Tag: Strategic Planning

A statement of business strategy describes where and how the firm will compete in order to accomplish its objectives, meet customer needs, and obtain a superior financial return. Strategy sets the boundaries around future decisions, describing which business opportunities should be pursued, how to invest resources, which skills to develop, who to hire, etc. The statement of strategy needs to be clear, specific, and concise enough to say yes to the preferred choices that are consistent with the strategy and no to the choices that are distractions from the strategy. The statement of strategy must be useful to all decision makers within the firm to keep everyone and everything operating within the direction defined by the business strategy.

Too often firms are either unable or unwilling to state a clear, specific, and concise strategy. Instead we find what purports to be strategy but simply consists of a bunch of buzzwords, or an agglomeration of goals and objectives, a very general description of mission, or a set of actions. Such a weak statement of strategy does not serve its purpose of guiding the future decisions of the firm or of defining where and how the firm will compete.

“Our differentiating value-added strategy is transformational change to reach a new paradigm of performance.” A collection of buzzwords does not define a strategy because it can be interpreted to be about anything. It does not provide direction for decision-makers.

“Our strategy is to grow top-line revenue 20% per year for the next five years.” Goals and objectives are not the strategy but are a prerequisite for strategy. The goals and objectives define where the firm wants to go but not how to get there. The strategy statement is intended define the path and drive the firm to a course of action to achieve the goals and objectives.

“Our strategy is to provide metal stampings and other metal components and fabrications.” A mission statement is not a business strategy. It simply describes what the firm is but not where and how the firm will compete. It does provide a specific definition of how the firm will develop its competitive advantage, so it cannot guide decisions as the firm evolves.

“Our strategy is to increase our machine shop capacity.” An action plan is not a statement of strategy. The action plan is the implementation of strategy, the specific things that will build the competitive advantage defined in the business strategy.

All of the examples above lack the clarity and specificity required to guide decisions by the organization. On the other hand a statement such as “We provide high quality, large, flat, injection-molded parts to the high-end, low-volume business and medical equipment market” provides a clear direction for decisions. The members of the organization know where and how they compete and what will be the expectations of their customers. The decisions that are made throughout the organization are then consistent with this defined strategy.

What are some examples of both good and bad strategy statements that you have seen?

Does your organization have a clear, specific, and concise strategy?

Whether reviewing business strategy and current performance, considering entering a new market, or evaluating an acquisition or investment, understanding market attractiveness is an important step. Market attractiveness analysis provides a view of profit potential based on an examination of the underlying market factors. While the operating performance of a business may determine the actual level of profitability, market attractiveness sets the boundaries around profitability potential. The best performing company in a market with low attractiveness can only achieve a mediocre return. A company operating in a market that is highly attractive has the potential for high returns, given a strong strategy and effective implementation.

An understanding of market attractiveness is an essential part of the situation analysis in strategic planning, the step where we examine the business environment and the company’s position as the foundation for the business strategy. In making choices about the future direction of a business, market attractiveness is key. Market attractiveness is also a critical part of valuing an existing business. A common pitfall of investors is solely relying on past financial performance as a predictor of the future without ever looking at the underlying market attractiveness.

A recent consulting project provides a good illustration of the value of understanding market attractiveness. The client was interested in vertically integrating into a market (call it Mkt. A) that they saw growing. They asked our consulting firm to help them understand this market and guide them through planning and implementing the steps necessary for market entry. During our analysis we realized that Mkt. A was not particularly attractive but there was an adjacent market space, Mkt. B, that was much more attractive. Mkt. A was relatively unstructured; it was difficult to clearly define customers and competitors, but there were a lot of competitors. The customers were generally small, poorly-capitalized installers. The customers’ customers were open to a wide variety of substitute products. The buying factors were dominated by price. All of this meant that players in the market were under constant price pressure and margins were likely to be low. The adjacent Mkt. B, on the other hand, was highly structured and stable. The customers were capable and well-financed. There were only two viable competitors. The buying factors were predominantly product specifications and quality. While Mkt. A was larger and growing more rapidly, the profit potential in Mkt. B was greater. It was going to take a little more work for the client in terms of product development and manufacturing process improvement, but they were capable and the return on investment was likely to be much greater. Our analysis convinced the client to re-focus on the more attractive market and laid out a plan for market entry into Mkt. B.

While market size and market growth are often the first things that people think of in assessing market attractiveness, there are other more important considerations. The relative importance of various factors will be different for each company based on its vision, goals, and objectives. If the vision is to become a billion-dollar company, market size may be critical. On the other hand, for a company in the 95% of businesses that are less than $10 million in revenue, there may be many other factors more important than market size as it considers the means to maximizing return on investment.

