This blog is originally published as a sub-chapter of The G.O.S.P.E.L. of Strategy.
The third step of winning is to formulate a smart strategy that leverages your strengths while making competitors’ strengths irrelevant so that you can outperform your opponents. How? By choosing an option that gives you a sharp focus. Yes, a sharp focus!
The Secret of Strategy: Sharp Focus
The greatest secret of Winning Strategy is all about sharp focus (i.e., the intense concentration in a chosen area of specialty). As you can’t be good at everything, you must focus on what you are best at – i.e., your competitive advantage (natural or created). You should do one thing very well and concentrate your resources on this one thing, thus giving you an edge against the other competitors in the market.
If you don’t have an edge in the market, competitors can easily steal your customers, and it will be very hard for you to generate high profits. If you want to win in business, you must develop this much-needed edge – by concentrating and having a sharp focus.
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A similar idea applies to military strategy. One of the most important and enduring principles of military strategy is Concentration of Force, i.e., a commander must concentrate all resources, efforts, and combat power at the decisive place and time to have a decisive effect. This principle is part of the British Defence Doctrine, the Soviet Principles of Military Science, the US Armed Forces’ Principles of War. Similarly:
Sun Tzu, the ancient military strategist who wrote the Art of War, advised: “Concentrate your energy and hoard your strength.”[i]
Napoleon Bonaparte, a brilliant military commander, said: “When you resolve to fight a battle, collect your whole force. Dispense with nothing. Gustavus Adolphus, Turenne, and Frederick, as well as Alexander, Hannibal, and Caesar – have all acted upon the same principles: to keep their forces united, to leave no weak part unguarded, and to seize with rapidity the important points.”[ii] According to him, the fundamental principle of a strategy for victory is: “All forces must concentrate on the task of attaining the objective.”[iii]
Alexander the Great: “a small army acting in concert was superior to a sprawling, disorganized one.”[iv] With focus, even a small army can defeat a larger one.
The principles of business strategy are the same as those of war. One must concentrate one's attacks, not disperse them. Imagine achieving your goal as sieging a fortress: fire must be focused on a single point. As soon as a breach is made, the equilibrium is broken, all other defense points become pointless, and the fortress falls.
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With a sharp focus comes specialization and mastery. Its benefit: making you successful. Take a look at Smilodons, the saber-toothed tigers. They developed long, curved, saber-shaped teeth – specialized for killing mammoths and megatheriums (elephant-sized sloths) efficiently. As a result of the specialization, they successfully became the apex predator in the ice age era for around 2.5 million years. That is a long time as we, humans, have only existed for about 200,000 years.[v]
But everything comes with a price. The price of specialization: making you vulnerable to a big, significant change. Around 12,000 years ago, the environment changed drastically – the ice age ended, and giant beasts like mammoths went extinct. Overly specialized at hunting large prey, Smilodons were unable to adapt and became extinct too.[vi]
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Fortunately, we are not Smilodons. When disruption happens, we can change our specialization. As discussed in Section 2.3.5, to be successful in the period of significant disruption, we need to focus on being adaptive (Exploration Mode instead of Exploitation Mode). No matter what, we still need to focus, i.e., focus on performance when the market is stable and on adaptability when the market is in turmoil.
What happens if you have specialized but then the market changes and requires a new specialization? You change. Don’t adopt a fixed mindset – which wrongly assumes you can’t change after you are highly specialized. People with a fixed mindset would think: “Your core specialization will lock you in as it can’t change.”
On the contrary, those with the growth mindset would think: “No matter how deep your specialization is, it can substantially change.” People with a growth mindset believe in serial mastery, i.e., you can use your existing specialization as a foundation to build a new, related specialization. This way, you don’t have to create a new mastery from scratch (starting a parallel specialization). Instead, you can use your existing mastery as the basis of your next mastery (extending a serial specialization).
An excellent example of this is Arnold Schwarzenegger. His first focus is on bodybuilding (with which he won Mr. Universe seven times, Mr. Olympia four times, and many other championships). Then, he capitalized on his bodybuilding success to enter the movie industry and win the Golden Globe Award, Hollywood Walk of Fame, and other awards. Leveraging his movie popularity, he then entered politics and eventually became the 38th Governor of California, USA. His political success opened other opportunities, such as campaigning for climate change, education, and veganism. Arnold’s case shows us that our first core focus, if leveraged correctly, can open the door to many other ventures in life.
Serial mastery also works in business. Recently, McKinsey released an article, Growth into Adjacencies, about how winning companies identify and prioritize new business areas where they can be the natural owners. According to McKinsey, winners survive the turbulent times because they can expand into adjacent business areas (i.e., using their existing strengths to create a new edge in the new area). The article reminds me of the case of Nokia’s serial mastery.
Nokia successfully transformed itself from a near-bankrupt mobile phone manufacturer into a leading network infrastructure business. In 2007, Nokia was the dominant player in the mobile phone market, with a 40% global market share.
However, just five years later, due to the iPhone's competition, Nokia was in a severe crisis. Its market capitalization dropped by 96%. Its operating losses were more than $2B in the first six months of 2012 alone.
In response, Nokia launched a dramatic, new strategy. The company decided to shed its then core business (the mobile phone business). As Apple’s iOS and Google’s Android rapidly captured larger and larger chunks of the market, Nokia sold its mobile-phone business to Microsoft for $7.2B in 2013. Then, Nokia decided to refocus on the network infrastructure business, leveraging its previous experience managing a mobile phone network.
Nokia’s strategy proved to be a success. By 2015, the network business has turned into the company's new core, generating several billions of dollars in shareholder value. Since then, Nokia has become a full-service network infrastructure provider. Its market capitalization in 2017 increased more than 500% since the low point in 2012.[vii] Nokia’s success shows that we can shed our existing core specialization, reorient ourselves around a related specialization, and come back stronger.
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Why do we need to focus if we want to win? It is because a sharp focus allows you to create and maintain a sustainable competitive advantage. I know it is an academic term, but it is an important concept. You need to pay attention to this concept if you want to become a master of Winning Strategy.
The term competitive advantage refers to something that allows you/your business to outperform your competitors, either through lower prices or by providing more excellent benefits and services. Competitive advantage can come naturally or be created via careful design. For example, in the early 2000s, Uber introduced personal, on-demand, app-based ride-booking when no one else in the industry offered that. As a result, its app became one of its competitive advantages.[viii]
The term sustainable refers to the ability to defend a competitive advantage for a long time. In the Uber case: as the years move on, many other companies started to copy Uber’s app and developed their own app-based booking system. By now, Uber’s app is no longer its competitive advantage. As you can see, Uber’s app was a temporary competitive advantage. It wasn’t sustainable because it could be easily copied. Fortunately for Uber, it has acquired new competitive advantages: the size of its network, the amount of capital it raised, and its brand recognition. These advantages are more sustainable because they are difficult to be copied.
Therefore, the term sustainable competitive advantage refers to something that allows you to outperform your competitors in the long term.
According to management theories, there are several ways to obtain a sustainable competitive advantage. However, if you think about it, they are all about focus:
Cost leadership strategy
This strategy wins by producing products/services at a lower cost than competitors. A business gains a price advantage over other companies if it can produce the same quality product but sell it for less. Even if the company doesn't sell for less, the lower costs result in a margin advantage. This is a sharp focus on Efficiency. Southwest Airlines, the world’s first low-cost airline, is a notable example. Compared to traditional airlines, it offered no-frills flight service that helped Southwest keep costs down and still profit despite the low-ticket prices. Despite many grumbling and unhappy customers, it won many price-sensitive customers. However, this model can be quickly replicated, e.g., by EasyJet and Ryanair.[ix]
Differential strategy
This strategy wins by creating attractive products/ services that are different from competitors’. The business typically needs strong R&D and design thinking to pursue innovative ideas and deliver better products/services. Since customers see the offer as being different from other products, they can’t buy it from the competitors and must buy it from the company. This is a sharp focus on an Offering. A notable example: Louis Vuitton successfully differentiates its brand against all other luxurious handbag brands. Its consistent focus on quality and innovation (e.g., waterproof and fireproof handbags) makes the brand a symbol of luxury. You’ll never see Louis Vuitton on discount (a tactic commonly employed by many apparel brands). [x] Yves Cercelle, its CEO, said: “We’re never on sale. All the rest discount. Us, never.”[xi] Louis Vuitton doesn’t need it, thanks to its strategy.
