Strategic Analysis - Organisation

The Value Chain Analysis of Michael Porter provides some valuable perspectives. I don’t intend going into any depth here. I simply want to focus on what I feel is the key aspect of VCA - the need for support functions to develop plans that integrate with and support the plans of the primary activities.

Thus, the HR plan should only have meaning in the context of how it supports operations, sales and marketing, in-bound logistics etc. The same with technology. Each of these functions must ask - how do I impact margin through my services to the primary functions?

An activity that I have found valuable in my strategy training courses is to ask participants to imagine that they are the HR director, for instance, and to present how they will support the other functions in their business.

Core Competencies

Hamel & Prahalad say:

“It is important that top managers view the firm as a portfolio of competencies, for they must ask, “Given our particular portfolio of competencies, what opportunities are we uniquely positioned to exploit? A core competence represents the sum of learning across individual skill sets and individual organizational units. Thus, a core competence is very unlikely to reside in its entirety in a single individual or small team.”

They expand:

“A core competence is not an “asset” in the accounting sense of the word. Core competencies don’t show upon the balance sheet. A factory, distribution channel, brand, or patent cannot be a core competence - these are things rather than skills. However, an aptitude to manage that factory (e.g., Toyota’s lean manufacturing), channel (e.g., Wal-Mart’s logistics), brand (e.g., Coca-Cola’s advertising), or intellectual property (e.g., Motorola’s ability to protect and exploit its patent portfolio) may constitute a core competence.”

The idea is that the organisation should be developing competencies that they can later exploit in, as yet unknown, markets. An example is Amazon. Amazon’s core competencies were in logistics, CRM and managing data. The start point was books. But these core competencies are not limited to books - they can be leveraged into almost any market. Amazon is what is known as a capability predator. What’s important is not the product but the competencies.

It seems obvious now. But there is a sense of putting the cart before the horse. Normally one looks for the opportunity then builds the capability. Here, the suggestion is that you build the capability then seek the opportunity.

A core competence must pass three tests:

• considered important by the target market (eg a clean showroom for Honda is a nice-to-have, but an efficient engine is a must-have)
• competitively differentiated - unique or highly unusual
• extendable - can be leveraged into new markets and products

The core competency approach is a valuable additional insight into how a firm may compete in the future and it encourages a longer-term perspective. It also encourages investment because the stark realities of a failure to invest become very clear. Hamel and Prahalad reserve particular scorn for what they term "denominator" managers; those managers who can cut costs but never increase revenues, who focus on efficiency not innovation and who slowly strangle a company through a focus on short-term ROI.

Strategic Analysis - Markets

This part of the analysis is concerned with finding attractive segments in which we can compete. What makes a segment attractive: size, competitive position, risk, fit with exising business, cyclicality etc.

How do we bring all this analysis together? I like to use weighted matrices in my strategy development workshops. The process consists of identifying the factors that are important in winning in this sector - the critical market success factors. There should be healthy debate around these!

The next step is to ‘weight’ these. Each factor should be given a percentage weighting - the higher the percentage the more important the factor is. The total weightings must add up to 100.

Since this is a competitive market, we now score ourselves and our competitors (out of 10) on each factor. For instance, if a distribution network is considered to be very important it may get a weighting of 20%. Our distribution network is not good, scoring only 5 out 10. Our major competitor on the other hand has a very good distribution network and scores 8 out of 10. This process is completed for each factor for ourselves and our major competitors.

The final stage is to calculate the scores for each factor and in total for ourselves and our competitors. The weighting for the factor, 20% for distribution, is multiplied by the score, 5 for us, 8 for our competitor. This gives us a score of 1 and our competitor a score of 1.6 (20% is the same as 0.20). We do the same for every factor, then add up the totals.

We now have view of how a view of how competitive we are likely to be in a particular market, based on how important several factors are in achieving customer satisfaction and our relative strength. Sounds perfect!

But it’s all made up - we don’t know half of these things?

True. Most of the data is hardly scientific. But that is to miss the point of the activitly. The value lies in the discussion, not the scores. The discussion forces the strategy development team to identify what is really important to success in the market and highlights strengths and weaknesses. It heightens awareness and makes the organisation more sensitive to competitor actions and changes in the market place.(back to our learning organisation again).

