In module three, we're going to discuss what it takes to build a competitive strategy. And very specifically, a leader's role in creating strategy. This happens to be one of my favorite subjects, leadership subjects that is. It is a place where you are going to bring together so many of the ideas that we've already talked about. Decision making, change management, understanding your corporate culture, how to create value, being able to communicate. So what did you think about that video that started off this module? This idea that this way of training yourself to slow down and do high road thinking. This clear minded observer kind of thinking that says we aren't in the tyranny of time here. How is it that I can look at longer term objectives and look at longer term goals and potential paths to increase the value of my organization? Rather than the more tactical decisions that you make in low road thinking which are things that need to be decided in the next day or week or month, and usually with little regard to strategy. So let's start with a leader's role in strategy. So, first of all, what is strategy? I have my own definition and it is a choice among alternatives. There are so many different ways to be able to execute a given approach to growth, let's say. Let's say revenue growth or entering a new market, right? You can imagine multitude of different ways to do those things. A strategy says I'm going to choose between those alternatives because I've done my homework. I've done an exhaustive analysis of the market, of the environment of my competitors and I'm going to choose amongst these alternatives. A strategic framework is how you're going to make those decisions, how you're going to play this game of business and do that selection amongst alternatives. So, without a framework by which you can test the risk, the consequences, the likelihood of success, you will end up probably making a sub optimum decision that eventually will accomplish little, squander profits and investment, potentially confuse your workforce. One of the biggest things in this way of thinking about how to make decisions is the first question you have to answer is. What value will you create by choosing this alternative to do something, to maximize revenue for the next five years, to enter a new market, to find a new set of customers? What value are you really creating? So, this framework has got to establish how does the organization deliver value, which customers are willing to pay for that value? And then, how is it that you eventually get to those hard targets of either revenue growth or increased profit? So, a strategy doesn't answer all the questions, it sets the vision and some top level objectives. After that, it becomes strategic planning and the details then follow below that. The interesting thing about a strategic framework is it identifies the game you are not playing. The things that you have no intention of delivering, the ways you have no intention of doing business. Also, the strategic framework has to look at the form of the business as it is now. And with this strategy that you have chosen, do you have to change anything in your business to profitably create value? In other words, are there parts of your culture that might resist this strategy? Do you have the right business models? Do you have the right staff? Do you have the right capabilities to be able to execute this strategy? The framework make sure that when you are making these decisions, that you address things. Let's look at some of the questions that leaders need to ask when you're building an effective strategy. An effective strategy, meaning one that people can execute and then will make good on the promises and have outcomes that are meeting the targets that you set. And these are pretty high level of questions about what is the business we're in? What are we not in and choose not to do? So what are our broad aspirations and the goals that we can measure our progress? Where do we choose to play? And where do we choose not to play in this field of business in this market segment? Or maybe multiple market segments that we're in? How do we choose to win against the competitors in that set? What makes us different? What are our differentiators, our discriminators? What are the alternatives long before we make a decision? How many different ways can we achieve this goal, strategic goal? What are our competitors doing at this same moment, who might be thinking the same things? Within our business, what are the capabilities necessary to build and maintain this approach, this winning approach? Do we have the right core competencies? Are we missing some? If we are missing some, can we close those gaps in time to be able to meet the market expectations? If it's going to take five years to build up some core capabilities or confidences to be able to fill this strategic goal, you've probably missed the mark in entering the market. Because others might have already done so. So, knowing where you are right now and where you want to go and sort of what three miracles have to occur. Can those three miracles truly occur in the amount of time that you have to be able to put that strategy into motion? Taking a very clear view and asking organization to assess its strengths and weaknesses as opportunities and threats. And truly looking at what it's going to take to become profitable in the end, the return on investment. So is there so much investment necessary that it is going to take such a large amount of time to recover that return and to make a profit? And does that make sense? Or are there other maybe alternatives you could pick that have less investment required in the beginning? Maybe to provide a little bit less of a return on investment, but maybe do it sooner. What's more important to the organization? Strategic clarity is crucial. These decisions that you make as a leader are the ones that literally drive everything else in your organization. Where money is spent, who is hired? What is the timeline that you're going to measure yourself against? What does success look like and what are the consequences? So one model for strategic thinking, this comes from McKenzie. There are a couple ways for