Here is an excerpt from an article written by David J. Collis for Harvard Business Review and the HBR Blog Network. To read the complete article, check out the wealth of free resources, obtain subscription information, and receive HBR email alerts, please click here.
Credit: Ilan Rubin
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The CEO’s job of crafting a strategy that creates and captures value—and keeps realizing it over time—has never been harder. In today’s volatile and uncertain world, corporations that have dominated their markets for decades can be blindsided by upstarts with radical new business models, miss the boat on emerging technologies, or be outflanked by competitors that are more adept at shaping consumer preferences. Young ventures can raise hundreds of millions of dollars, attract tens of millions of customers, and achieve lofty market valuations, only to collapse when they cannot figure out how to turn a profit or hold off imitators.
All too often those failures occur because the CEOs’ approach to strategy isn’t holistic. At many innovative new businesses, CEOs excel at identifying ways to generate value by addressing unmet customer needs—yet don’t adequately analyze what it would take to capture a sufficient portion of that value. Or they get seduced by the initial success of their new business models, grow too fast, broaden their firms’ scope too far, and neglect to invest in capabilities needed to sustain a long-term competitive advantage. Leaders of traditional corporations tend to make different mistakes: Some underestimate how much new technologies and business models can increase the value provided to customers.
Others align their operations with their distinctive market position so tightly that they can’t adapt when customers’ tastes change. These leaders either ignore some components of what I call the complete strategy landscape or don’t recognize the interdependencies among them.
Strategic adaptation must become an ongoing, iterative process of hypothesis, experimentation, learning, and action.
Today a complete strategy has to encompass carefully coordinated choices about the business model with the highest potential to create value, the competitive position that captures as much of that value as possible, and the implementation processes that adapt constantly to the changing environment while building the capabilities needed to realize value over the long term. CEOs must develop an approach that integrates all those elements. To do that, they have to take the following actions:
This involves continually taking stock of what’s happening in the outside world—developments in technology, demographics, culture, geopolitics, disease, and so on that are the current “hot topics.” These changes and trends open up possibilities for firms to exploit. The Covid-19 pandemic, for example, has sped the growth of many opportunities in areas from telemedicine and online education to home delivery services.
Define the best way to tap a given opportunity.
To translate an opportunity into strategy, CEOs need to develop a business model that maximizes the potential value of their offering. The model should describe the “job to be done” for customers, which affects their willingness to pay for the product or service and the size of its possible market. The model should also spell out the configuration of the assets—technology, distribution channels, and so on—that will be used to produce and deliver the offering (and that determine the cost of doing so), and the monetization method, or how all this will be paid for. The model will also suggest how the value produced might be distributed among the players pursuing it (such as whether a few winners will reap the lion’s share because of scale economies or network effects) and key aspects of possible strategies (such as whether being a first mover is important).
Figure out how to capture the value generated in the near term.
This requires designing a strong competitive position. To do that the CEO has to assess three things. The first is the industry’s attractiveness: Regardless of the value created, an industry will be attractive only if its structure allows participants to earn decent returns. (One of the contributions of Michael Porter’s five forces framework was its insight that not all industries are created equal.) The second is competitive positioning. Identifying a unique value proposition for a defined customer group and a distinctive configuration of activities is still the way to build an advantage that allows you to outperform the industry’s average rate of return—even when others pursue the same business model. (See “Can You Say What Your Strategy Is?” HBR, April 2008.) The third is competitive interaction: To assess the sustainability of any advantage, you must predict how interactions among rivals will play out. Here, behavioral and game theory approaches can be helpful.
Realize value over time.
To keep capturing value, a firm needs to constantly adapt how it implements its strategy—adjusting its activities and building new capabilities as the external environment changes. This typically does not mean the CEO has to reformulate the entire strategy; it’s more about making incremental changes to respond to new realities.
Build a foundation for long-term success.
The firm’s strategic choices and its interaction with competitors ultimately determine its financial performance and, critically, the resources it has to build assets and capabilities that support future moves.
Developing strategy across the complete landscape isn’t a linear process; it should be continuous and iterative. Good performance will allow a firm to refresh and expand its skills and resources, which in turn will enable it to search for new opportunities and respond to external change with new strategic choices.
The Incumbent’s Mistake
CEOs of established companies often pay too much attention to defining how their firms will capture value and too little to new ways to create value and how firms’ activities and capabilities need to evolve over time. One reason is that approaches focusing on capture (like the five forces) have been very successful in long-established and stable industries and as a result have become ingrained in the strategy process. But CEOs of mature companies should ask themselves, When did our annual strategy process last generate a truly breakthrough idea, like ride-sharing or mobile banking? When did it allow us to become the “disruptive” innovator?
Look at the list of the most valuable companies in the United States, and you’ll see that discovering and exploiting new business models to satisfy previously unmet, unexpressed, or even unknown customer needs is where the action has been in recent years. Those companies didn’t collectively create trillions of dollars in value by outpositioning their rivals. When they were founded, they didn’t have rivals. Indeed, the kind of businesses they started didn’t exist previously.
The good news for leaders of incumbent companies is that the emergence of new approaches doesn’t have to doom their enterprises. Indeed, if they take a holistic perspective on strategy, they may discover that those business models present attractive opportunities because they create more value.