And, finally, the lack of information argument fails on the simple question - "So how will you make the decision on where you will compete?" Any answer is usually based on some implicit understanding of the market that either falls down under rational analysis or uses the same reasoning as I have just outlined. The advantage of the weighted matrix is that the assumptions are explicit and it helps the strategy team to gain a real understanding of what is important to success.

Strategic Workshops - strategic analysis - macro-environment

Arie de Geus, author of The Living Company, said:

"The only way to sustain competitive advantage is to ensure that your organization is learning faster than the competition."

Strategic analyis is part of this learning process.

To understand the macro-environment, we use PESTLE (see strategy development process article). Let’s consider some demographic data. I’ll use a UK example, though it applies to much of Western Europe and North America. Around 40% of the UK population is aged over 50. If I am a builder, how does that impact me? Well clearly, I should be considering building houses that match the requirements of older people - such as:

• more bungalows
• smaller (children left home)
• support facilities
• in-built electronic monitoring - eg a wrist watch type device that monitors blood pressure and pulse, alerting medical services when appropriate (the ambulance now arrives before your heart attack!)

Armed with this knowledge, I may choose to seek partnerships with medical technology companies. This is a simple example using demographics. Let’s stick with our builder. P is for Politics and this includes the extension of the European Union which opens up the possibility of acquiring highly skilled labour from eastern Europe at competitive wage rates - or expanding into other countries. E is for environment and lots of scope here for builders in how they build and how the built house is run. But let’s not forget the L - legal; there may be new health and safety legislation or restrictions on certain materials.

Arab Dhow

I once saw on the wall of a client in Dubai a poster showing an Arab dhow and under it the words:

"We cannot change the direction of the wind, but we can set our sails to take advantage of it."

Strategic analysis opens our eyes to threats. But I think the emphasis should be on opportunities. We should create a "positive crisis within the organisation" - a real sense of anxiety that we may miss out on exciting opportunities if we don’t move quickly.

An interesting example of strategic analysis and its power to transform how firms compete is The Long Tail by Chris Anderson. Here he captures the essence of his message:

"The average Barnes & Noble carries 130,000 titles. Yet more than half of Amazon’s book sales come from outside its top 130,000 titles. Consider the implication: If the Amazon statistics are any guide, the market for books that are not even sold in the average bookstore is larger than the market for those that are. In other words, the potential book market may be twice as big as it appears to be, if only we can get over the economics of scarcity."

Whereas department stores and one-stop-shops were once seen as the future, niche marketing is the current flavour.

- is there any point when the world changes so quickly?

When it is sometimes difficult to predict what will happen next week, what is the point in looking forward five or even ten years? In such a dynamic world, isn’t strategy just a pointless academic exercise?

Well, as Michael Porter said, "No, no, no". Here is my view of why strategy is even more essential during times of great change.

Strategy is Position

Firstly, let’s be clear about what we mean by strategy. The purpose of a strategy is to gain a "position" which provides us with competitive advantage. For instance, we may decide to make ourselves more attractive to schools by gaining a greater understanding of their specific needs and producing products that meet these needs. This will also have the impact of making us less attractive to other organisations.

That is our intended position - our strategy. It tells us how we will compete, where our focus should be. What we now do to achieve that position is not the strategy - it is the tactics, the steps we take to achieve the strategy.

Our strategy guides us in the steps we should take - generally, get close to schools and invest in product development to meet the needs of schools. But we still have flexibility on how this is achieved. We can respond to radical changes in government education policy whilst our strategy, our position of focusing on schools remains unchanged. For instance, schools may be required to emphasise science over arts subjects, reducing demand for a large chunk of our product range. We adapt - our strategy remains the same, our tactics change.

Why is this so important?

Strategy enables managers to make decisions quickly - it sets the boundaries. Strategy is as much about what you don’t do as what you do. Managers at all levels of the business understand that the constants are: understand schools, develop and market products to meet their specific needs. It helps managers to make decisions about where resources should be invested, the skills required by staff, process design and so on. The strategy is like the guide rails in a bowling alley - it provides boundaries and direction.

In future posts, I’ll explore the strategy development process - how do you find your ‘position’?