In general terms, the factors of market attractiveness can be grouped into three overlapping areas: differentiation potential, pricing potential, and growth potential. Within each of these three areas are a variety of factors. The following might be some of the factors that determine market attractiveness.

Differentiation potential – The ability to differentiate, that is, to provide a unique value to customers, is a key factor in driving the potential profitability of a business. Certain elements of market attractiveness contribute to the ability to differentiate, and therefore to the potential return.

• Customer factors – Who are the customers? Are they identifiable? How definable are their needs or buying factors? How complex are their needs? (Complex might be good or bad.) Are there opportunities to develop unique product or service offerings to meet customer needs? How well are their needs currently being met?
• Technology factors – What sort of technology is involved in the product or in the production process? How mature is the technology? What opportunities are there for developing unique technology, either in product or process? Are there opportunities to develop unique and defendable intellectual property?

Pricing potential – Pricing potential is partially dependent upon the ability to differentiate but the industry structure and competitive environment determine the intensity of competition and the pressure on pricing.

• Industry structure factors – How much leverage do buyers have in price negotiations? Are there many choices available to them, either in the number of suppliers or in alternative or substitute products? How much leverage do suppliers have in this industry? Can suppliers squeeze margins of the competitors?
• Competitive factors – Who are competitors in this market? Are they identifiable? What are their capabilities? How intense is the competition? How easy is it for new entrants to come into the market?

Growth potential – Market size and growth is relevant but the most important part of market and growth is understanding the specific market segments that are to be addressed.

• Market size – What is the market size? What is the growth rate? How will the market size and growth rate change over time?
• Market factors – What factors are the drivers of the market? What are the growth opportunities? What are the risks regarding market size and growth? What are the segments or potential segments of the market?

Each particular business has its own market idiosyncrasies that determine market attractiveness. The challenge is to look beyond the simple and easy factors to develop a clear understanding of the structure of the market and the factors that will present either restraints on sales revenue and profitability or opportunities that can be exploited through a well-crafted strategy and action plan.

Do you understand the relative attractiveness of the market in which you operate? Are there opportunities to focus on more attractive market segments?

One of the potential tools for the situation analysis in strategic planning is the PEST analysis. No, this is not looking for insects and it is not referring to the competitors that make your life difficult. PEST analysis is shorthand for Political, Economic, Social and Technological analysis. It is often a part of the market and competitive environment analysis in a strategic planning process.

The big idea in PEST analysis is that a firm and its leaders should consistently have an outer focus that scans the horizon and remains aware of the trends and factors that are or may be impacting the business now or in the future. The strategic planning process provides a reminder to look at the big picture factors that might affect the market or business conditions and incorporate the potential effect and necessary actions related to those macro-factors. While often referred to under the acronym of PEST, this analysis may also extend into other areas that might affect the market or business such as legal, environmental, ethical, etc. although these can often be included under the primary PEST categories.

Too often firms can operate with a set of blinders, becoming too complacent in believing that nothing can change the way that the market has traditionally operated or the way that customers have functioned. Another risk is the result of being unwilling to face reality; we might see the changes but refuse to believe them. The PEST factors are not always threats; they can also present opportunities to take advantage of a changing situation to gain an advantage in the market.

Political factors can include rules and regulations that might change the way that business can operate as well as international issues. These might include things such as:

• Employment law
• Environmental regulations
• Trade regulations
• Tax policies
• Governmental leadership
• Political stability
• International relations

Economic factors can include the macroeconomic environment that might affect the buying power of potential customers or the firm’s cost of capital. These might include things such as:

• Inflation rates
• Interest rates
• Economic growth
• Disposable income
• Unemployment level
• Foreign exchange rates

Social factors include demographic and cultural aspects that affect the external environment. They affect the way that people think and operate, impacting both buying decisions and employment practices. Social factors can be a broad range of things that might include:

• Age distribution or demographics
• Population growth
• Lifestyle trends
• Consumer attitudes and opinions
• Consumer buying patterns
• Fashion and role models
• Ethnic/religious factors
• Ethical issues

Technological factors are all of the changes of technology on a global basis. These can change a market or even obsolete a market. They can change the power or position of competitors and potential customers. Technology can affect any point in the value chain with the potential, for example, of eliminating the need for a customer’s product or services, thus impacting down the chain. Technological factors can include things such as:

• Research and development
• Trends in global technological advancements
• Associated or substitutionary technologies
• Legislation in technological fields
• Patents
• Licensing
• Consumer preferences
• Automation and manufacturing technologies

No doubt you can think of examples where the failure to comprehend or appreciate such PEST factors have eliminated or greatly impacted businesses, e.g., Google’s failure in China due to underestimating the political challenges, countless companies that have disappeared due to lower-priced imports, Blockbuster’s failure to see the shift to on-demand films, or the many phone and tech device manufacturers that missed the integrating of technologies in the iPhone. Admittedly, some of these factors can seem a greater risk to large, international companies but no firm can afford to ignore the potential threats or opportunities that might surface in the market environment that affects them.

