Can You Say What Your Strategy Is? CAN YOU SUMMARIZE YOUR COMPANY’S STRATEGY in 35 words or less? If so, would your colleagues put it the same way? It is our experience that very few executives can honestly answer these simple questions in the affirmative. And the companies that those executives work for are often the most successful in their industry. One is Edward Jones, a St. Louis–based brokerage firm with which one of us has been involved for more than 10 years. The fourth-largest brokerage in the United States, Jones has quadrupled its market share during the past two decades, has consistently outperformed its rivals in terms of ROI through bull and bear markets, and has been a fixture on Fortune’s list of the top companies to work for. It’s a safe bet that just 82 Harvard Business Review 1084 Collis.indd 82 | April 2008 | Getty Images and IPNstock by David J. Collis and Michael G. Rukstad hbr.org 3/4/08 10:14:03 PM It’s a dirty little secret: Most executives cannot articulate the objective, scope, and advantage of their business in a simple statement. If they can’t, neither can anyone else. 1084 Collis.indd 83 3/4/08 10:14:09 PM Can You Say What Your Strategy Is? about every one of its 37,000 employees could express the company’s succinct strategy statement: Jones aims to “grow to 17,000 financial advisers by 2012 [from about 10,000 today] by offering trusted and convenient face-to-face financial advice to conservative individual investors who delegate their financial decisions, through a national network of onefinancial-adviser offices.” Conversely, companies that don’t have a simple and clear statement of strategy are likely to fall into the sorry category of those that have failed to execute their strategy or, worse, those that never even had one. In an astonishing number of organizations, executives, frontline employees, and all those in between are frustrated because no clear strategy exists for the company or its lines of business. The kinds of complaints that abound in such firms include: • “I try for months to get an initiative off the ground, and then it is shut down because ‘it doesn’t fit the strategy.’ Why didn’t anyone tell me that at the beginning?” • “I don’t know whether I should be pursuing this market opportunity. I get mixed signals from the powers that be.” • “Why are we bidding on this customer’s business again? We lost it last year, and I thought we agreed then not to waste our time chasing the contract!” • “Should I cut the price for this customer? I don’t know if we would be better off winning the deal at a lower price or just losing the business.” Leaders of firms are mystified when what they thought was a beautifully crafted strategy is never implemented. They assume that the initiatives described in the voluminous documentation that emerges from an annual budget or a strategic-planning process will ensure competitive success. They fail to appreciate the necessity of having a simple, clear, succinct strategy statement that everyone can internalize and use as a guiding light for making difficult choices. Think of a major business as a mound of 10,000 iron filings, each one representing an employee. If you scoop up that many filings and drop them onto a piece of paper, they’ll be pointing in every direction. It will be a big mess: 10,000 smart people working hard and making what they think are the right decisions for the company – but with the net result of confusion. Engineers in the R&D department are creating a product with “must have” features for which (as the marketing group could have told them) customers will not pay; the sales force is selling customers on quick David J. Collis (dcollis@hbs.edu) is an adjunct professor in the strategy unit of Harvard Business School in Boston and the author of several books on corporate strategy. He has studied and consulted to Edward Jones, the brokerage that is the main example in this article, and has taught in the firm’s management-development program. Michael G. Rukstad was a senior research fellow at Harvard Business School, where he taught for many years until his untimely death in 2006. 84 Harvard Business Review 1084 Collis.indd 84 | April 2008 | turnaround times and customized offerings even though the manufacturing group has just invested in equipment designed for long production runs; and so on. If you pass a magnet over those filings, what happens? They line up. Similarly, a well-understood statement of strategy aligns behavior within the business. It allows everyone in the organization to make individual choices that reinforce one another, rendering those 10,000 employees exponentially more effective. What goes into a good statement of strategy? Michael Porter’s seminal article “What Is Strategy?” (HBR November– December 1996) lays out the characteristics of strategy in a conceptual fashion, conveying the essence of strategic choices and distinguishing them from the relentless but competitively fruitless search for operational efficiency. However, we have found in our work both with executives and with students that Porter’s article does not answer the more basic question of how to describe a particular firm’s strategy. It is a dirty little secret that most executives don’t actually know what all the elements of a strategy statement are, which makes it impossible for them to develop one. With a clear definition, though, two things happen: First, formulation becomes infinitely easier because executives know what they are trying to create. Second, implementation becomes much simpler because the strategy’s essence can be readily communicated and easily internalized by everyone in the organization. Elements of a Strategy Statement The late Mike Rukstad, who contributed enormously to this article, identified three critical components of a good strategy statement – objective, scope, and advantage – and rightly believed that executives should be forced to be crystal clear about them. These elements are a simple yet sufficient list for any strategy (whether business or military) that addresses competitive interaction over unbounded terrain. Any strategy statement must begin with a definition of the ends that the strategy is designed to achieve. “If you don’t know where you are going, any road will get you there” is the appropriate maxim here. If a nation has an unclear sense of what it seeks to achieve from a military campaign, how can it have a hope of attaining its goal? The definition of the objective should include not only an end point but also a time frame