This page is a work in progress, part of a multi-year effort to capture and share learnings, frameworks, tools, and processes to run organizations. See Running Organizations for more.
What Is Strategy?
Strategy is a set of choices an organization commits to over the next 2-3 years to embody a mission, a vision, and a set of core values. Every strategy has tactics/activities planned against it, usually in one-year (or longer) increments, and also includes corresponding Annual or Quarterly Goals.
"Strategy is an integrated set of choices that uniquely positions the firm in its industry so as to create sustainable advantage and superior value relative to the competition." (Source: Playing to Win)
Strategy Is Using Limited Resources to Win
The strategy sets the direction for the organization’s growth. Strategy is also about survival. The fewer resources an organization has, the more unified and focused the strategy needs to be. The more resources an organization has, the looser and less coordinated a strategy needs to be.
"The organization needs to decide what it's going to do and what it's not going to do because it has limited resources. The scarcer the resources, the more clearly defined the strategy needs to be...the only reason companies need a strategy is that they have very limited resources." - Jay R. Galbraith (Source: Designing Organizations)
Strategy Is About Trade-Offs
The heart of strategy is making trade-offs. If a strategy doesn't involve making trade-offs and passing up opportunities, it's no strategy at all. A strategy that tries to accomplish everything is straddling. Straddelers don't grow.
"Strategy is scarcity's child and to have a strategy, rather than vague aspirations, is to choose one path and eschew others." - Richard Rumelt (Source: Good Strategy, Bad Strategy)
"Peanut butter syndrome" is a visual metaphor that I see everywhere in organizational strategy. It's explained in Scaling Up Excellence: "A few speeches and workshops and wiping hands clean is the 'peanut butter syndrome' - a thin layer of investment spread across the whole company."
Business case studies often laud organizations for the strategic choices they made, but little coverage is given to the trade-offs they made along the way. Every successful strategy includes missed opportunities. Being clear about what opportunities you'll forgo is key to developing a real strategy.
Questions About Tradeoffs
A good litmus test for any kind of strategic choice is covered in the book The Road Less Stupid. If you can't articulate the many downsides of your strategic direction, you likely don't have a strategy at all:
What is the upside? We are usually experts at this one.
What is the downside? What could go wrong? We rarely can do this one by ourselves because we are irrationally emotional and optimistic about the thing we are deciding about.
Can I live with the downside? Only the pros bother to think about this one, which is why their track record of dumb tax is so much smaller than the track record of the rest of us mortals. (Source: The Road Less Stupid)
Strategy Links Vision, Mission & Purpose to Action
A great mission and vision is a strategy half-completed. Without a clear mission, strategy is entirely up for debate. Without a clear vision, strategy is a set of endless possibilities, anchored by nothing more than vague worldly aspirations.
"Strategy concerns the evolution of the basic mission, whereas operational goals reflect the short-run tactical survival issues that the organization identifies. Thus, when a company gets into basic strategy discussions, it is usually trying to assess in a more fundamental way the relationship between mission and operational goals." - Edgar H. Schein (Source: Organizational Culture and Leadership)
Strategy Makes Vision Feasible
Strategy makes your vision not just clearer but feasible in the minds of everyone in the organization.
"Feasibility also means that a vision is grounded in a clear and rational understanding of the organization, its market environment and competitive trends...Strategy provides both a logic and a first level of detail to show how a vision can be accomplished." - John P. Kotter (Source: Leading Change)
Purpose, mission, and vision can take you a long way, but strategy helps you win in a competitive business environment in which other organizations are trying to accomplish some of the same things.
"As a collective enterprise, a business organization needs to act cohesively. It may have a very clear vision or sense of purpose, and for some types of organization that can suffice to provide the cohesion needed. However, it is unlikely to suffice for a business. A business is a collective enterprise that has to prosper in a competitive environment." - Stephen Bungay (Source: The Art of Action)
Strategy Is Committing to Difference
Different Wins
Having a strategy is not about being "the best" in a market. The "best" is always subjective. A great strategy is a commitment to being different from the competition. That means offering unique value that can’t be matched by competitors.