Do you have an outer focus that is aware of threats and opportunities on the horizon?

There are five general market or competitive forces that affect every business to some degree. These are often called Porter’s Five Forces because they were popularized in Michael E. Porter’s book, Competitive Strategy, published in 1980. The five forces result from industry structure and have an effect on the performance of a business and the attractiveness of a market. They describe the pressure on the industry participants and the impact on profitability performance of a company. The five forces are as follows:

• Bargaining Power of Buyers
• Bargaining Power of Suppliers
• Threat of New Entrants
• Threat of Substitution
• Intensity of Rivalry among Existing Competitors

The strength and effect of each of the forces varies depending upon the industry structure. Most businesses will be strongly affected by at least one of these forces. Very few businesses are affected by all five. While the strength of the forces is largely a function of the industry structure, industry participants can often take some action to mitigate the effect of the forces. Understanding the industry structure and resultant competitive forces is an important part of the strategic analysis and planning process. In industries where the combination of these forces are high, the pressure limits the achievable profitability and returns, making the industry and the industry participants less attractive or making the business more challenging for existing participants.

 

The bargaining power of buyers is mainly dependent upon the size and strength of the buyers. Large and strong buyers that are able to easily switch suppliers or backward integrate have strong leverage in dictating price and terms. This is especially true when the product or service is more of a commodity rather than a differentiated product.

An obvious example of this situation is the automotive industry where the OEM’s have great strength, especially relative to some of the smaller suppliers of common products. They are often able to dictate pricing and drive margins down. When possible, the best defense in situations of high buyer leverage is to create differentiation in some way that provides more power to the seller or drive up switching costs. In some cases the strategic selection of customers can keep a supplier out of the worst scenarios of buyer leverage.

The bargaining power of suppliers is strong when they have unique materials, technology, or other means to control the industry participants that rely upon them. Situations where there are few qualified suppliers or where there is strong differentiation of the supplier or high switching cost and where the industry participant is small relative to the supplier are often instances where the supplier has high leverage.

Intel would be a good example where technology and brand power gives them a strong position relative to computer manufacturers. For many years Gore-Tex controlled the best material for water-proof active wear and could control the market. Another less obvious example is the position of a labor though a union such as the UAW. Examples of how companies position themselves by location decisions or design decisions to move away from high-leverage suppliers are common.

The threat of new entrants is largely a function of not having factors such as economy of scale, product differentiation or the ability to develop proprietary technology, switching costs, or strong brands. In industries that are largely commodities and where it is easy to start up a new participant, the continual flow or even the threat of new entrants drives down pricing and profits. Buyers use this leverage in price negotiations or sourcing decisions.

The restaurant business is an example where local businesses come and go every day. Commodity businesses like sand, stone, etc. and manufacturing businesses like machine shops or plastic injection molding are pressured by the ease of new entrants. One obvious solution is to build differentiation or switching costs by developing or adding technology or unique capabilities.

The threat of substitution is an often overlooked potential pressure because substitution can come from left field. Where threat of entry is new participants coming into an existing industry, the threat of substitution can partially or completely replace an existing industry. This is best demonstrated with some examples, such as high-fructose corn syrup replacing sugar refiners, fractional aircraft ownership replacing aircraft charters, electronic music files replacing the record and CD business, etc. Substitution can also include instances where a downstream product or industry is re-engineered to eliminate the need for certain products or services, with the example of video stores. The defense here is more a matter of being aware of the world outside of one’s particular products and industry. If the railroad industry had thought of themselves as being in the transportation business rather than the railroad business they might have retained their value by adapting rather than being replaced by substitute means of transport.

The intensity of rivalry among existing competitors is the area with which most industry participants are familiar. Competitive rivalry is a result of numerous competitors, slow industry growth, lack of differentiation, excess industry capacity, high strategic stakes, or high exit barriers. Most of the causes of competitive rivalry are out of the control of an individual industry participant. The one defense is differentiation either through technology or through unique capabilities or relationships. Apple is an example of a company that generally stays out of the competitive fray by continually differentiating itself and its products.

Analyzing the industry structure is a necessary step in understanding the value and profit potential of a business. This analysis can identify threats and opportunities. It sets the context for strategy decisions. Profitability and return on investment can be optimized by identifying market or industry opportunities that face lower competitive forces.

What are the pressures facing your industry and business? How can you mitigate the risks and develop opportunities?