for reaching it. A strategy to get U.S. troops out of Iraq at some distant point in the future would be very different from a strategy to bring them home within two years. Since most firms compete in a more or less unbounded landscape, it is also crucial to define the scope, or domain, of the business: the part of the landscape in which the firm will operate. What are the boundaries beyond which it will not venture? If you are planning to enter the restaurant business, will you provide sit-down or quick service? A casual or an upscale atmosphere? What type of food will you offer – hbr.org 3/4/08 10:14:25 PM platitude of “maximizing shareholder French or Mexican? What geographic A Hierarchy of wealth by exceeding customer expecarea will you serve – the Midwest or the Company Statements tations for _______ [insert product or East Coast? service here] and providing opportuniAlone, these two aspects of strategy Organizational direction comes in ties for our employees to lead fulfillare insufficient. You could go into busiseveral forms. The mission stateing lives while respecting the environness tomorrow with the goal of bement is your loftiest guiding light – ment and the communities in which coming the world’s largest hamburger and your least specific. As you work we operate.” Rather, it is the single chain within 10 years. But will anyone your way down the hierarchy, the precise objective that will drive the invest in your company if you have not statements become more concrete, business over the next five years or so. explained how you are going to reach practical, and ultimately unique. No (See the exhibit “A Hierarchy of Comyour objective? Your competitive adother company will have the same pany Statements.”) Many companies vantage is the essence of your strategy: strategy statement, which defines do have – and all firms should have – What your business will do differently your competitive advantage, or statements of their ultimate purpose from or better than others defines the balanced scorecard, which tracks and the ethical values under which all-important means by which you will how you implement your particular they will operate, but neither of these achieve your stated objective. That strategy. is the strategic objective. advantage has complementary exterThe mission statement spells out nal and internal components: a value MISSION Why we exist the underlying motivation for beproposition that explains why the taring in business in the first place – the geted customer should buy your prodVALUES contribution to society that the firm uct above all the alternatives, and a What we believe in aspires to make. (An description of how internal activities and how we will behave insurance company, must be aligned so that only your firm VISION for example, might can deliver that value proposition. What we want to be The BASIC define its mission as Defining the objective, scope, and ELEMENTS providing financial advantage requires trade-offs, which STRATEGY of a Strategy What our competitive security to consumPorter identified as fundamental to game plan will be Statement ers.) Such statements, strategy. If a firm chooses to pursue OBJECTIVE = Ends however, are not usegrowth or size, it must accept that BALANCED SCORECARD ful as strategic goals profitability will take a back seat. If it SCOPE = Domain How we will monitor to drive today’s busichooses to serve institutional clients, and implement that plan ADVANTAGE = Means ness decisions. Simiit may ignore retail customers. If the larly, it is good and value proposition is lower prices, the proper that firms be company will not be able to compete clear with employees about ethical values. But principles on, for example, fashion or fit. Finally, if the advantage comes such as respecting individual differences and sustaining the from scale economies, the firm will not be able to accommoenvironment are not strategic. They govern how employees date idiosyncratic customer needs. Such trade-offs are what should behave (“doing things right”); they do not guide what distinguish individual companies strategically. the firm should do (“the right thing to do”). Firms in the same business often have the same mission. Defining the Objective (Don’t all insurance companies aspire to provide financial The first element of a strategy statement is the one that security to their customers?) They may also have the same most companies have in some form or other. Unfortunately, values. They might even share a vision: an indeterminate the form is usually wrong. Companies tend to confuse their future goal such as being the “recognized leader in the insurstatement of values or their mission with their strategic ance field.” However, it is unlikely that even two companies objective. A strategic objective is not, for example, the The trade-offs companies make are what distinguish them strategically from other firms. hbr.org 1084 Collis.indd 85 | April 2008 | Harvard Business Review 85 3/4/08 10:14:34 PM Can You Say What Your Strategy Is? in the same business will have the same strategic objective. Indeed, if your firm’s strategy can be applied to any other firm, you don’t have a very good one. It is always easy to claim that maximizing shareholder value is the company’s objective. In some sense all strategies are designed to do this. However, the question to ask when creating an actionable strategic statement is, Which objective is most likely to maximize shareholder value over the next several years? (Growth? Achieving a certain market share? Becoming the market leader?) The strategic objective should be specific, measurable, and time bound. It should also be a single goal. It is not sufficient to say, “We seek to grow profitably.” Which matters more – growth or profitability? A salesperson needs to know the answer when she’s deciding how aggressive to be on price. There could well be a host of subordinate goals that follow from the strategic objective, and these might serve as metrics on a balanced scorecard that monitors progress for which individuals will be held accountable. Yet the ultimate objective that will drive the operation of the business over the next several years should always be clear. The choice of objective has a profound impact on a firm. When Boeing shifted its primary goal from being the largest player in the aircraft industry to being the most profitable, it had to restructure the entire organization, from sales to manufacturing. For example, the company dropped its policy of competing with Airbus to