The rapid speed of technological advancement led to a business environment where competitive advantage is not only difficult to create, but also short lived. Some people started arguing that strategic planning doesn't make much sense nowadays. But we still think there is a way to do it while also accommodating the unforeseen pace of advancement.
Strategic management requires a change of focus form the traditional way of thinking to a new way. In this article we are going to explore 4 focus shifts that will help in strategic planning in the new age of technology and innovation
Strategic Planning with Flexibility and Agility
Strategic Planning creates a current commitment despite an uncertain future. Depending on the kind of choice that the company makes during the planning process, flexibility and agility which are necessary to navigate the current ever-changing business environment may be negatively impacted. There are different concepts that emerged to deal with the high making choices under high uncertainty. One such concept is the fail fast concept. One other concept is the Bayesian approach to strategy where the object of strategic planning is to become more right over time.
The competitive landscape is becoming more difficult to navigate with the pace of technology and globalization accelerating. Industry barriers are blurring, information gaps are closing, and it is becoming much easier to access resources that once constituted an entry barrier. Another problem is that innovation and disruption cycles has rapidly shortened. Current performance of a company no longer serves as a validation of its business model.
The other major issue is permeant connectivity. We live in an age where everything is connected. This has blurred industry boundaries and led to the emergence of new business models. Connectivity comes in many forms but has almost certainly blurred traditional boundaries. For example, peer to peer networks changed the music industry and blurred it with the tech industry. Kazaa, a file sharing tool, threated the music industry because for the first time, users could share music with other users without exchanging the actual medium (a cd). And then this p2p network developed into not exchanging music only, but also services. Uber is an example.
As a result, opportunities to maintain a sustainable edge in business are diminishing faster than before. But the opportunity to develop unique resources that are unique and valuable in the same time is not completely lost. In addition, different classes of resources and capabilities are emerging as new providers of advantage. In addition, connectivity also blurred the boundaries between customer and product. Because customer are always online, they generate a lot of data. This data is a source of profit in the cases for Google and Facebook.
Focus on a customer need instead of focusing on a product or a category
To illustrate the danger of focusing on a product, consider the following mission statement:
“We strive to become the biggest producer of steam locomotives in the world”
Having this mission statement would have resulted that you are long out of business by now. But regardless, let’s dissect this statement in order to see the danger of focusing your strategy on a product.
Products are just a means to an end. Customers don’t buy a product because they want it. They buy it because they want something out of it. Because of this, they will switch to a product that better serves their need. Now given the pace in which technology is advancing, you can safely assume that something will come out that better serve the need of your customer.
Additionally, the focus on the product will drive your “innovation” in a direction that make the product better, i.e. better steam locomotives. While incremental improvements are necessary, you have killed the already small chance of making an innovative leap.
In addition to protecting the company from being wiped out by new technology, focusing on a customer widens the horizon of the organization, is an excellent starting point for brainstorming, and is an important catalyst of innovation. It enables the company to be a force of disruption in the market and not a prey of technological changes.
Lets update the steam locomotive mission statement to be about “long distance travel”. The strategic question of the company will be along the lines of “How can we improve the experience of the customer who is traveling long distances?”, “Should we make it faster or more comfortable?”. Disruptive innovation arises from answering these kinds of question. It doesn’t arise from answering “How can we make it more fuel efficient”, which is something a product focused company would ask.
Coupled with the right corporate culture, customer focus also improves the chances of someone coming a long and saying something along the lines of:
“I heard about 2 brothers who invented something called an airplane. It covers distances really fast. Since our strategy is about long-distance travel (and not steam locomotives), does anyone else think we should explore this?”
Notice that the previous statement doesn’t contradict with 2 seemingly conflicting components; flexibility and commitment. But since the strategy is committed to a customer need, satisfying it became flexible and immune to being stuck in the past. The company is aligned but also flexible
Focus on ROIC instead of earnings and growth
ROIC stands for Return on Invested Capital and its one of the best proxies for shareholders’ value creation. It also has some properties that makes it important for maintaining strategic planning in the age of non-stop innovation.
Return on Invested Capital is the operating profit that the company achieved divided by the capital invested to generate that profit. In other words, it is a ratio that relates the profit to the asset base utilized to generate that profit.
In order to achieve high ROIC, you will need to minimize the asset base as much as possible given a certain level of profitability. As we will see later, the minimization of tangible assets leads to better flexibility.
