Sensible strategy

How do you know that customers will want to spend cash on what you have to offer?  You can’t – the best you can do is guess and hope.  You can make your guess as accurate as possible, but until the cash lands on the counter at some time in the future, it will always be a hopeful guess.

The first step in developing a sensible strategy is to accept that it always has an element of risk – it can never be certain even though we would love it to be so.  Once this frame is adopted, there is a lot that we can do to maximise the strategy.

1. Maximise the risk of success

How can we maximise the risk that customers will want to buy our products in future?  Mainly by keeping a close watch on what they are doing today and observing changes in that likely behaviour over time.  There are several ways to do this:

Observe the behaviour of existing customers.  Heavy reliance on information about the existing customer base can be dangerous if it is used to keep a company anchored where it is, when better opportunities may exist elsewhere. But that doesn’t mean the information is useless. A particularly fruitful area for observation and understanding are the pain points inherent in what we sell now – which, if they were removed, would make us more attractive to customers. One of the big advantages of this approach is that we know our own products and services very well, so it is relatively easy to step into the shoes of a typical customer and notice the weaknesses in our offerings.

In the 1990’s Ryanair was a small regional airline close to bankruptcy.  Michael O’Leary took the job as CEO on the understanding that he could do whatever was necessary to make it viable.  He implemented a radical strategy (based on that of South West Airlines in the USA) that stripped out costs aggressively in order to reduce fares while other airlines were trying to increase fares. O’Leary had correctly intuited that, for a lot of customers, the pain of the fare greatly exceeded the benefits of the fripperies offered by most airlines: the rest is history.  The strategy continues to evolve: EasyJet has been more careful with its cost-cutting to positive effect, and Ryanair is learning from how customers are responding.

Observe customers of other products and services, particularly if they are not our customers at present, and seek to understand and learn what may be relevant.  Studying non-customers (i.e. the vast mass of people who currently don’t buy from us) is one of the key components of Blue Ocean Strategy™, because it is much more likely to lead to blue oceans.  All of these non-customers are customers of someone else: they are exhibiting buying behaviours all of the time so there is a vast amount of information that we can collate and potentially apply to our own business. Nintendo observed that a large group of their non-customers – older adults – liked to play simple social games like golf and bowling. Transferring that observation to video games was at the heart of the subsequent success of the Wii.

Observe developments in goods and services, and how customers are reacting to them. The combination of out-of-town supermarkets, luxury shopping malls and massive growth in on-line retail purchases has been obvious to all of us for some time.  Yet many town-centre retail businesses seem to have been blind to these changes and treat the decline of town centre stores as caused by some sort of disease rather than the preferences of customers.  The failure rate is now high.  On the other hand, firms like Argos and John Lewis have combined new technologies into highly successful bricks-and-clicks business models which combine the convenience of on-line purchasing with the convenience of in-store viewing and collection.

The attitude that customers should want what we offer (because we know it is good!) is commonplace, but crippling in the search for a sensible strategy.  Customers vote with their spending money, and we can either like it or lump it.  That’s why we consistently talk about customer wants rather than customer needs: wants are exhibited via actual customer behaviours while, in this context, needs are an abstract concept determined by some authority or expert.

The growth of digital music and movies was also predictable for decades. Customers were absolutely clear about how they wanted to consume the music they had purchased, but the first reaction of the music recording industry was to seek to sue them – their own customers – for copyright infringement!  It took a complete newcomer to music publishing, Apple, to spot the potential and create iTunes – the first credible (and highly profitable) marketplace for digital music.

None of this is rocket science: the examples are familiar and understandable to us because we are all customers ourselves.  There isn’t a scientific formula for calculating what customers are doing elsewhere and transferring that to our own businesses. We have to use our intelligent observations, sensible deduction of motivations, and intuitions drawing from our own experiences as customers. We can’t prove anything with certainty, but we can hugely increase the risk of success by paying common-sense attention. The late Steve Jobs at Apple, Jeff Bezos at Amazon and Larry Page and Sergey Brin at Google have done that with restless intensity for years.

2.Differentiation

Once we think we have a good fix on what customers will want, we need to make sure that we have something special that no-one else can offer – otherwise we are back into those competition-infested red oceans.  It’s not enough to have something different from the competition, the difference has to be something that you are pretty sure that customers will value.

The fact that most of our competitors are obsessed with each other as part of their suboptimal strategy development gives us a clear lead here – they haven’t been thinking about what customers really want in the way that we have.  And their internal politics will lead to self-justifying dialogue which prevents them from moving. At various times Ryanair, Amazon, Apple and Nintendo have all been dismissed by their peers – and this has given them all extra time to develop and exploit their differentiated customer offerings.

But precisely because most companies focus strongly on their competitors, they will rapidly cotton on to the successes of others and seek to replicate them. Microsoft now has its own motion controller for the Xbox to match that of Nintendo’s Wii, and smartphone manufacturers are catching up fast with Apple.  The true source of competitive advantage then comes from constant application of sensible strategy to innovate the things that customers want.  As Jonathan Ive, the lead designer at Apple, has said: “Apple’s goal isn’t to make money. Our goal is to design and develop and bring to market good products.”

3. Implementation

Customers don’t buy a strategy: they might buy the products and services that have been determined by the strategy.  A common failing is to develop a high-level strategy statement that sounds sensible and worthwhile, and then neglect the practicalities of how it will be manifested in real life.  Once developed, a strategy is worth less than the piece of paper it is written on unless and until it can be converted into something tangible that customers will actually purchase.

