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Why strategies don’t work – Part 2

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Some years agoTom’s startup really made it: the online platform devised by him and his friends revolutionised the market. The trio’s strategy had paid off and within only three years their firm, having set off as a small living-room startup, had developed into a booming business with 15 employees, a turnout of hundreds of millions and a market share of over 30 percent.

But despite the seemingly positive figures Tom feels the pressure imposed by investors constantly growing and his position is becoming shaky. While revenues and his market share have lived up to his expectations, his company has still not been able to generate profits even though initial development expenditures and marketing costs were not higher than expected.

 

Tom is not the only person who has to fight these difficulties. According to an up-to-date study carried out by David J. Collis from Harvard Business School business strategies misfire because they fail to consider their whole strategic landscape. Young businesses and startups in particular founder regularly as they do no sufficiently take into account value capture and value realisation.

A company’s strategic landscape

As was described in this mini series’ first part, a firm’s strategic landscape comprises business opportunities, the value potential of the respective business model, an enterprise’s value capture and value realisation and their final output.

For a business strategy to be successful, you need to look at all five of these areas, find a suitable answer that does justice to each of them and unhesitatingly translate them into consistent action. While, as was explained in my latest blog, established companies tend to lose track of changes in business opportunities, startups typically make mistakes in a different area of their strategic landscape.

Common mistakes committed by startups

The main strength of startups is that they address so-called hot topics and transform them into a novel business model, or that they fundamentally change the way customers’ needs are met. Naturally, this strategy concentrates on the first two components of their strategic landscape, i.e. business opportunities and value potential.

Yet, to go beyond business opportunities and attractive business models and to lead a company to long-term success, careful consideration should be given to the remaining three elements of a company’s strategic landscape. This is a standard weakness of young businesses and startups: They overestimate the opportunity of making profits in the new market, whereas they ignore the strong likelihood that competitors will eventually copy their ideas, or the young firm fails to build efficient structures and to develop necessary competences of staff.

What follows is, as with Tom and his friend’s firm, that these companies my be capable of creating considerable growth and amplify substantial market shares, but in the long run they will find it difficult to create attractive margins from their turnover and their gained market share.

Robust strategies for startups

If you wish to develop a robust strategy, you have to field all aspects of a company’s strategic landscape. From the outset, startups ought to include questions of value capture and value realisation in their strategic planning.

A good starting point is the following set of four questions:

  • Will our business sector deliver decent profits?
  • How will established companies react to our market launch?
  • How easily will our business model be imitated?
  • How can a startup be scaled up efficiently?

The first question can reveal if a business concept or model should be put to the test in the first place. An attractive business concept with low profit potential (e.g. because the market is too small, necessary investment expenditures will be too high or expected margins too small) will not prove successful in the long run.

Questions 2 and 3 address the behaviour of competitors. In most cases an innovative startup enters an existing market in a new kind of way. But this also means that there are established companies unwilling to give up market shares. Sooner or later they will respond to the new competitor. Depending on how strong their market power is, they may severely hinder a startup’s market development.

When it comes to digital business models, you’ll have to check how easy it is to copy it. If its only innovation consists of not more than a few lines of code, it won’t take long until the idea is imitated. In such a scenario it will be unlikely for a company to gain both high market shares and high profit margins.

The last question examines the company’s future development. The characteristic agility and dynamic resilience embraced by many startups is a good precondition for generating new ideas and launching them into the market. For growth and profitability, however, other skills are required. Long-term success requires you to look ahead and provide, right from the start, the basis for developing structures and competences crucial for further expansion, even if you may not need them at the moment, and to implement this process of company growth early on.

If you wish to know how to combine all elements of your strategic landscape into a sustainable strategy, contact us for an informal free initial consultation.

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Why strategies don’t work – Part 1

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The pressure is on, and Mike’s post of CEO is threatened: Over the past ten years he has been constantly strengthening the market position of his company and continuously improving all areas within the enterprise. On the whole, all had been going well and the business owners had always been more than satisfied with his achievements.

However, for about two years business figures have been moving in the wrong direction: first sideways and then downhill, the downward trend having become more and more obvious lately. His strategy no longer worked although Mike had started several counter-initiatives and implemented as planned. Why was it that a weathered strategy that had been used and approved of for years suddenly flopped?

