- It’s hard to stop on top.
- Kauffman foundation found that only half of the Fortune 500 companies stay in the top 500 from 1985 to three decades later
- They found that the same was true between 1995 and 2010, meaning the attrition rate doubled in recent years.
Looking at how to create a strategy to knock your competitors out of the top spot, and keep it from happening to yourself.
Strategy Choices
- What will you do as a company
- What will you not do?
- How will you create advantage over the competition?
A strategy is important because resources are scarce and limited.
Why do some firms perform better than others?
- Industry attractiveness - Some industries are more profitable then others, so more opportunities for more companies to make profit.
- Competitive advantage - The advantage over their rivals. Do they have the ability to make profit higher than the industry standards?
Russel Ackoff
”Most corporate planning is like a ritual rain dance: it has no effect on the weather that follows, but it makes those who engage in it feel that they are in control.”
Strategy formulation is about making tough choices deciding how and where to compete.
Is strategy formulation always explicit, conscious and purposeful? In most cases, we see a lot of adaptation and not everything is thought through in advanced.
You will rarely find the strategy written down, generally you will find a budget and a target masquerading as a strategy.
Strategy is not an event, but a process.
Questions for plotting strategy:
- What’s your winning aspiration?
- Where will you play?
- How are you going to win?
- What capabilities must be in place?
- What management systems are required to implement the strategy?
The winner in the market is not the one with the best product, but the one who can plot their strategy and realize it in a timely manner.
Four key facts about competition that will set the stage:
- Industries vary widely in their profitability.
- The industry you’re in matters a great deal
- Competitive advantage may be fleeting - but it’s more fleeting in some industries then others
- Industry structure varies around the world
We’ll look at the tough markets and look at the people on top, we’ll learn more from them than an industry where everyone makes profits.
Reflection on Lecture
Apparently staying on top is hard. You need to have a competitive advantage over other companies, and maintain that. In order to successfully maintain your advantage your company needs a strategy.
Now strategies can be explicitly stated to begin with, or they can be a more natural evolution while your company gets it bearings. But be quick, the company that wins will be the one that can plot and act upon their strategy quickest.
One thing that happens in companies is that executives make strategy plans but in reality all they are doing is setting budgets and targets. If the strategy is to make a million dollars profit next year then they have not actually made a strategy at all.
While I didn’t take notes above one of the things mentioned were two people - Rita McGrath and Roger Martin - who had views on strategy and what a competitive advantage was worth. McGrath says competitive advantage is fleeting, and it’s impossible to sustain. Instead companies should be adapting from the get go to the market in order to stay ahead.
Martin, on the other hand, disagrees with the statement that McGrath confuses strategy with the strategic planning process. He agrees that your company does need to adapt and iterate, but you must begin with a clear set of choices.
You cannot compare returns from companies across industries. In the example given, Pfizer had a 12.8% return on assets in 2013 while Alaska Airlines had only a 8.7%. Does this mean Pfizer did better? Not necessarily. Pfizer is in industry where many companies can make healthy profit, whereas the airline industry is notoriously difficult to make profit. Alaska Airlines actually stands out amongst its peers for making higher than industry standard profits.
A low earning market does not necessarily guarantee nothing but low profits. While the super market industry is difficult, Whole Foods generated an 8% return on assets in 2012, while Kroger did 2.6% and Supafood generated a loss. This shows us that Whole Foods has managed to gain a competitive advantage in an otherwise low profit field.