I definitely had to write a post about Strategy. It is unbelievable the number of people who have no idea what strategy is and why it really matters.
So, here it is, guys, a short and introductory description:
Strategy is the core, the backbone, the bottom line of everything a company does.
What do companies like Nike, Apple, EasyJet, Starbucks, Red Bull, Airbnb, Coca-Cola, IKEA, have in common?
That’s right, they all have a great strategy.
So, what’s Strategy?
First of all, let me tell you that we’ll avoid all the typical theoretical definitions of strategy. It is not that these more academic definitions are wrong, quite on the opposite. It’s just they often are complex for people without a management background to visualize and understand their practical application in a given business.
But, if you’re curious to see what’s a more academic explanation, head over to this link.
Recalling my days at business school, it now feels sort of ridiculous to remember the way professors used to teach strategy courses. After all, this always was one of my favorite subjects in management, and I truly believe strategy is incredibly simple to define, even though it is tough to commit to in a business or life environment.
So, this is what strategy is all about – one word:
Now, you cannot imagine the number of times I’ve seen people completely miss interpreting what strategy is. We use these buzzwords as “strategic option”, “I’m thinking strategically”, “our strategic objective”, you name it. But it’s amazing that the vast majority of our society has really no clue of what strategy really is.
Here’s a typical scenario:
When I was working at my first corporate job, I used to help my fellows who were mainly engineers. Often, I’d ask them:
“Tell me, what’s the target of your product? Is it for small companies or, perhaps, to the larger ones?”
Even in this really simple example, you can already figure out what they used to reply, right?
“Both!” – …Oh, Great.
I’d like to share with you some rules of thumb to easily grasp what’s strategy. With these hacks, I’m confident you’ll be able to think strategically in everything you do in life, way beyond managing your business.
The first thing I want you to know is that strategy really means FOCUS, above anything else. In the example above, my colleagues used to think their products had to serve both small and big companies. They simply couldn’t understand that in order to have an outstanding product and to be highly successful, you cannot disperse your efforts amongst many directions. You have to focus.
It is definitely hard to develop a product if you’re thinking about what small companies need, and trying to merge it with what large companies want. Let’s face it, you’ll always be stuck in the middle.
And this stuck in the middle reality is extremely common whether we’re talking about a business or our own personal life. Most of us will never be able to understand that our businesses are stuck in the middle and that it is the cause of slow or nonexistent growth, not to mention the cases of bankruptcy for the lack of competitive propositions.
This leads us to the importance of saying “NO, we don’t do that“. If you want to know one of the best rules of thumb for strategy, here it is:
Define exactly what are the things that you do NOT do. And then, you have to stick to it, as consistency is what really pays off in the long term. Think about what your business can do best and be ready to say NO to customers that ask you to go in another direction.
And, you know, this is hard. That’s why a lot of people cannot do it, even in their personal lives. Now, imagine when we’re speaking about customers who want to pay you. It’s too appealing, no doubt, but that is why having a strategy is important. Because the next time you feel tempted to deviate from your strategy, you already know that you have a specific plan telling you that you should never leave the right track, and if you’re determined enough to succeed, you’ll find the strength to say “NO, we don’t do that anymore“.
Does it make sense?
You can find these types of questions and doubts in every category of our society. In our own lives, for instance, we face similar dilemmas. Let’s imagine you want to create a business and become an entrepreneur, but you have a full-time job that consumes from 8 to 12 hours of your day time, with commuting included.
If you ask me if you can and should create a business on the side, my answer will always be “yes, of course, you can and I’m happy to help you!”, but naturally, you cannot possibly compare your potential level of effectiveness with someone else’s who is creating a business in full-time.
Preferences aside, the undeniable fact is that the one focusing all his time on the business will definitely have much better conditions to launch and grow a business, not to mention that working in a best-effort approach often leads to giving up due to the accumulation of daily burdens and tasks that suck all your time and energy.
If you still don’t agree with me, let me share this story about Sir Richard Branson:
Some years ago one guy was setting up a major summit and wanted to invite Sir Richard Branson to be one of the main keynote speakers. So, he tried to contact him.
First, he started by a formal invitation, without any compensation associated. Some days later, he receives a rejection letter from Richard Branson’s secretary – I’m not sure if it was the secretary, but for the sake of this story, let’s just assume it was his secretary. The letter said something like “Sir Richard Branson apologizes but he cannot accept your invitation…”.