"Growth" Is Not Strategy
"Hyper-growth," and "growth hacking" is not a strategy. Inorganic attempts to grow either fail to produce lasting results (i.e. "increase ad spend") or compromise a strategic position (i.e. "add more of our competitors' features") by trying to be all-things-to-all-people.
"The approach to growth that works is deepening a strategic position, rather than broadening and compromising it. Deepening a strategy means to make the company's activity more distinctive, strengthening fit, and communicating the strategy better to customers who should value it." - Michael Porter (Source: On Competiton)
"Low Cost" Is Probably Not Your Strategy
Low cost strategies are viable strategies, but generally, only one organization can be the "low cost provider," in a space. There are unlimited differentiation-based strategies, but only one low-cost strategy.
Similarly, trying to "out-Lean" organizations usually isn't the best strategy. Organizations should always look to cut costs in areas that don't lead to their excellence and differentiation, but basing a Strategy around superior operational efficiency is shallow.
Strategy Is Capabilities Fit
Strategy combines your vision and purpose together with a specific playing field, the capabilities you'll build or strengthen, and the necessary management systems to implement those four elements. Creating that "fit" is critical to executing strategy.
"Fit is critical. Fit is the whole system. Fit makes imitation difficult because a competitor would have to imitate the entire system, not just the "positioning" or a few activities." - Michael Porter (Source: On Competiton)
When you have Fit between your Capabilities, you have a Strategy that a competitor would be hard-pressed to copy. Though competitors can match many of your capabilities, your positioning, and even your vision and mission, they can't easily or cheaply copy the entire Fit you're seeking to create.
How Much Strategy Is Enough Strategy?
How Much Do You Know, Right Now?
How much about the future do you feel confident in? If your market and your competition are well-known and slow to change, you know significantly more than the average startup. The more you're confident in, the more strategic analysis you can do, the more strategic choices you can afford to make, and the more central planning you can use to confidently execute.
The More Variables, The Less Strategy
The less you know about the market, the competition, and the customer, the less that developing a strategy will be a good use of your resources. Startups, and any organization that is pre-product market fit, won't benefit from a lot of up-front strategy work.
Iterate As You Go
Strategy and operations work together in a feedback loop. As you operate, you naturally gain more knowledge about the customer, the market, and the competition. Those new inputs should help you evolve your strategy over time.
In well-understood markets, landscapes shift, including how customers buy, the capabilities of competitors, and the technology at play. Strategy can't be stagnant as the landscape shifts.
"There is no checklist, whereby you create and articulate aspirations, then move on to where-to-play and how-to-win choices, then consider capabilities. Rather, strategy is an iterative process in which all of the moving parts influence one another and must be taken into account together." (Source: Playing to Win)
Dialogue is an important tool in creating strategy. Strategy should be a team effort. If you're growing fast, each piece in your operating rhythm needs to be sped up, and you should revisit strategy more frequently.
Elements of Strategy
Five Elements
A.G. Lafley and Roger L Martin offer a simple strategy breakdown in their book Playing to Win. The approach includes five areas:
- A Winning Aspiration - You've defined this in your Mission (what you've set out to achieve) and Vision (what it looks like to win).
- Where to Play - The market you're going after, including the core products/services you'll sell, the geographies you'll sell into, the segments of buyers you'll target, and the channels you use to reach them. They call this "the playing field."
- It's also known as "Arenas" in other models.
- How to Win - Your specific choices for winning. How will you create unique value and deliver it in a way that's different from your competition?
- "How to win" is mostly closed associated with "Vehicles" in other models.
- Core Capabilities - What Capabilities do you need to develop or advance in order to win?
- Capabilities are often referred to as "Differentiators" in other models.
- Management Systems - What systems and measures do you need to enable the Capabilities you've chosen? These management systems are areas that will be covered in the rest of this project, like Operating Rhythm, Operations Communication, Operations Metrics, and more.
In this section, we'll dive into Where to Play, How to Win, and Capabilities.
Where You'll Play
Where to Play is about making choices around Product Types, Geographies, Customer Segments, and Distribution Channels.
