Strategy – New Horizon Partners

An Effective Strategy Should Say ‘No’

An effective strategy sets the direction for a business but it also should be specific enough to say no—no to pursuing certain customers, no to entering certain markets, no to certain programs or investments, even no to hiring a certain person. No to choices that diverge from the optimal direction for the organization.

Strategic planning sets the direction for an organization by describing where and how the business will compete in order to provide value to target customers that will lead to accomplishing the organization’s strategic objectives. The purpose is to define and provide a clear, succinct statement of strategy that can guide decisions within the organization.

Strategy should focus the organization’s efforts and investments on those with the highest return potential. The strategy then becomes a screen that sifts through decisions regarding which business opportunities to pursue and about the allocation of resources. With an effective plan and management process the organization can then say yes to the right opportunities and no to the suboptimal choices.

For example, one of my recent manufacturing operation clients lacked a clear strategy. They were indiscriminately pursuing sales volume in hopes of making up losses on individual products with volume. In the meanwhile, they were teetering on the brink of bankruptcy.

Sensing an opportunity, an outside group acquired the company. Their first action was to define a clear strategy, a route to profitability. They identified the organization’s core competencies and the customers that were buying the specific products utilizing those competencies. This identified the size, shape and other characteristics of their preferred products and the specialized elements of the associated manufacturing process. Then they carefully examined the customers of such products and their value criteria. This led to identifying small lot sizes and quick-order turnaround as things highly valued by the target customers.

By focusing their new strategy on these very specific criteria, they moved from competing with 11,000 companies within a similar industry classification to facing only two or three operations with a similar value offering.

Having documented and communicated this newly defined strategy throughout the organization, they went about transforming the business. One early step was shedding the customers and products that no longer fit within their strategy yet represented two-thirds of sales—not a task for the faint of heart. But they quickly found that some good cost management and the early steps in growing their targeted business resulted in a strong return to profitability.

This strategy, with time and energy spent on buy-in throughout the organization, greatly simplified company management. Being more focused, the company is now recognized in their industry for their expertise, and many potential customers come seeking quotes. The strategy also provides the guidance to allow them to quickly say, “Nope, that doesn’t fit what we do well.” The people on the shop floor understand the importance of quick product changeovers and turning around orders quickly. This understanding results in a steady stream of innovations and process improvements coming from the floor. Every investment or expenditure of resources can now be examined with the strategy as a guiding light: “Does this investment help us move further down the path described by the strategy?” In short, the specificity and clarity of the strategy has resulted in unity and clarity within the organization in providing value to the customer, which in turn has enabled the company to achieve above-average returns.

Organizations typically make two mistakes in their strategic planning efforts. First, by not thinking deeply enough or not recognizing the value and purpose of effective strategic planning, they don’t develop a plan with the clarity and specificity to actually guide any decisions. Second, they don’t recognize that the purpose of planning is to guide every decision. The strategic plan does not belong on the bookshelf. It must be clearly communicated to the organization and continually held up as the signpost providing direction for the long-term development of the business.

Does your strategic plan optimize your decision-making process? Does it indicate when to say no and when to say yes?

(This article was previously published in IndustryWeek.)

Case Study in Strategic Focus

In a recent article we discussed strategic focus, the idea that companies should first develop a laser-focused strategy, i.e., a definition of precisely where and how they intended to compete, that provided the best path to achieving the company’s goals and objectives. Perhaps the greatest purpose of strategic planning is this second part of strategic focus, that the strategy needs to be clearly and consistently communicate to the entire organization and then used as a guiding light for the allocation of resources – capital, energy, thought, and actions – to maximize the likelihood of implementing and achieving the plan.

Some years ago, a client invited me in for a discussion about how to grow their business; more specifically, they wanted to talk about finding new customers. As I began to learn about the company and its business, I found different views of what they were and who they served. Most concerning, when talking to the sales director I was told that they were looking for anyone that bought plastic products. Of course, this demonstrated that they had no strategic focus at all and explained why they were struggling and needed help.

