Strategy of Business
Chapter 1- what is strategy?
Summary of chapter
Author asserts that not all business decision are strategic, where decisions can consider as strategic if they involve consciously doing something differently from competitors and if that difference results in a sustainable advantages. If the business cannot imitate or difficult to do so, then business can considered as sustainable. Activities which increase productivity by making existing methods more efficient “operational efficiency” are not strategic since they can be easily copied by others. One of the factor that renders strategies hard to imitate is they are the result of a complex interaction between different activities. As well, any company that concentrates just on operational efficiency will lose their competitive advantage. Author claims that strategic decision-making requires managers to decide what.
Operational Effectiveness is not strategy:
Companies that depend on imitate other market position and strategies and then applying on their structure they will down the path of mutually destructive competition. A Company can do better than rivals if it can create a difference that it can preserve, through delivering greater value to customer or create comparable value at a lower cost. That means all differences between companies in cost price derive from many of activities required to create, produce, sell and deliver their product and service to final customers. If companies follow those methods they can be Operational Effectiveness “OE” ” means performing similar activities better that rivals perform them“, whereas strategic positioning means ” performing different activities from rivals or performing similar activities in different way ” OE refer to any number of practices that allows a company to better utilize its input by:
- Reducing defects in products.
- Developing better products faster.
OE is differ from firm to another depends on firm itself, if it is exploit its source in efficiency way will reflect on its competition on market share and then enhance its profit. Although of manager that preoccupy with improve OE by using such tools as TOM, time- based competition, benchmarking.., in order to eliminate inefficiencies, improve customer satisfaction and achieve best practice, yet OE is not sufficient for two reasons:
1- Rapid diffusion of best practices è imitates “management techniques, new technologies…”
2- Subtle and insidious è the more benchmarking companies do, the more they look alike.
So, companies that depend on imitate other, will races down identical paths and then will be out of race of competition cycle. Managers, who let OE supplant strategy, will their resulting is zero-sum competition.
Strategy rests on unique activities:
Competitive strategy is about being different; it means deliberately choosing a different set of activities to deliver a unique mix of value. Strategy is – in the activities term – choosing to perform activities differently or to perform different activities that rivals. Firms should have clear strategic positioning that it follow until they reach targets such as profit, customer satisfaction.., and it should chose to perform activities differently from its rivals. IKEA, for example go after service customers who happy to trade off service for cost. Where IKEA designs its own low cost, modular and it display every product in sells in showroom. Also IKEA offers a number of extra services that its competitor do not, all those service differentiate IKEA from other. Strategic position emerges from three distinct sources:
- Variety-based positioning. Which based on producing a subset of an industry’s product or service, on other word, it is based on the choice of product or service varieties rather than customer segments. One of its feature is that is makes economic sense when a firm can best produce products which use distinctive sets of activities.
- Needs-based positioning. Which harmony a segment of customers, where it arises when there are groups of customers with differing needs, and when a tailored set of activities can serve those needs best. Variant of needs-based positioning arises when the same customer has different needs on different occasions or for different types of transaction, for example may have different needs when traveling on business then when traveling for pleasure. In this source manager can not conceive all customer needs and depend just on intuitive.
- Access-based positioning. On other word it about segment of customer who are accessible in different ways. Although their needs are similar to those of other customers, the best configuration of activities to reach then is different. This source consider as less well understood that the other two bases.
Whatever the basis variety, needs and access positioning requires a tailored of activities because it always a function of differences on the supply chain side. But that not mean positing is demand on customer side, where variety and access positioning do not rely on any customer difference. Finally, strategy defines -through defined positioning- is the creation of a unique and valuable position, involving a different set of activities. The essence of strategic positioning is to choose activities that are different from rivals, where if the same set of activities were best to produce all varieties, meet all needs and access all customers, then the company could easily shift among them and OE would determine performance.
A sustainable strategic position requires trade-off:
Strategic position is not sustainable unless there is trade-off with other positions. Choosing a unique position is not enough to guarantee a sustainable advantage, where a valuable position will attract imitation by incumbents, who like to copy it. Trade-off means that more of one thing necessitates less of another, and create the need for choice and protect against repositions and straddlers, trade-off occur when activities are incompatible. Positioning trade-offs are pervasive in competition and essential to strategy because:
- Positioning trade-offs create the need for choice and purposefully limit what a company offers.
- They deter straddling or repositioning.
Neutrogena soap for example, they are variety- based positioning with a large detail force calling on dermatologists, Neutrogena’s marketing strategy looks more like a drug company’s than a soap maker’s, to reinforce its positioning, Neutrogena originally focused its distribution on drugstores and avoided price promotions. It its original positioning, Neutrogena made a whole raft of trade-off like those trade-off that protected the company from imitations. Trade-off arises for three reasons:
- inconsistencies in image or reputation. A company that delivers another kind of value or deliver two inconsistent things at the same time, may lack credibility and confuse customers.