A great tool for mapping your many possible choices is an Adjacency Map, which I'll cover in the next section.
How You'll Win
Two Ways: Differentiation or Low Costs
There are two general ways to win in a market - through differentiation or through low costs (internal cost structure or low pricing). Most organizations will need to win through differentiation.
Keys to Differentiation
The key to differentiation is not analyzing yourself against competitors and seeing what competitors aren't doing, but by focusing on the dimensions that customers care about, first.
To be able to differentiate effectively, organizations need:
- A strong understanding of customers
- Brand-building capability
- Commitment to innovation
Core Capabilities
The "How" Behind Your Products
A capability is a combination of the "people, processes, technologies, and organization that allows you to deliver your intended outcome" (Source: Strategy That Works).
Capabilities are not products or services, they're the "how" behind your products and services. The "intended outcome" is your vision & mission.
3-6 Differentiating Capabilities
To win, you need 3-6 core differentiating capabilities that fit together coherently. "Core" means they're critical to delivering on your vision and mission. You may have many capabilities, but defining the Core Capabilities is key to generating strategy.
Core Capability Examples
Here are a few more Capabilities "system" examples from the book Strategy That Works.
- Retail interface design - Amazon creates and maintains digital pages that are elegant, seamless, and full of detail and have highly sophisticated search, comment, linking, and online payment features.
- Back-end supply-chain management - The company handles massive inventories through networks of specialized warehouses and the distribution networks of many partners, vendors, and suppliers.
- Rapid and effective online merchandising - A hidden source of value involves Amazon's ability to identify attractive products and feature them in the most appropriate places on its site.
- Customer-relationship management - Amazon uses data from past interactions to notify customers of potential affinities with other products and to solve dissatisfaction issues before they occur.
- Advanced technological innovation - This capability provides a platform from which the company can offer its one-click instant-ordering system, its Kindle e-book offering, and its cloud computing services - among many others.
- Deep understanding of how customers live at home : IKEA applies this capability to a variety of design, production, and retail practices.
- Price-conscious and stylish product design: IKEA integrates customer engagement, supply-chain efficiency, and price considerations into the design itself.
- Efficient, scalable, and sustainable operations. IKEA has developed its own distinctive operational capability integrating supply chain, manufacturing, and retail practices.
- Customer-focused retail design: The company knows how to create a distinctive combination of immersive and open-warehouse environments that provide engagement, inspiration and a distinctive 'day out' shopping experience where people can comfortably spend time choosing the things they live with every day.
- Consumer-responsive innovation: Haier rapidly tailors products and (increasingly) services for local markets and specific customer needs.
- Operational excellence: The company is geared to produce high-quality products at very low cost through continuous improvement and internal competition.
- Local distribution networks: This capability was honed in China's highly decentralized value chain and is used in emerging markets and other locales.
- On-demand production and delivery: Haier incorporates a 'pull' oriented distribution system and zero-inventory logistics, allowing immense variety at minimal cost.
- Deep customer insight: Inditex analyzes trendsetters, fashion shows, and market reaction to its own products to design clothes that appeal to its target customers.
- Fast, fashion-forward design of products: The company rapidly translates consumer insights, including those from store observations, into apparel design, incorporating manufacturability.
- Rapid-response manufacturing and operations: Inditex moves products from design to stores in as little as two weeks and with highly variable capacity...
- Globally consistent and pervasive branding: The company approaches branding so that everything, from products to locations to merchandising to staffing, is structured to offer a trendy, high-quality experience. This approach allows the company to increase traffic in its stores, provides an on-trend environment, collect more customer feedback, and accentuate sales.
- Rapid, highly successful flavor innovation: This capability, particularly the innovation of new varieties, yields snack foods resonant with many diverse local markets and changing consumer tastes.
- Development of local consumer and retail marketing programs: Frito-Lay has an exceptional ability to monitor customer and market data and adapt its merchandising mixes and promotions accordingly.
- Direct store delivery: Its well-designed DSD system, skilled staff and technological prowess enables tailoring assortments to each store, providing unique flexibility, productivity, and influence over the shelf.
