How to Develop Your Strategy

Two roads diverged in a yellow wood,
And sorry I could not travel both
And be one traveller, long I stood
And looked down one as far as I could
To where it bent in the undergrowth;

Then took the other, as just as fair,
And having perhaps the better claim,
Because it was grassy and wanted wear;
Though as for that the passing there
Had worn them really about the same,

And both that morning equally lay
In leaves no step had trodden black.
Oh, I kept the first for another day!
Yet knowing how way leads on to way,
I doubted if I should ever come back.

I shall be telling this with a sigh
Somewhere ages and ages hence:
Two roads diverged in a wood, and I,
I took the one less travelled by,
And that has made all the difference.

Robert Frost (1874–1963).  Mountain Interval.  1920

The successful growth of a business requires the development and implementation of a sustainable business strategy. To do this, we use a methodology we call sweet spot analysis[1], where the objective is to work out a complete strategy statement in 35 words or less. For a business with several product lines or activities in a number of different industries, it might be useful to develop one overall statement and then specific statements for the various main product lines.

It is important to develop the strategy statement simple, clear and brief, to ensure that everyone in the business can internalize and use it as a guiding light. A well-understood statement aligns behaviour within the business and allows everyone in the organisation to make individual choices that reinforce one another.

The process to developing a strategy statement is to start with defining the Mission and then Values end then defining the Vision as the next important step.

The mission statement is your high-minded guiding light and your least specific. It spells out the underlying motivation for being in the business in the first place. Firms in the same business often have the same or similar mission statements.

As you work your way down the hierarchy, the statements become more concrete, practical, and ultimately unique. No other company will have the same strategy statement, which defines your competitive advantage.

The key definitions in developing a strategy statement

Once there is a hypothesis for the three abovementioned points, the strategy can be developed.

A strategy statement consists of three critical components, including objective, scope and advantage.

1. Any strategy statement must begin with the objective, a definition of the ends that the strategy is designed to achieve. “If you don´t know where you are going, any road will take you there” is an appropriate maxim.

2. Since most firms compete in a fairly unbounded landscape, it is also crucial to define the scope, or domain, being the part of the industry landscape in which the business will operate. What are the boundaries beyond which it will not venture?

3. The third component is the competitive advantages, which are the essence of the strategy.

To define the above requires some critical decisions and trade-offs that cannot easily be reversed. The choice of objective will have a profound impact.

As regards the scope, it encompasses three dimensions: customer offering, geographic location and reach and vertical integration. Clearly defined boundaries in these areas should make it clear to managers which activities they should concentrate on and, more important, which they should not do. This will help to focus both the business and its innovation development.

Then, given that sustainable competitive advantages are the essence of strategy, it should be no surprise that competitive advantage is the most critical aspect of a strategy statement. Clarity is the point that will help employees in understanding how they can contribute to its successful execution.

The complete definition of a business competitive advantage consists of two parts. The first is a statement of the customer value proposition and the second is to capture the unique activities or the complex combination of activities that will allow the business to deliver the customer value proposition.

To develop the strategy statement, the first step is to make a careful evaluation of the industry landscape. This includes developing a detailed understanding of customer needs, segmenting customers and then identifying the unique ways of creating value for the ones the business choses to serve. It also calls for an analysis of competitors’ current strategies and a prediction of how they might change in the future.

The process must also involve a rigorous, objective assessment of the firm’s capabilities and resources and those of competitors. In Bearing we have a product we call the Innovation Navigator that we use to assess an organizations innovation capabilities.

The creative art of developing strategy is finding the sweet spot that aligns the business capabilities with customer needs in a way that competitors (with their current capabilities) cannot match.

There would be no point of competing in the intersecting triangle of all three circles above(however this is what many companies tend to do, keeping them in a low margin business).

The process of developing the strategy and then crafting the strategy statement that captures its essence in a readily communicable manner should involve employees in all parts of the business and at all levels of the hierarchy. The wording of the strategy statement should be worked through in painstaking detail. The end result should be a brief statement with a maximum of 35 words that reflects all the three elements of objective, scope and competitive advantages.

