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BOOK REVIEW: How to get the basics of your business strategy right

Jul 05 2018 06:01
Ian Mann

FT Guide to Strategy: How to create, pursue and deliver a winning strategy, by Richard Koch

"The sad fact is that strategy development is rarely done by the right people," Koch asserts.

The first part of his book is a start to using strategy effectively in your business. All too often, managers running clearly defined businesses, or business units, never get to grips with strategic insights.

In many businesses, or discrete business units in corporations – where strategy is used to improve the business – it is developed by two groups of people. One will draw up a plan, making recommendations, and may even do the monitoring. The second group will take care of implementation.

This rarely works, primarily because those who are supposed to be pursuing the new strategy don’t understand what went into developing it, don’t believe it, or don’t have the authority and confidence to adapt it to the changing circumstances of commercial life.

Many roads lead to Rome

There are many approaches to strategy, and like any other discipline, it has evolved and developed.

Many people still think of strategy as the answer to 'where we are now, where we wish to be in the future, and how to get there'.

Once you have answered these questions, you have a strategic plan. But this presumes that there is no competition; and that getting your company to follow the plan will happen just because you put it in writing – when your company quite possibly isn’t even able to deliver their goods on time. 

The beginning of developing a strategy, as described by Koch, is a blend of understanding the   profitability of your business currently, and understanding your competitive environment. This is undoubtedly a useful starting point, but requires that managers get involved in doing most of the work.

In this way, they will also see that strategy is not an inaccessible activity that can only be performed by highly trained outsiders.

It will alert participants to the fact that businesses generally don’t develop their strategies scientifically and rigorously. It involves a great deal of intuition and creativity. It also involves a significant amount of effort.

First steps

The quickest and most reliable way to get a realistic view of the business, is to do a detailed analysis of profitability by customer segment and product. Most businesses can be described as an island of profitability in a sea of red ink – few areas of profit-making and a hoard of loss-making units.

This is an important first step, because money does not lie.

Business success requires that companies focus where the money is in the short-term and long term. This entails the answer to two questions: are we in an industry that is worth staying in, and how can we do better than we are?

One determines how much the race is worth; the other, whether you win the race.

Industry attractiveness, on average, explains about 30% of the difference in a business’s profitability. The business’s competitive position within the industry, their management, skills and culture, explain about 70% of their success.

Getting ahead

A good industry to be in will give most of the businesses in the industry high returns on capital, and these will either be stable or rising. The industry will have clear barriers to entry and possibly even barriers to exit for customers, and little threat from substitutes. The output capacity of the industry would be at or below the level of demand. And so on.

But the most likely route to the success of your business remains within your control.

"The beginning of wisdom is to identify your core customers," Koch asserts. Core customers typically comprise less than half of your sales, but if you work your business correctly, will give you most of your profits. Koch is very committed to the 80/20 rule (he wrote a book by this title) according to which the focus on a small group of activities will produce a large, disproportionate amount of profit.

Finding your focus

This idea leads into the next important matter that must be addressed – where to focus. To arrive at this decision requires that you analyse your offering for profitability.

You could do this by segmenting your products or services, and identify the most profitable of these in the short and longer term. This segmentation could be geographic, or demographic, or any other segmentation that is relevant to you.

"You generally discover that some business is much more profitable than you thought before, and that some business you thought worth having, is in fact very unprofitable," Koch notes.

Armed with this information, you should now identify how strong you are in competitive terms.

There are many ways in which you can compete, limited only by your imagination, creativity and ability to learn from others. You could compete with 'operational excellence', which could enable you to be the lowest-cost supplier while not eroding margin.

You could compete with 'product leadership', having the best products and constantly innovating to stay ahead of rivals.

You could compete with 'customer intimacy', by personalising products and services based on knowing best what each individual customer wants.

If you attended business school, you will find very little of value in this book. And the little value you will find is in the alphabetically organised list of brief introductions to Strategy Thinkers, and a similarly organised list of ideas and tools that are commonly used in strategy conversations and work. 

For all those who did not attend business school, this book is a useful introduction to the essential discipline of strategy. It provides useful first steps and will enable the reader to participate with some confidence in strategic conversation.

Readability       Light ---+- Serious

Insights                      High --+-- Low

Practical           High -+--- Low

*Ian Mann of Gateways consults internationally on strategy and implementation and is the author of the recently released ‘Executive Update.’ Views expressed are his own.

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ian mann  |  business strategy  |  book review


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