Seizing Competitive Advantage
Strategy is an intent or plan that precedes action. It is the chosen direction, or set of directions, we follow in our quest toward the fulfillment of our larger mission or purpose.The object of strategy is to bring about favorable conditions within which action will occur.The Japanese business theorist Kenichi Ohmae says that “the object of strategy is to bring about the conditions most favorable to one’s own side…”
Strategic decisions determine the grand direction upon which an entity will embark.To ensure alignment of strategic decision-making throughout an organization, we recommend four steps to maintain strategic unity and focus in an organization:
1.Understand your sources of competitive advantage
2.Identify the competitive work of the organization and categorize all business processes
3.Resource work internally and externally appropriately
4.Allocate the time of contributors to best leverage competitive work
Understand your sources of competitive advantage
Southwest Airlines has drawn a lot of attention over the past couple of decades as a thriving company in the midst of an otherwise sluggish and seldom profitable industry.The difference, for Southwest, is that it simply does things differently.
In his influential article What is Strategy?, Michael Porter points out that sustainable advantage occurs only when you do different activities than your competitors, or when you do the same activities differently in order to create value.Porter insists that “operational excellence” -- doing the same thing the same way as a competitor, or even doing it better -- will not yield a sustainable advantage. While the other major players in the airline industry have had a difficult time differentiating themselves from their rivals,
Only the paint differentiates one company's airplanes from another.In Porter’s view, strategy is “the creation of a unique and valuable position, involving a different set of activities.” Companies that are strategic in approach find a way to be different from competitors.Companies that adopt a “me-too” approach are seldom successful. In order to excel, moreover, companies must establish differences that they can preserve.Competitive strategy is about being different.It means deliberately choosing a different set of activities to deliver a unique mix of value.Southwest uses a truly different business model.
Look at how Southwest tailors the activities of the organization around its strategic focus on low cost travel:
- Minimizing turnaround time at the gates by eschewing seat assignments and carefully managing the queuing for aircraft boarding.
- Simplify operations by using one and only one type of aircraft – the Boeing 737.This means every pilot and mechanic is capable of working any plane in the fleet
- Avoiding non-essential services such as in-flight meals in order to cut cost and enhance efficiency of operations.
This set of activities focused on competitive activities ensures that no full-service airline can compete with Southwest on cost.
In a nutshell, the secret to Southwest’s success is keeping the attention of its people on the work that differentiates the company from its rivals.Choices and decisions at Southwest are made with the intent of keeping organizational design aligned with business strategy.
The first step in becoming an organization aligned around strategy is to formulate and articulate strategic intent.In this regard, we recognize four basic or generic strategies.They are:
- Best Product
- Customer Intimacy
- Operational efficiency
- System Lock-In
Product leaders continually push their products into the realm of the unknown, the untried, or the highly desirable.
Product leaders concentrate on offering customers products or services that expand existing performance boundaries.
A product leader’s proposition to its customers is best product, period.
They are creative, commercialize ideas quickly, and relentlessly pursue ways to leapfrog their own latest product or service.
Customer Intimacy implies that every customer is treated as an individual, with the ability to receive customized attention to his or her needs.
Companies delivering value through customer intimacy build bonds with customers like those between good neighbors.
They don’t deliver what the market wants, but what a specific customer wants.
They make it their business of knowing the people they sell to and the products and services they need.
They continually tailor their products and services, and do so at reasonable prices.
“We take care of you and all your needs.”
- Operationally excellent companies deliver a combination of quality, price, and ease of use that no one else in their market can match.
- They are not product or service innovators
- They do not cultivate one-to-one relationships with their customers
- They execute extraordinarily well, and their proposition to customers is guaranteed low price and/or hassle free service.
System Lock-in Strategy
In a system lock-in strategy, the firm examines the customer’s entire experience (in some cases called the “cycle of service”) and covers the entire chain of experiences though partnerships with complementors and through end to end product lines.
As an example, Microsoft is not the leader in new product development.By way of contrast, Apple does follow a best product strategy.Nor is Microsoft a Customer Intimacy company, since “we get what we get.”Finally, Microsoft does not excel by Operational Efficiency, as products are slow to come out and Microsoft seeks to avoid competing on price alone.
Microsoft excels, rather, at what we call “system lock-In strategy.”By partnering with the hardware companies, most notably Intel, and the Applications companies like Adobe who all must stay Windows-compatible, Microsoft locks out its competitors.