Niche strategy
This strategy wins by serving a particular segment of customers better than competitors. The niche customers will naturally choose the company that best meets their specific needs. This strategy is often used for smaller businesses since they don’t have the resources to target everyone. This is a sharp focus on a customer segment. For example, Cobra Beer initially targeted large Indian restaurants in the UK only, unlike other beer brands that distribute via supermarkets and have big TV marketing budgets. According to Karan Bilimoria, the founder, this focused approach allowed Cobra Beer to build its brand (i.e., best beers to have with an Indian curry) and distribute its products with a minimal marketing budget.[xii]
Strategic positioning strategy
This strategy wins by occupying a strategic position in the market, e.g., becoming the biggest player, the only player, the most popular player. This is a result of a sharp focus. As an illustration: Google’s position as the biggest and most popular search engine (Google had more than 90% search engine market share worldwide in 2019).[xiii] These days, anyone who wants to do search engine marketing needs to consider Google (unless you are targeting Chinese consumers). This advantage takes effort and time to develop. Google has acquired this position over the last 20 years by consistently focusing on user-friendliness and the most relevant search results.
Special assets strategy
This strategy wins by exploiting special assets or capabilities that are difficult to be copied and replaced (remember the VRIE concept from Section 2.4.1), e.g., trademarks, patents, copyrights, custom-made machinery, extensive database, and organizational know-how. This is a sharp focus on a capability. An example: Zara’s short supply chain allowed it to perfect the art of fast fashion. When other apparel brands required 12-18 months to bring products from design to store, Zara successfully brought its products in 3 months. When its competitors finally caught up to a 3-month supply chain, Zara can now get its products from design to store in just 4-6 weeks. In some cases, a mere 2-week period is all Zara need. This supply chain capability resulted in lower excess inventory, higher sales, higher customer satisfaction, less markdown – all of these despite limited marketing.[xiv]
Adaptability strategy
This strategy wins by responding to changes correctly. This is a sharp focus on agility. This strategy is especially valid during a period of market turmoil. A notable example: IBM’s transformation from a hardware company into a services & software solutions company. In the 1990s, IBM’s expensive mainframes business was threatened by the incoming lower-cost microprocessor technology. When Samuel J. Palmisano became the CEO in 2002, IBM took a big step: it changed its focus into advising senior corporate executives on how to use technology to cut costs and generate new business. The new business model quickly paid off: it simultaneously generated higher-margin, created recurring revenue, and reduced volatility. Since then, IBM has spent more than $25B on dozens of acquisitions, nearly all services and software companies. The company’s big research arm retooled to orientate toward services. It was working with universities to develop services science courses at more than 400 schools in 50 nations. IBM was about to extinct, but it successfully changed itself and survived the structural landscape change.[xv], [xvi]
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In sum, companies are winning by having a competitive advantage acquired through sharp focus. So, Strategy is all about focus. Now, let’s review the step-by-step pointers on how to create a competitive advantage via sharp focus:
Define and understand your customers (i.e., Focus on certain customers).
Offer a unique value proposition (i.e., Focus on being different).
Leverage your strengths creatively (i.e., Focus on your strengths).
Concentrate your resources and effort (i.e., Focus your resources and effort).
Create a reinforcing effect to strengthen over time (i.e., Focus on reinforcing your advantages).
Ensure a simple, easy-to-communicate strategy (i.e., Focus on the executability of your strategy).
3.1. Define and Understand Your Customers
The first step to create a competitive advantage is by being clear about who your target customers are. It can’t be everybody as you can’t win everybody. You better focus your resources on winning a particular segment that you can easily win. Michael Porter, the Master of Strategy, once wisely said: “Strategy 101 is all about choices: you can’t be all things to all people.”[xvii]
Focus on a specific target segment allows you to understand the customers deeply. And knowing the customers gives you a competitive edge as it will enable you to differentiate yourself from the other companies.
The winners often follow a narrow and deep focus rather than diversifying into lots of different customer segments. It is precisely like what Brian Chesky, the co-founder of Airbnb, said: “It's better to have 100 people who love you than having a million who just sort of like you.”[xviii]
For illustration, Paccar (a heavy truck manufacturer) earns much higher profits than its competitors because it focuses on specific customers, i.e., the owner-operators. Paccar’s competitors sell to large businesses that operate large fleets but are price-sensitive. On the contrary, Paccar sells customized trucks to the owner-operators, who work for themselves (either contracting directly with shippers or subcontracting with big truck companies) and purchase a truck for themselves. As owner-operators spend most of their time in their truck, they care about quality and amenities first. They value a noise-proofed sleeper cabin, luxury-grade bedding, sleek interiors, a sharp-looking truck, roadside assistance, and a quick spare parts network. Because owner-operators want this level of quality and service, they are less price-sensitive and willing to pay more. By choosing a customer base that is more fragmented and discerning, Paccar avoids selling its trucks at a lower price.[xix]
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Another case in point is the world’s #1 commercial dishwasher manufacturer: Winterhalter. It focuses on meeting hotels and restaurants' needs and has successfully dominated the global market for more than 70 years.[xx]
Similarly, electronic retailer Best Buy understands which customer segment generates the most money by store location. This allows Best Buy to tailor its inventory to a particular store based on the local target segment. For example, if the area has many affluent home-movie-lovers, then Best Buy creates a store with a dedicated department for home-theater systems. If the area has many tech geeks, Best Buy then places in-store specialists who can answer most technical questions. As a result, Best Buy customers are happy and coming back more often.[xxi]
Having a target customer segment doesn’t mean you reject selling to non-target customers. It means you only dedicate your effort, time, and money to win the target customers. You can serve the non-target customers if they come to you, but you don’t proactively chase them. You only proactively chase the target customers. If you target your customers correctly, you won’t have difficulty doing business with them. If the demand is there, your products/services will sell like hot cakes.
The framework Who-What-How is simple but useful to summarize the target customers. Since I learned this elegant framework at the London Business School, this framework has become one of my standard toolkits. An illustration:
Who-What-How Framework to identify Target Custome
Why is it essential to have a specific target customer? Because without knowing who your target customers are, you cannot design the best experience and value proposition for them. Entrepreneurs often focus too much on their products and completely forget about the customers. Instead of creating the products first and finding customers later, you should define the customers first and design the products later.
Customers come before products and offers. Steve Jobs, the visionary founder of Apple, was right: “Think customer experience first! What are the incredible benefits we can give to the customers?”[xxii] Great companies put much emphasis on understanding the customer so that they can design the winning products. Intuit, the tax-preparation software company, often shadows customers at home or work to learn more about how they really use the products.[xxiii] At Procter & Gamble, the managers responsible for the low-end brands spent a week living on a budget of low-income customers. This experience gave the managers insight into these customers' lives, especially how they budget to purchase personal items.[xxiv]
Focusing on products and ignoring customers is always a grave mistake, as experienced by Quibi that went bust barely six months after going live. Launched in April 2020, Quibi was a paid streaming service, which served 5 to 10-minute videos formatted to fit a smartphone screen. It aimed to revolutionize how people consume entertainment by providing high-quality short-form content every single day.[xxv]
At first, Quibi looked promising:
Led by veteran Hollywood executive Jeffrey Katzenberg and former HP CEO Meg Whitman;
Raised nearly $2B of capital even before launching;
Had a long line of Hollywood talent on board to provide movies and shows;
Offered a cutting-edge technology that seamlessly switches between landscape and portrait video orientations depending on how you hold your phone.[xxvi]
But the company failed in less than a year because it forgot about the customers.
Who: Quibi didn’t understand who the target audiences were. As a result, it was full of sporadic contents. An industry observer called this approach a ‘spaghetti’ approach of developing contents, i.e., throwing noodles at the wall to see what sticks. The BBC interview with Quibi content creators revealed that Quibi had no concept of who the audience was. Hence, it made a little bit of everything. As it was trying to offer everything, it needed a lot of content and was forced to buy mediocre content from studios and networks. Many of its videos were similar to the videos found on YouTube. Except on YouTube, the same type of content was better and free.[xxvii]
What Offering: Quibi didn’t understand what its audiences wanted. Quibi focused too much on product development. It spent a lot of money on the technology that enables real-time switch between horizontal and vertical viewing. Quibi thought its technology would be its key point of differentiation from its competitors. But, for customers, the technology is not important enough to justify a subscription. The numbers speak for themselves: Quibi only had 50k subscribers in Oct 2020, far lower than the projected seven million paid subscribers.[xxviii]
What Price: The fact that Quibi charged $8 a month for mediocre content was nonsensical. For mediocre content, people can get it for free on TikTok, YouTube, or Twitch. For quality content, customers can buy a cheaper subscription from Netflix, Prime Video, Apple TV, and Disney Plus. Unlike Netflix or Disney Plus, Quibi didn’t have any breakout shows or movies that people are rushing to watch, nor does it have a catalog of beloved titles.
