APPENDIX B

Organizational Strategy: A Primer

This guide has focused on the day-to-day aspects of strategic thinking—understanding your company’s objectives, setting priorities, and aligning your team—and has mostly taken as a given that your company already has a clear and defined strategy.

However, the further you advance in your career, the more you’ll be a participant in developing your company’s strategy. And even if you’re a new or midlevel manager now, understanding how and why your leaders set the organizational strategy will help you execute it with your team.

This appendix explains what strategy is, how to formulate it, and what leaders should be thinking about when they set and update company strategy.

What Is Strategy?

Bruce Henderson, founder of Boston Consulting Group, wrote that “strategy is a deliberate search for a plan of action that will develop a business’s competitive advantage and compound it.” Competitive advantage, he continued, is found in differences: “The differences between you and your competitors are the basis of your advantage.” Henderson believes that no two competitors can coexist if they seek to do business in the same way. They must differentiate themselves to survive.

For example, two men’s clothing stores on the same block—one featuring formal attire and the other focusing on leisure wear—can potentially prosper. But if the two stores sell the same things under the same terms, one or the other will perish. More likely, the one that differentiates itself through price, product mix, or ambiance will survive. Harvard Business School professor Michael Porter, whose work inspires modern corporate strategy, concurs: “Competitive strategy is about being different. It means deliberately choosing a different set of activities to deliver a unique mix of value.” Consider these examples:

• Southwest Airlines didn’t become the most profitable air carrier in North America by copying its rivals. It differentiated itself with a strategy of low fares, frequent departures, point-to-point service, and customer-pleasing service.
• Toyota’s strategy in developing the hybrid-engine Prius car was to create competitive advantage within two important customer segments: People who want a vehicle that is environmentally benign and cheap to operate, and those who covet the latest thing in auto engineering. The company also hoped that the learning associated with the Prius would give it leadership in a technology with huge future potential.

Strategies may center on low-cost leadership, technical uniqueness, or focus. Porter also argues that you can think about them in terms of strategic position, “performing different activities from rivals’ or performing similar activities in different ways.” These positions emerge from three, sometimes overlapping sources:

• Need-based positioning. Companies that follow this approach aim to serve all or most of the needs of an identifiable set of customers. These customers may be price sensitive, demand a high level of personal attention and service, or may want products or services that are uniquely tailored to their needs. Target’s focus on image-conscious shoppers is an example of this type of positioning.
• Variety-based positioning. Here, a company chooses a narrow subset of product/service offerings from within the wider set offered in the industry. It can succeed with this strategy if it delivers faster, better, or at a lower cost than competitors. Walmart’s past decision not to stock big-ticket items like appliances and electronics is an example of this type of positioning.
• Access-based positioning. Some strategies can be based around access to customers. A discount merchandise chain, for example, may choose to locate its stores exclusively in low-income neighborhoods. This reduces competition from sub urban shopping malls and provides easy access for its target market of low-income shoppers, many of whom don’t have automobiles. Target’s decision to locate stores in urban environments is an example of this type of positioning.

Simply being different, of course, won’t keep you in business. Your strategy must also deliver value. And customers define value in different ways: Lower cost, greater convenience, greater reliability, faster delivery, more aesthetic appeal, easier use. The list of customer-pleasing values is extremely long. As you evaluate your own company’s strategy for gaining competitive advantage, ask yourself these questions:

• Do we differentiate ourselves based on need, variety, or access?
• How does our positioning attract customers away from rivals? How does it draw new customers into the market?
• What value does our strategy aim to provide? Does it deliver?
• What tangible advantage does this strategy provide for our company?

Understanding your company’s approach here will hone your ability to think strategically. And it will also allow you to formulate your own group’s strategy from the ground up.

Developing Strategy

If you haven’t had much experience developing strategy, know that most managers are in the same position. That’s because it isn’t an everyday activity. “Executives hone their management capabilities by tackling problems over and over again,” notes Harvard Business School professor Clayton Christensen. “Changing strategy, however, is not usually a task that managers face repeatedly. Once companies have found a strategy that works, they want to use it, not change it. Consequently, most management teams do not develop a competence in strategic thinking.”

Whether you’re revitalizing your team’s business model or building a new business unit from scratch, you need to analyze how your company’s external circumstances relate to its internal resources. That’s the essence of strategy building: finding unique links between the opportunities and threats that present themselves to your business and your particular capacity to respond.

The order in which you perform this analysis is important. It yields the best results when you begin by identifying a problem out in the world, then work toward a solution inside your company. The process rarely succeeds in the opposite direction: A strategic initiative that’s not grounded in a real business need is likely to make you less competitive rather than more.

Over the past few decades, many frameworks for building strategy have emerged, from the work of Porter and others. The fol lowing steps are a generalized outline of these processes, which may prepare you to contribute to your company’s strategy, as well as ensure your team’s plans are well constructed.