The answer is simple and does not only hold true for Mike’s company but in almost any cases where strategies do not render the desired results: The strategy misfired because it failed to take into account the whole strategic landscape of the business. Mike has made a mistake which according to a current study by David J. Collis is rather common among established companies.

 

The strategic landscape

A company’s strategic landscape is characterised by five elements: set of opportunities, value-creation potential, value capture, value realisation and business performance. A successful strategy has answers and approaches that harmonise these five areas reasonably well.

Set of opportunities

The set of opportunities describes the external environment of the respective company. They comprise, among other things, the political and legal framework or technological developments, but also demographic trends or changes in our natural environment.

These opportunities define the frame within which values can be captured – plus what is to be seen as “value”. This frame will change over time, thus causing answers given and approaches chosen to be adapted to these altering general conditions. A useful tool to take into account these changing conditions is scenario planning.

Value-creation potential

A company’s value-creation potential depends on the chosen business model: How can a company, based on current and future opportunities, generate value for potential customers? What payment models are chosen for products and services?

This sector of the strategic landscape has the potential to transform whole industries, as was the case when video shops were supplanted by streaming services or when pay-per-call contracts were replaced by flatrate phone call offers.

Value capture

While the business model describes what creates value for potential customers, value capture is about how this value for the company can be measured. Here topics like market attractiveness, the best positioning of one’s own company or possible reactions of competitors have to be assessed and taken into account.

All these questions can be tackled with classic strategic approaches, like positioning, Michael Porter’s five forces model or SWOT analyses. An unorthodox, but interesting way of designing a strong strategy is to make use of game theory.

Value realisation

Value realisation comprises anything generally called strategy implementation. It intends to build capabilities and resources needed for long-term success and to re-adjust structures, so that they be more adaptable to change.

Having identified suitable and necessary measures, questions of timing and deadlines need to be taken into consideration. In this way the respective organisation can be guided into adopting a new strategy without straining its capacities.

Business performance

The fifth feature of the strategic landscape is represented by the actual outcome. Often within the scope of controlling, here current developments are observed and compared with intended targets, objectives and goals. If necessary, corrective measures are being implemented.

However, measuring performance must not be the end of a process chain, but merely a single building block of a company’s strategy.

A common mistake of established companies

A robust and successful strategy equally takes into account all five components of the strategic landscape. Established companies, like Mike’s in the introductory example, often make the mistake of focussing too much on value capture, while at the same time they tend to neglect changes in opportunities and to overlook new value-creation potential.

Often these enterprises have for years been successful in one specific business model and have made themselves at home there. Turnout and profits have been stable or are even increasing, so there seems to be no reason to change the running system.

When things have become a habit, change is frequently seen as unnecessary: “We’ve always done it this way – and it always worked!” is what you will hear all too often. But this approach will only work on the condition that the external environment will basically stay the same or that no competitor will start to satisfy customers’ demands in a different, more effective way.

When external conditions will change after all, CEOs like Mike more often than not seek to make up for a worsening outcome with new or better answers in the area of value capture and value realisation. It is all too clear, though, that this will prove unsuccessful in the long run.

Robust strategies for incumbent companies

A robust strategy which can be successfully implemented is holistic, i.e. when it comes to planning and implementation, it takes into account all five elements of the strategic landscape. Established companies in particular have to keep analysing their set of opportunities and value-creation potential and not only to pay attention to pursing a specific business model.

A first step can be questioning the way things have always been done:

  • How is the environment of my business currently changing?
  • Are customer demands changing as a result as well?
  • What new approaches are there to satisfy customer demands?
  • What do these changes mean for the business model I have adopted?

This reactive approach helps companies realise when it is necessary to adjust their business model. In this way enterprises can be prevented from clutching to outworn business models and, as the proverb has it, beating a dead horse.

Better still would be a pro-active approach that anticipates future developments and predicts customer needs and business models not having yet been identified. This is how enterprises can say goodbye to outdated strategies and business models while there is still time and also actively shape the market, hence strengthening their own market position.

Contact us when you want to lead your company into the future with an active strategy.