How: Quibi was notably bad at marketing. It did an expensive Super Bowl ad, which failed to demonstrate what Quibi was. It ran ads months before Quibi was available, leaving people more confused than anything else. None of the ads for shows ever shown on TikTok, Instagram, Twitter, or Facebook. As a result, very few people outside of the Media circle knew it even existed.[xxix]
The founders blamed Covid-19 as the reason for Quibi’s failure. Yes, the pandemic probably hurt Quibi. But, even if the pandemic didn’t happen, Quibi would have failed. Not understanding the audiences, flawed offering, poor price positioning, and ineffective marketing weren’t due to the pandemic. But due to a lack of insight into consumer wants. Had Quibi conducted consumer research before launch, it could have been a very different story. Alas, more than $1B was wasted to launch a new product that nobody wanted.
On the other hand, take the example of Qantas that won against competitors by understanding its customers. In the 2010s, Qantas Airlines faced new competitors. Low-cost carriers expanded into Australia (e.g., Tiger Airways, Virgin Australia, AirAsia, and Scot). Even worse, Virgin Australia also targeted the higher-paying business travelers (Qantas’ core market).
Initially, to defend its turf, Qantas competed on price. It introduced scores of new routes, lowered fares, and even launched its low-cost carrier, Jetstar. But the strategy of competing on prices wasn’t working: the low-cost carriers can do it better than Qantas. As a result, Qantas ended up with a billion-dollar loss in 2013.
After that, Qantas switched strategy, i.e., focusing on whom it wanted to win over and what to offer them. For example:
Qantas started by targeting business travelers from/to Asian markets (which have faster growth, higher margin, and less competition). It introduced direct flights from Australia to the top ten Asian corporate destinations.
Then, Qantas focused on improving customer in-flight and out-flight experience. Unlike many carriers which charge even for basic services, Qantas offered many free services – including free and fast in-flight Wi-Fi service. Busy business travelers need to respond to emails all the time, so free and fast in-flight Wi-fi is a highly valued service. In addition, knowing that business travelers hate queuing, Qantas introduced an innovative baggage tagging system to speed up the baggage check-in process at the airports (the tags are linked to customers’ profiles and booked tickets, so people can simply drop their bag at a central hub).
To ensure customers also enjoy excellent service in Asian airports, Qantas developed a partnership with Emirates, China Eastern, and China Southern. This partnership allows the customers to obtain reward points, access airport lounges, and have more route choices. Overall, it increased customers’ satisfaction significantly.
Qantas also went beyond the flight experience. It expanded its loyalty scheme into a leading affinity program by partnering with non-airline companies such as banks, retailers, and telecom companies to reward their customers. Its reward points became highly sought after.
These measures to improve the customer experience dramatically boosted customer loyalty of Qantas passengers (despite its higher price compared to Virgin Australia). The airline was voted the best business airline by TripAdvisor and several other travel sites, far ahead of Virgin Australia. Between 2013-2017, Qantas’ profits were up fivefold, and its market capitalization increased by over 200%. In all, the focus on customer experience has made Qantas a winner.[xxx]
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Of course, the implication of having target customers is that some customers (i.e., non-target customers) will be unhappy. In the Qantas case, the price-sensitive customers would be unhappy with the high prices. But this is good. After all, Winning Strategy is about making the target customers really happy and ignoring the other customers.
In fact, a Winning strategy must make some customers unhappy! Yes, you heard me correctly: make some customers unhappy. It is as Michael Porter, the father of the modern strategy, advised: [xxxi]
“Strategy is about making some customers unhappy. If you don’t make some customers unhappy, you don’t really have a strategy…”
“Strategy needs a really smart customer choice. Some customers will be really happy with your offering… but other customers won’t like it...”
So, when you formulate your strategy, ensure you have clarity on who the target customers are. However, knowing the customers aren’t enough. You also need to know how to win them. The second step is about how to win the customers.
3.2. Offer a Unique Value Proposition
You may know your customers. But what would make them choose you over the other companies? Answer: If you have something that the others don’t have.
In business, the best way to win is to be unique/specialized (i.e., offering a differentiated product/service). If you are the same as everyone else, then you must compete on price (i.e., you can only win if you have a sustainable cost advantage).
Competing on price is dangerous because it triggers a race to the bottom. Once, I served as the Global Head of Pricing with a manufacturing company. We experimented with a price reduction in a few markets to see if we could win more market share. But all the competitors quickly reduced their prices too. In the end, we didn’t win any market share, and all players in the market suffered a lower profit.
If you are unique, you can win without low prices. You can command a premium. You can compete against larger competitors. You can create your own market segment.
Take, for example, the Ajinomoto case, whose specialization saved the company. In the early 2010s, Ajinomoto (a Japanese food and chemical manufacturer) was beset by dire problems. Its commodity chemical products suffered from intense price competition – one of its divisions even saw a 62% revenue drop. Despite this, other players kept increasing production capacity (because economies of scale can give you a price edge), pushing prices down even further. By 2013, the intense competition, coupled with Japan’s economic slowdown and raw material costs inflation, nearly forced Ajinomoto down to its knees.
Ajinomoto knew it needed to make a drastic change to stay in the game. So, in 2014, Ajinomoto launched a new strategy: changing focus from commodity chemical products to specialty bioscience products. To support its strategy, Ajinomoto shifted most resources to its R&D function and successfully developed various specialty products in healthcare and regenerative medicine. These new specialty products allowed Ajinotomoto to differentiate themselves against competitors and obtain pricing power.
Ajinomoto’s emphasis on being different (instead of playing in the commodity market) resulted in significant performance improvement. Its operating profit jumped by $200M to $760M, and its market capitalization doubled from $6.7B to $12.2B – all of these just in two years.[xxxii]
Another example is the UK-based Mabey Bridge, which specializes in rapidly deployed modular bridging. Its products are used worldwide in areas where bridges are needed in a hurry (e.g., after natural disasters or conflict). Many companies can build bridges, but no one can do it as fast as Mabey (i.e., generating quotes in minutes and deploying bridges in days). So, even though Mabey isn’t the cheapest provider, its business is flourishing.[xxxiii]
Similarly, Poriferous is a US-based small company making surgical implants for reconstructive bone surgery. Despite its smaller size, Poriferous’s implants are highly sought after – thanks to its manufacturing flexibility. Each implant is uniquely tailored to the client’s particular circumstances and designed to allow bones to knit and grow around the implant, giving a superior final result.[xxxiv] Poriferous’s flexibility gives it an edge against its much larger competitors.
Don’t be afraid to create a new specialization if need be. When Bruce Henderson founded BCG (the prestigious management consulting firm), he knew that BCG needs to specialize if it is to win. So, Bruce asked his associates what they thought BCG's specialty should be. Many suggestions were offered, but in each case, they were able to identify several other firms that already had strong credentials in that particular area. The discussion began to stall. Then Bruce asked a momentous question: “What about business strategy?” One of the associates objected: “That's too vague. Most executives won't know what we're talking about.” Bruce replied, “That's the beauty of it. We'll define it.”[xxxv]
That is how BCG became so successful: when most consulting firms focused on benchmarking and best practices, BCG differentiated itself by creating a new specialization (i.e., in business strategy). By helping companies differentiate themselves – so they could thrive in an increasingly competitive world – BCG thrives.
It is sad to see many companies try to do everything and end up all over the place. They don’t realize that: to win, you don’t have to be good at everything – you just need to be very good at one thing. This is the epitome of strategy.
A handy framework to think about differentiation is the Spear & Shield of Strategy framework. This framework has been one of my favorites since I created it in 2007. It stipulates that you require two things to win:
Shield = The collection of the basic things everyone needs to do to reserve the right to play, e.g., working product, decent service, reasonable delivery time, meeting the industry standards and regulations. You must do them all, but they won’t win you the game. They are just enablers.
Spear = The one thing you choose to focus on – that differentiates you from the others. It is your spike (i.e., your specialization) that wins you the competition. Think of them as the sharpest edge of your attacking differentiation. Without a sharp edge (i.e., sharp focus), your attack will be blunt.
Only having the Shield will make you as good as the others but won’t give you a victory. Success comes to the company with a Spear (i.e., can deliver a meaningfully differentiated offering that addresses customers’ needs/desires). See the examples below.
Next time you think about your strategy, ask these questions:
What is my spear, i.e., my unique differentiation point? How can I obtain a sharp edge against competitors? What will make my target customers buy from me, not from the others?
What is my shield, i.e., the basic requirements I must fulfill? What things can I safely ignore? What things can I not ignore?
The Value Curve is a valuable tool to identify/choose your Spear. It is a 2-axis line chart: the vertical Y-axis scores the value of each player’s offering for a particular buying factor; the horizontal X-axis lists all buying factors of customers (both existing and new factors).
