Every business has pressing issues, but which ones are strategic? Are falling sales a strategic issue? What about rising material costs? What about a new competitor?
Perceptions of exactly what constitutes strategy can vary greatly, even among a single management team. A single question about strategy can produce multiple perspectives that must be resolved before attempting to make any meaningful strategy decisions. The following story helps illustrate this point.
“In this year’s strategic plan, I want to reexamine our sales compensation structure and understand why we spend so much on system demonstrations. I also want a new deal-approval process in place.”
That’s the answer I got from a capital equipment company senior manager in response to the question, “What are the most important things to address in this year’s strategy-development effort?”
Continuing my senior-management interviews, I met with the senior vice president of marketing and asked the same question.
His response: “That’s easy. In two years, our customers will be manufacturing their next-generation device. This will make our current product obsolete. We will have a hole in our portfolio if we don’t do something.”
The marketing executive had a very different perspective on strategy development. The first executive looked internally to find the most important issues. However, the marketing vice president looked externally for emerging threats to the business.
A third executive answered the question this way:
“We’re not going to do anything strategic this year. We need to work on our current business before we think about another acquisition.”
With this third executive came yet a third perspective. In his view, an issue wasn’t strategic unless it involved an acquisition, implying that any issues in the existing business must be tactical.
Why are there three completely different perspectives on the same question? It’s simple. The management team was asked to identify strategic issues before they had a common definition of the word strategy.
An effective, strategy definition should clearly distinguish between strategy and tactics. To that end, consider the following:
Strategy is the big decisions that senior managers make to respond to or anticipate changes in the market or the competitive environment. Everything else is tactics.
Notice that this definition lays out a much clearer concept of strategy than the typical “strategy is long term, and tactics are short term” paradigm. It sets strategy apart from tactics on two key dimensions:
- Decisions vs. actions
- External vs. internal perspective
A definition like this fosters a strategic mind-set. When used as a filter, it will help keep tactical, internal issues from distracting your strategy-development efforts.
Portfolio strategy seeks to answer the question, “What business should I be in?” Whereas product strategy seeks to answer the question, “How will I compete in my business?” See the figure below.
Portfolio strategy (also sometimes called corporate strategy) defines the scope of a company. Decisions to:
- Start a company,
- Acquire or develop a new product line or business unit,
- Increase or decrease investment in an existing business, and
- Shut down or sell a business
are all examples of portfolio-strategy decisions. Commitments to individual lines of businesses and the financial objectives for each are the output of portfolio strategy. This output serves as an input to product strategy which is also sometimes called business-unit strategy. Decisions to
- Segment the business’ market,
- Include or exclude market segments,
- Select vectors of differentiation,
- Establish market positions, plus
- Develop, market, and retire products
are all examples of product-strategy decisions.
Portfolio decisions require broad exposure to market opportunities plus awareness of the capabilities across your entire company. The responsibility for figuring out which businesses to pursue typically belongs to someone at the enterprise level with a corporate development or strategy title.
Product-strategy decisions, on the other hand, require relentless focus and attention to the market and competitive environment in which the business unit operates. The responsibility for figuring out how to compete is usually assigned to a business unit’s product management team.
Put your management team in a room. Hand them each a small piece of paper. Then, ask them to write down what they want out of a value-based strategy.
What do you think you’ll get?
Most likely, you’ll get a chorus of something like, “More customers at higher prices.” It’s no surprise that everyone seems to know exactly what he or she wants from a value-based strategy.
Now imagine that same exercise. Only this time, you ask them, “What is a value-based strategy?”
Now, what do you think you’ll get?
This time, the harmony is not so obvious. On those sheets of paper, you’ll probably get a cacophony of ideas like those shown below.
|Cost of Ownership||Products|
What may sound like noise is actually a great start. All these are part of a value-based strategy. But what you’re looking for is a clear, holistic definition, one that you can use to guide the organization’s value-based-strategy decision-making and implementation.
If you were to ask the group to summarize these ideas into key themes, you’d be looking at something like these four:
- Economic value for the customer
- More value than the competition
- Fair, profitable compensation
Now you’re getting somewhere. These themes tell you a lot about what a value-based strategy entails. Let’s take a closer look at each and then try to tie it all together.
Economic Value for the Customer
This value-strategy theme tells you that the customer defines value. Therefore, you’ll need to define that customer very clearly. Market segmentation will not be an off-the-cuff decision.
Also, capital equipment buyers buy only to make a profit. This is the lens through which they define value. If you’re intent on pursuing a value-based strategy, you’ll need to understand how your equipment affects your customers’ economics.
More Value than the Competition
Your customers measure your value relative to the alternatives in the market. A value-based strategy seeks to create more value than those alternatives.
This has implications for the equipment supplier. Your competitive intelligence efforts will need to go way beyond reading competitors’ websites and reviewing stale win-loss reports. You must develop an understanding of your competitors’ ability to create value that rivals your understanding of your own.
Fair, Profitable Compensation
As an equipment supplier, you’re entitled to a portion of the value that you provide your customers. Your fair compensation is defined as the maximum that the market will bear in the context of your competitive environment.
A value-based strategy is interesting only if it enables you to make more profit. Therefore, your products must produce acceptable profitability when they are sold for fair compensation.
Consistently achieving the returns promised by a value-based strategy isn’t an ad hoc endeavor. It’s a deliberate decision to make defining, creating, and marketing customer value a core competency. The decision to adopt a value-based strategy is going affect the way you
- Define and select customers,
- Define and develop products, and
- Market, price, and sell those products.
There’s nothing casual about it.
Bringing It All Together
Put these four themes together, and you get your clear, holistic, value-based-strategy definition.
Value-based strategy is a product strategy that deliberately creates more economic value for the target customer than alternative offerings and then extracts fair, profitable compensation for that value.
It’s only twenty-nine words. But it contains everything you need to guide your quest for more customers at higher prices.
For supporting strategies, the fundamental question is ‘How will I support the portfolio and product strategies?” See the figure below.
Supporting strategies include
- Sales strategy,
- Marketing strategy,
- Engineering strategy,
- Manufacturing strategy,
- Supply-chain strategy,
- Service strategy,
- Information-system strategy,
- Human-resources strategy, and
- Financing strategy.
Each of these functional strategies is in support of the portfolio and product strategies. Therefore, they cannot be developed until portfolio and product strategies have been completed. It’s the connection to portfolio and product strategies that give supporting strategies an outside-in perspective.