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Using scenario planning to bridge the present and the future

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“Nobody could have foreseen Covid19 – or couldn’t they?” – The introductory question of an interview sequence about risk management conducted by “Businesstalk am Kudamm” reveals how unprepared many companies were when hit by the pandemic. While it is true that the Robert Koch Institute published a study in as early as 2012 showing what might happen in the case of a similar epidemic outbreak, the results of this scenario have been widely ignored by entrepreneurial strategists. Still, scenario planning can, more than any other instrument, help develop robust strategies for an uncertain future.

Crafting suitable scenarios

In his recent Harvard Business review “Learning from the future” [3], J. P. Scoblic emphasises that companies have to bridge the gap between long-term planning and short-term optimisation. While the first requires a prudent consideration of what will, could and might be, the latter demands focus on current processes, data and trends.
Here scenario planning helps to close the gulf in an ideal way, by combining analysis of current developments with an anticipation of the future. Creating scenarios means that present trends and dependencies are used to explore plausible far-future worlds, with a special focus on critical uncertainties.

Constructing robust strategies

Such a scenario planning typically results in a set of realistic scenarios which are also as distinct and dramatic as possible. In a next step, the company has to devise a strategy for its organisation and to put it to the test in the drawn-up scenarios.

Similar to scenario planning processes, strategic planning, too, combines what is relevant now with what might be in the future. In this context, it’s a company’s present environment in the form of existing capabilities, capacities and freedom of action that a strategic planning will start with. The relevant scenarios then show what challenges the organisation will have to face in the future.

The developed strategy usually refers to one scenario only. In the following test this strategy is adapted to the remaining scenarios. If a strategy is robust, it proves itself to be successful in all – or at least most – of the devised visions of the future.

Successfully ingraining these strategies

To ensure that reconciling short-term optimisation and long-term planning has been really successful, a third element has to be considered when it comes to scenario planning, and that is integrating it into the organisational structure of the respective company. Here, too, a balance must be struck between current developments and future unpredictabilities, thus helping to master the challenges described by J. P. Scoblic.

Ingraining scenario planning into a company is carried out in two directions: One goes from the scenario to the entrepreneurial context, the other leads from current external and internal developments to the scenarios. The first step is that all persons responsible for implementing the company’s strategy are constantly reminded that the depicted alternative futures are relevant to their decisions. In this way the drivers for and the relevance of the strategy are kept alive and future planning becomes more self-aware, thorough and prudent.

The second step in integrating scenario exercises in a company’s culture is to review critically the scenarios themselves at appropriate, regular intervals and to update them. Hypotheses which have proven to be unrealistic have to be replaced by new ones and the process has to be reiterated, at least partially. This will guarantee that the scenarios will stay relevant to the company and thus contribute to optimise strategic planning.

  1. Businesstalk am Kudamm (2020): „Corona wurde vorausgesehen“
  2. Robert Koch-Institut (2012): „Bericht zur Risikoanalyse im Bevölkerungsschutz 2012“
  3. J. Peter Scoblic (2020): „Learning from the future“
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Tool Box Talks: SWOT Analysis

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Management tools are a dime a dozen. And yet, contrary to popular belief, most of them are good and helpful if used correctly and in an adequately defined context.
In “Tool Box Talks” we introduce you to common and less well-known tools and show you how you can exploit their potential for your enterprise, with today’s focus on the SWOT analysis.

What is a SWOT analysis and when should it be used?

A SWOT analysis examines an organisation’s present state of affairs, taking a look at two dimensions:

  1. An organisation’s potential (looking on the inside) will reveal strengths and weaknesses;
  2. an organisation’s environment (looking on the outside) will unmask opportunities and threats.

This investigation of internal and external factors helps to assess the current state of affairs in a very precise and exact way.
Where SWOT analyses are performed is in strategic planning processes as these often require an exact status assessment as a first input, which can be conveniently generated by a SWOT analysis.

How is a SWOT analysis carried out?