You use it to identify your target segments' most crucial buying factors and then offer them precisely those. Different customer segments have different buying factors. If you have the highest score in certain key buying factors, you will likely win that market segment. So, you don’t have to be the best at everything. You just have to be unique to carve out a market for yourself.
In the simplified example below, the menswear suit market is traditionally dominated by two distinct offerings:
Ready-to-Wear Value Suit: the consumers who prefer an affordable suit that can be brought home as soon as they pay for it. These customers (the left-side segment) are likely to be won by the ready-to-wear off-the-rack retailers (i.e., the line-with-triangles in the chart below).
Handmade Bespoke Suit: the consumers who put much emphasis on fit, style/cut, fabric material, product quality, and details. They are happy to pay more for their suit and are willing to wait for a few weeks to have a suit tailored for them. These customers (the middle-side segment) are likely to be won by the hand-made bespoke tailors (i.e., the line-with-circles in the chart below).
With the expansion of technology, the market has seen the introduction of a new product segment. This is exactly like the men’s watch industry, where the new Smart Watch segment appeared on top of the traditional Casual Watch and Dress Watch segment. The new product creates a new customer segment:
Wearable-Tech Smart Suit: consumers who prefer wearable-tech gadgets and new fabric technology in their suits. Take, for example, the M.J. Bale’s Power Suit and the Ministry of Supply’s Aviator II Suit. Another example: Coats was once exploring carbon nanotubes fabric for bulletproof suits. It is a thin and flexible fabric but has high ballistic resistance. This new market segment is still small today, but it will grow big and fast as technology improves and costs decline. These customers are likely to be won by the smart suits providers (i.e., the line-with-squares in the chart above).
Because of this differentiation, the new electronic suit providers don’t need to compete with the traditional suppliers head-on because they target a completely different market segment.
Why put so much emphasis on being different? Because from the strategic point of view, doing things differently is much better than doing the same things better!
Doing things differently (i.e., having a unique business model) creates a unique competitive position and gives you a long-term strategic advantage. On the other hand, doing the same things better (i.e., having the same business model but better) creates best practices and only gives you a short-term operational advantage. Peter Drucker, the legendary management guru, wisely said: “There is nothing so useless as doing efficiently that which should not be done at all.”[xxxvi]
The reason for the difference is due to the difficulty of replication. A unique model is cumbersome to be copied by others because the copiers will need to change their entire business model for it to work. Best practices are easy to be replicated because the copiers don’t need to change the entire business model – they just need to adopt the best practices. Hence, best practices give you a temporary advantage only. Commonly seen: best practices are quickly assimilated and even extended by the copiers. If you are doing the same thing as everyone else, then, sooner or later, someone will do it better than you.
Doing the same things better is distracting. It is akin to trying hard to beat others in someone else’s game. It is much better if you focus on creating your own game (i.e., offering a unique value proposition). Once you have your own game, others’ games become irrelevant anyway.
For example, in the early 2000s, video game companies, like PlayStation and X-Box, competed on higher and higher-quality graphics. This pushed costs up (e.g., requires better video quality, bigger hard disk, higher processing power, more expensive production, as well as a more expensive console). But Nintendo created its own game in 2006 by launching Nintendo Wii.
Instead of competing on higher-quality graphics, Nintendo offered a unique wireless motion control stick (Wii). Due to standard quality graphics, Wii games and consoles were cheaper to produce, resulting in an affordable price point for customers. Wii’s unique motion control allowed innovative, previously unseen gameplays (e.g., playing games to get fit, playing in a larger social group). With Wii, Nintendo created an entirely new market and attracted even the non-gamers (such as the elderly, parents, younger children).
By being different, Nintendo eliminated the need to beat fierce competitors like PlayStation and X-Box in graphics quality (i.e., no need to adopt the best practices).
Caution: Don’t forget that a unique value proposition is also about value. This means you must be unique on something that customers do value. Don’t differentiate yourself on something that customers don’t strongly value. For example, Total Black, a London-based clothing brand, tries to differentiate itself based on color (offering a collection of black-colored clothing & accessories) and logo (proudly printing its signature diamond logo on all products).[xxxvii] If you want to differentiate, choose a strength that fulfills the VRIE criteria (discussed in Section 2.4.1).
When you develop your unique offering, think also about what buying factors of the consumers that you can: [xxxix]
Reduce, i.e., features of your product/service that can’t be eliminated entirely but can be reduced. For example, you can reduce the number of physical bank branches and replace them with online banking services.
Eliminate, i.e., features of your product/service that can be eliminated to reduce costs. For example, you can eliminate in-flight meals to cut costs and speed up plane turnaround.
Raise, i.e., features of your product/service that can be improved. For example, you can improve your product quality, pricing, or after-sales service standards.
Create, i.e., new features that aren’t commonly associated with your market. For example, Lululemon offers free yoga classes (while selling trendy yoga gear). This uncommon offering differentiates Lululemon from other yoga clothing retailers.[xl]
3.3. Leverage Your Strengths Creatively
To ensure victory, you must play to your strengths, i.e., choose a differentiation that maximizes your strengths. Winning Strategy is about leveraging your strengths and making competitors’ strengths irrelevant.
Remember: play to your strengths, not competitors’. Don’t do what others do. Do what will make you win. You can’t do everything and be very good at it. Focus on what you do really well.
If I were a penguin, I wouldn’t enter a marathon contest in the Sahara. Instead, I would enter a swimming race in the Nordic sea. If you are great at cooking but hopeless with numbers and details, then be a chef, not an accountant.
Golden Eagles are really fast in the sky – they can reach 200 mph (320 km/hour) airspeed. But, on the ground, they can’t even outrun chickens, which have a nine mph (14 km/hour) running speed.[xli] The moral of the story: Find ways to use your strengths to their maximum potential.
The case of Bristol-Myers Squibb (one of the largest biopharma companies in the world) shows that focusing on your core strength does pay off. In 2006, Bristol-Myers Squibb lost patent exclusivity for Pravachol (its blockbuster drug used to fight cholesterol), causing sales to drop by $1.2B in one year. Furthermore, a patent dispute over its other top-selling anti-cholesterol drug, Plavix, resulted in an additional loss of $1.5B.
At that time, many biopharma companies were turning to portfolio diversification to become diversified healthcare companies. However, against the popular trend, Bristol-Myers Squibb decided to focus even more on biopharma R&D, its greatest strength.
It closed its diagnostic-imaging business in 2007, sold its wound care business in 2008, and spun off its nutritional business in 2009. These divestitures freed up additional capital to invest in the most promising new therapeutic areas. These also allowed the management team to focus their time and attention on sharpening the R&D capabilities.
At many biopharma companies, the senior R&D managers are too far from actual drug development to function effectively. But Bristol-Myers Squibb developed a cadre of hands-on R&D managers with a deep understanding of the science and know-how to create business value. As a result, Bristol-Myers Squibb’s R&D was transformed into a decision-making hub responsible for making intelligent trade-offs among drugs in the company’s R&D pipeline.
The strategy paid off. By 2011, Bristol-Myers Squibb had developed several new-generation blockbusters, which resulted in the company outperforming the industry. For example, Opdivo, one of its new blockbusters, alone generated $3.8B sales in 2016. And it grew to $8.1B sales in 2020.[xlii]
Between 2013 and 2016, Bristol-Myers Squibb's revenue increased by 18%, EBITDA margin increased by 15%, and market capitalization nearly doubled. Indeed, focusing on your core strength allow you to allocate resources better, concentrate your effort, and outperform your competitors.[xliii]
Does focusing on your strengths mean ignoring your weaknesses? Not really. You shouldn’t ignore your weaknesses. As per the Spear & Shield of Strategy framework, you need to bring any weaknesses in the Shield category to an acceptable level.
If your company has glaring weaknesses, you need to fix those weaknesses, but don’t obsess over them (i.e., no need to excel). Consider this: No one cares that Albert Einstein can’t paint as well as Michelangelo. Albert’s weakness in painting doesn’t matter. What matters is his Spear in physics.
Since every company has limitations, there are some areas where you’ll never excel. You don’t need to bring your company to excel in those weak areas. You only need to be acceptable in those weak areas. Once your weaknesses are at an acceptable level, quickly go back to your strengths and find ways to improve them.
For most companies, it is easier to develop further on the things they’re good at. Furthermore, as there is usually a match between interests and capabilities, you’ll find that focusing on your strengths is more exciting than working on your weaknesses. As a result, improving your strengths often generates a faster and higher return (vs. working on your weaknesses).
Take a lesson from the Olympus case. Between 2008-2012, Olympus was at one of its lowest points. Its profit significantly dropped due to the introduction of smartphones (which dramatically cut camera sales). All its effort to revive the consumer cameras led to nowhere.