So, he decides to offer a symbolic compensation – perhaps it was a matter of money. But this offer was also refused. And, still, the man doesn’t give up. He is determined to have Sir Richard Branson speaking at his stage and, therefore, keeps on increasing the compensation proposal up to 500k$.
And the offers keep on being rejected.
So, after several proposals, he finally gives up, exhausted, and asks Richard Branson’s secretary:
“Ok, just tell me: what does it take to have Sir Richard Branson as a keynote speaker?”
And here’s the reply the secretary gave him:
“At this moment, I have clear instructions from Sir Richard Branson not to interrupt him with absolutely nothing that goes beyond his main priority.”
And, you know what? The sad truth is that most people will read this and think:
“Oh, I see, he has so much money that he can manage to easily refuse 500k$. It must be good to be Richard Branson!”
But the blunt truth is this:
It is precisely because Richard Branson always understood the importance of focus that he is now in his position. It is NOT the other way around.
What you don’t know is that he’s been doing this ever since the beginning of his journey. Even when he didn’t have keynote speaking offers such as this one, he was already prioritizing and focusing.
You see, we all tend to seek for excuses for others’ success because we don’t want to see what’s the real truth. Often, this truth is quite simple to understand, but because we think it is that obvious, we don’t take it seriously and we fail on executing it.
So, here’s the reality: it all comes down to really simple things such as having the consistency and determination to do only the ONE AND MOST IMPORTANT THING at a time. This is what strategy is all about.
And what Richard Branson is doing by asking his secretary to reject everything that draws his attention in another direction is, simply, being strategic. He’s saying “NO” to whatever appears because it surely isn’t as important as his main project.
And this capability to say “NO, we don’t do that stuff” is distinctive in successful people and, ultimately, is what separates the thriving companies from those who cannot endure in an ever-changing environment.
Never be stuck in the middle. The companies that don’t have a unique positioning will never be incredibly good at anything because they will always be competing with other companies that apply 100% of their efforts in the same product. And, unless you have an unfair advantage, I really don’t see how you can expect to outrun someone sprinting in a straight line if you’re constantly switching routes.
So, I hope by now you understand what strategy is but, most of all, I hope that you realize how in our own lives we’re constantly choosing to do everything, developing all the skills, targeting all the segments, etc. It is hard to say “NO”, I get it. But that’s what it takes to achieve whatever you want to achieve in life.
Now that we understand what FOCUS is, we’ll address Competitive Strategy, so you can visualize how to position your company in a specific market and the type of reasoning you must go through.
We will now enter a new strategic dimension called “Competition”.
Here, my go-to guy is and will always be Michael Porter. At the end of this article, I’ll leave you some additional resources and one of the videos will be a 1-hour conference call with Michael Porter in which he explains competitive strategy in detail.
Michael Porter introduced a large part of what are the management concepts we use nowadays.
I wanted to explain you the importance of having FOCUS before we dive in competitive strategy because, as you’ll see, both subjects are highly connected by the type of reasoning.
Strategy is about being UNIQUE
Probably the most important thing I’ve learned with Michael Porter is that strategy is not about being the best. It is about being UNIQUE.
And this is huge.
Recently, I’ve written an article about how you beat a stronger, bigger competitor. In this article, you can learn why you should never fight fire with fire in spite of what most people think.
It’s not about beating your competitors; it’s about finding a unique positioning for your company, a unique story and value proposition to your customers, so they will never confuse you with your competitors.
For example, who would say that Apple can be confused with Microsoft or Dell? Or, for instance, no one says that Red Bull is like Coca-Cola, right? And what about Mercedes being Volvo?
You see, even though we’re talking about companies that compete in the same industries, the fact is their positioning in the market is absolutely unique and differentiated. You cannot possibly confuse the brand Red Bull with the brand Coca-Cola. And I’m not only talking about the visual aspects, I’m talking about everything else:
- The product itself
- Brand values
- Channels’ distribution
- Target market
- People they hire
- Where they choose to have their headquarters
- Internal culture
And so on.
Here, I’d like you to start framing a very important concept:
Being unique is the tip of the iceberg visible on top of the water. And even though it is absolutely paramount, it doesn’t exist if you don’t have a whole and giant block of ice beneath it.