The first step in any SWOT analysis is to define its context, i.e. that the subject in question has to be described, for example a company, an organisation (or a part of it) or a concrete product or service. Plus, you need to decide what the focus of the analysis is to be. Depending on the nature of the strategic planning processes relevant to the SWOT analysis, this can be, for example, a company’s branding as employer, its positioning in a specific market segment or the product portfolio.
Having set the analytic frame, the actual analysis can begin and strengths and weaknesses, opportunities and threats for the issue in question are defined. If the analysis is about a product (subject of analysis) that is to be introduced into a new market (perspective), the following four questions can be helpful:

  • What strengths does the product have relevant to the market?
  • What weaknesses does the product have significant for the market?
  • What opportunities does the new market offer which the product is to open up?
  • What threats are there with regard to the new market which can impede a product’s introduction?

In any SWOT analysis, people with different backgrounds should be involved, for example staff from different departments or with varying functions or external experts. If available, you should also use data relevant to the analysis. If a product is to be introduced, this can be market analyses or comparisons with products sold by competitors.

Beware of pitfall!

The greatest danger when making use of a SWOT analysis is the failure to pinpoint its context. If its definition is not appropriate or precise enough, the results, too, will be at best vague, sometimes even contradictory.
If, for instance, the context of a SWOT analysis is only roughly outlined as “the new product”, using a modular construction system can be interpreted both as strength (“can easily be aligned with customers’ demands”) and as weakness (“is difficult to handle in terms of production and logistics”).

What is the use of a SWOT analysis?

A SWOT analysis helps to create a comprehensive and exact representation of how things really are. It is not limited to the organisation or the product itself, but also takes into account a company’s external business environment.
This information is the input to further strategic planning processes, which often centre around questions like:

  • How can we use strengths to seize opportunities?
  • What weaknesses prevent us from doing so?
  • What threats are likely to come up due to our present weaknesses?
  • Which of these four areas needs to be addressed?

This list is in no way exhaustive and should be adjusted to present needs.

Follow us on LinkedIn to learn on a regular basis how you can make the most of management tools, so that you will stay one step ahead of your competitors.

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Successfully implementing strategy

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The consultants completed their job and the corporate strategy is defined. After a two days’ workshop and three or four iterations of the report, the results are great: The company’s vision is now realigned, goals and targets for the next fiscal year are defined and a detailed action plan is derived. Shareholders, directors and management are satisfied and fully support both strategy and action plan.

The team enthusiastically starts working on the tasks, but soon daily business becomes top priority and strategic work is hardly performed. It is obvious in the mid-year review that the team will not be able to complete all the initiatives defined in the strategy workshop – and at the end of the year just one single project out of a dozen is completed and only one more reached implementation status.

Strategic planning vs. operational reality

I regularly come across stories like this. A corporate strategy is defined and a project for implementation is initiated. However, completion of the project fails because operational tasks are prioritised. There are many reasons, but you can make out some generic themes.

Assumed ability for change

“We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten.” This quote from Bill Gates is a fair summary: In the strategic planning for the next one or two years we often assume that we can achieve almost anything we’d like to. That the proposed change would be too much for the organisation, is only considered after the implementation failed.

Available resources
To implement a strategy, you need resources. If a company’s staff is busy with operational tasks, the organisation is simply not able to drive strategic projects and initiatives.

Lack of focus
And even if resources are available, daily business often compromises strategic work. It is the daily business which generates cash flow. Therefore, there is always a tendency to allocate resources to operational tasks, even if they were originally planned for strategic projects. This behaviour boosts short-term performance (and may be reasonable in some instances) but mostly results in issues with long-term strategy implementation.

Successful strategy implementation
I do not deny the importance of strategic planning, but it is the implementation of a strategy which supports success. To realise your strategy and thus secure long-term success of your company, you should focus on three things:

Realistic planning
The cornerstone of successful strategy implementation is realistic planning. Be true about what you and your organisation can achieve and plan accordingly. I propose to ask yourself two questions:

  1. What is it that I should do?
  2. What am I capable of doing?

In case you are not sure about the answer to question 2, you should work with priorities. This allows you to guide strategic initiatives according to their importance.

Providing resources
Once the planning is completed, you need to check whether you have the required resources for implementation available. This should include finance, skills and manpower. In case you identify a need, closing the gap is priority No 1. F this is about skills and manpower, you can either hire staff or engage a consultant.

