Transcript
Specialization Certificate:
Business Foundations
Course 1 Module 4 Lecture 2
Welcome back. We're now going to talk about the topic of strategy articulation. So far
we've been talking about creating and capturing value and we'll talk shortly about
delivering value. I want to take a pause to talk about the topic of strategy articulation.
How do we write down what exactly the strategy is for a business? You'll see in a
moment that strategy articulation involves a fairly succinct core statement of what the
strategy is of an organization.
Before we get to that, however, I think it's important to ask the question, why is it
important to be able to write down and articulate the strategy in such a straightforward
way as that?
There's a simple answer to it, which I think is very compelling. We of course want to
always be asking the question, do we have the right strategy? Is our strategy going to be
effective in driving success for our business? Well, in order to answer those questions,
we have to first be able to say what our strategy is. We can't begin to debate it, discuss
it, evaluate it until we've first been able to articulate and describe what that strategy is.
That's the reason for going through this part of the content. Any articulation of strategy
is essentially going to involve 2 key pieces. What is it that our organization will do? What
will we do? What products and services will we provide? What geographies will we
serve? What target customers will we be aiming towards and what activities? How
vertically integrated will our business be?
In many ways, this is a mundane description of what exactly it is that a company does.
On the other hand, it's important to recognize that every one of these 4 questions
speaks to very particular strategic choices that a company makes.
For example, it's a strategic choice whether you'll have a business that operates just in
California, whether you plan it to be a nationwide business or a global business. Those
are fundamental strategic choices that businesses make. Even though it's in many ways
a description of what we do, it really speaks to key strategic choices that an organization
makes.
Secondly, how will this drive success? How will our strategy allow us to beat our
competitors? How will we avoid being copied? The competitive advantage piece needs
to be built-in to the strategy statement as well.
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Let's cut straight to an example. Here's an example of a business called Airborne Express
that operates in the overnight express mail space. Airborne doesn't actually exist
anymore, but they were a very successful company in the late 1990s, early 200s.
Here's an example of Airborne's strategy statement. First of all, let's note that it's quite
short. We'll go through this carefully in a second and realize just how much incredibly
detailed content is in here, but notice that it's actually a very short statement. Let's go
through it together.
Airborne's strategy is to be the lowest-cost provider of business-to-business overnight
express mail in the U.S. metropolitan regions by offering streamlined services with
enhanced capacity utilization, resulting in almost-on-time delivery at significantly lower
prices for our customers.
Let's break this down into a few key pieces. To begin with, it says Airborne's strategy is
be the lowest-cost provider. A very clear statement that their competitive advantage is
about low cost, not about high quality. This company will succeed because they can
provide overnight express mail services at lower cost than their competitors. We'll talk
more about that in a moment.
Provider of business-to-business. An immediate statement around the customers that
they target. They're not in the business of doing consumer-to-consumer shipping. Not
even business-to-consumer shipping. It's all about business-to-business, overnight
express mail. That's a statement of the kinds of products they provide. They don't
provide non-overnight express mail. It's about overnight express mail. In U.S.
metropolitan regions. Now that's a very specific statement about the kinds of
geographies that they're focusing on. They're not providing services to rural customers.
They're focused on the U.S. and it's metropolitan regions in particular.
The next word is a small word, by, 2 letter word. It's a powerful word for me when I read
a strategy statement because it's a cue that now we're going to learn something about
what the competitive advantage is. How are they going to succeed, outcompete others,
in providing that kind of service to those customers? By offering streamlined services.
What does streamlined services refer to? We'll elaborate a little bit on this in a moment,
but it essentially means that you're not getting all of the bells and whistles that you
might get with some of their competitors. FedEx and UPS, the 2 major competitors to
Airborne at the time, are providing all sorts of fancy technological solutions. Tracking
online, ordering things online, all of these kinds of things, which Airborne is not doing.
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Airborne is providing a very basic, streamlined set of services for overnight express
shipping.
With enhanced capacity utilization. Again, a very specific statement about, they believe
that their competitive advantage lies in enhanced capacity utilization relative to their
competitors. For example, FedEx and UPS will be sending planes across the country
with, let's say, 65-70% capacity utilization while Airborne will be sending planes with 8590% capacity utilization. Begging the question, how is it that Airborne's able to pull that
off?
The last piece. Resulting in almost-on-time delivery at significantly lower prices for our
customers. Almost-on-time delivery. What a fascinating part of the strategy statement.
For Airborne, it was explicitly clear that they didn't provide on time delivery.
FedEx, for example, "When it absolutely, positively has to be there" was always their
catchphrase. FedEx is willing to send off planes with low capacity utilization in order to
satisfy their goal of being on time. Airborne has made a conscious choice. We will give
up on achieving a high degree of on time delivery in order to do what we do at lower
cost.
You can see immediately that if you're a customer for whom on time delivery is very
important, you're not going to want to use Airborne. You would rather use FedEx or
UPS. On the other hand, if you're a customer who cares more about a low price of
overnight express mail and less about that necessarily being on time, you're will to take
a lower probability of the delivery happening on time in return for a lower price,
Airborne is the supplier for you.
In that sense, Airborne is very differentiated from these other providers. That's a
strategy statement. Hopefully you can see from how we've just discussed that and gone
through that statement that there's an enormous amount of insight and very specific
strategy in that statement.
This strategy statement is very different from the strategy statement that FedEx or UPS
would use. I think that's always an important litmus test for deciding whether or not
you've really been able to articulate the strategy well.