This means that being unique is the consequence of the strategic reasoning, but this position only leads to outstanding payoffs if you build the necessary foundations beneath it. And those foundations are EVERYTHING the company does. Agree?
So, three very important notions:
- It is not about being the best, it is about being UNIQUE.
- Being UNIQUE is only achievable if you build the necessary foundations.
- The foundations are virtually EVERYTHING a company does.
And here we’re talking strategy.
This is what strategy is all about. In this case, we’ve to call it competitive strategy because, as you’ll see next, it is quite rare to find a company that creates such a blue ocean that has presently no competition whatsoever. In the vast majority of cases, you’ll always have competitors to play against.
So, I believe it is now the right time to present you The Three Generic Strategies of Michael Porter.
Through these three generic strategies, I hope by the end of this article you’ll have a clear picture of how you want to position your business or, at the very least, what’s the strategic reasoning that you must go through when creating a company.
So, here they are: The Three Generic Strategies
First, a brief explanation on the graphic above, so you don’t get lost:
This is a typical 2×2 matrix, in which you have on the left the dimension of the target and on top the key advantage of your business.
The goal here is to think where your company belongs. Should you position your company as a cost leader? Or, perhaps, as a different and unique product? And what about the size of the market? Do you think you can address an entire industry or only a small niche?
As you can see, you can either choose to go for the whole industry or for a specific segment. Secondly, you can choose to be unique and different from the standard, or you can be the cheapest in the market. When you coordinate the options, you’ll have three types of strategies that I’ll present and detail below.
But the important here is that you understand that being stuck in the middle is by far the worst option.
Even though I’m doing my best to make it as simple as possible, if you have any doubts on this, please email me to email@example.com.
1#: COST LEADERSHIP
What cost leadership really means is being the cheapest in the market. To understand this, it is important to detail a bit how you can have cost leadership. Because, you see, you can only be the cheapest in the industry if you have a competitive advantage on the amount of money you pay to sell one product.
Producing a product cheaper than anyone else will usually require one of two scenarios, or both:
- Economies of scale: the bigger your company gets, the lower your unit cost becomes because you can dilute all your infrastructure costs for all your production output. If you produce more products, you’ll have a lower average unit cost. 10 divided by 100 is not the same as 15 divided by 1000, you see? Usually, companies with large infrastructure and worldwide production scale will be able to produce a lot cheaper than a small company selling only locally.
- A secret sauce: if you have a specific and scarce know-how, or you’re the only one from the industry with access to a really cheap labor market, you’ll then be able to exploit a specific unfair advantage that helps you reducing your cost structure. By the way, the cost structure is the whole puzzle of your company’s costs. Briefly, you can have fixed costs or variable costs. And if you find a secret sauce to reduce one of these types of costs, you’ll be able to price your products cheaper than your competitors.
Now, all I wanted you to understand is that this generic strategy is based on having a key to produce your products at a lower cost than your competitors, and because you can do so, you’re able to be the cheapest in the market.
This also means you’ll be focusing on volume. When you’re the cheapest, it means your margins are really low, and that’s actually OK, as long as you sell a lot more than your competitors. So, this is why you’re going for the whole industry and not for a narrow niche.
Typical references with this strategy are: Walmart and IKEA.
In the differentiation strategy, you’re still addressing a whole industry. However, you’re not competing on price, but you’re rather competing based on a unique value proposition that is intrinsically different from all the other competitors.
As we’ve mentioned previously, a company seeking to differentiate its offer won’t be too concerned about having a higher unit cost that its competitors. After all, this company is adding more value than the average of the market, and the trick here is increasing overall profit margins.
There are many ways you can add more value. As an example, you can, for instance, work on the packaging to increase the value perceived. If you want to position your product as unique or, at the very least, different than all the others, you can have a fancy packaging which will naturally be slightly more expensive.
But besides the packaging, you can also work on many other choices, from the service level to the quality of your product, to the number of features or the support you deliver, etc., etc. You can even work with pricing. Did you know there’s a thing called placebo effect?
It turns out when you price a bottle of wine for 99$ instead of 5$, people will actually believe the most expensive tastes better. But when you switch the wines, guess what… customers still believe the expensive is the best. 😉
Typical references with this strategy are: Apple and Starbucks.
Now, finally, we arrive at what I’d always recommend as the initial strategy of any firm.