Customers, of course are locked in as competitors are locked out.Several years ago, Digital Research released a PC operating system hailed by critics as superior to Microsoft’s product. Several magazines awarded the Digital Research product, DR-DOS as the “best product” among operating systems.Unfortunately, the OS was not fully compatible with all of the software people generally use – word processing, spreadsheet, database, presentation software ad the like – while most software available at that time had been developed specifically for Microsoft’s MS-DOS.In the end, the new OS could not compete.Digital Research was effectively “locked out” by Microsoft.
The Competitive Advantage Model
These four generic strategies can be understood in terms of a 2 by 2 model, as depicted below.
The two columns reflect Porter’s view that companies must compete through one of two avenues: on price or by differentiation.In this model, we see that companies may differentiate either by focusing on a best product strategy, or by cocusing on customer service. The second column, shows strategies based on System Economics. These strategies involve either a product focus in which supply chain management keeps costs low, or a focus on the customer's complete experience, locking in loyalty by the interconnectedness of the elements of the system. That is, efficiencies can be either internal, as managed by Wal-Mart, or external, as controlled by Microsoft.
The top row indicates strategies that focus on the product itself – best product (differentiated) or Operational Efficiency (low cost).The bottom row indicates strategies resting on the customer’s experience.Customer Intimacy implies that every customer is treated as an individual, with the ability to receive customized attention to his or her needs.In a system lock-in strategy, the firm examines the customer’s entire experience (in some cases called the “cycle of service”) and covers the entire chain of experiences though partnerships with complementors and through end to end product lines.
Please examine the corporate examples shown in the table above.Coca-Cola may seem surprising in the System lock-in box, but think McDonalds, vending machines and super market shelf space.These are indicative of a strategy based on complementors.
2. Identify the competitive work of the organization and categorize all business processes
All works of strategy include the caveat that you cannot excel at everything, you must make strategic choices.Categorizing work allows the firm to understand where they must excel, and where they must simply stay at industry parity.The first task is to identify the critical work processes of the organization. The second task is to categorize the work processes based on what is mission critical.
The organizational design tool called Categorization of Work was designed to identify the activities that an organization chooses to perform differently to distinguish itself from its competitors.
Generally, all work can be classified as either Core Work, such as creating strategy, developing new products, managing supply chain activities, and revenue generation, or as Enabling Work such as human resource development, accounting and information technology.
Within the two types of (core and enabling) processes there are four categories of work.Once work is categorized, the organization can be aligned to properly support the requirements of each type of work. These four categories are noted below:
Competitive Work.In the organizational context, this is the core competence of the organization.Strategic Work is that which creates sustainable competitive advantage and distinctiveness. For example, the competitive work of a hospital is healing.
Competitive-Enabling Work.This is work that “leverages” competitive work.This work gets you ready to do the competitive work.Training doctors and attracting patients might be the strategic-enabling work of the hospital.
Business Essential Work.This is work you must do to stay in business, but it is nonetheless work that customers don't really value from you. Even if done at world class level business-essential work does not create sustainable competitive advantage. Nonetheless, if done below industry standards, the outputs of business-essential work can cause disadvantage and/or poor performance. Sending out bills is business essential work.
Compliance Work.This is work that is done to manage legal risk to the organization.If done below industry standards, the outputs of compliance work can cause disadvantages and/or poor performance.Work that if done at world class level does not create sustainable competitive advantages.This work is stuff you have to do, and probably would not do if you were not required to do so.Reporting to the IRS is compliance work. This work, if left unabated, will consume the organization’s competitive work.
Once business processes are identified and understood, the organization can determine the critical few measures of performance most important to company success.Wal-Mart’s inventory turns measures and Southwest Airlines’ gate turnaround times serve as excellent examples.
3. Resource work internally and externally appropriately
Outsourcing of selected business processes has become an important strategic option for companies wanting to maintain a focus on their strategically important or competitive work.Resourcing decisions are dictated by the Type-of-Work and the nature of the individual skills and knowledge required to perform the work. Competitive Work is always performed and managed in-house.
Work that is note categorized as competitive work is subject to consideration for outsourcing of one sort or another.To determine the best possible distribution of work, we use the following model.
4. Allocate the time of contributors to best leverage competitive work
Once work is categorized, then the organization can align itself to properly support the requirements of each type of work. Regardless of how work has been divided into in-house and outsourced buckets, it is important that the focus of the organization is focused on excelling at the competitive work.
Of course, the Categorization of Work tool is not used solely in high technology situations.Recently, we worked with an elementary school on an organizational redesign project.The impetus of the project was the frustration that many teachers were feeling about the demands on their time which took their focus away from teaching and coaching (their strategic work) and from preparing lessons (strategic-enabling work).Some said that up to an hour per day was spent filling out various government-required forms (compliance work).Even more of their time was spent marshalling children here and there across the campus and dealing with assistants and specialists (business-essential work).