We have learnt about strategies that work, but what about the common mistakes crafting our company strategy. If we do not know the common errors crafting strategy, we cannot avoid them. So let’s go to analyze different misapprehensions that could make us believe that we have a strategy, when our “pretended strategy” is not working at all:
Confusing Strategic Intent with Strategy
Some CEOs misinterpret Hamel & Prahalad when they suggest “to rewrite their industry rules and create new competitive space.” Therefore, those CEOs use a more internal environment focus to formulate strategy. They “forget” to perform a deep analysis of competition and the coherence of our strategy related to our competitors position, movements and strengths. So, they focus on the goals that they would like to achieve, disregarding the environment/competitors’ analysis. This is a dangerous misinterpretation of strategic intent, because the firm could plan expenses for unrealistic higher revenue and profit growth. Moreover, unrealistic goals are very dangerous because use to undermine staff morale and bonuses/incentives.
Ignoring the strategic boundaries
Many firms decide a Customer Intimacy/CRM strategy or Product Leadership/Innovation strategy in order to try to run away from product commoditization. Notwithstanding, that those differentiation strategies have an important boundary, I mean the price and promotion of the products use to constraint those strategies. So, customer flexibility can be a source of competitive advantage just at affordable prices. Moreover, Product Innovation could improve the quality, but quality perception has limits and the price that customers are willing to pay for an innovation too (e.g. How much is willing to pay for a car buyer in order to reduce the petrol consumption just 0.1 liter?) Other important risk of Product Innovation is being too much focused on the product, and forget that products are bought by customers (e.g. assuming that all the customer would like to have a Mercedes Benz or other good brand could push that firm to lose customer focus). We have to mention that there are products with less price elasticity than others (e.g. luxury products.) On the other hand, we have Operational Excellence/Infrastructure Management strategy as a low cost strategy, its boundaries are the minimum product features and the right placement requested by customers. Finally, heavy overheads can lead to failure almost any strategy. So, overheads must be monitored, and especially in the low cost strategy.
Not having a good value proposition
If we ask companies with a weak strategy for their value proposition, we are likely going to receive ambiguous answers like: “we are a customer centric firm”, “we have a global presence”, and so on. So, the next question would be: Why are customers going to buy our products rather than competitor products or even substitutes?
Not having a solid business. Does our business generate recurrent and stable profits? Are we able to replicate our business success in other markets and/or products?
While we have companies like ZARA/Inditex that they are able to replicate success in almost every market and product line, we have organizations that they do not even understand their success in a few markets. So, they are not able to take advantage of growing sales and profits much faster than the fixed costs. Furthermore, because their business success is “unpredictable,” they do not use to take full advantage of financial leverage too. So, the strategic paths of those firms is selling the firm or growing by acquisitions, because they cannot replicate success. We should be aware that in solid and replicable business success like ZARA/Inditex make sense vertical integration, and outsourcing potential benefits are limited by the real synergies of that working business model.
Confusing Competitive Advantage with Strategy
People who enjoyed some success in the past use to assume that there was a good strategy in place. Sometimes, that success comes from a First Mover Competitive Advantage just selling first in a specific geography. Therefore, when they tried to replicate their success in another market with strong competition (after a few years), they realize that they cannot replicate the past success. First Mover Competitive Advantage use to be sustainable when we create a product innovation, buyer switching costs, or we achieve a critical volume that offers us Economies of Scale. Thus, we should monitor that we are not losing market share or reducing our margins’ year by year, because that could be a signal that we are losing our old competitive advantage of being first selling in one specific market. In that case, we did not generate sustainability in the First Mover Competitive Advantage for the lack of strategy.
Believing that strategy is just the definition activity rather than definition and execution activities
Our strategy formulation process shows where we want to go, but do we show clearly HOW TO get there? A poor strategic execution shows a huge gap between our strategic objectives and our feasible achievements. Those firms use to impose unachievable objectives with the expectation to revamp the firm, but they cannot materialize the growth without defining HOW TO. Again, that dynamite staff morale, and best staff will probably leave the company.
Forgetting the third strategic level
When the strategy formulation starts with the Corporate Strategy and end with the Business Units Strategy. So, the Functional Strategy is not developed at all. Therefore, most of the business policies are not developed neither.
More focus on support activities than customers and strategy
Sometimes when we read a companies’ annual report, we can find that the main subjects are important, but just support activities like Corporate Governance, or Health and Safety matters. In those cases, it is difficult to locate strategy or new customers’ acquisition subjects. Thus, we should wonder us a couple of questions: Are we leaving at a difficult time with lack of ideas? Or do we have companies managed for people with difficulties in bringing and materializing new ideas?
Building a management team too much homogenous
It is much easier to bring up ideas, building management teams based on diversity. Nevertheless, we can find many companies that the concept of globalization is just entering new markets and move the sales responsibility locally. So, in those firms, many of the management positions are just for people located or coming from the global headquarter, with the same nationality, with the experience in the same industry, and even with the same degree (engineers for example). When this is the situation, it is difficult to bring up new ideas and create a “killer strategy.”
Wrong people in the wrong position
We can meet with the board of some organizations; people with a good background, many years of experience in one specific industry, good communication skills, and with the same nationality of the firm. However, are those the Key Success Factors (KSFs) to develop a leading strategy? Probably NOT, the KSFs are likely creative and strategic thinking, and these are not very common competences. Another important question is: do we have good managers to execute our strategy? In order to identify good managers I would suggest the following: good managers have a good staff around them, and they have the competence to identify quickly brilliant people. Unfortunately, that capability is not as common as must be. In those cases, we will have average teams, performing mediocre strategies.
Lack self-confident and visionary people
It seen amazing, but we can find top management more worried with action than inaction issues. Finally, we have managers that rather than bringing and supporting new growth and improvement initiatives, they are focused again just on Corporate Governance, Health and Safety, and avoiding or delaying investments.
Short term and very low risk focus
If the focus is the short term ROI and low risk, we are not thinking strategically that means the long term planning. So, we are rejecting many opportunities to build “new” competitive advantages and create a growing path for the firm. We must mention that those firms do not use to feel comfortable planning HOW TO execute strategies. They use to fail putting resources in place to avoid so much as possible the investment and risk associated with it. The result of a strategy not supported with the right resources is the frustration of the team and a false strategy start.
Be global and unable to act locally
There are subsidiaries that copy the huge elephantiasis global organizational chart at the local level. Indeed, they do not know how to adapt the global strategy at local level. Furthermore, it is quite common that headquarter staff request at local level resources to implement their global initiatives that not always fit with the local priorities.
Strategy is a matter of “just top management”
There are companies assuming that all the top management has the strategic thinking competence. Thus, the strategy process is limited according to hierarchy position. We can find good operational people with limited strategic thinking, participating in the strategy process. On the other hand, we have “young” staff with good strategic thinking skill that they do not participate, because their position in the organization inhibits them. Moreover, in those firms the strategy communication process uses to be an issue. They use to forget that strategy execution must arrive to the lowest level of the organization. The communication process, the message, and the objectives should be different for each level. Nevertheless, every employee in the company must be informed about the strategy and its evolution in order to allow the strategy to transform the whole organization. We should be aware that some companies do not communicate their strategy because they are afraid to be copied by competitors. That just actually shows the misunderstanding of strategy execution power and copying execution complexity.
Turnaround a business which “strategy is that they do not have strategy” is complicated. A business that does not have a clear direction and execution of strategy cannot guarantee a profitable future. Therefore, we should be aware of strategy crafting pitfalls in order to make the necessary adjustment into our strategy to build a business able to generate sustainable and replicable profits.