Besides being called “FOCUS” – which is great -, this strategy is paramount for any early stage venture because these don’t usually have the necessary means – neither will they be successful – to compete in multiple segments or within an entire industry.
A brand new startup cannot compete with an established company in the market, right? There’s no way I’d ever recommend you to head-butt someone who is bigger or larger than you. So, why would we do that in a business environment?
You see, these three generic strategies can be quite insightful, but IMHO, the real deal is this third one, the FOCUS strategy.
This option will be divided into two major blocks, as you can see by the top axis:
- You can have a focus strategy oriented to differentiation
- Or you can have a focus strategy oriented to cost leadership
The thing is: focusing on a small set of customers and exploring a low margins’ business model (cost leadership) doesn’t make that much sense to me. If there aren’t many guys willing to pay for a product and you cannot make a lot of money from it, the idea seems a bit more like a labor of love. Do you agree?
So, I believe we have to focus specifically on the first alternative – differentiation. And here’s how it works out:
You create a product that serves a narrow set of people and that has really high-profit margins. This is how great businesses are built; you find the early adopters that are more than willing to buy a product that solves their burning pains – or perhaps you find a way to develop a product way better than your competitors’.
Now, I’m not saying this is the only strategy that matters, obviously. My recommendation is that you start with the end game in mind, understanding from the get-go where you want to position your brand and entity for the long run, but follow a focused strategy in the early days of your company.
Great businesses never start big; they start small and grow from the ground. They address one customer at a time, and often manually. Their goal is to create something that will be missed and to be able to generate enough money so they can repeat the whole manual process, until one day it becomes automatic and they can scale.
One note about scaling up:
We usually have this idea that scaling means conquering the world, right? Well, I just want you to know that earning more revenue or finding more customers to your product doesn’t necessarily mean you’re conquering the entire planet.
It means that the small niche you’ve selected in your country can also be found in many other countries, for instance. It doesn’t mean that you’ll suddenly be addressing the whole industry, you see?
A practical example:
If you create a really expensive beer club because you understand a lot about beers, and there are a small group of people willing to pay for two new beers every week recommended by you, it doesn’t mean that to scale you’ll need to address the whole beer industry and compete with Heineken. Not at all. To scale this business, perhaps you just need to increase your suppliers’ base and make sure you can serve this hyper-niche in each and every country.
Typical references with this strategy are: Niche Websites, Prada, Ferrari.
Great! So, I hope this is the article that can finally explain you in a simple way what strategy really is, why it matters, and how can you start thinking strategically about your business and also in all the other matters of your life.
At the end of the day, strategy is focus, and my humble recommendation is that you always seek to be unique.
I’d like to wrap up by sharing this brief story:
Once, Ramit Sethi said that people used to unsubscribe from his mailing list because from time to time he swore a bit. They would be shocked and would say things such as:
“How can you speak like that? Don’t you have decency? I’m unsubscribing immediately!”
But here’s the thing:
As Ramit says, it is OK if you don’t like him to swear. That’s fine! But that’s the way he is. So, while some guys won’t accept that, the fact is a lot more people will actually admire him for being human and transparent. He’s showing that he could virtually be a friend or a neighbor of yours.
And, besides, the moment Ramit stops being as he is and becomes equal to everyone else, that’s the day people will stop caring about him.
You see? This is positioning.
In this example, I don’t know if Ramit does this on purpose (I actually think he does because he doesn’t let anything to chance). But the fact remains: this is his positioning, and it’s a damn good one, by the way.
So, how will your business be unique? How will you differentiate from everyone else?
What is the story that you want your customers to tell their friends about buying your product?
This is strategy. Strategy is not a 250 slides deck with 45 action points. Strategy is focusing on what’s really core, and building the foundations to be seen as unique, apart from any other company.
I hope this was a fresh perspective on strategy for you, and I’d like to leave you with two great videos that I’ve watched more than 10 times each.
They are long, more than 1-hour duration if I’m not mistaken, but as anything in life, I’ll always recommend you seek the detail and the content, and never settle with the shortcuts and quick hacks.
Thanks for reading, I hope this material helps you accomplishing your goals.
Here are the videos.
The first one is from Professor Michael Porter on Strategy. Here’s where I learned – I guess – that strategy is not about being the best, but being unique.
The second one is from Professor Richard Rumelt on Good Strategy vs Bad Strategy. Here’s where I learned that strategy is focus.
Thanks for reading,