thinking about setting strategy, balance scorecard is one. But they typically all take some of the same steps. First one is the starting point of where you are. How do you create value, how you deploy value? Where are you maybe not executing the way you thought you might? Then forecast. How do you see the future unfolding from a technology standpoint, a workforce standpoint, a market standpoint, what your competitors are doing? Thinking in all of those dimensions as you imagine a future in, depending on the industry you're in, in five years or seven years. Then when you combine this idea of okay, truly, where are we now? How do we create value now? How do we deploy value right now? And what we think the future states, not just one, but there may be multiple, may look like. How do you modify what you're doing to win in the future? So now you're looking at potential pathways, alternatives, different ways of thinking, maybe acquiring a company, strategic alliances, investing in new technologies, reorganizing your company, so many different ways to address what that future state looks like. Then you choose one based on a lot of analysis, discussion. Then you need to create an action plan, those very specific steps that have to be written down and measured to reallocate resources and do the work and then evaluate the outcome. But at the end of the day you can never stop examining because the market is forever changing, your competitors are fierce, and your customers are always demanding more. So who creates strategy? Well, it's not you, it's by far not you and it's not all tops down. Some of the best strategies are created, not just taking a vertical slice through the organization, but a diagonal slice. So at all levels of responsibility, all functions and roles, bringing newly hired individuals into the strategic development process. Those working at the interfaces, those working between organizations, between programs, they have interesting insights. As a leader, you want to hear revolutionary ideas. You want people to challenge the assumptions of the past. You want them to ask you the hard questions and in doing this, you need humility, because you really need to listen to what the barriers are and what the pathways could be. Now there are many pieces of the organization that do the heavy lifting in strategic development. You've got business development, marketing departments, strategic planning offices, all of those play a very large role. Yet as a leader, you have to make the tough decisions. They're going to bring you all of this data, alternatives, different pathways, strengths and weaknesses, competitor analysis, but it's up to you to make the decision that you think is going to bring the most value to your stakeholders. And then it's up to you to communicate that decision both internally and externally. On top of that, if that decision requires changes in the organization because you may not have the core competencies, then you have to build an organization that will carry that strategy out. You need to have the capacity in the organization to be successful. You're going to set yourself up for failure if you pick a strategy that you don't have any chance of executing in a reasonable time. I think about strategy in three different hierarchies. You have the corporate strategy, this is the highest level and it's going to be vague and you want it to be vague. Yet it basically is setting the stage for asking the organization below it to create value, either create more value, different value, quicker, a new global environment. At the corporate level you may hear things like grow our market share or introduce our products to new customers. Corporate then is responsible for building internal competencies and potentially providing resources to the levels below who are going to execute some of those more detailed strategies. In the business area, this is where real strategic thinking happens, because as you have this top corporate strategy that says bring our products to new customers. Now you're in a business area, we're in LTO space. So how do we win in our market? It's very specific, and corporate didn't really tell us how they just sort of set this vision. So now we need to understand our competitors, what are truly our core competencies and our strengths, weaknesses, opportunities, and threats. This is where you create the strategic plan that either produces a different way of going to market for these new customers, let's say. Or maybe it tweaks the product a little bit to be able to be more palatable to a new customer so. Now let's go down one more level, a team strategy. Now you are the executers more often than not of this business area strategy. You have very specific things you're doing, you're modifying a product or you're creating a detailed customer analysis, and it might be customer surveys or questions about if you were to have this product. Or if you were to buy this product, what would be the attributes of maybe cost or performance or other things that you would find of value? And do you have any alternatives? So in this particular case, as a team that is entrusted with executing some of this strategic plan, you're going to be talking about how as a team, you work together, your operating principles. What are your key performance indicators, how are they going to be measured? And then how do you communicate it to even lower levels? So a couple of tools that are used in creating strategy. One is, we've talked about SWOT, the best way to do strengths, weaknesses, opportunities, and threats analysis is bringing in people with diverse opinions from all of your stakeholders to understand their ideas, but also the impacts of certain decisions and alternatives on them. This idea of strengths, it is, what is it in the company's makeup, in the assets, in the core competencies, in the intellectual property, in the culture of innovation or learning agility, that is right now contributing to your success or your advantage? And might it continue to increase your market share? That strength. It needs to be objective, which is why you have multiple voices at the table to sort of challenge others' introductions of strengths. Weaknesses, now that's kind