once products and portfolios are in place, demand must be generated in the market; exactly how this should be done should be described in a demand management plan. As an example, this plan should clarify important decisions regarding a company’s go-to-market approach; for instance, whether the company should work with channel partners and/or through its own sales force.
Fulfillment management defines how to operationally deliver products and services to customers
Fulfillment is a tremendously important part of execution and an important component in the corporate context. The fulfillment plan should clarify how the company plans to meet customer demand once it has been generated. There are several important decisions that must be made in the fulfillment plan, such as whether the company should work with its own manufacturing or whether manufacturing should be outsourced to a third party.
Vision articulates your long-term view of the business and your position
Although vision and mission are sometimes referred to as one entity, they essentially aim to answer two separate questions. The vision should describe where you see your business and your company in the future; that is, your vision of the business. This is not about providing a snapshot of the business of today, but rather providing a statement – usually a bold one – of where you can take it in the future.
Mission articulates the overarching purpose of the organization
Unlike your mission statement, the mission is not necessarily future-oriented. Your mission statement should fundamentally articulate your company’s mission in society, or the overarching purpose of the business.
Cultures, value and guiding principles define your fundamental beliefs
Cultures, values and guiding principles are all part of the corporate context. They might not exist in all corporations, but all companies are likely to have at least one of the components. The cultures, values and guiding principles all strive to impact the way people act and behave by articulating your fundamental beliefs.
The importance of keeping the context in sync
Apart from the strategy itself, we have now provided a high-level review of the nine other components that exist in the corporate context. In order to effectively understand how to realize true value from your strategy and to avoid the most common pitfalls in strategy development and realization, it is essential to understand the full scope of the corporate context. To clarify the point, let’s examine two fictitious examples, one successful and one less successful.
Luxury Clothing, Inc.
Luxury Clothing, Inc. is a relatively small company whose strategy is to provide high-end fashion apparel products to young women aged 18–28. The company aims to achieve a 25 percent market share with an operating margin of 3–5 percent. The company has developed a comprehensive portfolio of clothing products that covers various categories and price segments. Eighty percent of the company’s marketing budget has been allocated to advertisements in nationwide daily newspapers.
This is clearly an example of where the components in the context are not in sync with the overarching strategy; this company is more than likely to deliver average or even poor performance. With the premium position articulated in the strategy, this company should have adopted a much more focused niche approach; that is, five percent or less market share, a significantly higher operating margin target, more focused product portfolio and perhaps a marketing plan that aims to generate demand through niche channels like high-end fashion magazines.
Basic Apparel, Inc.
Basic Apparel, Inc. is an established company whose articulated strategy is to provide affordable men’s clothing. The company’s mission is to “Provide affordable basic apparel to men across society’s borders” and its vision has been defined as “The number-one natural choice for men looking for basic apparel”. Furthermore, the company has defined a focused product portfolio that only contains basic clothing products, such as t-shirts, socks and underwear. Products have been consistently priced 20 percent below the average market prices, while demand is generated primarily through social media and through selected advertisements in car and sports magazines. Products are offered through a web shop only, no investment has been made in physical sales outlets and all products are manufactured in a low cost country in order to reduce the cost of goods sold.
Basic Apparel, Inc. is an example of executive management having done a good job aligning the components of the corporate context with the company’s overall strategy. The company has a good chance of performing well, assuming the strategy chosen in this case is sizeable and feasible.
The business plan is a tool that could help keep components of the corporate context aligned with the overall strategy
As demonstrated through the two simple examples above, it is essential to be able to keep the components of the corporate context in sync. Based on our experience, working effectively to develop a comprehensive business plan can be used as a tool to achieve that goal.
In fact, this is one of the great benefits of business planning; if you are able to ensure that all components of the corporate context are well aligned and in sync with your chosen overall strategy, you have met the fundamental perquisite for being able to realize your strategy and deliver profits at or above the level of competition.
However, if you are not able to align the components of the corporate context with your chosen strategy, strategy realization will very difficult and there is a risk is that you will soon find competition ahead of you rather than behind you as intended.
About insight on strategy
Strategy is one of the most overused and misused words in the business community. It is a term 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.
Previously published articles in this series:
- A definition: http://www.2by2.se/insight-on-strategy-a-definition/
- Competitive advantage: http://www.2by2.se/insight-on-strategy-competitive-advantage/