Here is an excerpt from an article written by Freek Vermeulen 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
* * *
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.
* * *
Here is a direct link to the complete article.
Freek Vermeulen is a professor at London Business School and the author of Breaking Bad Habits: Defy Industry Norms and Reinvigorate Your Business (Harvard Business Review Press, 2017).