Oftentimes companies will write down a strategy statement which feels very generic. It
feels a lot like the strategy that any one of their competitors might write down as well,
Transcript
but I hope you can see from this example that what Airborne's articulating here is a
totally different strategy than what FedEx or UPS would have written down.
Now, the strategy statement itself doesn't necessarily explain why this makes sense. You
could look at that statement and ask yourself, how exactly does this combination of
customer targeting, geographic scope, product scope and the so-called low cost
competitive advantage, how exactly is that going to lead to sustainable profitability in
the long run? The strategy statement itself doesn't provide an expanded detailed
explanation of how exactly this strategy is going to work.
There's a piece which we refer to as strategy logic, which is, how would you exactly
explain this and back this up? What assumptions are being made for this strategy to be
an effective strategy? Are these assumptions right? Do we need to go and validate
whether or not these assumptions are, in fact, correct? Do we need to validate these
assumptions? And how would we validate these assumptions?
A strategy articulation doesn't necessarily provide clear answers to all of these things.
However, if an executive were to present this strategy, they should be able to provide
answers to all of these questions. Here's what we're assuming, here's whether or not we
should be worried about these assumptions and here's the kind of research we've done
to be able to validate and back that up.
Let me give you an example of how we might explain the logic of the Airborne strategy
that we just talked about. Here's a classic cost curve from economics. On the horizontal
axis we've got output, on the vertical axis is cost. The line that I've just drawn in here is
the average cost curve for FedEx.
FedEx in this space can be roughly characterized as being a company that has enormous
fixed cost investment in hubs, in sophisticated planes, in information technology,
satellite systems, whatever it may be. For FedEx, the key to their success is volume. The
bigger they get, the larger their market share, the more they can spread out all those
massive fixed cost investments in order to achieve a low average cost of output. And it
would be the same for UPS as well. Scale is essential to the success of their strategy. The
bigger they get, the lower their cost get in doing that.
Here, on the other hand, is the cost curve of Airborne. Airborne has made a very specific
choice to de-emphasize fixed costs leading to less of a scale advantage, but as a result
they're able to achieve a low average cost at a relatively small scale.
Transcript
On this diagram, for example. If this were the level of output for Airborne, you can see
that they would have a very low level of average cost compared to what the average
cost would be for FedEx at the same level of output. FedEx would be at a major cost
disadvantage at this low level of output. At a high level of output, you can see that
FedEx would have a major cost advantage over Airborne.
Therein lies the key to Airborne's strategy. Airborne has adopted an approach that
allows them to be efficient at small scale. While FedEx has adopted an approach which
allows them to be efficient at very high scale. Here we just label some of these curves.
We can see that the marginal cost of FedEx, the cost of an incremental unit to go
through their system, is very low, allowing them to achieve a very low level of average
cost at a very high volume. But at the end of the day, at low volume, Airborne has a
huge cost advantage over FedEx.
Let's talk about some of the key challenges that Airborne faces with this strategy. On the
one hand, here they are at small scale having to compete against dominant competitors
who are large and will potentially have an even lower average cost than them once
those dominant competitors get to be very, very large. That's a classic example of where
niche competitors are challenged by large, dominant incumbents.
Secondly, there's going to be competition from other niche players. We haven't talked
about other firms out there that are copying and trying to do exactly what Airborne is
doing, but it's conceivable that there are other small scale players with similar strategies
that are also going to be very tight competitors for low cost in that space as well.
Lastly, there's limited growth potential. By construction, by design, Airborne has created
an approach to competing in this market which would make it very difficult to scale up.
If Airborne were to seek to become a larger, more dominant player in the market, they
would see that their cost structure would very quickly put them at a disadvantage
relative to, say, FedEx or UPS in this market.
That's classic example of the kinds of questions and issues that firms with niche strategy
face. You can see that as long as Airborne stays focused on being that small scale player,
they have a distinct cost advantage over other firms in the marketplace.
Let me just quickly talk about how the benefit of articulating the strategy, and you can
see through this example, is it helps you to talk about are we aligned in the external
market? Are we really targeting the right set of customers? Should we be fighting
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against any other firms in the market or should we be accommodating them? How do
we think about the way that we compete against other incumbents in this space?
Articulating the strategy allows us also to get clarity around the kinds of investments,
the kind of operational choices, the organizational choices that we make in order to
support that strategy as well. So having a clear articulation of the strategy allows us to
ask the question, do we have the right strategy? Are we externally aligned with our
competitors in the marketplace? And are we doing the right things internally in order to
support that strategy?
Tremendous value comes from articulating and clarifying what exactly the strategy is
that we have in place. To quickly recap. Articulate the strategy in order to define it and
allow for the question, do we have the right strategy? Is this strategy going to be
effective going forward?
The Airborne example provides us with a nice case of a particular strategy statement
which we see what a niche strategy looks like and we see how there are certain
advantages and disadvantages to a niche strategy. That's part of what strategic thinking
is all about. This was just one example of what it looks like for a niche firm. There are
many other examples of different types of strategies as well.
Lastly, very quickly, we talked about how it's really valuable to articulate the strategy in
order to be able to ask the question, do we have external alignment and do we have
internal alignment in the operational aspects of what we're being able to do?
Up next, we're focusing on the final of the value questions. We've talked about creating
value, we've talked about capturing value. Next we want to talk about delivering value.