Blue Ocean Strategy

When it comes to development of product placement, delivery channels and marketing approach, we believe it can be useful to follow the Blue Ocean Strategy methodology. The essence of this is a practical and easily understandable approach for how to define the uncontested market space in the sweet spot away from the overcrowded triangle.[2]

In this methodology, Red Oceans represent all industries in existence today in the known market space. In Red Oceans, industry boundaries are defined and accepted, and the competitive rules of the game are well understood.

This is the case in the triangle where all the three circles in the sweet spot analysis intersect. Here companies try to outperform their rivals in order to grab a greater share of existing demand. By the market dynamics, supply will overtake demand and as the space gets more and more crowded, the opportunities for profit and growth are reduced, products turn into commodities and the result is a low margin or loss making business. In this fierce rivalry, the blood of the losers taint the color of the water.

Due to the swift development of hyper competition in recent years, more and more markets are becoming Red Oceans and most companies seem becalmed in being there, more focused on winning against rivals than on going for uncontested new market space.

Blue Oceans denote all the industries recently discovered or not in existence today, the unknown market space, untainted by competition. In Blue Oceans, demand is created rather than fought over. There is ample opportunity for growth that is both profitable and rapid. In most cases a Blue Ocean is created within a Red Ocean, when a company alters the boundaries of an existing industry by developing new capabilities and thus creates competitive advantages.

What the statements in the table above means

Focus on current customers vs. focus on noncustomers. In most industries there is little effort to attract new buyers to the industry, thus the focus on the customers currently purchasing in that industry. In the Blue Ocean, there is a focus on trying to increase the size of the industry by attracting people who have never purchased in that industry.

Compete in existing markets vs. Create uncontested markets to serve. Existing markets are all the customers doing business in the industry right now, whether they are doing business with you or your competitors. If someone wins a customer, then it is assumed, someone will lose a customer. For someone to win, someone must lose. In uncontested markets, there is only a winner, you. No one else is fighting for the business because either they don’t know about it, or they don’t know how. They will try, of course, but if you have done things the Blue Ocean Strategy way, they will not be successful for a very long time.

Beat the competition vs. Make the competition irrelevant. The competition becomes irrelevant because they cannot duplicate the ideas in a way that is a commercial success. Remember, the whole idea of Blue Ocean Strategy is to have high value at low cost. If you are doing that, how can anyone compete with you? All the would-be competitors fall by the wayside.

Exploit existing demand vs. create and capture new demand. You will be creating value so high that you will be attracting customers that never before would have considered entering the market.

Make the value-cost trade-off vs. break the value cost trade-off. If you learned strategy in business school by reading Michael Porter’s Competitive Strategy concepts, as I did, you understand that there were only two strategies to chose from, value or low cost. It was understood that you could not have both value and low cost. The creators of the Blue Ocean Strategy have broken that concept and said that you can have high value and low cost and have developed the tools to do it. In fact, if you don’t break the value cost trade-off, competitors will easily duplicate what you are doing and the ocean will once again be very red.

Align the organization with differentiation OR low cost vs. aligning the organization with differentiation AND low cost. You can’t just say you are going to have differentiation and low cost. You must go lean and search every angle of your processes and organization to strip away unnecessary cost. The entire organization must be aligned this way. Anything that does not create or contribute to value, gets eliminated or reduced. It is just the most efficient way to run an organization whether in a blue or red ocean.

In essence, in the Blue Ocean market methodology, we have the tools to follow on from sweet spot and work with innovation in order to define and develop uncontested customer segments and develop new capabilities for creating barriers of competitive advantages.

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[1] ”Can You Say What Your Strategy Is?” by David J. Collis and Michael G. Rukstad, published in Harvard Business Review in April 2008.

[2] For reference see ”Blue Ocean Strategy”, W. Chan Kim and Renée Maouborgne, Harvard Business Review October 2004.