One lecture that has really stayed with me was given by our superb lecturer Gianvito Lanzolla. He asked us a simple question, “What is strategy?”. It should have been a really easy question to answer but after much debate we did not have a coherent answer.
“Strategy is value creation and value appropriation it involves difficult trade-offs and needs to be reinforcing with the objective to create sustainable competitive advantage.”
Michael Porter also makes the important point operational effectiveness is not strategy. Operational effectiveness means performing similar activities better than your rivals, where as strategy is performing different activities from your rivals or similar activities in different ways.
Value creation
Providing something that customers want and they are willing to pay more than it cost to produce.
Value capturing with unique positioning
Capturing value is about being different (ideally unique) and deliberately choosing a different set of activities so that customers cannot buy the same product elsewhere. For example Ryanair offer low cost flights to out-of-town locations and does not fly long haul.
Porter argues that strategic position comes from three sources:
- Serving few needs of many customers (e.g. Evian only sell water nothing else)
- Serving broad needs of few customers (e.g. Northern Trust targeting only high-wealth clients)
- Serving broad needs of many customers in a narrow market (e.g. Carmike cinemas who operate in towns with population less than 200,000 people)
Difficult decisions and trade-offs
Resources are always limited so you must make difficult decision and trade-off when you develop your strategy. For example Southwest airlines could choose to serve meals or it could not but it cannot do both.
Reinforcing choices and strategic fit
You need to develop your strategy so that elements of the business model “reinforce” each other or “fit” well. Elements fit well if the value of each element is increased by the presence of the other, an example might be Border’s decision to sell a wide range of books and their decision to invest in cutting-edge inventory tracking software.
How do you describe your strategy?
A very simple but powerful tool to describe your strategy is who, what, how.
Who is the customer (and who is not)
What is the value proposition (and what is not offered)
How do we deliver it (and how do we not deliver it)
Final thought
Competitive advantage erodes over time and must be renewed, once you have achieved success you must start looking forward to your next renewal.
Links
If you want to see Gianvito in action here are a couple of videos:
- Gianvito Lanzolla on the Digital Revolution
- Dr Gianvito Lanzolla on the correct strategy for western businesses In China
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