How we can make a good business strategy
How do we achieve superior profitability in the industry Whatever the industry attractiveness looks like well that has to do with the two fundamental types of competitive damage and this never changes and never will change there are only two ways to get in advance one is to differentiate yourself? Do something better? Customers will pay you more for it because you're delivering something the customer thinks is better.
It could design, it could be an image, it could be functionality, I could serve it. It could be almost anything but you know competitive advantage number one is differentiating and getting a higher price and if you're differentiating you better get a higher price. Because if you're not getting a higher price, then you have to ask, are we really differentiating if nobody's willing to pay us extra? Are we really better and that’s a kind of tough, honest question we have to ask ourselves?
The other competitive advantage is the lower cost if we can actually do something cheaper and more efficiently and that's not just luck that's not just oh we bought lower-cost parts this week. But if we can find a way of structurally being lower cost because we've redesigned the way we do things, that’s the other competitive advantage and really the broadest thinking about strategy starts with okay which path are we on? Are we on the path to differentiate? Are we on a path to be at the lowest cost? Those are both good passes but we gotta usually decide which path we're going to be on because if we're going to really differentiate and have better quality and better service and You know better-educated Salesforce.
It's going to be hard to at the same time is the lower cost that's what we've learned, so we've got to figure out what path was on And then we have to turn it into a strategy using the value chain And again, I hope everybody here is familiar with that concept, it's quite embedded now and management thinking the value the chain says, you know for any business there's a whole set of things that we have to do in order to conduct that business.
VALUE CHANGE IN BUSINESS
Logistical things, operating things which could
manufacture, marketing, sales service, supply chain Technology development
you see this and this idea called the value chain is a way of mapping, what operation in this industry looks like?
And this slide is just an example of the telecom in the mobile communication
business, so a sprint or an AT&T in our country, here's the value chain in
that business, so you can see if you go back.
This is a sort of a general set of titles, but this says okay now in mobile phones We don't say we have to talk about device coverage What set of mobile phone types, do we support in our network? And then there's kind of we got to have a network, We got to operate the network and make that network efficient, So you get the bars and you don't lose your service and you know, you can here and so forth and then we got to figure out how to price pricing is very complicated in mobile phones all kinds of special deals prepaid, postpaid So there's a lot of choices in activity there, bill processing, there's a lot of marketing, promotion, PR After sales support, and so forth.
So every business has a value chain Every one of
your businesses have the value chain and if you're going to be disciplined and
rigorous about the strategy you've got to really lay out what that value chain
is because strategy is the set of choices you make across the
value chain So what kind of network am I going to operate What's my pricing
approach.
DISTINGUISH ME FROM A COMPETITOR
How am I going to distinguish myself from a competitor? You know, what tools am I going to use for marketing? Am I going to have a lot of physical locations and stores or I'm going to use them primarily? Advertising what am I going to do to market my service versus the other guy and so forth and so on Strategy isn't sort of any esoteric thing. It's simply a set of choices about how we are going to operate the business, including choices about the technology, we're going to sell you know. The function of our product the features of our product, the technology of our product, and A good strategy is one where there's clarity on the choices, we are really making and There are enough things that we're doing differently that we can get a competitive advantage, So let's talk a bit more than about that The first key idea here is going from kind of value chain to strategy is the notion of operational effectiveness versus strategic position.
OPERATIONAL EFFECTIVENESS VERSUS STRATEGIC POSITION
This is an idea that I didn't have when I first published my first workbooks in this field. I was thinking mostly about strategy but I didn't really make the distinction, that there's a lot that a company does that isn't a strategy, There's a lot of best practice, If we're going to be in the auto industry, there's a lot of things we have to do just to be a good auto company, You know, we have to buy the right machines for our factory; we have to have, you know, a decent dealer network we have to, you know, learn how to execute good advertising. There's a lot of best practice in every industry and what we've learned is if you're not using best practice, you're going to lose no matter what your strategy is.
If you're not buying the latest manufacturing equipment, your competitors are going to win. You're going to give up too much cost and quality through that, So what we have to understand is in any company, we have two jobs one is we got to implement all the best practices? That we can find, If we see somebody doing a better approach to the customer, you know customer care, You know, we better look hard at that and make sure that we're at least at some, you know, the threshold level of best practice.
That's operational effectiveness but operational effectiveness is not the strategy Operational effectiveness is doing the same things as your competitor, better and better. It's raising the bar on the same things as all your competitors are doing. Your competitors have a factory they have machines, If you buy the newest machines first, then you'll have an advantage you'll be operationally better than them until they buy the machines, But that's not a strategy. Strategy is on top of operational effectiveness, you've got to sort of operating the business well, but you have to have a strategy and that strategy is building on the best practices, but then including the choices that are going to define your uniqueness in the business. Both things are important: if we're just sloppy and not enhancing our operational effectiveness, we're going to lose.
No matter
what strategy we have? But just being operationally effective will not get us to superior performance, because all our competitors are going to be
implementing the same best practices as we do. So if we really want to win we
got to do both and we've got to make sure that we're clear about what we're
doing? And this is a very important distinction You know the question I used to
get all the time, you know, 15 years ago 10 years ago can you be both low cost
and differentiated at the same time and The answer is usually you can't But the
cases that look like you're doing that are cases where the competitor has lousy
operational effectiveness, Then you can be both low cost and differentiated But
if you've got a good operationally effective competitor, Then to differentiate
or to be lower cost you're going to have to make real choices.
