Friday, May 31, 2013

Strategic positioning - 3 Effective Strategies to Prevent Common Challenges

Most companies today not only fail to arrive at the right strategic answer, they no longer even understand the question. A failure to understand the critical importance of, and payoff from erudite strategic positioning extends from the Board Room down to through the ranks of middle management. I have observed across a host of organizations three consistent challenges that diminish the understanding and valuation of strategic positioning as a primary determinant of long-term, sustainable profitability. The three challenges include, 1. A misunderstanding of the difference between strategy and operational effectiveness or continuous improvement programs 2. Annual strategy planning processes that are distinctly not strategic 3. Organizational barriers, disincentives, and shortfalls As historical context to the first challenge, beginning in the 1980's operational effectiveness was at the heart of the Japanese challenge to Western companies. An embrace of continuous quality improvement tools quickly became the order of the day - tools later broadly implemented and renamed by companies such as Motorola and General Electric as Six Sigma. Companies became much better operators and enhanced efficiency, sometimes drastically reinventing cost structures and shifting "efficiency frontiers". While operational effectiveness is necessary, it is not by itself sufficient. Also, drastic gains in efficiency have rarely been reflected in long-term gains in profitability. Rather, as all competitors in a market hire the same consultants, read the same management books and employ the same tools, the result is competitive convergence, which serves all equally poorly. These hyper-competitive conditions that today create across-the-board challenges are largely self-created and a direct result of ignoring the importance of competitive positioning, which is based in deliberate choices to engage in a unique set of activities to deliver a unique mix of value. The second challenge is based in internal process and nomenclature shortfalls. Often when I talk to executive management of a company about the need for strategic analysis or considerations, they will typically refer me to their annual "strategic" or business planning processes. A strategic or business planning exercise in most organizations is a mandatory response to the information requirements to manage a publicly traded company. The core requirement is revenue forecasting or "planning". Effective strategy formulation requires a different term perspective, different skill sets, and asking and answering a materially different set of questions. Strategy formulation is a craft that requires the right approach, tools, dedication of effort, analysis, and disciplined, courageous decision making. A clearly articulated strategy will include creation of a unique and valuable position - one that will necessarily require support from a unique and cohesive set of activities. A strategy must also make courageous and wise decisions regarding tradeoffs; good strategy will always be more about what an organization chooses not to do than about what it chooses to do. Finally, a strategy must carefully consider issues of fit. Strategies derive power and sustainability from the way that the chosen activities fit with and reinforce one another. Unlike continuous improvement or operational effectiveness, which is based on isolation of a single activity, strategic positioning is about an entire set of activities that build sustainable positioning against imitators, substitutes or direct competitors. The third challenge that I have consistently seen among organizations in embracing meaningful strategy is shortcomings in company leadership and their unpublished reward systems. The choice to apply scarce resources to continuous improvement or operational effectiveness to the exclusion of strategic considerations and decisions is a potent seduction, most particularly for the politically savvy executive in today's corporate environment. Sadly, what is too often rewarded is risk aversion, vocal contributions as an observant critic of big change, concrete short-term plans, and actionable / measurable goals and objectives. Operational effectiveness and continuous improvement programs provide a safe haven and a chic business suit for that internal rewards environment. What strategy requires on the other hand are deep analysis, a longer-term orientation, broad understanding of strategic principles and markets, and above all, the willingness to make hard decisions. The job of a leader is to understand, set and implement strategy, and most importantly have the courage to say no to certain activities, customers, markets, geographies, etc. As long as we continue to move forward under the assumption that we are in business to make money, wise strategic positioning will remain a challenging, yet absolute requirement of attaining superior returns on invested capital. While effective programs like Six Sigma will remain a ticket to solvency, sole reliance on those programs will equate to running faster and faster on a treadmill into a profit-starved competitive convergence.