Strategic advantage

2040

There is more vacuity about strategy than about any other topic in business today. But there is a real issue, and a real subject of strategy for the corporation.

No self-respecting business today would be without a strategy. But what is a strategy? The modern student is often confused by the many different uses of the words strategy and strategic.

Probably the commonest sense in which the word strategy is used today is as a synonym for expensive. You can always be sure that this meaning is intended when the term strategy is used in a context which involves advice. Here are some examples of strategy meaning costly. “We are strategy consultants”, “Can we help you with your strategy?” “I advise company x on its strategy”. These can be interpreted respectively as “our fees are very high”, “we hope to send you a large bill” and “company x pays me a lot of money”. Another useful term is “strategy weekend” which means a lot of people eating good food and fine wine at a country house hotel.

Strategy means expensive is also the key to understanding phrases like “strategic investment” and “strategic acquisition”. “This is a strategic investment” should be translated as “we are going to lose a lot of money on this project”. “This is a strategic acquisition” means “we are paying more for this company than it is worth.”

The word strategy is also often used to mean important. You can recognise this in the phrase ‘I’m in strategy” which means ‘I have a large office, large salary, and the ear of the chief executive’. ‘An interesting proposal, but does it have strategic significance?’ can be translated as ‘I am not going to waste my time with things like this’. And when the accountants, the human resources department, and the public relations people explain how they need to be involved in the firm’s strategic planning, what they are saying is that they don’t receive enough attention.

This interpretation of the word strategy has crept in to everyday usage. When I picked up a leaflet the other day which described English language gospel ministry as a truly strategic enterprise, I think what they meant was that they were engaged in an important activity.

Strategy means important is closely related, but not identical to, another meaning of strategy. In this, strategy is what the chief executive does. Thus “Mr A deals with the strategic issues while Ms B is concerned with operations” means “Mr A has a much larger salary and many more share options than Ms B”. Importance is, of course, a relative concept, specific to the environment of the firm. What is important is, by definition, what the important people do. Running the business is not necessarily important.

This kind of usage is exemplified in another meaning of strategy: strategy is about acquisitions and disposals. This interpretation is virtually universal in the City. “We don’t understand company x’s strategy” means “we haven’t heard about (or aren’t hired for) any deals involving company x. “Firm y has no strategy” means it hasn’t bough or sold any other companies recently. This concept is reflected in the common financial market term “corporate activity”, which covers financial restructuring and acquisitions. The opposite of “corporate activity” is “corporate inactivity”, which describes the rest of a company’s operations – making things and encouraging customers to buy them.

So what is strategy, really? The strategic issues facing a company fall into two groups. Corporate strategy is about answering the question “what markets are we (or should we) be in?” Business strategy, or competitive strategy, is about how the company is placed in these markets relative to its competitors.

So the subject of corporate strategy is the matching of the capabilities of the firm to the external environment that it faces. The first stage in considering strategy is to determine what these capabilities are. Firms can add value only if they can do something in a market that others cannot easily replicate. Thus the successful corporation is generally built round – no more than one or two – things that it is uniquely able to do. Sometimes these distinctive capabilities are based on innovation, sometimes on reputation – with customers, suppliers or in the labour market. Sometimes they are based on the structure of a firm’s relationships, its architecture, either with the firm and outside it. When you have analysed your distinctive capabilities, you can identify those markets in which they add value – and those in which they do not.

And this analysis tends to frame your analysis of business unit strategy as well. Should you be positioned up or down market of your principal competitors? This is another questions whose answer depends on your distinctive capabilities. How should you respond to their initiatives – or pricing, in marketing, in product innovation? Answering these questions is based partly on what exactly it is differentiates you from them – distinctive capabilities again – and partly on the increasingly extensive toolbox for understanding the interactions between small groups of competitors.

There is more vacuity about strategy than about any other topic in business today. (I wrote that down but I’m not sure I believe it – there is a lot of vacuity about). But there is a real issue, and a real subject of strategy for the corporation. And because strategy is based on distinctive capabilities, there are no generic strategies. There really are many interpretations of strategy. Strategy is what is right for you.

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