GOOD CHOICE AND UNIQUENESS
Okay, and you cannot do those both probably you're going to have to decide which path you're on, Am I on the path of differentiating? Am I on the path of being the lowest-cost producer? To have a successful strategy, we understand the process Involves; you know these basic conditions:
Number one, to have a truly successful strategy, we have to define a unique value proposition We can't just be trying to do the same thing as our competitors are trying to do, We have to be doing something unique and that involves, Serving a different set of customers, We’re going after the large industrials, our competitors are going after the medium-sized smaller companies.
That's one part of the value proposition. What
customers are we actually trying to serve? Again so many companies the
customers they have they sort of got by luck, But most important ideas in
strategies you've got to choose your customers you actually have to choose who
you want your customers to be and If you choose I want all customers. I want to
serve every single customer. That's usually not an excellent choice, because
customers have very different needs, particularly in a complex economy like this
one.
You know another Question, you've got to ask of the customers I choose to serve which of the needs of that they have done I want to actually meet uniquely well Again a lot of companies just fall into the idea that anything the customer wants, I'm going to provide
But actually, you know, most great strategies don't do that or at very least they're very specific about which customer group and then they say, okay, I'm going to go after this customer group And I'm going to then really meet all their needs, But that we just try to meet all the needs and anybody ever comes and asks us to meet that's usually not a good strategy.
Then we're going to have to make that choice about pricing Are we going for a premium price or we try just to match the other guy? Or are we going to offer a discount because we think we're going to be more efficient to sustain that discount and still make good profits, you know, this is a company that's on its way to India? I don’t think it's actually opened yet. It's been struggling to get into India like historically the number of companies have to have had to do this is one of the most extraordinary companies in the world in furnishings IKEA some people call it IKEA. It depends on are you speaking more Scandinavian and are you speaking more American? And this is a company that sells home furnishings and this is a kind of great strategy example.
STRATEGY AND UNIQUENESS
Strategy starts with a unique value proposition, and what you see here is a sort of simple description of what their value proposition is to the customers? That they really are seeking to serve and what are they delivering those customers in terms of products to meet those needs and where are they pricing?
Okay, so I will I won't read this but just take a quick look at that. Okay, and You know The interesting thing about this value proposition is nobody had ever seen this before this company, Nobody had ever segmented customers in this way, Nobody had ever thought about customers with relatively small living spaces before this was an innovation in thinking about segmentation and a lot of great strategies involve this new way of looking at customers and segmenting customers as these guys did Also, this strategy was the real breakthrough in, You know operations for a furniture company and we'll talk about that in a minute.
Here's another great strategy example: remember I talked about heavy trucks earlier and How difficult in the industry it was the average profitability not so good. Well, here's the company in the industry that is the premium superior high profitability company. It's called Paccar it's quite a global company and you sort of see what their value proposition was. So IKEA was about really low prices this company is about a premium, We're going to get a premium of 10% for our trucks because our trucks will not look like our competitor's trucks our trucks are. We're going to have a strategy about customization Cost of operation that will allow us to actually differentiate, but not for all customers.
ANALYSIS OF STRATEGY:
This is a wonderful strategy because the company figured out that the big customers in the industry. Weren't the customers that we're the good customers for them? They actually figured out that the small customers, the people that owned one truck and drove that truck for their living, that was the really interesting customer in this industry, So they built the whole strategy around this narrow group of customers about 25 to 30 percent of all the customers that buy trucks are bought one or two trucks and They often drive their own truck.
Okay, Second Test of a brilliant strategy again. Think about your own company here a Distinctive value chain, if you don't operate the business differently, your value chain will not be real, you've got to have a different operating model that aligns with your positioning Ok, so if we take IKEA and I won't go through this if you look at how they operate there their company compared to all the other companies in their industry they do it differently, they have a different value chain. Their stores look different their customer service looks different, their logistics looks different, and it's all aligned with that value proposition, They’re their breakthrough idea was that they wouldn't that sell not fully assembled the furniture they assembled parts, They sell parts in a box so when you go to IKEA; You buy your walk out with a box in which there are the parts of the furniture. You just bought and you get the opportunity to actually take the furniture home yourself, you don't get somebody with a van; you know, delivering dropping off completed furniture at your house.
IKEA understood that was good most a lot of customers like that but the customers they liked they wanted to serve who was very price-sensitive, they will deliver themselves, they would deliver their own furniture and by doing it that way and by also having inbound logistics in, Not entire sofas, but the parts for a sofa in a box, they saved huge amounts of logistical costs and They took that savings and they passed it on to the customer in terms of a much lower price, but the customer then had to put the furniture together themselves.
You know, then you get to put it together. It's
like somebody's birthday. Put together the birthday present, you
know, or Christmas it's like putting together the toys and you know, that could
be fun. I frankly found it very tedious I have a lot of fun doing it, but my
some colleague really liked this company the value.
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