They were a part of an industry with thousands of competitors and tens of thousands of customers. Without having a clear definition of where and how they wanted to compete, they often found themselves competing for business based on the lowest cost for customers that had little expectations of value desired. While they competed for lots of low-price business, they had a substantial engineering function which was a requirement of some of their best customers but which few of their competitors offered. This represented a higher cost that was often not valued by many customers. They also a sophisticated quality and process control system, again representing a higher cost than the run-of-the-mill competitor. Without a strategy and strategic focus, the more business they gained, the more their net margins declined.

As we dug into this project, we naturally needed to begin with a strategic planning process. As part of this process we spent time talking about the need for strategic focus in order to be successful and maximize profitability. In defining their strategy, the where and how to compete, and the ways in which they wished to differentiate themselves from the mass of competitors, they decide to keep and build upon their strong engineering capability and the quality and process control standards. This led them to define their desired customers as manufacturers who would attribute value to an ability to re-design, consolidate, and improve the components that they purchased and would attribute value to the superior quality and consistency of parts.

This planning process and the subsequent communication process brought most of the team together, marching to the same beat of differentiation and serving a select set of customers. In the process, they learned some new language to use in evaluating business opportunities and decisions about allocation of resources.

The organization share this focus except for one person, one person who was key to the implementation. The sales director was either unable or unwilling to adopt the same focus as the rest of the organization. Throughout the planning process and subsequently he saw his role as “finding any potential customer that bought plastic parts.” In conversations with the company president, I pointed out this problem. In spite of the fact that the sales director and the company president where close and long-time friends, we agreed that he would be better served finding different employment. I then introduced them to a potential candidate that I knew would embrace the importance of focus and would be driven to find the right customers as defined by their strategic plan.

As a result, their profitability shot up and the business over the next few years grew from one plant to three plants. The right strategy was helpful, but strategic focus was the key to this company’s turnaround.

Does your organization have an appropriate and well-defined strategy? Does your organization understand it and have they rallied around it to develop strategic focus?

Strategic Focus

Strategic planning has many purposes. It provides the opportunity and impetus to examine your market environment, your customers, and your competitors and to think about the past and the future in each of these areas. Strategic planning provides the opportunity to examine and refine your organization’s mission, vision, goals, and objectives. The strategic planning process provides an opportunity to refine your strategy – to define again where and how you will compete to best meet the organization’s goals and objectives. Strategic planning asks the organization to plan the specific tactics and actions that will implement the strategy and lead to achieving those goals and objectives.

But perhaps the most important purpose of a strategic plan is to focus the organization and all of its resources on the most important activities and investments that will lead to achieving the plan. The plan is both a communication tool and a sieve to keep the organization’s actions and investments pure. Peter Drucker once said, “Culture eats strategy for breakfast.” I often say that a mediocre strategy well executed is likely to create more value than the best strategy poorly implemented. Both of these statements are based on the fact that any strategic plan is only as good as the organization’s ability to rally around the plan and to work as a tight-knit, collaborative unit in pursuing the implementation without distraction. This is what we refer to as strategic focus.

Strategic focus means that the organization is diligent in examining every action and every investment to assure that they move us down the road to become what the plan defines. No one in the organization has a sacred cow, or a pet project, or an interesting opportunity that diverts any attention or resource from the strategic plan.

To achieve strategic focus, the plan needs to be clearly laid out and defined so that all parties understand and so that there are no open ends. To achieve focus, the plan needs to be communicated frequently and clearly so that all understand and buy in. There is another saying, “When you are tired of saying it, people are beginning to understand it.” The plan needs to be visible and present in every discussion that might lead to activity or allocation of resources that could possibly be relevant to the plan. Each person must see their role in achieving the plan.

There are many reasons why organizations fail to achieve focus, and therefore fail to implement or achieve their plan. Most of the time it is because they don’t see the importance of day-to-day reminding of what they hope to achieve. Too often the planning process is a sterile, one-time process of development. Sometimes it is introduced to the organization in a single meeting, where it is presented in summary without making each person’s role and the importance of achieving the plan clear. Often the plan is put on the shelf or stuffed in a drawer, never to be seen again until the next year, when we wonder why it never happened.