Keep you focus
It is important for those responsible that they keep their focus on implementing strategy. Therefore you ought to make sure that managers and employees have sufficient free capacity for strategic initiatives.
In case an employee needs to be re-allocated from a strategic project to another task, you should carefully consider all aspects of the respective decision. You should not take such a step unless you are sure that the long-term benefit of an additional operational effort exceeds the value of the strategic project. Besides, such a decision should be documented – including the reasons for the decision.
If you plan realistically, provide the required resources and ensure that the team keeps its focus, you will probably be able to implement your strategy. And with a successful implementation of your strategy, your company will economically thrive.

For more insights, we recommend our articles “Three Steps to Project Success” and “Without any alternative? – Improved decision making“.

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Without any alternative? – Improved decision making

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You surely know such sentences:

  • “We have to do it this way!“
  • “There’s no other option!“
  • “It’s the only way to get through this!“
  • “There is no alternative!“

Such phrases are often used to justify unpopular decisions, not only in politics, but also in companies, clubs, or schools, i.e. not only the decision makers Themselves, but also other people are affected by the consequences of a decision.

The attractiveness of presenting decisions as the only way

Presenting something as the only alternative, as it is suggested by such phrases, does have its advantage: it makes matters seem urgent, and urgency is a pivotal element in change processes [1]. Also, if deviating paths of action are excluded right from the beginning, those concerned are discouraged from thinking about other options. So for a decision maker, putting forth a decision for which there are supposedly no alternatives definitely has its pros.

However, deciding on a single-option basis has serious disadvantages. If there is only one option to choose from, the actual decision has already been taken elsewhere. Thus you can assume that the decision makers will not back up their “decision” as they would do if they had really taken a decision on their own. In the context of change processes, this will weaken the leading coalition and not strengthen it [1].

Another effect of signing off on a decision rather than sincerely taking the decision is that decision makers will not think about and discuss a matter as thoroughly as they should. Therefore, an option for which there is no alternative way of action is hardly sufficiently elaborated and regularly not the best option for the organization.

Developing single option strategies?

Unfortunately, decisions options without alternatives are often difficult to recognise. Whenever there is only one answer to a strategic question, only one solution to an entrepreneurial problem, only one option in a decision paper, someone is trying to apply the concept of no alternatives.

This may not be done out of bad will, but unconsciousness does not make this approach any better: Such a decision does not match the ultimate potential of the organisation. Important strategic decisions are taken without sufficiently discussing the underlying problems and searching for different courses of action.

Strategy development as decision process

You can easily avoid single option strategies by conceiving strategy development as a decision process which features a real choice [3]. The idea put forth by Lafley et al. is based on a simple jet effective approach: For each strategic decision, define at least two contradicting options to choose from.

The resulting success is enormous. Since there are two or more competing options, discussion on the decision become more intense, the pros and cons are thoroughly discussed, and assumptions are critically reviewed. The outcome is a higher quality of strategic decisions.

Improved strategic decision making

In order to leverage the potential for increasing the quality of strategic decisions, a four-step approach can be used:

  1. Define alternative options;
  2. Identify success requirements and obstacles;
  3. Analyse feasibility and prospects;
  4. Decide on one option.

First, the decision options need to be defined. It is important that there are at least two options. These should be formulated in a way that only one of them can be implemented as the process is about choosing the best option for the company and not arriving at a compromise.

After drafting the strategic options, the requirements for a successful implementation and its obstacles need to be worked out for each of them. By sketching out the respective requirements you create a baseline for further evaluation.

Next, data need to be collected which supports or refutes the strategic options. The data available at the end of this step should be sufficient to judge the success and implementability of each of the options defined in the beginning. One additional approach to creating a basis for decision-making, especially in uncertain framework conditions, is scenario planning.

Once all information is available, the final strategic decision can be taken. As the different ideas have been thoroughly considered throughout the decision making process based on hard data, the resulting decision on the company’s strategy is better adjusted to the actual situation of the company.

 

[1] J. P. Kotter (2012). „Leading Change”. Harvard Business Review Press: Boston, USA.

[3] A.G. Lafley et al. (2019). “Die Kunst der Strategieplanung”. In: Harvard Business Manager, Edition 1/2019, pages 44-53.

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