- Consistent manufacturing and continuous improvement: Frito-Lay products continually stand out in taste, freshness, and perceived value.
Developing Strategy
Market Analysis Tools To Consider
There are a number of strategy frameworks and analysis tools you can use to build a strategy. Strategy is an act of creation and these tools are for analysis, but they can be helpful inputs to thinking about strategy.
I've left off strategy classics like the Ansoff Growth Matrix, Porter's Five Forces, the BCG Matrix, and PESTLE/PEST/STEER/STEEP/STEEPLE, as I haven't found any of them to be particularly helpful for small-to-medium sized organizations.
Analysis Tools
- You are already in + try to add in data on how you are doing in each (i.e. market share, profitability, or just red/yellow/green)
- You are actively considering or have rejected in the past
- Might take two or three strategic moves to reach
- Your competitors have and you don't
- You could create by technology or other developments
Making Good Strategy Decisions
Leveraging Strengths
Before solidifying your Core Capabilities and overall Strategy, let's explore the keys to good organizational strategy.
A model by Gerald Adolph and Kim David Greenwood shows three ways to grow, starting from the Core of your business, and moving outward to developing new capabilities. This is a great exercise to follow a Definition of The Core and an Adjacency Map.
- In-market growth: seeking out new growth opportunities in your existing core market...among your existing customers. (i.e. Amazon's development of Prime).
- Near-market growth: expansion into adjacent markets, but only those where your existing capabilities system will make a difference (i.e. Tesla making batteries for homes and other buildings)
- Growth through capability development: evolutionary extension of your capabilities system, building one capability from another. This is sometimes known as 'capabilities chaining,' because each new form of proficiency, while fitting into your capabilities system, enables you to establish a chain of new businesses that in turn spur the development of other capabilities.
If you start by leveraging your existing Capabilities rather than defaulting to building or acquiring new ones, you’ll have a higher probability of success.
A strategy that leverages an organization's existing Core Capabilities is often called an "Edge Strategy," or "Adjacency Strategy." Edge Strategies are covered at length in the book Edge Strategy: A New Mindset for Profitable Growth and Adjacencies are covered in the book Profit From The Core.
"The most successful sustained growth companies almost always follow the pattern of expanding in a regular and organized way into a series of adjacencies around one or two strong cores. The pattern resembles the growth rings of a tree, emanating out from the center, expanding and reinforcing the core." (Source: Profit From The Core)
An Adjacency of What?
Most organizations have multiple products or services and customer segments they're going after. Some have multiple geographies they're targeting. Understanding what the core of your business is is the first step in exploring adjacencies to grow from. The "Core" here, are the Capabilities you have that define the essence of your mission.
"We define the core business as that set of products, capabilities, customers, channels, and geographies that defines the essence of what the company is or aspires to be to achieve its growth mission - that is, to grow its revenue sustainably and profitably." (Source: Profit From The Core)
Adjacencies Are Less Risky
Edge/Adjacency strategies are less risky because they do not require that you build something entirely from scratch and step into a new space that you're unfamiliar with.
"The average 'adjacency move' has a success rate, we find, of 20 to 25 percent. Adjacency moves off a strong core have nearly twice the success rate. And such moves, if 'very close' to a well-defined core, can go even higher." (Source: Profit From The Core)
Finding Opportunity At The Edge
According to Alan Lewis & Dan McKone, there are three key Edges in any organization.
- Product Edges that are often add-ons, free services, areas where you could extend an existing service or product, or simple modifications to an already existing base offering.
- Journey Edges along the customer journey where you're not currently providing value. This is "verticalizing." This is not as simple as leveraging Product Edges, as it may require you get into business in areas you've never been in before. This is where M&A strategy can make sense.
- Enterprise Edges at the edge of your internal organization. Look for less visible options like selling usage rights, by-products of your product process like data or material, or spare capacity that you're not utilizing. Amazon's AWS is an example of an Enterprise Edge that paid off.
Upselling options, Product Bundling, Customization (and consulting), and Self-Service strategies (i.e. Unbundling) are other areas you can probe to find Capabilities that you didn't have before.