Step 1: Look outside to identify threats and opportunities

There are always threats in your organization’s outer environment: new entrants, demographic changes, suppliers who might cut you off, substitute products that could undermine your business, and macroeconomic trends that may reduce the ability of your customers to pay. Opportunity also lurks in a new-to-the-world technology, an unserved market, and so forth.

Deepen your understanding of this landscape by gathering the views of customers, suppliers, and industry experts you may interact with in your role. Have conversations with others in the organization to identify current threats and opportunities. Some firms, particularly in technological fields, enlist teams of scientists and engineers to analyze markets, competitors, and technical developments. It’s their job to look for anything that could threaten their current business or point toward new directions that their business should follow. Gain exposure to this work if possible.

Whether you’re contributing directly to strategy development in your role or simply trying to understand the environment in which you operate, consider the following questions:

• What is the economic environment in which we must operate? How is it changing?
• What will our customers want/expect from us in 5 to 10 years? How will the world have changed?
• What major threats do we face now or are we likely to face soon? What aspects of the current environment are our competitors struggling to adapt to?
• What opportunities for profitable action lay before us? What are the risks associated with different opportunities and potential courses of action?

Step 2: Look inside at resources, capabilities, and practices

Internal resources and capabilities can either frame and support or constrain your company’s strategy, especially for a larger company with many employees and fixed assets. And rightly so. A strategy to exploit an unserved market in the electronics industry might not be feasible if your firm lacks the financial capital and human knowledge to carry it off. Likewise, a strategy that requires entrepreneurialism from your employees probably won’t get off the ground if your company’s management practices reward years of service over individual performance.

These internal capabilities—especially the human ones—matter greatly, but strategists often overlook them. To whatever degree you participate in organizational or team strategy development, consider questions like:

• What are our competencies as an organization or team? How do these give us an advantage relative to competitors?
• What resources support or limit our actions?
• What attitudes and behaviors do our employment practices encourage?
• What is our workforce good at, and what does it struggle to accomplish?
• What does it take to implement real change here?

Step 3: Consider strategies for change

Once you have a picture of how the changing external world affects your business and what the company or your team looks like right now from the inside, it’s time to think about directions for change. Christensen has advocated that strategy teams first prioritize the threats and opportunities they find (he calls them “driving forces” of competition) and then discuss each one in broad strokes. Like all idea-generation sessions, these conversations will be most successful if you push your team to create many alternatives. There is seldom one way to do things, and in some cases, the best parts of two different strategies can be combined to make a stronger, third option.

As you’re working with your boss, your peers, or your own team, don’t be too attached to your new ideas at this stage. Check your facts and question your assumptions. Some information is bound to be missing, so determine where your knowledge gaps are and how to fill them. As your options start to take shape, vet the leading strategy choices with others, including longtime employees, subject-matter experts, and other industry players in your network. (You’ll have to be careful how much information you share with each person, of course.) Collecting a wide range of reactions will help you counter groupthink.

Step 4: Build a good fit among strategy-supporting activities

Good business strategies, according to Porter, combine activities into a chain whose links are mutually supporting and lock out imitators. Take the rise of Southwest Airlines as an example: As Porter describes, the company’s breakthrough strategy was based on rapid gate turnaround that allowed Southwest to make frequent departures and get the most out of its expensive aircraft assets. The emphasis on gate turnaround also dove tailed with the low-cost, high-convenience proposition the airline offered its customers. Critical activities across the company’s operations supported these goals: the highly motivated and effective gate personnel and ground crews, a no-meals policy, and no interline baggage transfers. All made rapid turnarounds possible. “Southwest’s strategy,” wrote Porter, “involves a whole system of activities, not a collection of parts. Its competitive advantage comes from the way its activities fit and reinforce each other.”

To systematize the strategy in your own organization, focus on these issues:

• What activities and processes are involved in carrying out our strategy? Which are most (and least) important to the success of the strategy?
• How could we modify each activity and process to better support the strategy? How can we organize these changes to compound our advantages?
• What resources and constraints should we plan for? How will we implement the highest-priority and highest-impact changes?

Step 5: Create alignment

Once you’ve developed a satisfactory strategy, your job is only half done. The other half is implementation. You’ll need to create alignment between your people and operations, and your strategy. This is critical for managers at any level. Ideally, employees at every level in your company will understand (1) what the strategy is; (2) what their role is in making it work; and (3) what the benefits of the strategy will be to the organization and to them as individuals. Only when your people have a strong grasp of all three points will they be able—and willing—to carry out their work.

Managers like you play two roles in this process. As a coordinator, you must organize work in your department so that those everyday efforts support the business’s strategic intentions. That means drafting assignments, streamlining processes, and reshaping roles so that no one’s time is wasted and everyone feels connected to the shared sense of purpose. And as a communicator, you must help people understand the strategy and how their jobs contribute to it. Even your entry-level employees should be able to articulate the goals of the organization and explain how their efforts every day fit in.

Adapted from Harvard Business Review Manager’s Handbook (product #10004), Harvard Business Review Press, 2017.