Many companies struggle to develop a good competitive strategy and to set a clear direction for managers and employees. Strategy formulation, in fact, almost poses as many challenges for business leaders as strategy implementation. The solution is a back-to-basics approach — and a framework that addresses four fundamental questions about where and how the business will compete.
“Strategy is often like desert rain. Before the raindrops leave the desert floor, they evaporate, creating little or no effect below” — George Labovitz and Victor Rosansky, The Power of Alignment (Wiley, 1997).
Failure rates for strategy execution are notoriously high: estimates by academics and consultants range from 40 to 90%. It’s no surprise, then, that strategy execution is high on today’s agendas, ranking as a top priority in the CEO challenge reports published by research group The Conference Board in 2007 and 2010.
So how can you reduce the risks of things going wrong? The first step is to get the formulation process right. Making sure different activities are aligned with the strategy and that employees are committed to making it work is essential — but secondary. Implementation will always be difficult — if not impossible — when the strategy itself is low-quality and lacks coherence.
One of the key characteristics of effective formulation is clarity. The starting point is to be clear about what strategy actually is. The meaning of the word seems to have got lost amidst the jargon and acronyms — Blue Oceans, ambidexterity, TQM, etc. Many companies confuse strategy with ‘mission’ and goals. Statements such as “our strategy is to double our sales in three years” are not uncommon — and they say very little about how a business plans to achieve its goals.
A strategy is, essentially, an integrated set of decisions about where and how to compete. It defines the business, its place in the market and its future direction — and it does so coherently and precisely. It follows that the core of strategy formulation is making clear choices. The next ‘step’ is to find answers to four fundamental questions — and questions that flow from them:
The answers to the first two questions — whom the company serves and what it provides — set the company’s competitive arena. The answers to the last two decide how a company can win in its chosen arena — they describe the competitive theme to both customers and employees and decide the model that relates to it best.
It should be stressed that the quality of the responses is critical. Best-in-class companies don’t just answer the questions, they answer them more sharply and more distinctively than their competitors and they discover their USP.
The four questions provide a strategy formulation framework that can be used to help companies win a competitive advantage.
Once they’ve been answered, leaders can begin the work of aligning activities with a core competitive theme and of creating an organizational context — for example, a collaborative culture — that ensures employees and managers are committed to making the strategy work.
In the best organizations, the strategy formulation framework starts a virtuous circle that drives performance. The strategy leads to a set of coherent, reinforcing activities that lead to results when supported by committed employees. Committed employees then provide further input that leads to further strategy refinements and new activities that increase commitment.
Effective implementation of an effective strategy is, in other words, an iterative process that strengthens performance over the long term.
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