the last cent on every deal and abandoned its commitment to maintain a manufacturing capacity that could deliver more than half a peak year’s demand for planes. Another company, after years of seeking to maximize profits at the expense of growth, issued a corporate mandate to generate at least 10% organic growth per year. The change in strategy forced the firm to switch its focus from shrinking to serve only its profitable core customers and competing on the basis of cost or efficiency to differentiating its products, which led to a host of new product features and services that appealed to a wider set of customers. At Edward Jones, discussion among the partners about the firm’s objective ignited a passionate exchange. One said, “Our ultimate objective has to be maximizing profit per partner.” Another responded, “Not all financial advisers are partners – so if we maximize revenue per partner, we are ignoring the other 30,000-plus people who make the business work!” Another added, “Our ultimate customer is the client. We cannot just worry about partner profits. In fact, we should start by maximizing value for the customer and let the profits flow to us from there!” And so on. This intense debate not only drove alignment with the objective of healthy growth in the number of financial advisers but also ensured that every implication of that choice was fully explored. Setting an ambitious growth target at each point in its 85-year history, Edward Jones has continually increased its scale 86 Harvard Business Review 1084 Collis.indd 86 | April 2008 | and market presence. Striving to achieve such growth has increased long-term profit per adviser and led the firm to its unique configuration: Its only profit center is the individual financial adviser. Other activities, even investment banking, serve as support functions and are not held accountable for generating profit. Defining the Scope A firm’s scope encompasses three dimensions: customer or offering, geographic location, and vertical integration. Clearly defined boundaries in those areas should make it obvious to managers which activities they should concentrate on and, more important, which they should not do. The three dimensions may vary in relevance. For Edward Jones, the most important is the customer. The firm is configured to meet the needs of one very specific type of client. Unlike just about every other brokerage in the business, Jones does not define its archetypal customer by net worth or income. Nor does it use demographics, profession, or spending habits. Rather, the definition is psychographic: The company’s customers are long-term investors who have a conservative investment philosophy and are uncomfortable making serious financial decisions without the support of a trusted adviser. In the terminology of the business, Jones targets the “delegator,” not the “validator” or the “do-it-yourselfer.” The scope of an enterprise does not prescribe exactly what should be done within the specified bounds. In fact, it encourages experimentation and initiative. But to ensure that the borders are clear to all employees, the scope should specify where the firm or business will not go. That will prevent managers from spending long hours on projects that get turned down by higher-ups because they do not fit the strategy. For example, clarity about who the customer is and who it is not has kept Edward Jones from pursuing day traders. Even at the height of the internet bubble, the company chose not to introduce online trading (it is still not available to Jones customers). Unlike the many brokerages that committed hundreds of millions of dollars and endless executive hours to debates over whether to introduce online trading (and if so, how to price and position it in a way that did not cannibalize or conflict with traditional offerings), Jones wasted no money or time on that decision because it had set clear boundaries. Similarly, Jones is not vertically integrated into proprietary mutual funds, so as not to violate the independence of its financial advisers and undermine clients’ trust. Nor will the company offer penny stocks, shares from IPOs, commodities, or options – investment products that it believes are too risky for the conservative clients it chooses to serve. And it does not have metropolitan offices in business districts, because they would not allow for the convenient, faceto-face interactions in casual settings that the firm seeks to provide. Knowing not to extend its scope in these directions hbr.org 3/4/08 10:14:40 PM has allowed the firm to focus on doing what it does well and reap the benefits of simplicity, standardization, and deep experience. Defining the Advantage Given that a sustainable competitive advantage is the essence of strategy, it should be no surprise that advantage is the most critical aspect of a strategy statement. Clarity about what makes the firm distinctive is what most helps employees understand how they can contribute to successful execution of its strategy. As mentioned above, the complete definition of a firm’s competitive advantage consists of two parts. The first is a statement of the customer value proposition. Any strategy statement that cannot explain why customers should buy your product or service is doomed to failure. A simple graphic that maps your value proposition against those of rivals can be an extremely easy and useful way of identifying what makes yours distinctive. (See the exhibit “Wal-Mart’s Value Proposition.”) The second part of the statement of advantage captures the unique activities or the complex combination of activities allowing that firm alone to deliver the customer value proposition. This is where the strategy statement draws from Porter’s definition of strategy as making consistent choices about the configuration of the firm’s activities. It is also where the activity-system map that Porter describes in “What Is Strategy?” comes into play. As the exhibit “Edward Jones’s Activity-System Map” shows, the brokerage’s value proposition is to provide convenient, trusted, personal service and advice. What is most distinctive about Jones is that it has only one financial adviser in an office, which allows it to have more offices (10,000 nationally) than competitors do. Merrill Lynch has about 15,000 brokers but only 1,000 offices. To make it easy for its targeted customers to visit at their convenience – and to provide a relaxed, personable, nonthreatening environment – Jone ...
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