In 2013, Olympus adopted a new strategy by leveraging its core strength (i.e., quality imaging). It reoriented its business away from the low-cost consumer cameras toward the high-price medical imaging. Olympus strategically invested in its core strength to further increase its specialization in medical imaging. For example, it invested in R&D to improve its performance in the gastrointestinal endoscopy market (an already strong area). Soon, its products gained a reputation as the best medical imaging products.
The strategy paid off dramatically. In just a few years, Olympus successfully doubled its EBITDA margin from 9.6% to 19.2%. By focusing on its core strength, Olympus has emerged from its crisis stronger than ever.[xliv]
What if you don’t have any strength? For example, your company has three competencies but, when compared to other companies, these competencies are at an average or weak level. How can your company win? Well, you don’t have to compete with other companies head-on. This is precisely the point of being different: no need for direct competition.
For illustration: You want to start a new women's shoe company in London. You are planning to hand-made the shoes and then sell them online. However, after your research, you found that many large competitors are already in London (both online and brick-and-mortar). Ranging from the likes of Stuart Weitzman, Jimmy Choo, Alexander McQueen to the likes of Zara, Primark, Asos, and BooHoo.
When compared to your startup, these competitors have a bigger marketing budget, cheaper cost base (larger companies can import from low-cost countries cost-effectively), wider distribution channel in the UK, more extensive product range (various designs and materials), more exceptional designers, and more experienced employee. How can you win? At first glance, it looks impossible…
This is where you need to be creative in finding and using your strengths. For instance, you realize that your hand-made in the UK operation allows you to:
Target women with odd shoe sizes (e.g., the petite sizes or the enormous sizes);
Offer personal customization to each of your customers;
Use Made in Britain as one of your selling points.
Your bigger competitors can’t do this because it will be too costly for them. Even if you steal some of their customers away, they aren’t likely to start moving their production to the UK and offering customization. They are more likely to ignore you. You suddenly carve a market for yourself – where no one else plays.
From a position of no apparent strength, you suddenly have a position of strength, allowing you to win. Once you have secured your position, made a brand name for your company, and acquired experience and talented designers, you are ready to expand further. After all, success begets success.
Be very careful when your strengths don’t fit into people’s expected/predefined templates. Don’t quickly give up!
When Arnold Schwarzenegger, the famous movie star, first tried to enter the film industry, many agents didn’t want to represent him. They told him: “You have an accent that scares people” (Arnold has Austrian accent), “You have a body that’s too big for movies” (he was 6’2 and 250lb), “You have a name that would not even fit on a movie poster,” and “Everything about you is too strange.”[xlv] Everywhere he turned, he was told that he had no chance.
Ironically, it was his accent and muscular body that later propelled Arnold to the superstar. Arnold’s breakthrough film was the epic Conan the Barbarian, a box-office hit (the character Conan is a muscular man from a foreign land). Later, his movie The Terminator and The Terminator II topped the box office and helped solidify Arnold's status as a leading actor. His ‘weaknesses’ turned out to be his strengths: his accent makes him sounds like a machine; his big body makes him look very convincing in a role of a menacing killer-cyborg.
The agents worked based on a particular template, and since Arnold didn’t fit into their template, they ignored him. In the end, it is his uniqueness that made him successful.
To find your strength, sometimes you need to think ‘outside the box.’ Take a more in-depth look at your problem and its related issues. Then, creatively, find unexpected approaches to the solution. Try traditional solutions. Try non-traditional solutions. Try different points of view. Try to be flexible. Try to generate as many ideas as you can. Even if many of the generated ideas are stupid or crazy, you’ll find some ‘diamonds.’ Be creative, and you’ll find that your company has many strengths.
I know it is easy to say “be creative!” but how can you really be creative? Use the system engineering approach: break down the problem into its basic elements and then non-linearly restructure them again. No matter how complex a problem (i.e., a system) is, it merely is an amalgamation of simple, basic elements. Kenichi Ohmae, a famous strategist and management thinker, once suggested that non-linear thinking is the epitome of strategy: “In strategic thinking, one first seeks a clear understanding of the particular character of each element of a situation and then makes the fullest possible use of human brainpower to restructure the elements in the most advantageous way.”[xlvi]
There are many problems, issues, and challenges that your company will face over the years. You might think that for each new problem, you will need a new solution. But you won’t!
Yes, don’t be over-creative, overthink, and overcomplicate things. Instead, focus on your most fundamental strength – your one biggest thing. In his essay, The Hedgehog and the Fox, Isaiah Berlin describes how having one simple big thing (hedgehog’s approach) beats having many things (fox’s approach).
The fox is clever and able to devise many tactics for attacking the hedgehog. Every day, the fox comes out with another brilliant plan to finally win his prey. On the other hand, the hedgehog is a slow and boring creature whose defense is the same no matter how the fox attacks.
Every day the fox thinks, "Aha, now I've got you." But no matter what approach the fox takes, no matter where he strikes from, no matter what time of day it is, as soon as the hedgehog senses danger, he thinks, "Here we go again," and rolls up into a little ball, extends his sharp spikes, and spoils the fox's best-laid plans.
Isaiah explained that some people (the foxes) see the world in all its complexity. Their approach constantly changes depending on the circumstances, but they never develop a unified vision. Other people (the hedgehogs), on the other hand, simplify the complexity of the world into one principle, i.e., one basic idea that determines their every move.
Drawing upon Isaiah's observation, Jim Collins, in his book Good to Great, argued that great companies (the beyond good ones) are consistent with the Hedgehog Concept.[xlvii] Jim’s study found that most good-to-great companies were hedgehogs, not foxes. The foxes – being scattered, diffused, and inconsistent – wouldn’t win against the hedgehogs who possessed the clarifying advantage.
Therefore, when finding your strengths, think like a hedgehog, not a fox. For a hedgehog, the solution is always the same. The hedgehogs aren’t simple-minded. On the contrary, their understanding of the world is so profound that they can identify the most fundamental elements. Jim Collins proposed this framework to identify your hedgehog strength.
Of course, every company would like to be the best at something. But to be the best, you need to really understand:
what you actually have the potential to be the best at;
what you cannot be the best at.
Understanding these two points is absolutely crucial if you want to become the winner. As Jim said: “Just because you’re good at it – just because you’re making money and generating growth – doesn’t necessarily mean you can become the best at it.” The winners understand that doing what you are good at will only make you good; focusing solely on what you can potentially do better than any other organization is the only path to greatness.
Now that you know which strengths you need to develop, you need to ensure that you focus on that one thing and not be distracted by the other things.
3.4. Concentrate Your Resources and Effort
Once you know in what area you need to specialize, you must focus only on that area, i.e.,
Choose only one direction and let go of all others;
Do a few things only (all of them must be in the same direction); and
Don’t do all other things besides those few things.
Remember: In life, you get what you focus on. The key is to choose what you focus on... wisely.
3.4.1. Choose One Direction Only (Let Go All Others)
Strategy is about focusing all efforts toward one single direction. Mixed directions don’t work. A company is like a ship: it can’t sail toward two different destinations simultaneously. You must focus on one direction only: a cheetah who chases two antelopes running in two different directions will catch neither.
Jan W. Rivkin, the chair of the strategy unit at the Harvard Business School, once wrote: “Strategy is about choice. The heart of a company’s strategy is what itchooses to do and not do. The quality of the thinking that goes into such choices is a key driver of the quality and success of a company’s strategy.”[xlviii]
Letting all others go is what makes Strategy so powerful. In Strategy, you need to choose because once you come to a fork in the road and take a path, you can’t go back to the road not taken without wasting time and resources. To reach your goals, if you are already facing the right direction, all you have to do is keep on walking.
Do you remember Segway? The two-wheeled transportation device came on the market with incredible fanfare in 2002. It was heralded as a game-changer in how we all would mobilize. The founders predicted that sales would explode to 10,000 units per week, and the company would reach $1B in sales faster than ever in history.
But the company sold less than 10,000 units in its first two years and less than 24,000 units in its first four years. What was initially a ‘really, really cool product’ turned into a dud.[xlix]
Why? Segway failed because it didn’t focus on any one-use. Instead, Segway tried to be a general-purpose product. But no disruptive product has ever succeeded with that kind of positioning. Clayton Christensen, the famed innovation guru, said: “when you launch a new product, you must have a very clear focus on the product's initial use and make sure the product does the job brilliantly.” [l]
Had Segway focused on one initial market (e.g., as a golfer's cart or as a walking assist for the elderly/infirm), the company would have been able to study the market needs deeply and focus all aspects of the product, distribution, promotion, training, communications, and pricing for that one-use. By winning over users in the initial market, Segway could have made those initial users very loyal, outspoken customers who would recommend the product again and again - even at a $4,000 price. Then, it would be ready to expand to the second market.