If you want to develop a strategic plan, it ought to be one that actually defines a plan of action and that plan of action needs to be part of the organization’s daily activities. It requires strategic focus.

Does your organization seek to implement a strategic plan that really affects the way that you compete? Do you develop strategic focus that drives your implementation?

Where and How to Compete

The best definition of business strategy, at least in my opinion, is a statement of where and how an organization intends to compete. A longer version of this definition would be business strategy is a description of where and how an organization intends to compete, using the organization’s core competencies to meet customers’ needs and provide a compelling value to the customer. So, what does a statement of where and how to compete entail?

Where to compete describes and differentiates what is within and what is outside of the scope of business in which the company wishes to compete. This can include any combination of the following elements:

Geographic scope – this could include a locality or a region. It might also include a description, calling to mind certain retailers that define their market by demographics of certain locations over a broader scope, for example, a retailer that does business only in small towns.
Product or service offering – the particular definition of the company’s product or service offering defines where they will compete. This begins to overlap with the definition of how to compete. Breadth of product offering is one part of the process of defining where to compete.
Preferred market segments – segmentation begins to define more specifically where to compete and some of the definitions of segmentation can greatly overlap with the definition of how to compete. Defining segments can be as specific as defining the one customer that the company intends to supply. Segmentation can include dimensions such as vertical markets, demographics or psychographics of customers, distribution segmentation, occasion-based segmentation, and many others.

How to compete moves more deeply into defining how the company will allocate resources and present itself to the customer. Defining how to compete requires an understanding of customer needs and matching these needs with core competencies, either current or desired. At its highest level, how to compete requires a choice between the generic strategies of low cost producer or differentiate supplier. Defining how to compete can involve many different dimensions as the company positions its value offering to meet specific customer needs and to stack up against the offerings of competitive suppliers. For one supplier, how to compete might include providing the highest level of precision, for another, the most durability, for another, the sleekest design, for another, the best customer service, etc. The two major dimensions of how to compete are –

Price and cost positioning – understanding the needs of customers, the economic value of the product/service offering, and the relative positioning versus competitors and alternatives.
Features and benefits packaging – understanding the value of the product/service offering relative as defined by customer needs and relative to competitors and alternatives.

Business strategy provides focus for the organization’s allocation of resources and guides the actions of the organization as it builds its future. The more clearly and precisely the company is able to define its strategy in terms of where and how it plans to compete in the future, the more effective the organization can be in developing its competitive position.

How clearly has your organization defined where and how it intends to compete?

Profit Is a Reward, Not a Goal

Profit is the reward that a business earns for providing value to its customers and producing that value economically. While the customer does not intentionally award profit, they recognize the value offered and pay what they consider a fair price that is in line with the value. If the supplier is able to provide this value economically, then there is a profit after the cost of producing and supplying the product or services.

The mission of any business is, in general, to meet some societal need for certain products or services. This package of goods and services is termed the value offering. In making a choice of a supplier, customers evaluate various value offerings and select a particular supplier’s value offering based on the match with the needs of the customer. Evaluating a value offering is a complex process that incorporates a broad range of conscious and subconscious factors.

The ability to generate a reasonable profit that represents an attractive return on investment determines the viability of a business. If the market is unwilling to pay a price that generates a reasonable profit or if the organization is unable to provide the value offering of products and services at an economical cost that allows a reasonable profit, then the business is not viable on a long-term basis. It is not likely that rational investors will be willing to provide the capital necessary to support the business if it is unable to generate adequate profits. Therefore, it is logical for the business to identify target levels of profitability. However, it can be dangerous to establish profit goals or objectives, becoming overly focused on profit alone.

