Strategy is both the goal of an organisation, and the pathway it follows to achieve that goal, defines Jo Whitehead in What You Need to Know about Strategy ( www.wiley.com ).
Distinguishing that all intended strategies are decisions, but not all decisions create strategies, he adds that a strategic decision is one that is difficult, hard to reverse, and involves the commitment of significant resources for the opportunities being pursued in the face of constraints. “For example, Apple's strategy for the iPod could be to maintain market share above 60 per cent (the goal) in the MP3 player market (the opportunity) through continuous investment in product upgrades (a commitment of resources), while still delivering profit margins of at least 25 per cent (a constraint).”
External environment
The author offers the acronym EIEIO to capture the six basic strategy questions: What is the external environment, what is the internal situation, how might the situation evolve, what is the primary issue, what are the options, and which option is best.
To emphasise the importance of the external environment, he narrates the case of Honda which famously misunderstood the US motorcycle market when it first entered that country. It knew that there was a market for large bikes and tried to sell its most powerful machines – but these models proved to be unreliable in the US, where the average journey was much longer than on crowded Japanese roads, recounts Whitehead. “It was only when customers started to ask whether they could buy the smaller 50 cc bikes that Honda managers were riding as work vehicles that they realised that this was an untapped market. Even then, senior management took some persuading.”
A chapter devoted to understanding the market speaks of segmentation to help analysis. Useful caution, however, is that traditional segments may, over time, become irrelevant. Take, for instance, the UK insurance business in which Direct Line became the first to use the telephone as the main channel of communication; and the company, started in 1985 with 65 employees, now employs 10,000 people and is the recognised industry leader, informs the author. “More recently, the emergence of another new channel, price comparison Web sites, has allowed new insurance companies to set up with very low overheads, selling insurance at low prices.”
Internal situation
As for the internal situation, two aspects must be understood – the objectives of the organisation, and its capabilities, guides Whitehead. And the tricky part, as he puts it, is to view both these in the context of the external environment. For, “It is not enough to know that you have capabilities in R & D ; you must understand how valuable they could be in generating superior products for customers and how these capabilities compare with those of your competitors.”
To avoid a navel-gazing exercise about your own organisation, begin by asking yourself what it is that you do to meet the needs of those you serve, the author advises. “What value do you create for them? What makes them want to buy, or not buy, your product or service? This is sometimes described as a CVP (customer value proposition) or USP (unique selling point).”
Looking back at the 1960s and '70s, the author reminisces how, at that time, companies with strong positions appeared to be the most successful in the long run, whether they were in mature markets such as cars (GM and Ford) or earth-moving equipment (Caterpillar), or higher growth markets such as computers (IBM) or photocopiers (Xerox). Decades later, during the 1980s and '90s, even companies with strong positions could be outmanoeuvred, as he reminds. “Toyota and Honda took on the US auto giants, and Komatsu caught up with Caterpillar. Emerging competitors such as Compaq, Intel and Microsoft took market share away from IBM, as did Canon from Xerox.”
Cost evaluation
The book discusses a direct approach to evaluating competitive advantage – that is, by comparing your costs and price point with those of different competitors. Although this normally requires extensive data collection, modelling, and educated guesses, a simple suggestion of the author is to start with your own cost structure and average prices and then think through how these might vary for your competitors.
An example given in the book starts with the cost structure of a traditional European airline and then estimates average prices using travel Web sites, and also uses data on the number of seats and utilisation of planes collected through surveys of budget airlines carried out in airports. A telling finding from the sample analysis is that budget airlines typically have 20 per cent more seats and enjoy a 30 per cent higher utilisation of those seats, providing significant cost savings on fuel, plane leasing, staff and airport charges.