What is Strategy?

“Strategy is buying a bottle of fine wine when you take a lady out for dinner. Tactics is getting her to drink it.”
Frank Muir, English comedy writer

The word “strategy” is commonly used in business conversations, but frequently misunderstood. Given the impact of strategy on the value creation potential of an organization, creating a broader understanding and appreciation of strategy is far from an academic exercise.

Fred Nickols provides a good overview of strategy definitions found in management literature:

‘The many definitions of strategy found in the management literature fall into one of four categories: plan, pattern, position, and perspective. According to these views, strategy is:

1. A plan, a "how," a means of getting from here to there.
2. A pattern in actions over time; for example, a company that regularly markets very expensive products is using a "high end" strategy.
3. A position, that is, it reflects decisions to offer particular products or services in particular markets.
4. A perspective, that is, a vision and direction, a view of what the company or organization is to become.’

Unfortunately, I believe much of the literature mixes strategy with strategic inputs and outputs.

From my perspective, strategy is a set of general rules and boundary conditions that enable an organization to achieve a vision, resulting in a plan and a pattern of actions over time. This definition (displayed graphically below), provides enormous flexibility and can be applied at all levels of an organization: holding company, corporate entity, business unit, function, organization unit, or process.

For example, corporate strategy is a specific approach a company takes to win in the marketplace – including customer and product selection, strategic positioning, and a consistent set of reinforcing activities (essentially answering the classic “where” and “how” strategy questions). In contrast, strategy for a corporate function is a specific approach to support the corporate strategy – including alignment of priorities, policy guidelines, and supporting activities and processes.

For more information on the differences between a vision, business model, strategy, and tactics, this chart from Harvard Business Publishing provides an excellent overview.

Critical Observations

In his classic Harvard Business Review article "What Is Strategy?," Michael Porter makes a number of critical observations about strategy:

1. At the corporate level, strategy is about creating a unique strategic position in the market: Distinction occurs by performing different activities from rivals, or performing similar activities in different ways. Sources of strategic positioning include: (a) variety-based positioning (produce a subset of an industry’s products or services), (b) needs-based positioning (serves most or all the needs of a particular group of customers), and (c) access-based positioning (segmenting customers who are accessible in different ways).
2. Strategy requires you to make trade-offs – to choose what not to do: Some competitive activities are incompatible; thus, gains in one area can be achieved only at the expense of another area. A strategic position that involves trade-offs facilitates sustainable advantage (it is difficult for straddlers and repositioners to imitate the position).
3. Strategy involves creating “fit” among activities: Fit has to do with the ways a company’s activities interact and reinforce one another. First order fit = consistency (i.e., alignment); second order fit = reinforcing (i.e., 1 + 1 > 2); third order fit = optimization of effort (e.g., coordination and information exchange). Fit drives both competitive advantage and sustainability.
4. Strategy must have some degree of continuity – it can’t be constantly reinvented: History is littered with great companies that failed to evolve as landscapes around them changed (e.g., General Motors). Consequently, strategies must evolve over time. However, frequent adjustments to strategic positioning, trade-offs, and activities (a) create confusion in the organization, (b) reduce the quality of front-line decisions, and (c) and prevent operational effectiveness. Strategic continuity makes an organization’s continuous improvement efforts more effective.
5. Operational effectiveness is not strategy: Efficient and effective operations (i.e., reaching the “productivity frontier”) are necessary but not sufficient to achieve superior performance. Best practices are easily emulated and do not provide sustainable competitive advantage. A siloed pursuit of operational effectiveness can actually degrade the competitive position of a company by negatively impacting the “fit” between activities.
6. Strong leadership is essential: Leaders must make the difficult trade-offs to develop a strategic position and complementary set of activities, communicate the strategy to the organization, drive the execution of the strategy (along with operational effectiveness), assess industry conditions and the effect on the strategy, instill strategic discipline in the organization, and defend the strategy against internal threats (e.g., growth trap).

In periods of dramatic strategic change (e.g., turnarounds), it is particularly important to assess strategic trade-offs and activity “fit.” Extreme care must be taken during the transition period between the old and new strategies to minimize confusion of customers and employees. Extensive communication and a rapid transition will help minimize the negative effects of the strategic change.

Monday Morning Actions

• Assess your strategic position – have you made choices on what not to do? If not, why not? Discuss the issue with your strategic thought partners.
• Make a decision on pending strategic choices. Don’t be afraid to say “no” and not pursue an opportunity.
• Identify an activity that doesn’t “fit” with your strategy. Work with the owner of that activity to gain better strategic alignment.
• Identify an operational improvement that may be degrading the “fit” between activities. Redirect or kill the operational improvement.
• Evaluate the continuity of your strategy. Are you unnecessarily creating organization confusion and sacrificing operational effectiveness? If so, consider modifying your approach to strategic change.