Unfortunately, by not focusing on specific market needs, Segway missed the opportunity to truly disrupt one market and start the path toward wider success.
This is why I find strategy exciting: it is about the deciding moment in life or history when a major choice is required. After all, it is not our abilities that show who we truly are – it is our choices. Winning Strategy is the same: it is all about choices.
You may be hesitant about choosing. Because by choosing one path, you are closing all other paths. It is understandably a very hard thing to do. But choosing is the price you have to pay for a winning strategy. As with everything in life, if you want to obtain something, you need to pay its price.
The good news: Choosing is also the benefit of Strategy. Think of adopting a strategy like getting married, i.e.,
The drawback: By choosing one option, you have to commit to this option and forgo all other options.
The benefit: By choosing one option only, you can put all of your energy, resources, and time into this option and fully reap its benefits.
People are often reluctant to choose/commit because they are afraid of missing out. Unfortunately, the drawback of not choosing is much, much bigger than the drawback of choosing. Strategy requires sacrifices. With limited resources and time, you can’t do everything. Hence, choose the Best Option as your Strategy’s one and only direction.
3.4.2. Do a Few Things Only (All in the Same Direction)
Your Strategy must not pursue too many things. Doing many things isn’t good. It is a distraction to your brainpower, a waste of your company’s resources, and a source of confusion for your people. Whoever tries it will achieve a suboptimal result.
Bruce Lee, the legendary martial artist and founder of Jeet Kune Do, once said: “I fear not the man who has practiced 10,000 kicks once, but I fear the man who has practiced one kick 10,000 times.”[li] Doing too many things is a sign of poor strategy without clarity on how to win. In Strategy: the less you do, the more you succeed.
The case of Enron shows how doing too many things can be dangerous. Many factors contributed to Enron’s startling collapse, but lack of focus was the driver. Relying on Enron’s success in the natural gas and electricity market, Enron executives rushed to enter many other markets – ranging from coal, steel, pulp and paper, broadband telecom to exotic markets such as weather derivatives.
They were confident that Enron’s success in the natural gas and electricity market would allow the company to make hefty profits in the other markets. But, in reality, doing too many things are disruptive – most of Enron’s new ventures were value-destroying, which eventually led to Enron’s accounting scandal.[lii]
HSBC’s case: Doing less is actually doing more. Before 2011, HSBC had operations in 88 countries – many of them were standalone entities, with separate strategies, processes, and IT systems. This was a complex operating environment with hundreds of initiatives.
In 2011, when a new CEO took over, he immediately simplified the bank. As a result, HSBC exited 98 businesses in 2011-2016 and reduced its presence from 88 to 67 countries in 2017. Similarly, the number of employees dropped from 307k to 233k people. This simplification saved HSBC $6B and eliminated excess management layers. Before, there were many units across 88 countries. After, there were only four global businesses and a small set of global functions.
This led to significant efficiencies. For example, by consolidating Global Procurement, HSBC can negotiate its procurement in ways that derive full economies of scale. Overall, the intensive focus on simplification resulted in an increase in share price by 57% and dividends per share by 42%. In 2017, Euromoney named HSBC the world’s best bank.[liii]
Another example: when Jack Greenberg became McDonald’s fourth CEO in 1999, McDonald’s sales growth had been slumping due to maturing international markets and concerns about fatty foods in the US. Jack announced that he would focus on improving the core business but, at the same time, he pursued new platforms for growth by acquiring other restaurant businesses such as Chipotle, the Mexican food restaurant chain.
The result of this growth initiative was that, in 2001, McDonald’s announced a quarterly loss for the first time in its history. With the core business still deteriorating, Jack resigned. During Jack’s tenure (between May 1999 and December 2002), the stock price dropped from $45 to $15/share.
McDonald’s then announced that James Cantalupo, who had spent 28 years at McDonald’s, would become CEO. James’s first announcement was that McDonald’s was doing too many things, so he sold or closed most of the acquisitions made under Jack’s tenure. Due to McDonald’s renewed focus on its core business, the stock price increased from $15/share at the end of 2002 to more than $220/share in December 2020.[liv]
Similarly, Takeda, Japan’s leading pharmaceutical company with 238 years of history, narrowed its strategic focus from six to three therapeutic areas in 2015. As a result, its pipeline of new drugs (a key gauge of future growth) has increased from 7% partner-based to 45% partner-based in just three years (a remarkable speed, especially for a Japanese company). The new focus has put Takeda on the path to become a global pharmaceutical powerhouse for the next 20 years.[lv]
The moral of these stories: pursue a few things only! Gary Keller, a bestseller author, goes even further. He claimed: there exists One Thing that delivers extraordinary results. Therefore, he recommended seeking it: “What's the One Thing you can do such that by doing it, everything else will be easier or unnecessary?”[lvi] I find that focusing on one big thing is like filling a jar with a big boulder. You can fill a jar (i.e., your goal) with many small pebbles (i.e., small initiatives) or a few big rocks (i.e., big initiatives). But using one big boulder is much more effective and efficient.
If you find it difficult to focus on one thing, then start small and relax the ‘rule’ a little bit: set the limit to three things at most. Ask yourself: “What are the three things that will allow me to achieve my Goal with high confidence if I do them properly?” Don’t pursue more than three priorities in your strategy. And it’s imperative to ensure all of your few things must be in the same direction. Don’t mix conflicting things!
3.4.3. Don’t Do All Other Things
Once you have decided to do a few things only, you must not do all other things. Be very, very selective about what you do. Alas, too many people (even after they have decided their focus area) still pursue many other things. To justify, they make many excuses, e.g., urgent deadlines, requests from important people, previously made commitments, attractive opportunities, and so on. This doesn’t work.
Imagine it like this: delivering a winning strategy is like training for a gold medal – it takes two kinds of commitment. First, the commitment to do some things (e.g., be focused, train intensively, eat a healthy diet, keep a positive mindset). Second, the commitment to AVOID doing other things (e.g., don’t smoke, don’t drink too much alcohol, don’t overeat). It’s the same for Strategy: if you want to be successful, you have to STOP certain activities.
It is crucial to be very selective about what you’ll do and be very strict about what you won’t do! Warren Buffet, the legendary investor, once advised his team members to follow this three-step formula:
Step 1: Write down your top 25 things to do. Ignore all other things outside these 25 things.
Step 2: Draw a circle around your top 5 things to do (which are absolutely critical for you).
Step 3: The other 20 things become your ‘avoid at all cost’ list. And you pursue only the top 5 things.[lvii]
Often, saying No is more important than saying Yes. According to Warren Buffet: ‘‘The difference between successful people and really successful people is that the really successful people say no to almost everything.”[lviii]
Similarly, Michael Porter said: “The essence of strategy is choosing what not to do.”[lix] So, don’t be shy of saying “No” to many things and many people.
Take a look at this case. Focus and saying “No” has made Groupe PSA one of the top-performing automakers in the world. Groupe PSA (the parent company of Peugeot, Citroen, Opel, Vauxhall Motors, and DS Automobiles) was struggling in 2012. Car sales in Europe plunged in the period. The company had too many models (23 in its Peugeot brand and 22 in Citroen), which weren’t differentiated enough and cannibalized demand from one another. Furthermore, its pricing was lower on average than other manufacturers. All of these led to a $7.9B loss in 2013.
In 2014, the company changed its strategy. First, Groupe PSA differentiates its brands in the eyes of car buyers. Citroen was positioned as a value brand, Peugeot as more of a mid-market brand, and DS as the company’s premium brand. With a clearer market position and stricter rules regarding discounts, the company could increase prices by 3 to 10 percentage points.
Then, it started to say “No.” The company thinned out its portfolio of models from 45 down to 26. It reduced manufacturing complexity, leading to significant cost savings. Selling some unneeded assets also allowed Groupe PSA to modernize its manufacturing facilities, increase efficiency, and achieve a further $2.5B cost savings.
Overall, the combination of higher prices and lower costs led to a 35% increase in gross margin. Between 2013 and 2017, Groupe PSA turned around its EBIT margin from negative to 6% (a relatively high margin for an automobile company). And the company’s market capitalization increased by over 700%.[lx]
Putting things that you won’t do on paper is very helpful. When this list of things to do/not to do is well communicated, your employees and customers can clearly understand the difference between your company and your competitors. And they can point it out to you if you are violating the strategy. See the below example:
3.5. Create a Reinforcing Effect to Strengthen
Previously, we discussed the need to focus on your strength to create a unique offering for your target customers. But what if, after seeing your success, others are starting to copy you? There is indeed a successful business model based on copying others (e.g., Rocket Internet and its Copycat Strategy). What can you do? How can you defend your points of differentiation?