For example, would you rather make a onetime sale of a physical product or build a long-term client relationship and deliver tailored solutions that generate more value for the customer and potentially much more profit for you? As some old-line companies have discovered, the latter is the opportunity that new digital business models offer firms that can effectively leverage data and analytics. Komatsu now offers subscriptions to its Smart Construction platform, which coordinates all the activities of a construction site, including drone surveys, dumptruck scheduling, and the operation of autonomous earthmoving equipment. The platform cuts construction projects’ entire costs by well over 15%—creating far more value than the revenue from the sale of bulldozers, which was all that was available in Komatsu’s previous model. In a somewhat similar fashion, Siemens uses artificial intelligence to predict, and so prevent, maintenance issues on its trains. The improvement in uptime performance allows it to switch to performance-based contracts for rail service that bring in thousands of dollars a day, rather than just the initial price of a train.
No incumbent should respond to every new business model—that would simply be playing whack-a-mole. Instead, a firm must develop a strategic approach to identifying the value-creation potential of models and then determine whether to pursue any new ones by predicting the outcome of competition among alternative models.
By using available tools, strategists could have foreseen, for example, that video on demand (streaming) would replace Netflix’s original mail-order delivery of DVDs and Blockbuster’s old-fashioned video stores. The superiority of the value proposition for the job to be done for the customer, which was “delivering personal video entertainment,” suggests the absolute dominance of streaming. An examination of the purchase criteria you might consider—convenience, the ability to make an impulse purchase, access to recent best sellers, a large back catalog—reveals that video on demand serves customers better than either of the earlier business models. If that weren’t enough, the cost of delivering movies and TV shows over the internet is vastly lower than doing so via physical stores or the mail. Considering those advantages, it’s no wonder that almost everyone is now paying monthly subscription fees to streaming services.
In contrast, a similar analysis suggests that Amazon’s online business model, which consists of a retail website, a limited number of fulfillment centers, and fleets of delivery trucks, will never fully displace Walmart’s longtime business model, which features traditional brick-and-mortar stores supplied by a national network of distribution centers. When you compare how well each does the job to be done, you see that Amazon’s model is good at providing home delivery for a very broad range (hundreds of millions) of items, while Walmart’s is better for immediate availability at low cost of a more limited number (a few hundred thousand). Each business model has a distinctive proposition that appeals to different customers on different occasions for different products. And a comparison of the cost positions of their asset bases shows that Walmart’s logistics system is low cost for everyday items that consumers pick up in stores in rural or suburban locations, while Amazon’s is more efficient for long-tail items and home delivery in densely populated geographies. Neither business model universally dominates the other. Both will survive, which is why each company is rushing to replicate the other’s asset base, with Amazon buying Whole Foods, and Walmart spending billions of dollars to expand online and add fulfillment centers.
The Complete Strategy Landscape.
Strategy involves more than finding an attractive industry or defining a competitive advantage. It requires an aligned set of choices about which opportunities to pursue, how much value the firm can create and capture, and how to keep realizing value and build a foundation for long-term success. The entire set of strategic decisions comprises these questions: One: What is our opportunity set? What demographic, political, technological, regulatory, and other environmental changes can we exploit? Two: How can we create the most value? What is our business model? What’s the “job to be done” for customers? How will we charge for our product or service? What assets do we need to produce and deliver it? Three: How can we capture value? Does the industry structure allow a decent return? What is our positioning? What is the scope of our business? What is its competitive advantage—its unique value proposition and distinctive configuration of activities? How will our rivals react? Four: How do we keep realizing value over the long term? Will our initiatives build the capabilities we need in the long term? Are we organized to adapt to change? Five: How strong is the outcome? Does our performance provide us enough resources to support desirable future moves?”
The second control mechanism lies in selection of the tactical projects pursued. Here, the CEO must be able to see through the fog of immediate pressures and identify and support a limited number of long-term initiatives that will guide the individual experiments. Typically, these become “corporate” initiatives, even if in smaller firms nothing that fancy is ever announced. They’re not objectives, since they lack a time frame and specific metrics, but broad themes that govern the sequence, selection, and design of multiple projects. They must be injected into every ongoing change program in the firm that cuts across silos and boundaries.
These broad initiatives should be manageable in number—probably seven or fewer—so that each can be adequately funded, monitored, and continually promoted. They cannot change regularly; if that happens, they’ll be viewed as “flavors of the month” that can be ignored or met with lip service.
CEOs of mature companies should ask themselves, When did our annual strategy process last generate a truly breakthrough idea, like ride-sharing or mobile banking?
These higher-level strategic programs must be owned and championed by the CEO. Only the firm’s top leader has the perspective and authority to ensure there’s enough investment in building the capabilities they’ll require. One example is the “digitalization” initiative at Siemens that Joe Kaeser spearheaded. Another is the Creating the New initiative at Adidas, which Herbert Hainer started and his successor, Kasper Rørsted, is continuing; it focuses on speed (in order to offer consumers “exactly the products they want to buy whenever, wherever, and however they want to buy”), key strategic cities (to spot emerging trends), and open-source innovation (collaborating with third parties in industry, sports, and entertainment). A third example is Bob Iger’s commitment to invest in quality branded franchises, technology, and globalization during his 14 years at the helm of Walt Disney. Each CEO took personal responsibility for shepherding progress in the chosen areas.
It is the outcome of these “must-win” battles that determines long-run success. Though these broad themes or initiatives are not corporate strategies—as they are often mistakenly called—their pursuit is an essential part of a complete strategy.
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Here is a direct link to the complete article.