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Don’t mistake your humdrum annual plan for your strategy

Mar 02, 2009 Business Daily, Strategy

“There is nothing like a crisis to clarify the mind. In suddenly volatile and different times, you must have a strategy. I don’t mean most of the things people call strategy – mission statements, audacious goals, three- to five-year budget plans. I mean a real strategy.

For many managers, the word has become a verbal tic. Business lingo has transformed marketing into marketing strategy, data processing into IT strategy, acquisitions into growth strategy. Cut prices and you have a low-price strategy. Equating strategy with success, audacity, or ambition created still more confusion. A lot of people label anything that bears the CEO’s signature as strategic – a definition based on the decider’s pay grade, not the decision.

By strategy, I mean a coherent response to a challenge.”

Richard P. Rumelt, ‘Strategy in a Structural Break’, McKinsey Quarterly (2009 No 1)

A fine fellow, Richard Rumelt. He is a renowned professor of strategy, but never tires of clarifying the term for managers. In my experience of working with scores of organisations and their CEOs, people almost never ‘get’ strategy. They mistake strategy for plans, strategy for tactics, strategy for goals, strategy for pricing, strategy for computerisation, strategy for every damn thing but strategy itself.

So what does Rumelt mean when he asks us to think of it as “a coherent response to a challenge?” Simply that strategy is a reply to a question asked by big forces: industry upheavals, economic meltdowns, technological change, customer evolution, new competitors. These forces have the potential to ruin you – or to take you to new heights.

A strategy is a consistent pattern of thought and action in response to these forces – a great reply to the question the changing world is asking of your organisation. For example, IBM was the world’s dominant computer maker, relying on integrated mainframe computers to exercise its dominance. But changing needs combined with technological advancements in the 1980s meant that the consumers of computing increasingly wanted it decentralised, personalised and simplified. Demand for computing was about to explode – but not for the IBM way of providing it. IBM lurched from one wrong answer to another to this challenge, before finding one that saved the company: making a systematic move away from being a hardware and software vendor to being a company with a competitive advantage in selling analytical solutions. In other words, the box ceased to be important; what to do with the box became the real issue.

Making this strategy real took the better part of a decade for IBM. If it introduced new boxes, or cut the price of some of them, or bought another company or two: none of those things were strategic in themselves. They made sense only if they were part of a longer-term ploy to change its competitive position. So the lesson to managers about strategy is this: look beyond the immediate, the momentary, the trivial; and learn to generate strategies that look at the big picture and play themselves out over a longer time-frame.

Strategy is about the systematic development and exploitation of competitive advantage. Aha, another mysterious term to confuse you with. Here too, Rumelt simplifies it: if you can take business away from competitors at a profit, you have a competitive advantage. Not by cutting prices to the bone or by making your products ruinously attractive – anyone can do that. You have to be able to take business away AND make money. Equally, your competitive advantage has to survive downturns – there is no value in an advantage that unravels in a recession.

So the challenge for business thinkers: can you understand your industry deeply, and work out a coherent response to the forces that are going to shape it? Can you develop a competitive advantage that makes you money, and keeps making it? THEN you have a strategy.

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