The best way to defend your competitive edge is by creating a Reinforcing Effect (that sharpens your differentiation, making it difficult for others to copy). When you align your key decisions and ways of operating in such a way that they strengthen your company’s competitive advantage, you successfully create a virtuous cycle that will strengthen your competitive advantage over time. As time passes, your spear of sharp focus becomes sharper and sharper. This effect is called the Reinforcing Effect. Make sure you utilize this effect.
Learn from Amazon’s case. Today, it’s challenging to copy Amazon.com, the world’s largest internet-based retailer in the world. Even if you can easily copy its website, you still need to attract ~200 million regular buyers and ~3 million active sellers into your platform.[lxi] But it would be easy to copy Amazon in the 1990s when it was just a small online bookstore. Take a look at the illustration below on how Amazon’s key decisions have sharpened its competitive edge over time.
Henry Mintzberg, a management guru, once said: “Strategy is a pattern in a stream of decisions.”[lxii] So, build a pattern that reinforces your advantage. Similarly, don’t do things that weaken your advantage. Many companies take conflicting decisions that sabotage their own competitive advantage.
Consider the Tommy Hilfiger case. Between the 1980s and 1990s, Tommy Hilfiger had crafted an upscale brand with its iconic red, white, and blue flag. However, in the late 1990s, it weakened its own brand by making the products widely accessible to middle-class consumers (in an attempt to increase short-term sales). For a short while, the move increased its sales by $1B between 1998-2000. But this move also caused Tommy Hilfiger to lose its status as an aspirational brand, alienated many of its upscale customers, and harmed its long-term sales. As a result, Tommy's sales and net profit faltered as soon as 2001. Eventually, the market value of Tommy Hilfiger dropped from $3.9B in 1999 to $1.6B in 2006, and the company was taken private.[lxiii]
The coffee chain Starbucks also made the same mistake in 2005-2008. Instead of creating a reinforcing effect, it created a diminishing effect. For example, it sold sandwiches that interfered with the aroma of coffee. It introduced soft drinks that cannibalized the sales of coffee. It destroyed the welcoming atmosphere by trying to sell books and CDs. As a result, the share price of Starbucks dropped by 27% between 2005 and 2008. Luckily, Howard Schultz, the founder, returned as the CEO in 2008. He quickly ensured Starbucks’ offerings centered around quality coffees in an inviting atmosphere.[lxiv]
Sometimes, your strength allows you to win in another category easily. For example, Amazon has transformed from an online book retailer to a multi-product e-retailer and multi-business company (it now offers cloud computing, digital streaming, and artificial intelligence solutions).
Another example is Circuit City, a successful US consumer electronics company. Following its winning strategy in consumer electronics retailing in the 1980s, it applied the same strategy in a new setting, i.e., used-car retailing in the 1990s. CarMax, the company spun out of Circuit City, is still dominating the US used-car market until now, with over $17B in revenue.[lxv]
Why do some companies miserably fail when they try to expand to another category (e.g., Enron) while other companies are successful (e.g., Amazon)? The difference: successful companies enter only new categories that align well with their fundamental business model and strengths (i.e., reinforcing instead of conflicting).
Let me repeat these often ignored but crucial, simple facts:
Over time, the reinforcing effect increasingly creates more significant differentiation. You have an edge that results in higher performance and the ability to invest. When you reinvest the return on a reinforcing effect, you will have a sharper edge. This gives you even better performance and a higher ability to invest. It becomes a virtuous cycle that allows you to improve your strengths and defend your competitive edge for a long time. The reinforcing effect is why the rich get richer, the successful get more successful, and the powerful get more powerful.
You must create this virtuous cycle. How? By designing your business’s organizational environment to optimize the reinforcing effect. Ensure your decisions on all business practices (e.g., People, Culture, Incentive, and Structure) are fully aligned toward maximizing your competitive edge (i.e., your specialization).
When you stick to your strategy long enough, you’ll have the chance to learn, tweak, and improve your strategy. As a result, it enables you to improve your strategy continuously. Over time, due to the virtuous cycle effect, you’ll get better and better – granting you a sustainable competitive advantage. So, don’t change your strategy too often. Sticking longer allows you to learn how to do it properly.
3.6. Ensure a Simple, Easy-to-Communicate Strategy
When developing a strategy, I spend plenty of time thinking about how to best communicate the strategy (by making it more appealing, concise, clear, and emotive). For example, I play with various alternatives and come out with many catchy slogans. One time, a manager who was working for me got frustrated. He asked me why we spent a lot on these ‘superficial’ things (he would like to immediately ‘get dirty’ and jump into execution). I told him: “Otmane, my friend, these things that you called superficial aren’t superficial at all. In fact, they are essential.”
Yes, it is part of human nature to support things they identify with. If you want your strategy to get the people’s support, you need to make them identify with your strategy. Jim Collins and Jerry Porras, the authors of Built to Last, declared: “Building a visionary company requires 1% vision and 99% alignment.”[lxvi] For you to be able to do this, you need to prepare your communication well.
If you do it well, even slogans can be a powerful force of change, a rallying cry. Take examples from politics: Martin Luther King’s I have a dream, Margaret Thatcher’s Labor isn’t Working, Obama’s Yes, We Can!, or Trump’s Make America Great Again! These slogans resonate with the campaign’s central message and the audience’s consciousness. If you don’t carefully think about it, your communication is likely to be forgettable.
And forgettable is bad. Consider the Brexit referendum: Why did the ‘Remain’ camp lost and the ‘Exit’ camp win? Because the ‘Remain’ camp had many messages, but none of them were memorable. While the ‘Exit’ camp had only one message, it is memorable: “the UK sends £350m a week to the EU.” The irony: The statement was actually wrong because it disregarded Britain’s rebates of £100m and the amount the EU spends on the UK. The lesson: focused communication makes a memorable message.
This reminded me of an interesting case from Niro Sivanathan, Professor of Organizational Behavior at London Business School: “Who will achieve the most, Tim or Tom?
Tim spends 31 hours a week studying outside of class.
Tom spends 31 hours a week studying outside of class, has a brother and two sisters, visits his grandparents often, once went on a blind date, and shoots pool once a month.”
Although both Tim and Tom spend the same hours studying, research shows that, on average, people rate Tim to have a significantly higher GPA than Tom. It is irrational, I know. But what’s going on?
Apparently, human minds average out information. When you introduce irrelevant or weak points, these weak points dilute the overall strength of your message.[lxvii] So, next time, be very careful with your communication. Less is more, and it’s a scientific fact.
Why is it important to have a strategy which is easy to be communicated and memorable? Because it helps your employees to execute it. It allows the employees, when faced with thousands of small decisions in everyday operations, to make decisions and take actions that are aligned to the strategy.
For example, the executives of Ducati, the legendary Italian motorcycle maker, communicated its strategy as ‘the Disney of the motorcycle industry.’ By doing so, the executives made it clear, to insiders and outsiders, that Ducati emphasized more in the experiential aspects of the brand and less on the physical product.[lxviii]
Similarly, Charlie Merrill, the founder of Merrill Lynch (the financial services company), had a very easy-to-be-communicated strategy, i.e., ‘the financial supermarket.’[lxix] This one single phrase makes you quickly understand what Merrill Lynch offered and what it didn’t offer.
Furthermore, a strategy that is easy to be communicated is also easy to be debated. It is good to have the draft strategy debated by your employees. The employees can provide many valuable inputs and improve the quality of the strategy. Debates, if managed well, will significantly improve buy-in from employees.
I find winning strategies are the easiest to be communicated. It is because Winning Strategy keeps things simple, despite the overwhelming pressure to complicate things. Thanks to this simplicity, Winning Strategy is easy to be understood. Albert Einstein once said: “Any intelligent fool can make things bigger and more complex. It takes a touch of genius – and a lot of courage – to move in the opposite direction.”[lxx] Similarly, Leonardo Da Vinci, the great master, declared: “Simplicity is the ultimate sophistication.”[lxxi]
In my very first project in McKinsey & Company, Kaushik Das (the very first Partner I worked with in the Firm) coached me: “If you can’t summarize your strategy in seven words or less, it means you don’t have a good enough strategy.” Freek Vermeulen, my strategy professor at the London Business School, is more forgiving. His advice was: “You must be able to summarize your strategy in three bullet points and explain them in 30 seconds.”
Over the years, I have come to believe that winning strategies can be summarized into a single word only. Yes, a characteristic of winning strategies is that they can be easily compressed into a single word! Their expanded form may be as long as needed, but their essence is still the one word. Just like what Hans Hoffmann, a renowned artist, once said: “Simplify means to eliminate the unnecessary so that the necessary can speak.”[lxxii]
On the contrary, losing strategies often contain too many things, thus are hard to be compressed into a single word. In sum, you can measure how good a strategy is based on its communication easiness:
Winning Strategy: Straightforward to be communicated and understood. Frequently expressed in a single word (e.g., “Simplification”) or a catchy phrase (e.g., “The Widest Product Range in the Market.”)