Some organizations do make the mistake of establishing profitability goals or objectives. The danger in doing so is that goals and objectives should drive strategies and action plans. When a business sets profitability objectives, these objectives then drive the actions of the business. At best profitability objectives set up a conflict between meeting customer needs and driving for profitability. In the worst case, the result is a loss of focus on the customer, the customer’s needs, and the appropriate value offering to best meet these needs. Instead, profitability objectives drive an internal focus on costs and pricing that ignores the customer and the value offering. In the long term, a business that is focused on costs or profits often sacrifices value that meets customer needs, hence, damaging the firm’s long-term competitive viability.

We often see examples of this short-sighted or backwards view. The pressure of Wall Street analysts drive publicly-held companies to overly focus on profits. Many private equity firms play the short-term game of pumping profits and cash flow to flip the investment quickly. In both of these cases, the businesses that get sucked into overly focusing on profitability are liable to enter a death spiral in which cost reductions to generate profits result in lower value to customers, resulting in loss of market share, resulting in the need to further reduce costs, and so forth.

None of this is to negate the importance of generating profits. Rather, businesses that are successful in the long-term focus first on meeting the needs of their customers, then on managing the costs associated with providing that value to the customer in such a way as to generate adequate or even excellent profitability.

Is your organization focused on providing value to your customers or profit to your owners?

Focus and Choice

Business strategy is about focus and choice. Strategy answers the question, what will we choose to focus on and what will we choose not to focus on? The struggle that many organizations deal with when trying to think strategically is a fear of bypassing any business opportunity. But not every business opportunity is a good opportunity. By failing to focus, the organization spreads its limited resources too thinly. Business strategy, when defined well, forces the organization to focus its resources on the business opportunities that are expected to provide the highest leverage, generating greater returns on the investment made.

One of our early consulting projects was with a manufacturing company that had been acquired by an equity fund. The owners brought us in to help the operating company define a growth strategy. When the owners described the company, they referred to “valuable, proprietary technology.” Their description was hard to understand but on my first visit to the company’s shop floor I saw this manufacturing process. To me it seemed “proprietary” as I had never seen or heard of their process elsewhere in their industry, but it was not “valuable.” In fact, it was a legacy manufacturing process. The business had its roots as a startup serving very low volume applications. This particular process had been “valuable and proprietary” when the company was a startup and trying to grow to $5million. But they were now a $50million company tasked with doubling again in size. This legacy manufacturing process was still in use serving a small percentage of their customers and applications. While it only represented a small portion of business, it required an inordinate amount of organizational energy to keep the process running and to serve these low-volume customers. In fact, it took so much energy to serve this small segment of business that they could never find resources, especially the energy, to achieve their objective of growing to $100million. In developing a strategy for growth, they were forced to make a choice.

Business strategy defines where and how to compete. A successful strategy requires making choices about where, in other words, with which products, in which markets, for which customers, will the organization serve. It also requires choices about how to compete, in other words, at what level of pricing, with what combination of products and services or features and benefits. In order to provide this choice of particular value offering, the organization needs to make choices regarding how to produce and deliver, in other words, with what manufacturing processes, at what level of integration, at what level of quality, etc. Strategy, then, describes the choices made regarding the value offering and the customers to be served.

Many organizations struggle to make these choices. They fear that, by focusing on the highest and best opportunity, they bypass other opportunities and, therefore, miss out on sales revenue opportunities. But, by failing to focus, the organization dilutes its potential to maximize return on investment. By failing to focus, companies fail to maximize efficiencies in production and confuse the organization and the market.

On the other hand, a strategy that has made clear choices provides direction for the entire organization. The engineering function knows what the product should and should not contain. Operations can optimize their manufacturing processes. Sales and marketing can identify the right customers and communicate the right message that responds to the needs of the chosen market segment. While the organization may bypass some sales revenue, the return on sales and return on investment is maximized when the organization has a clear sense of what it is, who it serves, and how it provides value.

Does your organization’s strategy have the clarity to identify the right focus and choices?

Strategic Focus

Strategic focus is essential to business success. It is the ability to identify the one path that the business intends to take to accomplish its objective and to then relentlessly pursue that path while ignoring other paths along the way.

