Effective strategy is beating competitive convergence

It is much easier to participate in, rather than win the competitive game of business. Studies reinforce that the top 20% of performing companies secure over 90% of the economic rent available in the sector and deliver capital returns on average 30 times better than the middle 60% of companies who struggle to return their cost of capital. The remaining 20% of companies in the sector do not return their cost of capital and either cycle out of the market or are absorbed by competitors. This performance outcome repeats across industry segments and is a result of the inherent bias towards convergence in competitive markets.  Beating competitive convergence is the ultimate truth teller of strategy effectiveness.

Effective strategy is defined by the need to make choices amongst alternatives

Effective strategy is the process of making discrete choices amongst viable alternatives, and then focusing and aligning resource allocation (human and capital) around the choices in proprietary ways that enables strategic execution better than one’s competitors. The more discrete the choices are and the more proprietary the capability platform is – the more defendable the competitive advantage will be over time.

Searching for signals of strategic effectiveness

All companies like to think they have a strategy – but how do you know if it is effective or in need of a refresh? Guberno Consulting supports companies across a range of sectors refine and/or reposition their growth strategies. Extensive experience highlights a range of repeatable quantitative and qualitative signals that support the value of a strategic refresh. Importantly, effective strategy is not about competing with yourself, but rather winning in a competitive context. Therefore, adopting both an internal and external perspective on strategy effectiveness is of equal importance.

Interrogating time-series performance data to understand strategic effectiveness

Modern business is not devoid of numbers and metrics – quite the contrary. However, from a strategy perspective, the challenge is seeing the wood from the trees and using the right metrics to provide insight into strategy effectiveness. Point-in-time and period-on-period comparative quantitative data are the metaphorical trees, while time series data allows you to see the wood. Trends that emerge from time series analysis provides the insight into strategic effectiveness.

The first place to look for trends are at the customer interface

Understanding the health of a strategy should always start with the customer as it is the primary interface that delivers financial oxygen to the business. Deciphering a company’s relationship with its customers and then translating this relationship into a financial perspective is a core task of the strategist. Comparing metrics on customer type, loyalty and advocacy, retention, and profitability relative to stated strategic objectives is the launch point for any strategic health check.

The top and bottom half of the profit and loss accounts provides different signals

The next port of call for assessing strategy effectiveness is the company’s financial accounts. The strategist divides the profit and loss account into two parts – with the top half (between revenue and gross margin) providing insight into the underlying health of the customer value offering, and the bottom half (between gross margin and earnings before interest and tax) providing insight into the sizing and efficiency of the organisation to deliver its customer value offering.

Deciphering trends in the top half value drivers – volume, price and cost of goods – are key to understanding whether the business is providing inherent value to customers to the extent that they are willing to pay a price exceeding the cost to serve. Growing revenue and margins are common objectives of most strategies and the absence of growth in both metrics are important signals of the need for a strategic health check.  Albeit, strategic significance may not be immediately obvious and may require peeling away layers of product, geographies, and customer segment data to reveal underlying causes.

Deciphering trends in the bottom half value drivers – marketing, sales, general, administration, and depreciation costs – are key to assessing whether the organisation is right sized and efficient in delivering its targeted customer value propositions. The strategist looks for trends in organisational costs and their ratio to gross margin over time as signals for organisational efficiency and effective strategy execution.

The absence of capital reallocation is a signal that strategy execution is weak

The balance sheet and cash flow statements are the guide to understanding available cash resources, where it is being deployed, and how effective these are in delivering returns. While working capital is necessary, its limited role in growing the business makes it expensive and sometimes lazy capital. Aligning capital to strategic choice is harder than it seems with momentum leading many companies to replicate capital allocation year on year. The absence of capital reallocation over time is a strong signal of the need for a strategic refresh.

Trends in market share and shifting profit pools help decipher the competitive landscape

There are a range of metrics that the strategist will interrogate to understand the company’s relative positioning within a competitive context. The company’s trend movement in market share, and that of its competitors, is core to interpreting shifting competitive landscapes. Deciphering causality for movement is a key focus for the strategist. Equally important is monitoring changing market dynamics that may be altering the location and size of industry profit pools. Most common is the shrinking of existing industry profit pools because of competitive convergence and the emergence of new profit pools on the back of defendable differentiation.

Benchmarking competitor financial metrics is an early warning signal for a strengthening or weakening competitive position. An inferior relative cost position resulting from a competitor’s distinctive business model is sure to put the strategist on high alert.

Qualitative signals help fill out shape and colour in strategic effectiveness

While the strategist is naturally drawn to quantitative signals to help decipher strategic effectiveness, qualitative signals can also enhance understanding.

The strongest qualitative signal is the level of leadership alignment around the strategy. While alignment can be interpreted by listening to words, it is most powerfully demonstrated by actions. The loudest signal for a strategic refresh emerges when leaders try to do too many things at once, thereby diverting organisational energy and capability across too broad an area – sometimes referred to as the ‘peanut butter’ approach. A failure of strategy occurs when there is an absence of an aligned mental strategic framework that equips leaders with the courage to say no in the bid to optimise resource allocation.

A second qualitative signal is the clarity of purpose around building and maintaining the organisation’s capability platform required to deliver competitive advantage. This clarity naturally translates to decisions around what capabilities the company wishes to develop and maintain in-house and those it is happy to source from other suppliers. An ad-hoc decision-making process around crafting the capability platform is a sure signal for strategic renewal.

The third qualitative signal for strategy effectiveness lies in the level of complexity that exists within the company’s products, services, and organisation processes. Clarity of strategic purpose is a precondition to organisational simplicity. The prize for simplicity is high with research indicating that the companies with low complexity delivering growth 30-50% higher than the norm and around 80-100% faster than companies exhibiting high levels of complexity.

The signal for a strategy refresh our evident in performance metrics and the actions of leaders

Evidence of effective strategy is rarely a neatly bound dossier that is the outcome of an organisation’s strategic planning process. Effective strategy is most evident when there is a positive trend of internal and external performance metrics, and when leaders share a mental strategic framework that facilitates timely and meaningful prioritisation of constrained resources in the face of competing demands. The absence of either is a timely signal for a refresh of your organisation’s strategy.