Good Strategy: Can be expressed in 3-5 bullet points, e.g., “Our strategy is:
generate more leads to acquiring more new clients;
increase user engagement to improve customer satisfaction;
offer additional and relevant products to our customers.”
Poor Strategy: Require many pages of PowerPoint/Word document just to describe and explain the strategy. Despite the lengthy presentation, people often still don’t understand the strategy.
Once you have chosen your Strategy, quickly write it down. You must always write down your strategy. Adopt this mindset: ‘If my strategy isn’t on paper, then it doesn’t exist.’
Don’t underestimate the power of writing things down. By writing things down, you make everything clear (as you structure and clarify your thoughts). As a result, it becomes easier to communicate your strategy to other people and debate the strategy (either with your team or external audiences). By simply writing down your strategy, you can increase your success rate from 40% to 60%.[lxxiii] Writing things down is powerful!
The probability of achieving your goal is…
0% - if you don’t have any goal.
20% - if you have a goal but don’t write it down.
40% - if you have written down your goal
60% - if you have written down both your goal and your strategy
80% - if you have written down your goal and strategy and track the progress weekly.
Source: BoardView Research (2016)
Many people are eager to implement as soon as they have a strategy. Unfortunately, this is a dangerous mistake. Before you can jump into execution, you need to have detailed plans. The high-level strategy is insufficient if you want to have a smooth implementation. Don’t make your execution a nightmare by skipping the phase of proper planning.
Continue to explore the secrets of Winning Strategy here.
[i] quotefancy.com/quote/1548604/Sun-Tzu-Concentrate-your-energy-and-hoard-your-strength [ii] www.military-info.com/freebies/maximsn.htm [iii] www.napolun.com/mirror/napoleonistyka.atspace.com/Napoleon_tactics.htm [iv] www.nationalgeographic.com/culture/people/reference/alexander-the-great/ [v] www.nationalgeographic.co.uk/animals/2019/08/sabre-tooth-surprise-fossils-redraw-picture-fearsome-big-cat [vi] en.wikipedia.org/wiki/Smilodon [vii] www.bcg.com/publications/2017/transformation-value-creation-strategy-nokia-reprogramming-growth.aspx [viii] www.linkedin.com/pulse/what-ubers-competitive-advantage-ivan-zupic/ [ix] simpleflying.com/southwest-lcc-model/ [x] www.cnbctv18.com/videos/buzz/why-is-louis-vuitton-so-expensive-4378811.htm [xi] Chris Blackhurst. 2010. La Belle Maison. The Evening Standard. [xii] Based on the story shared by Karan Bilimoria at the London Business School. [xiii] Google.com (I used Google to google Google data. What a googly phrase!) [xiv] Based on personal observation when I was working in the Apparel & Footwear Industry. [xv] www.nytimes.com/2012/01/01/business/how-samuel-palmisano-of-ibm-stayed-a-step-ahead-unboxed.html [xvi] www.nytimes.com/2010/01/20/technology/companies/20blueweb.html [xvii] www.brainyquote.com/quotes/michael_porter_381637 [xviii] www.techinasia.com/airbnb-co-founder-brian-chesky-make-100-people-love-product [xix] Michael Porter. 2008. The Five Competitive Forces That Shape Strategy. Harvard Business Review. [xx] Hermann Simmon. 2009. Hidden Champions of the 21st Century: Success Strategies of Unknown Market Leaders. Springer. [xxi] Matthew Boyle, Susan M. Kaufman, and Joan L. Levinstein. 2006. Best Buy’s Giant Gamble. Fortune. [xxii] medium.com/thrive-global/always-start-with-the-customer-experience-not-with-the-technology-former-apple-ceo-john-sculley-68b5f36e810e [xxiii] Christopher Meyer, and Andre Schwager. 2007. Understanding Customer Experience. Harvard Business Review. [xxiv] Roland T. Rust, Christine Moorman, and Gaurav Bhalla. 2010. Rethinking Marketing. Harvard Business Review. [xxv] www.wsj.com/articles/quibi-weighs-shutting-down-as-problems-mount-11603301946 [xxvi] www.theverge.com/2020/3/11/21173981/quibi-eko-lawsuit-turnstyle-technology-jeffrey-katzenberg-streaming-interactive [xxvii] www.bbc.co.uk/news/technology-55154808 [xxviii] www.nbcnews.com/business/business-news/look-why-quibi-failed-so-soon-after-launching-n1244312 [xxix] www.theverge.com/2020/10/22/21528404/quibi-shut-down-cost-subscribers-content-tv-movies-katzenberg-whitman-tiktok-netflix [xxx] www.bcg.com/publications/2017/transformation-value-creation-strategy-qantas-improving-operations-investing-digital.aspx [xxxi] I got these quotes directly from Michael Porter. [xxxii] www.bcg.com/publications/2017/transformation-value-creation-strategy-ajinomoto-diversifying-into-new-markets.aspx [xxxiii] The Manufacturer. Vol 23. Issue 9. December 2020. [xxxiv] Ibid. [xxxv] Internal legend in BCG. [xxxvi] www.brainyquote.com/quotes/peter_drucker_105338 [xxxvii] total-black.com [xxxviii] To learn more about this interesting three-circle model, please see the article by Urbani and Davis at hbr.org/2007/11/strategic-insight-in-three-circles [xxxix] Adapted from Mauborgne and Kim. 2004. Blue Ocean Strategy. Harvard Business Review. [xl] yoga.lovetoknow.com/yoga-centers/lululemon-yoga-classes. [xli] en.wikipedia.org/wiki/List_of_birds_by_flight_speed [xlii] www.fiercepharma.com/special-report/top-20-drugs-by-global-sales-2019-opdivo [xliii] www.bcg.com/publications/2017/transformation-value-creation-strategy-bristol-myers-squibb-reshaping-portfolio.aspx [xliv] www.bcg.com/publications/2017/transformation-value-creation-strategy-olympus-refocusing-core-strengths.aspx [xlv] Arnold Schwarzenegger. 2012. Total Recall. Simon & Schuster. [xlvi] Kenichi Ohmae. 1991. The Mind of the Strategist. McGraw-Hill. [xlvii] www.jimcollins.com/concepts/the-hedgehog-concept.html [xlviii] hbr.org/2005/04/how-strategists-really-think-tapping-the-power-of-analogy [xlix] www.forbes.com/sites/adamhartung/2015/02/12/the-reason-why-google-glass-amazon-firephone-and-segway-all-failed/ [l] www.forbes.com/sites/adamhartung/2015/02/12/the-reason-why-google-glass-amazon-firephone-and-segway-all-failed/ [li] www.brainyquote.com/quotes/bruce_lee_413509. [lii] en.wikipedia.org/wiki/Enron [liii] www.bcg.com/publications/2017/transformation-value-creation-strategy-hsbc-simplifying-organization.aspx [liv] www.macrotrends.net/stocks/charts/MCD/mcdonalds/stock-price-history [lv] www.london.edu/think/takedas-strategic-transformation [lvi] Keller. 2012. The ONE Thing: The Surprisingly Simple Truth Behind Extraordinary Results. Bard Press. [lvii] medium.com/accelerated-intelligence/warren-buffett-really-successful-people-say-no-to-almost-everything-ab78832ffebc [lviii] ibid. [lix] en.wikiquote.org/wiki/Michael_Porter [lx] www.bcg.com/publications/2017/transformation-value-creation-strategy-groupe-psa-revamping-product-lineup.aspx [lxi] Amazon.com [lxii] learnwell.com/strategy-is-a-pattern-in-a-stream-of-decisions-henry-mintzberg/ [lxiii] en.wikipedia.org/wiki/Tommy_Hilfiger_(company) [lxiv] Jenny Wiggins. 2008. When Coffee Goes Cold Part 1. Financial Times. [lxv] en.wikipedia.org/wiki/CarMax [lxvi] Collins and Porras. 1994. Built to Last: Successful Habits of Visionary Companies. HarperBusiness. [lxvii] www.london.edu/think/the-power-of-brevity [lxviii] hbr.org/2005/04/how-strategists-really-think-tapping-the-power-of-analogy [lxix] ibid [lxx] www.goodreads.com/quotes/1199019-any-intelligent-fool-can-make-things-bigger-and-more-complex [lxxi] ydraw.com/marketing/simplicity-is-the-ultimate-sophistication-leonardo-da-vinci/ [lxxii] www.thebraveryboard.com/blog/2016/7/12/the-necessary [lxxiii] www.boardview.io