Are You Sure You Have a Strategy?

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Donald C. Hambrick

Columbia University Graduate School of Business

Consider these statements of strategy drawn from actual documents and announcements of several companies:

“Our strategy is to be the low-cost provider.”

“We’re pursuing a global strategy.”

“The company’s strategy is to integrate a set of regional acquisitions.”

“Our strategy is to provide unrivaled customer service.”

“Our strategic intent is to always be the first-mover.”

“Our strategy is to move from defense to industrial applications.”

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Our central concept of how we will achieve our objectives

Our recognition of an opportunity and plan for seizing it

What should it do for us?

Guide our resource allocation and daily actions

Guide our design of organizational arrangements

Provide a catalyzing “shorthand” of what we are all trying to do

What Is Strategy?

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Strategy

Our central concept of how we

will achieve our objectives

Objectives

specific targets

Supporting Organizational Arrangements

structure rewards

processes people

symbols activities

functional policies and profiles

Strategic Analysis: C3E

Customer analysis

Competitor analysis

Company capability analysis

Environmental analysis

Mission

fundamental purpose

values

Putting Strategy In Its Place

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What will be our speed and sequence of moves?

Speed of expansion? Sequence of initiatives?

Where will we be active?(and with how much emphasis?)

Which product categories? Which market segments? Which geographic areas? Which core technologies? Which value-creation stages?

How will we get there?

Internal development? Joint ventures? Licensing/franchising? Acquisitions?

How will we win in the marketplace?

Image? Customization? Price? Styling? Product Reliability? Etc.?

Arenas

Differentiators

Vehicles Staging Economic

Logic

How will we obtain our returns?

Lowest costs through scale advantages? Lowest costs through scope and replication advantages? Premium prices due to unmatchable service? Premium prices due to proprietary product features? Etc.?

The Five Major Elements of Strategy

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Value-Creation Stages

A biotech company

BasicResearch

Product Development

Clinical RegulatoryTrials/Approvals

Manufacturing Marketing/Sales

Distribution

A toy company

Product Development

MarketResearch

Marketing/Advertising

Sales Distribution/Logistics

Manufacturing

Stages Done In-house Stages Outsourced

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Wide

Geographic Scope

Narrow

WideNarrow

Product line breadth

Stage 1

Stage 2

Target

National

GeographicScope

Regional

Weak Strong

Brand power

Stage 1

Stage 2

Target

Currently

Examples of Strategic Staging

a: printing equipment manufacturer with plans to expand internationally and broaden the product line

b: regional title insurance company with plans to expand nationally by acquisition and build a superior, prestigious brand

Stag

e 3

Currently

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•

•

Economic Logic:

How will we obtain returns above our cost of capital?

Pricing Leverage: a) Premium prices, b) from price-insensitive buyers, c) for product features they deem very

appealing, d) and which competitors can’t

readily match.

Cost Leverage: through scalethrough scopethrough replication and experiencethrough advantageous endowments

Asset Leverage: extraordinary asset turnsextraordinary asset longevitybrand leverage

Combinations are possible!

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Arenas

Differentiators

Vehicles Staging Economic

Logic

IKEA’s Strategy

Arenas

Inexpensive contemporary furniture Young, white-collar customers Worldwide

Vehicles

Organic expansion Wholly-owned stores

Differentiators

Very reliable quality Low price Fun, “non-threatening” shopping expreience

Economic Logic

Economies of scale (global, regional, and individual store scale) Efficiencies from replication

Staging

Rapid international expansion, by region Early footholds in each country; fill-in later

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Another Example:GE Transportation Systems --

Locomotives

Arenas

Differentiators

Vehicles Staging Economic

Logic

Arenas

Diesel Emphasize long and heavy hauls (including industrial and mining) Americas, Asia, Middle East, Africa Limited defensive position in Europe

Vehicles

Wholly-owned subs with extensive service sites Selective JVs in Europe (including Eastern/Central)

Differentiators

Service Mileage/operating efficiency Safety Operator comfort/ergonomics

Economic Logic

Premium prices for superior product and service Lowest diesel manufacturing costs (Erie factory)

Staging

1: New Model X by Year 2 Push very aggressively in Latin America and Asia Sign Eastern Europe JVs

2: New Model XX by Year 4 Push aggressively in Africa

Throughout: 5% annual productivity gains Wait-and-see in Western Europe

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Testing the Quality of Your Strategy

Key Evaluation Criteria1. Does your strategy fit with what’s going on in the environment? Is there healthy profit potential where you’re headed? Does your strategy align with the key success factors of your chosen environment (s)?

2. Does your strategy exploit your key resources? With your particular mix of resources, does this strategy give you a good “head start” on competitors? Can you pursue this strategy more economically than competitors?

3. Will your envisioned differentiators be sustainable? Will competitors have difficulty matching you? If not, does your strategy explicitly include a ceaseless regimen of innovation and opportunity creation?

4. Are the elements of your strategy internally consistent? Have you made choices of arenas, vehicles, differentiators, and staging, and economic logic? Do they all fit and mutually reinforce each other?

5. Do you have enough resources to pursue this strategy? Do you have the money, managerial time and talent, and other capabilities to do all you envision? Are you sure you’re not spreading your resources too thinly, only to be left with a collection of feeble positions?

6. Is your strategy implementable? Will your key constituencies allow you to pursue this strategy? Can your organization make it through the transition? Are you and your management team able and willing to lead the required changes?

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