- Trade-off arise from activities themselves. Many trade-offs reflect inflexibilities in machinery, people or system. The More IKEA has configured its activities to lower cost, the less able it is to satisfy customers who require higher levels of services, where Different positions require different product configuration, different equipment…,.
- Trade-offs arise from limits on internal coordination and control. By clearly choosing to compete in one way, senior management makes organizational priorities clear.
if there are no trade-offs companies will never achieve a sustainable advantage. Trade-offs add a new dimension to strategy which make it as ” making trade-offs in competing” where without trade-offs there would be no need for choice and thus no need for strategy.
Fit drives both competitive advantage and sustainability:
Way that activities relate to one another is important to positioning choices, where OE is about achieving excellence in individual activities or functions, whereas strategy is about combining activities. Competitive advantage for any firm comes from the way its activities fit and reinforce one anther, which deter imitation, where fits locks out imitators by creating a chain that is as strong as its strongest link. Firm with good strategy, its activities complement one another in way that create real economic value and then have competitive advantage. One activity’s cost, is lowered because of the way other activities are performed. Similarly one activity’s value to customers can be enhanced by a company’s other activities. That is the way strategic fit creates competitive advantage and superior profitability. For example, production line with high levels of model variety is more valuable when combined with inventory and order processing system, advertising.., will minimize the need for stocking finished and then meet customer’s need. Fit have three types which they are:
- Simple consistency. Which between each function or activity and the overall strategy. For example, company will low-cost strategy, avoid commissions to brokers, limit advertising, downsizing.., consistency make s the strategy easier to communicate to customers. Employees, and shareholders and improve implementation through single-mindedness in the corporation.
- Fit occur when activities are reinforcing. Neutrogena, for example, markets to upscale hotels eager to offer their guest a soap recommended by dermatologist. Hotels grant Neutrogena the privilege of using its customary packaging while requiring other soaps to feature the hotel’s name.
- Fit goes beyond activity reinforcement – optimization of effort.
In all three types of fit, the fit among activities substantially reduce cost or increase differentiation, and competitive advantage grows out of the entire system of activities, and creates incentives to improve OE, which make imitation harder. so strategic fit is fundamental to competitive advantage as well sustainability of that advantage, and then it is harder for rival to imitate process technology or replicate a set of product feature, that is the position built on systems of activities are more sustainable than those built on individual activities. By Fit access, strategy is creating fit among company’s activities. The success of a strategy depends on doing many things well and integrating among them. if there is no fit among activities there is no distinctive strategy.
Rediscovering strategy:
There are many reasons that cause why do so many companies – managers – fail to have right strategy. Some of them:
- managers face a high level of uncertainly about the needs of customers, products, services that will prove to be most desired.
- Changes in technology.
- Change in behavior of competitors.
- Frightening from trade-offs which make no choice is preferred to risking blame for a bad choice. Companies’ imitate one another in a type of herd behavior.
- Company operate far from productivity border, then trade-offs appear unnecessary.
Grow has the most perverse effect on strategy. Pressure to grow or apparent saturation of the target market lead managers to broaden the position by extending products lines, adding, new features, imitating competitors’ service.., could lead to growth trap. For example, Neutrogena have fallen into this trap where its distribution broadened to include mass merchandisers, and under its name, the company expanded into a wide variety of products in which it was not unique and which weaken its image. Compromises and inconsistencies in the pursuit of growth will erode the competitive advantage of any company, which mean that some growth imperative hazardous to strategy. The question is “what approaches to growth preserve and reinforce strategy?” the answer is:
1- to be concentrated on deepening a strategic position rather than broadening and compromising.
2- Making the company’s activities more distinctive, strengthening fit and communicating the strategy.
3- Globalization, by opening up larger markets for a focused strategy.
4- Creating stand-alone units, each with its own brand name and tailored activities.
Leadership or general manger- management have vital role to applying as well implementation strategy on their organization. Where clear strategy is often primarily an organizational one and depends on leadership. Where leadership its core is strategy because:
1- Defining and communicating the company’s unique position.
2- Making trade-offs.
3- Forcing fit among activities.
4- Provide the discipline to decide which industry change and customers needs
5- Tech others in the organization about strategy.
6- Operational agenda which is the proper place for constant change flexibility.
Finally, Strategic continuity does not imply a static view of competition; a company must continually improve its OE and shift the productivity frontier. Company’s choice of a new position must be driven by the ability to find new trade-offs and leverage a new system of complementary activities into a sustainable advantage.
Credit:ivythesis.typepad.com
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