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Simply Strategy: The shortest route to the best strategy, by R Koch and P Nieuwenhuizen, Prentice Hall, 2006
Strategy is an often talked about but frequently under exploited area of leadership. Although strongly emphasised in MBA studies and the subject of many excellent text books (two of the best being Exploring Corporate Strategy, by Johnson, Scholes and Whittington, Prentice Hall, 2007 [878 pages] and Contemporary Strategy Analysis, by Grant, Blackwell Publishing, 2007), much of this set in the context of deciding strategy for large international corporations. At the other end of the market there are any number of airport style popularisations that simplify to the point of patronising.
For those of us who are not privileged to guide huge corporations, but do want to know how to sustainable boost the long term income generation and profitability of our business unit, Simply Strategy is one of the best on the market. It is robust and up to date, but practical, and, most importantly, it is aimed at the level of business that most of us have a chance of making an impact upon: the business unit or SME.
The book has a wealth of practical tools, and on-line support, based around 10 key questions. We will summarise each of these in order:
What business are you in?
o List out possible business segments. These can be classified by product, service, activity, customer groups, main competitor groupings, supply chain differences, profitability, business model, etc.
o Test whether these segments really are different. You can do this quickly by checking whether you face the same competitors with the same relative market share (RMS) in each segment (where the answer is yes, you are probably not dealing with two distinct segments), or apply a set of 12 questions which the writers describe as the “Segmentation Mincer”. These further questions include: Are the customers the same in the two products or areas? And, is our firm’s profitability roughly the same in the two products or areas?
Where do you make the money?
o Identify profits generated by segment in terms of return on sales (ROS) and return on capital employed (ROCE). As financial data will almost certainly not be available for the segments as identified in the previous exercise, some accounting work will need to be done here. This can either be as a rough, top down estimate for each segment, or a more rigorous bottom up review.
How good are your competitive positions?
o The next step is to establish the competitive strength of each segment. Koch and Nieuwenhuizen suggest that this is done by identifying: current relative market share (RMS); the trend in RMS; expected annual future growth rate of the relevant market and ROCE for each segment. These and related tools are explained in detail and worked examples are provided.
What skills and capabilities underpin your success?
o This is related to the important strategic idea of CORE COMPETENCY. The concept of core competencies was first put forward by C.K Prahalad and G. Hamel in a 1990 Harvard Business Review article.
o Koch and Nieuwenhuizen take this concept and explain in practical terms how to apply it an business unit and SME level. They recommend considering what your business is especially good at doing, how rare these competencies are, how easy it will be for your competitors to copy you, how you can expand and deepen these capabilities, and is which adjacent segments your competencies would be of most value.
o They then recommend listing 25 to 50 specific capabilities that the business knows how to do, narrowing this down to 5 to 25 distinctive skills and then finally reducing this to 3 to 5 key core competencies.
Is this a good business to be in?
o Industry attractiveness is the other side of the strategy debate. This is Michael Porter territory. Koch and Nieuwenhuizen stress that these competing views of strategy should not be viewed as an either or because one determines how well you are likely to do in the race and the other determines whether the race is worth entering in the first place.
o Koch and Nieuwenhuizen recommend an approach which involves adapting and extending Porter’s FIVE FORCES MODEL. The factors they propose are: industry ROCE average, trend in ROCE, barriers to entry, future market growth, capacity / demand balance, threat from substitutes, suppliers’ power, and customers’ power.
What do the customers think?
o The key concept her is that of VALUE DISCIPLINE. They relate this back to Michael Porters view that customers have three broad kinds of value requirements which provide different ways within which business can address a given market. These are: cost leadership, differentiation and focus. They also highlight Treacy and Wieraema’s update of these categories, in their book The Discipline of Market Leaders, to become: operational excellence, product leadership and customer intimacy.
o In choosing their own value discipline propose first answering the questions: What are you good at? What do your customers prefer? And, what is the size and potential profitability of each value discipline?
What about the competitors?
o Koch and Nieuwenhuizen deal with this area rather briefly, they offer two case study examples which examine areas such as core competencies, cost structure and chosen value discipline. Little generalise advice is offered other that to identify specific questions you need to answer about your competitors?
Should you do something else?
o The concept of diversification and the use of Ansoff’s MARKET / PRODUCT MATRIX for business development is discussed. Koch and Nieuwenhuizen suggest that although the fashion for diversification has now rather been taken over by a push for innovation, in their view: “If you are in a reasonably attractive industry and your market is expanding, all you need to do is pursue maximum growth.”
Who are we? What will we do?
o Having done all this strategic work, Koch and Nieuwenhuizen suggest that business can do one of three things: correct their weaknesses, enhance their areas of strength, and focus on those functions, parts of the VALUE CHAIN, products and / or markets that really play to your strengths. Of these three choices, they suggest, only the second and third are likely to lead to success.
o Finally, its is suggested the three things be formulated: your MISSION, your VISION and your STRATEGY. The strategy should simply be four to eight statements that explains how to get from where you are now to where you intend to be in three to eight years time.
This book provides an informative and rigorous synthesis of practical strategy tools designed to be used in anger at business unit and SME level. Hopefully, reading this summary has given you a sense of what is proposed and how it may help you and your business. If has sparked your interest, there is no substitute for reading the actual book.
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