It’s word that gets dropped into every business conversation. Put “strategy” or “strategic” next to something and it sounds really important. So we have IT “strategy”, manufacturing “strategy”, “strategic” human resource management.
But are we in danger of losing the plot? Of using it excessively while confusing ourselves about what strategy really is? Of kidding ourselves that we’re developing strategy when, in reality, we’re not?
So, what is competitive strategy?
And it is an important question. Without clear answer, managers will continue to struggle, and their organisations will continue to underperform. Evidence from our research shows that Australian and New Zealand organisations typically only achieve 15 percent of their competitive potential. This is largely due to their inability to develop strategy that really is competitive.
Here’s fresh view on the subject based on our 16 years of consulting experience.
Just ops in fancy dress?
Many managers are confused and infuriated by discussions of strategy. At recent seminar, one delegate, CEO, when asked to list his learning needs, wrote: don’t use the word “strategy” or “strategic”.
That’s bit difficult when you’re conducting seminar on strategic planning!
“Over the years,” he said, “strategic planning has been taken and clouded with mystery. We now need an industry to unravel the mystery.”
As he saw it, the terms had been overused to such an extent (both in literature and in his workplace) that they’d become meaningless. The worry is that without clarity regarding what strategy really is, his organisation will be unable to produce an effective strategic plan.
Another case concerns an organisation whose management had “given up on strategy and gone back to tactics”. Its management had become burnt out by the failure of their strategic considerations to produce anything of value for their organisation. My concern was that in focusing on “tactics”, as they called them, they’d merely be returning to focus on operations and thus be outmanoeuvred by their strategically focused competitors.
In my role as facilitator, assisting organisations to develop strategic plans, I noticed in their previous plans focus on the activities of such departments as marketing, finance, human resources and corporate services – rather than on the organisation’s key stakeholders. This operations focus fails to produce strategic plan – it’s just an operational plan in masquerade.
What is competitive advantage?
It’s important to return to basics. In his various publications, Harvard Business School professor Michael Porter distinguishes between “two basic types of competitive advantage: lower cost and differentiation”.
Lower cost, he explains, “is the ability of firm to design, produce, and market comparable product more efficiently than its competitors. At prices at or near these competitors, lower cost translates into superior returns.”
Porter contrasts this type of competitive advantage with differentiation. In terms of product quality, for instance, the basis of strategy is special product features and service. combination of such features allows firm to command premium price, yet still provide superior value to the buyer.
This framework has influenced many managers’ thinking and can be found in many textbooks. But has Porter got it right? What is competitive advantage? There are important practical implications that flow from answers to both questions.
To define competitive advantage effectively, we must take an external frame of reference. We’ll choose that of customers here, but could just as easily use other stakeholders, such as employees or shareholders. It’s reference point we describe as “outside-in”: viewing an organisation from the outside looking in, not from the inside looking out.
Customers are not interested in operations – activity within an organisation. They’re not concerned with how efficient company is. But they are interested in how internal operations impact on them – in terms of price, customer service, delivery and product quality, among other factors.
It’s this outside-in view that raises the issue of differentiation. It’s by differentiating itself on items such as the above that business achieves competitive edge. We call these items strategic factors, and different set exists for each of an organisation’s key stakeholders – its customers, suppliers, employees, shareholders and so on.
Competitive advantage is achieving superior performance on the strategic factors relevant to key stakeholders.
For customers of car manufacturer like Ford, these include product quality, product features, customer service, product availability and price. When, as customers, we weigh up price with all the other strategic factors like product features – an indication of what we’ll receive for our dollars, we determine value. In other words, value is determined by balancing strategic factors. It follows, then, that competitive advantage becomes equivalent to delivering value on strategic factors superior to that of our competitors.
Approaching competitive advantage and differentiation in this way makes it impossible to see lower cost as anything but change in the frame of reference. Through the lower-cost lens, we’re looking at competitive advantage not from the outside-in, as we do with differentiation, but from the inside-out – not from the customer’s point of view, but from the organisation’s. In doing so, we’ve converted competitive advantage into an internal operations concept. And operational efficiency, while important and capable of improving profits by cutting costs, is not competitive strategy.
If we equate “lower cost” to “lower price” – which wasn’t Porter’s original intention but which many commentators do – then this becomes just another form of differentiation: differentiation on price.
To sum up, an organisation achieves competitive advantage by differentiating itself on strategic factors relevant to its key stakeholders. It takes position on these factors and delivers superior value.
However, it can only sustain its position through operational efficiency, one form of which is cost containment.
To maximise long-term profit, firm must produce effective competitive strategy and achieve lower cost. But lower cost is not competitive strategy.
David Jones – struggle with strategy
Let’s take look at that great Australian icon, David Jones. It has 35 department stores across Australia and is household name. Most Australians and many New Zealanders know it as “quality” store, with all that that conveys.
David Jones’ last five years have involved wonderful success story. You wouldn’t guess it from its recent press, because its department store success has been overshadowed by its Foodchain and online website failures. Both the success and failure stories are based on competitive strategy and strategic factors. The department store got it right; Foodchain got it wrong.
The department store’s competitive strategy is focused on target customer: 30- to 54-year-old high-income woman. David Jones has built competitive advantage on the strategic factors relevant to her.
These include:
• image, through its in-store product brands and advertising;
• customer service, which it monitors vigorously via mystery-shopper programme;
• store presentation, by having clear lines of sight, by not being overstocked and by general ambience; and
• product range – many of the branded products are exclusive to David Jones. This combination of strategic factors allows David Jones to be competitive on price, but it doesn’t aim to be “discounter”.
Peter Wilkinson, until last year the CEO, laid out his and his company’s thinking on competitive strategy at presentation. We can see Porter’s influence here.
Wilkinson described how management queried “whether you should go for price leadership, differentiation or for v