And, crucially, people within a firm cannot deliver those products and services until the strategy has been made sufficiently clear that they can engage with it in the context of their own jobs.  The relevant filter here is chunk size: by describing the strategy in different chunk sizes we ensure that as many people as possible engage with it.

We will therefore articulate the strategy at big chunk, medium chunk, and small chunk levels.

Big Chunk

The big chunk description is the summary of the strategy – the overall direction and concept.  It needs to be simple and compelling, like Apple’s goal to develop and bring to market good products. It also needs to define what the business will actually do (and not do) in the marketplace, so that staff and external stakeholders can understand the strategy.

Amazingly, many strategy statements fall at this first hurdle by talking about:

1. profitability or return on investment, which isn’t a strategy or a goal but is a measure of financial performance that doesn’t tell anyone how the firm expects to achieve it
2. growth – another measure, which automatically implies that the strategy is “what we have now plus a bit more”
3. phrases like “achieve excellence in our chosen markets” which are completely vacuous: they are empty of any strategy at all.

Imagine Napoleon telling his generals that his chosen strategy is to win the battle, or even to put on a good show, and you get the picture.

Medium Chunk

The overall strategy then has to be broken down into specific goals and tactics that enable executives and managers to work out what actions they need to take to ‘get’ and implement the strategy. There are several useful tools for this:

• The SMART criteria for goal-setting that, when applied correctly, maximise the probability that the goals will be achieved.
• Decision drivers, which move the high-level strategy into a series of consistent ‘truths’ about the future that underpin what the strategy is all about and minimise the risk of contradictory interpretations.  An example of a design principle from military strategy might be “we will always use the archers to weaken the enemy first”, or from business that “we will consider anything that has the potential to reduce costs” or “we will retain tight control of our intellectual property”.
• Future pacing.  Describe in vivid sensory language what the business will look, sound and feel like as a result of implementing the strategy.  How customers will react to the future services, and what they think of the company as a result.  This 3D representation of the future communicates the essence of the strategy better than anything else and builds excitement about its feasibility and desirability.

The architects of a new head office building we had commissioned asked us, the executive team, what kind of building we wanted – should it be a Rolls Royce, an executive saloon, or a 2CV?  We replied that we would like a Ford Mondeo.  The building was completed on time and budget, and we were delighted with it.

Small Chunk

While having a big and bold strategy is exciting, the devil is in the details. Specifically, it’s not possible to know whether a strategy can possibly be viable unless the costs of delivering it are known.  And costs are inherently bottom-up – they are an accumulation of all the items that money will have to be spent on.

A key element of the design of the Nintendo Wii was a motion sensor inside the innovative game controller.  While the strategy was being developed it was not possible to say whether this could be manufactured cost-effectively, or whether new and expensive technology would be required. In practice the strategy was broken down into sufficient detail to establish that an inexpensive component that already existed in the automotive industry could be used.  Profit margins on the Wii were massive compared to those of other video game manufacturers.

By contrast, the dialogue between the architects of the new Scottish Parliament building and their clients, the politicians and civil servants, was consistently conducted in big chunk language.  The main architect seemed to be particularly skilful at pulling the conversation back to the historic significance and required grandeur of the building (big chunk concepts).  The building was completed three years late, at a cost of over ten times its initial estimate.  Had the politicians known about the ultimate cost of the building, it is unlikely that they would have approved it.

Small chunk language is not just about assessing and managing costs accurately. It is also about providing people with information in a form that they can absorb.  Different people have different preferences – some are happy with the big chunk language of strategy statements, but many relate more comfortably to detailed information.  The stonemason building a cathedral needs to know exactly what sort of finish and shape is required for each block that he or she is working on.  Implementation of a successful strategy requires that the strategy be converted from big chunk language into coherent and consistent medium and small chunk language too.

Diagnosis/ Guiding Policy/ Coherent Actions

We mentioned earlier that Richard Rumelt had a lot to say about the neglect of implementation when thinking about strategy.  He proposes an overall framework for implementation which is a useful mechanism for incorporating the big/medium/small chunk issues outlined above.

1. Diagnosis (or big chunk) – is like a signpost marking the direction forward but not defining the details of the trip. Defines or explains the nature of the challenge. A good diagnosis simplifies what may be the immense complexity of the current reality by identifying certain aspects of the situation as critical:

• It identifies the specific structure of the challenge (e.g. change or competition) rather than naming performance goals
• It can often be described through metaphor/ analogy

2. A Guiding Policy (or medium chunk) – for dealing with the challenge. This is an overall approach chosen to cope with, or overcome, the obstacles identified in the diagnosis. It is described as guiding because it channels action in certain directions without defining exactly what needs to be done.

The policy creates, or draws on, sources of advantage. It creates advantage by:

• Anticipating the actions and reactions of others
• Reducing ambiguity and complexity
• Exploiting the leverage inherent in concentrating effort on a  pivotal or decisive aspect of the situation
• Creating (or building on) policies and actions that are coherent – each building on the other

3. A Set of Coherent Actions (or small chunk) – not the fine detail of implementation, but a set of feasible co-ordinated policies, resource commitments and actions designed to carry out the guiding policy. These are steps that are coordinated with one another to work together in accomplishing the policy, covering required changes in people, power and procedures – and organisational capability.