I’m learning more and more about business strategy lately. I’m taking notes as I’m reading and practicing it. Here’s my high-level summary as a reminder.
Strategy is a set of activities that ensure unique positioning.
- The essence of strategy is choosing to perform activities differently than rivals do.
- Strategy should be sustainable. In other words, the goal of strategy is to maximize profits over time, not through growth.
- Strategy is different from operational effectiveness.
All activities a company performs should fit together. Types of fit:
- Simple consistency. Example: Vanguard aligns all activities with its low-cost strategy.
- Reinforcing activities. Example: Neutrogena markets to upscale hotels, customers try, and more likely to purchase due to premiumness.
- Optimization of effort. Example: GAP in-store product availability and the process to make that happen.
In all three types of fit, the whole matters more than any individual part. Discrete activities often affect one another. A value chain is a series of linked activities. A value chain is a powerful tool for disaggregating a company into its different strategic activities to focus on the sources of competitive advantage.
Competitive advantage is superior performance resulting from sustainably higher prices, lower costs, or both. Competing to be the best feeds on imitation (zero-sum game), competing to be unique thrives on innovation (positive-sum game).
All activities for maintaining a competitive advantage can fall into two broad categories:
- Prevent imitation. Examples: patents and other intellectual rights, and fit (described above).
- Be the first. While being the first in a market doesn’t guarantee success, it can accelerate network effects. There is also nothing else in the market with which to compare a company’s product, so the company can set the baseline.
Two critical questions required for determining if a company can compete in its industry:
- Does a company have advantages that could be turned into profit?
- Does the company’s environment allow turning those advantages into profit?
Five forces as a method for analyzing an industry:
- Power of buyers (customers)
- Power of suppliers
- Threat of substitute products
- Existing competition
- Potential of new entrants into the industry
There are almost always trade-offs. When incumbents want to copy newcomers, they often don’t make those trade-offs.
Deepening a position involves making the company’s activities more distinctive, strengthening fit, and communicating the strategy better to those customers who should value it. But many companies succumb to the temptation to chase “easy” growth by adding hot features, products, or services without screening them or adapting them to their strategy. Or they target new customers or markets in which the company has little special to offer—it’s hard to say “no” to a customer.
As a summary, here are five tests that every good strategy must pass:
- A distinctive value proposition (that you can deliver)
- A tailored value chain
- Trade-offs different from rivals
- Fit across the value chain
- Continuity over time