Shifts happen. The study or practice of strategy design is no different. The time-tested ‘classic’ constructs, such as Porter’s Five Forces and Competitive Advantage, that strategists have grown to love over the last few decades demand a rethink of their universality of application today.
There was a time not so long ago when the leadership team in an organization would go on a strategy retreat at the end of a year and chalk out the strategy for the year ahead (or even several years at a time – the era of the 5-year strategic plan). The team would make use of well-accepted frameworks to assess their industry, identify the threats and opportunities, and devise ways to sustain their competitive advantage. That was strategy. Not much more seemed to be required.
Two critical assumptions underpinned the study of strategy at the time. First, industry was the most important factor to analyze. And since an industry was viewed to be relatively stable, if we could spot industry trends and design our strategy accordingly, the ROI of the analysis was quite significant. Second, once competitive advantage was achieved, it was sustainable. When a solid position is attained within an industry, a firm could optimize other factors, such as people and processes, to further strengthen these advantages.
To be sure, we can find examples of success based on these two assumptions even today, in industries such as aircraft manufacturing, mining, and food production. But in an increasing number of sectors and for an increasing number of firms, this does not accurately represent how the world looks like any more. Instead sectors such as hi-tech, travel and music are facing situations where advantages are mimicked rapidly, technology shifts, or customers explore other alternatives, and competitive advantages are no longer sustainable for long.
A recent article in The Economist provides a good example of the predicament a firm can find itself in when it clings on to such assumptions too strongly for too long. The article traces Microsoft’s strategy during the Bill Gates and Steve Ballmer era: “Everything Microsoft did had to strengthen Windows, to make it ever more crushingly dominant.” Microsoft had found its competitive advantage, and directed much of its resources and talent to strengthen its advantage. Contrast this with the Apple strategy for most of its history: build competitive advantages but recognize that the advantages are transient, and be prepared to ramp-down and disengage from those advantages as you build new advantages. The result of those two fundamentally different strategies over a sufficiently long 25-year period is beautifully articulated in a simple chart in that article.
Another classic construct that is intrinsically connected to the concept of competitiveness and one that requires a fundamental rethink today is marginal costs. In every finance and economics class we took at university, we were taught that in order to evaluate alternative investments, we should ignore sunk and fixed costs, and instead base our decisions on marginal costs and marginal revenues. By definition, this biases firms to leverage what has already been put in place to succeed in the past, instead of creating capabilities needed for future success.
The underpinning assumption in this situation: the future is exactly the same as the past. If, however, the future turns out to be different (and it almost always is), then marginal cost analysis will lead to marginal thinking, which causes established firms to continue to leverage what they already have in place. They will end up paying far more than the full cost because they will lose their competitiveness. This is why big, established firms with lots of capital often find certain new initiatives too costly, while small, new entrants with much less capital find the same initiatives straightforward. bKash with respect to its much larger financial sector competitors in Bangladesh’s mobile banking sector is a case in point. Henry Ford had once said “If you need a machine and don’t buy it, then you will ultimately find that you have paid for it and don’t have it.” The same thing can be said about strategy, with one exception: replacing the “if” with a “when”.
This article was written in 2015.
pi STRATEGY