Most people have heard of the term strategy and assume they know what it means. However, this word is often misused, and as a result, people never realize the full potential of the concept. Strategy is not everything companies do, even though almost everything companies do should be impacted by it (big difference). Calling everything strategy is like wanting to learn to swim, but calling everything involving water … swimming. It makes no sense, right? How can you learn to swim well if you are bathing, drinking water or washing the car? If you call these things swimming, you might drown when you try to swim! It’s the same thing with strategy. If you call everything strategy, you are unlikely to understand and use it successfully.
Strategy
Strategy is simply a long-term set of coordinated activities that gets one from the present, to achieving the company’s major goals in the future (vision), while at the same time building and/or defending competitive advantage(s). Strategy is used to transform a domestic firm into a global powerhouse (McDonalds), a nearly bankrupt company into an industry leader (Apple), a commodity producer into the only manufacturer of a highly sought product (Tide from Proctor & Gamble), etc. Sounds pretty good, right? It sounds so good and simple that the term strategy is used for almost everything. However, it’s important to keep in mind that strategy is not every positive action you or your company takes.
Strategy is long-term in nature, so you cannot have a strategy for a week; that is just a plan. If there is a major snow storm, you don’t change your strategy, but you might need to adjust your activities for some time. If a team is losing members on a regular basis, you don’t need a new strategy, but you might need a new approach to hiring or training. Calling all these things strategy will prevent you from using strategy to achieve your vision and secure competitive advantage. If everything is strategy, you will not be able to distinguish the factors that really contribute to strategy, and it’s pretty hard to produce it if you don’t know what creates it. Therefore, understanding and using the term strategy correctly is the first step to realizing the potential of this powerful concept.
Devising strategy is a function of understanding the external environment (e.g., competition, economy, etc.) and creating an organization that fits it (e.g., an innovative firm). Implementing strategy often involves changing the culture so that it fits the strategy, thereby ensuring that followers’ behavior is supportive of the strategy. For example, in the computer-technology industry, companies must be flexible to compete effectively in their fast-changing environment. Just having an innovation-focused strategy is not enough. The strategy must be implemented with creative followers who are flexible when reacting to change and take the risks necessary for innovation.
Competitive advantage
Wait, what is competitive advantage? Competitive advantage is something unique and valuable that you have, and others don’t, which allows you to either differentiate or have lower costs when compared to the competition. I have a basic cell phone and when it was introduced in stores, no one noticed. Compare that to when the iPhone was introduced. People were waiting overnight in front of stores so they could buy the first ones. The same has happened with other Apple products. Apple is able to differentiate its products in ways that its customers value (style, functions, etc.), and customers are willing to pay more for Apple’s products. Its valuable differentiation is the main advantage it has over the competition, and Apple earns higher profits as a result. Another example is Walmart, which has a low-cost competitive advantage. It can purchase and distribute the products it sells at a lower cost than its main competitors. As a result, Walmart earns a higher profit compared to its competition (e.g., Kmart).
Competitive advantage allows companies to beat the competition on a regular basis. It also allows them to survive, particularly when external events impact them. Both Apple and Walmart have remained competitive and profitable during the post-2008 economic contraction. Competitive advantage also allows companies to earn above average profit over the long-term.
A crucial factor in developing competitive advantage is to avoid copying other firms. Firms that are successful over the long-term are distinctive regarding the services and products they provide. Having unconventional leadership and an adaptive organizational culture supports such uniqueness. Being aware of the internal and external environment allows management to adapt its competitive advantages to match competitive dynamics. Finally, leaders must focus on being either a low-cost or differentiated provider in either a broad or narrow market. For example, Wal-Mart is a low-cost provider with a broad target market. On the other hand, Prada is a differentiated provider with a narrow target market. Below are ways to achieve the two main competitive advantages, which can apply to either broad or narrow markets.
Low-cost Differentiation
Efficient distribution Fast delivery
Automation Personal service
Common parts Specialized items
Standardized service Customized service
Examples of Strategy and Competitive Advantage
Strategy and competitive advantage work for individuals as well as companies. Imagine two MBA students (Simon & Fred) in the same program who both want to become CEOs; this is their vision or long-term future goal. Simon’s strategy is to work over the long-term to become the smartest and most knowledgeable person in his field. His knowledge and intelligence will be his competitive advantage over other candidates. Every day at school, he studies hard and earns top grades. When he gets a job, Simon builds on his reputation. He reads industry journals and books to enhance his knowledge. Simon attends industry conferences where he makes presentations. He writes articles in industry journals and blogs. After years of doing executing his strategy and being promoted several times, he’s finally selected for a CEO position, primarily for his competitive advantage; superior intelligence and knowledge.
Fred, on the other hand, decided on an entirely different strategy to achieve the same vision of becoming a CEO. He believes that who you know is more important than what you know. Therefore, his strategy is to network and become friends with key people. He started doing this at school and continued in all of his jobs. Like Simon, Fred attended industry conferences, not to learn more, but to network and maintain relationships. After years of building his social network competitive advantage, he is selected for a CEO position.
Companies are similar to Fred and Simon in terms of how they use strategy to achieve their vision and build competitive advantage. For example, both General Motors (GM) and Toyota have similar visions; to grow and become the dominant global auto manufacturer. However, they have different strategies and competitive advantages. GM has achieved much of its growth though acquisitions of preexisting car manufacturers around the world. Its competitive advantage is primarily many brands and frequent model changes that allow it to meet specific customer needs. Toyota has used a different strategy. It has grown mostly though internal growth by building the Toyota brand or creating its own new brands (e.g., Lexus and Scion) to meet specific customer needs. Toyota’s main competitive advantage is quality and/or fuel efficiency, and this is a result of years of implementing its strategy. Since both companies are comparable in terms of world market share, both strategies have worked, although not perfectly (e.g., GM 2009 bankruptcy, Toyota 2009-10 quality problems).
First Steps to Using Strategy
- Articulate a challenging vision that is focused on doing something unique and valuable for customers; something no other company can do.
- Create a strategy to reach the vision while building competitive advantages.
- Modify the culture to match the strategy and competitive advantages sought.
- Monitor the internal and external environment to see if changes are necessary for the strategy or culture.
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Eric J. Romero, PhD is an Unconventional Leadership & Innovation Badass! He helps managers become unconventional leaders who innovate and beat the competition. Eric partners with them to create competitive advantage based on creativity, flexibility and risk-taking. Eric has written over 35 articles and presented his ideas around the world for over 15 years. He is the author of Compete Outside the Box: The Unconventional Way to Beat the Competition. Originally from New York City, his presentations are delivered with a sense of humor, 100% unedited honesty and street smarts! For more information go to www.CompeteOutsideTheBox.com