Many businesses fail to focus which dilutes their resources and can eventually drain or drown the business. The reason that companies fail to focus is a fear of missing a business opportunity. This is especially true for young entrepreneurial businesses. Granted, we hear of stories in which a business pursued something out of their ordinary line of business and serendipitously found a great business opportunity. But this is the exception rather than the rule.

Lack of strategic focus dilutes resources because the organization spends its resources pursuing opportunities that have cross purposes. The danger comes in when one day the organization is pursuing business that requires lowest costs, the next day they pursue business that requires higher levels of production capabilities, then they pursue some business that requires unique customer service commitments, and so forth. As these different customer requirements come into the business, the organization spends time, money, and energy to develop each of them. And the result is that resources are cast about and the capabilities are given (at no cost) to customers who do not value them.

We should clarify here that strategic focus is a different, although similar, concept than a focus strategy. In the classic book, Competitive Strategy, author Michael Porter defines three broad or generic choices for strategy:

Cost leadership strategy in which the business pursues the lowest cost of producing or delivering its product or services.
Differentiation strategy in which the business pursues unique design or production capabilities that provided added value in meeting customer needs.
Focus strategy in which the business pursues a well-defined segment of the market in which it is able to develop either a cost leadership or differentiation advantage for a certain set of customers.

The smart business finds a business strategy in which they have faith and relentlessly pursues it. Strategic focus is this ability to define and pursue a clearly defined strategy that delivers value to a clearly defined set of customers. Strategic focus causes the organization to ignore business opportunities that do not fit within the strategy and the customer definition. It unites the organization in its effort to continually build the capabilities that make it unique. Strategic focus drives the organization to identify and pursue the customers that value the firm’s capabilities or product/service offering.

One of the purposes of strategic planning is to communicate and unite the organization to pursue the defined strategy based on the belief that this strategy will produce results that meet the firm’s objectives. In turn, the organization needs to have a culture that draws the organization together in pursuit of this strategic focus.

Does your organization have strategic focus? Is everyone on the same page and pursuing the same strategy?

Resilience and Business Strategy

Resiliency is often spoken of as an important character trait of an individual. A healthy person is expected to be highly resilient. Resilience is the strength and speed of our response to adversity or change. The Oxford Dictionary defines resilience as “the capacity to recover quickly from difficulties; toughness.”

There is a similar concept of organizational resilience that can apply to business strategy. This organizational or corporate resilience is the strength and speed with which an organization is able to respond to changes in the competitive or market environment or other events that might affect the health and well-being of the firm. These changes could be technology-driven changes, economic changes, changes in the competitive landscape, or anything else that might affect the organization’s ability to compete effectively. Some examples of the types of adversity that organizations might face could be a decision by a major customer to vertically integrate the product that the organization supplies, the entrance of a new and powerful competitor, a technology that makes the organization’s product obsolete, or a decision by a customer to move production or sourcing off-shore. Other types of adversity could include a fire that damages production capability or the death of a key member of the organization. Resiliency includes both the ability to foresee or prepare for possible adverse situations and to respond and recover when they do happen.

Part of the strategic planning process should include a risk assessment. The thought process for this assessment is to consider the various potential risks and the likelihood of occurrence. For the highest potential risks or those with the greatest potential impact on the viability of the organization, the planning process should give some thought to either contingency plans or implementing actions beforehand that mitigate any potential impact of the higher-risk potential adversities.

Strategic planning should lay out a course of action and allocate resources to improve the organization’s ability to compete. As such, strategy and the strategic planning process provide focus. Yet, the need for resiliency requires that the organization sometimes explores or experiments with other potential strategies, business models, or courses of action. It is not inconsistent, in fact it is wise, to explore alternatives that might unfold into the future, either because of a change in the environment or due to the discovery of a strategic path that generates higher value. The bottom line: an organization, like an individual, cannot be complacent but must be taking in and processing information and considering the impact and the alternatives in a changing world.

Is your organization working to build its resilience?