However, the real importance of ROIC from the agility standpoint is it’s a measure of earnings after all investment needed to keep the business running is made. So there is a level of freedom as to what you can do with these “extra” earnings. You can think of this as the resources that are available to change the direction of the business, jump on opportunity, or expand in a new market.
ROIC can also reveal more about competitive advantage that earnings. This is because you can have high earnings and even high growth without competitive advantage. For example, you can extend very long credit terms to your clients, your earnings will skyrocket and you may even be able to enhance margins.
Now lets look at the example above from the ROIC perspective. Because invested capital includes all the tangible assets used to generate the earnings, you will find that when you give better credit terms to your customers, your Account Receivables increase, which is a current asset on the balance sheet. So now you may find that your ROIC is almost the same despite the increased profitability.
In other words, ROIC is more difficult to trick when it comes to where you stand in terms of competitive advantage.
Because ROIC is an important proxy for value creation, you can use it as one of the factors to predict how easy it will be for the business to raise money.
The market for capital is a competitive market, just like any other market. But the criteria for getting your share in the capital market is simpler than that of the other market. People will give you money if you give them higher returns that what that money cost (their opportunity cost)
The link between your performance in market for capital and your performance in your product market is competitive advantage. When a business is generating higher ROIC than its cost of capital, competition arises. If you don’t have competitive advantage, your ROIC will drop because of this.
When your ROIC drops to a level where it is equal to the cost of capital, this is a good opportunity to get out while you are still on top.
Focus on building intangible assets instead of fixed assets
Traditionally, the resource-based view of the firm entertained the idea that firms which have unique resources are more competitive than others. This view is challenged by today’s rapid technological advancement and an increased pace of disruptive innovation. This is because, assets represent a long commitment which may be rendered less profitable because of fast technological changes. However, there are two attributes that will make an asset less exposed to redundancy.
Those 2 attributes are 1) Specialization and 2) Mobility
Specialized assets usually do one thing, but they can do it very effectively. Highly specialized assets usually have high acquisition costs because there is usually very specialized know-how involved in making these assets. For example, a piece of machinery that is producing a product at very high level of efficiency. Despite the obvious benefit, it is risky to invest in such specialized assets as the speed in which products (which are produced by these assets) become redundant is increasing. Hence, the more de-specialized the asset or the resource is, the better (given an adequate level of usefulness). This is because, you can switch the resource from one product to another and not lose a significant part of your investment.
This brings use to the next point, which is how easy it is to reallocate resources from product to product or generally across the organization. Resource mobility is how easy it to redeploy an asset in different situations. This is important because opportunity is time-varying and as such, the optimal use of certain assets change as well.
There is a class of assets that covers both the specialization and mobility criteria discussed above quite well. Intangible assets.
Intangible assets come in many forms. Examples include brand, relationships, knowledge, etc. Most of intangibles have both the de-specialization and the mobility traits. This means that 1) they can be redeployed for different products and 2) the cost of their redeployment is relatively low.
The best use of a de-specialized intangible would be to magnify the usefulness of other tangible and specialized assets. This will yield increased benefits from the company’s owned and outsourced capabilities. This combination will enable a company to achieve competitive advantage without the over specialization of its resource portfolio.
Corporate Strategy with Flexibility and Agility
Following the logic within this article, corporate strategy would be concerned with selecting a number of customers’ needs to serve in addition to having a portfolio of capabilities that the company may deploy to service those selected need.
The best combination of customer needs and resources entails the maximization of resource usage to by having the common resources that can service multiple customer needs within the corporate portfolio.
A good example of this is Amazon. Amazon tends to the need of customers to buy “stuff” online. But there is another thing that Amazon does very successfully. It is the biggest cloud computing provider in the world. Amazon beats the likes of Microsoft, IBM, and Google at their own game and managed to get the most market share in this market.
The reason why it is smart to provide cloud computing services despite the fact that it has nothing to do with buying goods online is that it leverages the same resources. In this case the resources here are computational infrastructure required to run the ecommerce business. Amazon thought, why not rent excess capacity, and they grew this until they became the biggest cloud computing provider in the world.
This strategy is very good because the effort that goes into improving their computational efficiency translates equally well to both their ecommerce platform as well as their cloud computing services platform. 2 birds with one stone