of interesting. You have to look at the external forces that are driving how and why you do what you do. And then with respect to your competitors and your position with your customer, your position with your suppliers, are your approaches really a weakness and could they be improved? What's interesting is sometimes weaknesses can present new opportunities, depending on how you address them. And they could be future threats. So I give you this example of COVID, what was a disaster to the airline and restaurant industries business models? That was by far a weakness and a threat in the shutdown and then the ability for those organizations to continue to do business for a while. Tech companies were able to seize that same situation and turned it into an opportunity and try and figure out how they address their workforce in a remote work situation and then use those approaches, as we sit today, to invigorate their workforce and potentially create a discriminator. Another tool is Porter's Five Forces. So Michael Porter, his professor at Harvard Business School, wrote several books on this topic. And his hypothesis, I will say, is that there are five forces that work in an industry that influence their ability to develop a competitive strategy. Very important. This is an industry not a company per se. You can draw some analogies to an individual company as well. But these five forces we're going to explore in the next couple of charts. Let's take the first one, which is this center of this graphic and that's rivalry among existing competitors where you sit right now, it's the business you're doing the competitors that you are in the market with right now. The very first force you're dealing with is your immediate competitors. And how well does what you do your products or your services stand up to your competition. If you are in intense competition for price, let's say you have to look at what ability and capacity do you have to get above your competitors if you were to cut prices and what might that do to your organization? If you don't have a lot of strong competition, then you potentially have quite a bit to gain in your market by maybe offering a new product or an improved product or a better service or something at a better cost and schedule. So now let's look at sort of these outside forces and the first one is the power of your suppliers. If, in fact, you are very dependent on your supply chain and for whatever reason, prices increase, what would that do to your competitive position? Are there multiple suppliers and you have just picked one and such that if just one supplier set has thought about increasing their pricing to you, do you have alternatives? Do you have enough time to build up a vertical integration strategy where maybe you are very, very vulnerable? In one case, there's only maybe one supplier that provides you a very important part of your product and they could hold you hostage. Might a strategy be let's invest and let's do it ourselves, produce it ourselves. Now, that's going to take money. It's going to take time. Could mean core competencies that you don't have. Moving on to buyer power. This is the bargaining power of your customers. Are there alternatives in the market? Can your customers shop around? Can they make deals with your competitors? How much power do your customers have and determine the price of your product? Knowing these things may give you a different perspective on what customers really want and what they value. Threat of substitution. So what happens when your customers begin to find alternatives or find substitution? Maybe not one for one substitution, but close enough at a price point that's better. All of a sudden these substitutes and alternatives bring a different kind of value to your customers and depending on if its price they value or quality, they value, they may move away quickly from your products and services. And then finally, threats of new entrants. And this is absolutely made possible by ever evolving technology. How easy is it for newcomers to the market enter and create a product or a service in a way that your customer base has not seen before and potentially using the supply chain in a way you've never thought of? And we'll explore some examples of that in a little bit. Okay, strategy half life. It's not very long. Strategy is temporary at best. Just due to all of those forces. As a leader, you have to watch the environment, competitive environment, economic environment, customer environment and make adjustments, your competitors, new entrants, market forces, technology, all decay your strategy almost the minute you write it down. In order to be resilient, you do have to anticipate and adjust to these trends that you are seeing and build a resilient organization, a learning organization that's making its future. They think about it, making its future rather than defending your past. In some cultures, you need to conquer denial, nostalgia or arrogance, and this quote is perfect. Success breeds active inertia and active inertia breeds failure. Being successful in the past is no prescription of success in the future. And fondly remembering the past and its successes does very, very little to making you successful in the future and then monitoring orders five forces. Again, your role in strategy is develop a strategy that all will understand and accept out of trust in the beginning because it's going to be a change and it may be drastic. You need everyone working together to be able to execute that strategy from business areas down to teams and that means you have to communicate, take the long road, make decisions that build long term value for your stakeholders. And again, it sounds simple. A strategy is a way to create and claim value through differentiation, being different from all the other potential products and services out there and adding value in ways that your customer wants value to be added. So again, a leader's role is not to do all of that work, but it's to make the hard decisions and ask the right questions. So next, I want you to watch a video on Porter's Five Forces and then we'll get back together and we'll talk about different types of strategies. So I'll see you there.