Choosing Capabilities & Tactics
This is a process for mapping Capabilities that I've adapted from Shannon Susko's The 3HAG Way:
Write Down Market Capabilities
- Gather your Leadership Team and ideate on the most critical capabilities to compete in the market you're competing in. These are not necessarily your own Capabilities or those of your competitors, but generic attributes that matter to the customer.
- Whiteboarding is a great way to create a big list, quickly. Bucket all of the Capabilities ideas and then work with the Team to narrow that list to the 6-10 most critical.
Score Your Org and Your Competitors
Discuss Capabilities
Activity System Mind Map
The Activity System Map is a Michael Porter tool that maps your Core Capabilities and the key activities that support those Capabilities. This is a tool you can continue to update and refine over time to visualize your strategy, but for this exercise, creating an initial map is what we're going for. This will help make your strategy real and bring execution into the minds of your team members.
Communicating Strategy
The Strategy must be communicated to all levels of an organization. A long-form document that explains the strategy and specifically, the thinking and rationale that went into the key decisions, is helpful. The goal is to help people understand the strategy and see how it can be put into action.
There are lots of ways to communicate strategy, including Scaling Up's "7 Strata of Strategy," but I feel that the most critical component of communicating strategy is coverage of your 3-5 Differentiating Capabilities. A well-written Strategy Statement can do just that.
Writing a Strategy Statement
What's a Strategy Statement?
A Strategy Statement is a one or two-paragraph statement that reiterates the organization’s purpose, the market context, and how you'll compete in that market.
- Who your customers are
- What your products/services are
- What you do that's different (Processes/Activities and/or 3-5 Core Capabilities)
- What enables you to do that (Processes/Activities and/or 3-5 Core Capabilities)
Components of a Good Statement
Here are the components of a good Strategy Statement from the book The Strategist:
Reasonably short and parsimonious
Specific
States what the company does and why it matters in a way that anyone can summarize without having to quote it literally
Avoids jargon like 'best of breed' 'best in class' or vague words like superior, expert, empowered
People easily recognize it’s you
Check Your Statement
Read your Strategy Statement aloud and make sure it meets these three criteria: (Source: Playing to Win)
Feasibility: Is this a realistic activity system to build? How much of it is currently in place, and how much would you have to create? For the capabilities you would need to build, is it affordable to do so? If unfeasible, reconsider where to play and how to win
Distinctive: Is it distinctive? Is it similar to or different from competitors' systems? Not all elements need to be unique or impossible to replicate - it's the combination of capabilities that must be inimitable.
Defensible: Can it be easily replicated or overcome? If not, good!
Strategy Statement Examples
Here are three examples from the book The Strategist:
- "Is dedicated to perfecting the travel experience through continuous innovation and the highest standards of hospitality. From elegant surroundings of the finest quality, to caring, highly personalized 24-hour service, embodies a true home away from home for those who know and appreciate the best. The deeply instilled _ culture is personified in its employees - people who share a single focus and are inspired to offer great service."Â
- "Founded in 1960, has followed a targeted course of expansion, opening hotels in major city centres and desirable resort destinations around the world. Currently with 75 hotels in 31 countries, and more than 31 properties under development, _ will continue to lead the hospitality industry with innovative enhancements, making business travel easier and leisure travel more rewarding."
- "Ink for Less aspires to be the largest and most profitable professional ink refilling business by providing
- The best and latest ink refill quality and service
- At reasonable prices
- To our quality conscious but price-sensitive individual computer users and small and medium scale business and government institutions
- Through conveniently-located ink refilling stations throughout the major cities and key towns in the Philippines and the rest of Asia."
- "To be the prime source of 24-hour-a-day vibrant sports news targeting an audience of passionate, young, male Brazilian sports fans by:
- Employing 300 sports multi-task journalists to provide exclusive content;
- Using the most current technology to deliver content across the widest number of media platforms (print, web, mobile, WebTV and web radio)
- And using compelling design to enahnce all Lance! products;
- All under a powerful core brand, Lance!
- As a means to become one of the most profitable Brazilian media groups as measured by ROI"