The Five Tests of a Sound Strategy

Assuming that we know “what we want to be,” that is, we now have a vision in place, we can begin to immerse ourselves in deciding the best path toward reaching our destination.

Yes, we are finally ready to formalize our business strategy.

Strategy is defined based upon (1) the industry and your position within the industry as well as (2) your position relative to your competitors’ position.

Most people think of strategy as optimizing what they already do and being the best at it, leading them to conclude that there is one, best way to compete. Strategy is really about choosing to differentiate one’s product / services from one’s competitors.

Failing to differentiate one’s products / services from those of one’s competitors – meaning the consumer can’t decide which product is better — creates destructive competition in which the only distinction is price. Price competition is never sustainable and is unwinnable.

Competing effectively means that a company is

  • Exceeding the Industry Average Return
  • Creating a return greater than those of most or all of your competitors

To win, you either have to have a higher price (justified by a differentiation of product / service) or a lower cost (justified by a more efficient value chain). You need to operate from the industry cost vs. your cost and the industry price vs. your price. Regardless, you have to be profitable. After all, you can’t have an army without feeding it…and you can’t have a business without being able to sustain it.

Five Tests of a Sound Strategy

There are five tests of a sound strategy

1.      A unique value proposition compared to competitors

2.      A different, tailored value chain

3.      Clear tradeoffs, and choosing what NOT to do

4.      Activities that fit together and reinforce each other

5.      Strategic continuity (having the strategy permeate throughout the organization)

Defining the Value Proposition

Defining the value proposition means identifying the end users and the channels used to sell to them; understanding the end user’s needs and which products, features, and services will address them; and creating a profitable price at which they will buy. We have already discussed how we can learn more about what our customers are really buying.

According to UCLA Anderson’s School of Management Professor Richard Rummelt, there are two ways to get to a successful value proposition. One, you can invent your way to success. Unfortunately, you can’t count on that. The second path is to exploit some change in your environment – in technology, consumer tastes, laws, resource prices, or competitive behavior – and ride that change with quickness and skill. The key is to take a position while there is uncertainty and ambiguity. Clarity occurs only after a company takes a position. However, by choosing to let another take a position, one loses the opportunity to profit from the knowledge.

The second path is how most successful companies develop their plan. Changes do not come along in nice annual packages, so the need for strategy is episodic, not necessarily annual.

Sustaining Competitive Position – The Role of Tradeoffs

  • Choosing a unique position is necessary but not sufficient to create a sustainable advantage because of the threat of imitation
  • Traditional thinking focuses on competitors’ difficulty or ability to imitate
  • Equally, if not more important, is whether competitors want to imitate
  • Tradeoffs are incompatibilities between strategic positions that create the need for choice
  • Strategic tradeoffs lie at the heart of sustainability
  • An essential part of strategy is choosing what not to do

The takeaway is that as business leaders, we want to encourage choice. In fact, we want to our offering to appeal to our target consumers. We want the service / product to contain exactly what they would like and not have more features than are required, even if they are additional to what the consumer wants. Additional and unnecessary features only drive up our costs and reduce profitability.

In the next post, we’ll talk about companies who employed this approach to great success.

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Explore posts in the same categories: Leadership, Strategic Plans, Strategy

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