Strategic Competencies

Competency or competence is defined as “the ability to do something successfully or efficiently” by the Oxford dictionary. Vocabulary.com defines competency as “the quality of being adequately or well qualified physically and intellectually.” We can think of competency either on the personal level, the skills that a person brings to the tasks they face, or on an organizational level. On the organizational level, competencies are the skills, processes, or knowledge that the organization possesses. In other words, competencies are the things that the organization does exceptionally well. Some organizations are able to describe a long list of competencies or things that they do exceptionally well.

From a strategic perspective, only a very select group of competencies are relevant. These are variously referred to as core competencies, distinctive competencies, or strategic competencies. Some people split hairs in differentiating between what would be termed core, distinctive, or strategic competencies but any difference in the definition of these three terms is inconsequential. Therefore, we can use these three terms interchangeably.

A strategic competency is what sets an organization apart from competitors in their ability to meet customer needs. To qualify as a strategic competency, it must 1) be a skill, process or knowledge that the company possesses, 2) have value to the customer, and 3) be difficult for competitors to duplicate.

A strategic competency must be a skill, process, or knowledge that the organization possesses. It drives the way the organization produces its product or service offering. It is not a piece of equipment, but it could be the knowledge to develop specialized equipment or to use equipment in a specific way.

A strategic competency must develop value for the customer. As stated above, there could be many competencies in an organization but only the ones that develop value for the customer have the potential to be strategic competencies. A manufacturing facility that is skilled in its ability to be clean and organized has a competency, but it is unlikely to be strategic. A culture that values teamwork and collaboration in and of itself is not a strategic competency but could support a competency such as speed of development. A strategic competency enables the organization to better meet particular needs of customers.

A strategic competency must be difficult for competitors to duplicate. If an organization is just one of many companies that possesses a particular skill, it is not a strategic competency. If the skill or knowledge can be quickly reproduced by others, it is not a strategic competency. It must be unique or fairly unique to be a strategic competency.

Strategic competencies are the skills or knowledge that underlie or produce a competitive advantage. Competitive advantage is the ability of an organization to provide a greater value in meeting the needs of customers. In a way, strategic competencies and competitive advantage can be thought of as opposite sides of the same coin. Strategic competencies are the abilities of the organization to produce higher value for the customer; competitive advantage is the perception on the part of the customer of the higher value provided.

One of the key purposes of strategic planning is to identify the most important strategic competency (or competencies) and then to identify and allocate the resources and actions that will further develop them. By doing so, the organization builds the capability to deliver value to the customer and a competitive advantage over other potential suppliers.

Does your organization understand its strategic competencies? Does your plan focus on further developing these strategic competencies?

Culture Trumps Strategy

Business guru Peter Drucker once said, “Culture eats strategy for breakfast!” By this he did not mean that strategy was unimportant but, rather, that culture is a more important determinant of the success of a company than strategy. Culture is the “set of values and attributes that shape how things get done in the organization.” Getting the culture right is a prerequisite for making the strategy work. This is because culture determines our ability to implement.

Any strategy is only as good as its implementation. Thoughts in our head or on paper do not create value. Action creates value if it is the right action. Strategy defines the action but culture energizes the action. The right culture provides the motivation, innovation, and collaboration that provide the energy for implementation. The right culture aligns the organization and its resources with its strategy so that it all works together to achieve the desired results. The best strategy in an organization with a poor culture or a culture that is not aligned with the strategy falls flat because the implementation fails.

On the other hand, a mediocre strategy from an organization that has a great culture can still lead to a very successful business. A great culture is attractive and infectious. Culture alone can draw in loyal customers. Picture a commodity business, perhaps selling gravel. There are not a lot of opportunities to innovate or differentiate the product of gravel. But a culture that delivers excellent customer service and relationships can become a competitive advantage and provide the basis for a successful strategy.

Culture and business strategy are inextricably linked. The best companies get them both right but culture can determine the success or failure of any strategy.

Which one is holding back your organization – strategy or culture? What action are you taking to move forward or develop alignment?