Category Archives: Definition of strategy

Structuralist vs reconstructionist

Building up a new strategy means dealing with added value and profitability.

Reaching ‘value innovation’ has been reviewed by many theoristsLeonardo Da Vinci bike over the years. The main topic of discussion concerns the origin of value innovation. Two main theses are related to the points of view of structuralist and reconstructionist.

Structuralists follow a structure, conduct, performance thesis where value innovation doesn’t come from the firm but it comes from fundamental changes in basic economic conditions and technological breakthroughs. Market structure, given by supply and demand conditions, shapes sellers’ and buyers’ conduct, which, in turn, determines end performance.

This means that inside the market structure firms are not able to add value and they will compete into a zero-sum game in which one company’s gain is achieved at another company’s loss. Like chess players, companies will apply strategies to compete within a strict value-cost trade-off. Also profitability is determined from conditions outside of the firm i.e. structural factors and companies principally seek to capture wealth instead of creating wealth.

Competition causes firms to develop new products and services, which would give consumers greater selection and better products. The greater selection typically causes lower prices for the products, compared to the possible price if there was no competition (monopoly) or little competition (oligopoly).

Companies that follow structuralist thesis will act strategically on the supply side of the equation focusing on dividing up by tailoring products to better fit customers demand.

On the other end of the spectrum we have the reconstructionalist view of strategy. This point of view is based on J.A. Schumpeter’s observation where innovation can happen endogenously (inside the firm).

The reconstructionalists view suggests that value innovation can occur in any company in any time by cognitive reconstruction of existing data and market elements in a fundamentally new way.

They move the strategy from the supply point of view to the demand point of view underlining that the market boundaries can be changed to unlock new demand.

This way it is possible to move out from the value-cost trade-off and there are not going to be any more attractive and unattractive markets since companies will be able to move the market boundaries in order to innovate and create profit.

Reacting is as important as planning

Reacting is about reshaping the strategy to match unplanned events. To be able to react it is needed to get feedback from the inner (inside the company) and outer world. A firm may react after factors such as government policy changes, consumer demand etc.

Reacting is also about adapting the company direction in order to compete with other firms and their activities; it is the “me too” approach that usually doesn’t drive the company to more profitable markets as they are constantly imitating others.

After applying a new business plan, a strategist has to start to monitor the inner and outer reactions to the new strategy.

The firms’ new strategy is less value innovative the sooner the competitors are able to react to the market changes. This is due to the fact that with highly value innovative strategies a new market is opened and other competitors have to deeply redesign their activities to follow your company moves. In order to reorganize their activities they will lose time allowing your company to set up countermeasures to limit new comers’ success. The strategist should be continually shifting through events for evidence about how the deployed plan is working. The danger is that following the plan too slavishly (without responding to events) will lead the company “efficiently” in the wrong direction.

The right plan can be made wrong by events and therefore the strategist must monitor these events too. Even worst would be not to follow any plan. It would almost definitely lead the firm to reach low to no profitability as the firm would find it difficult to link actions to create value for the consumer.

A good strategist will consider possible events in the market while planning (different scenarios) therefore being prepared to react to events faster and intellectually, which may possibly give the company the leading edge.

In the real world, it is highly possible that the intended strategy (deliberated strategy) is different from the realized strategy due to the adjustment applied in deployment phase to better focus environmental changes.

Some strategies or part of them turn into unrealized while emergent strategies, driven by market events, become part of the realized strategy. This phenomenon was first highlight in the H. Mintzberg’s “deliberate and emergent” theory (1985).

Mintzberg’s deliberate and emergent

Author: Carlo Olmi

The importance of strategy

“Mission is at the heart of what you do as a team. Goals are merely steps to its achievement”. e.g., (Dixon P. 2012).

“The expert in battle seeks his victory from strategic advantage and does not demand it from his men.”  e.g., (Tzu S. 2009).

A company is made up of people, assets and financial resources. It is a collection of skills and resources. Combining these items and focusing them toward a shared objective is the main strategy goal for the company. The importance of combining skills and resources was well highlighted by Porter in his “value chain” concept from business management.

A value chain is a chain of activities for a firm operating in a specific industry. The business unit is the appropriate level for construction of a value chain, not the divisional level or corporate level. Products pass through all activities of the chain in a set order, and at each activity the product gains some value. The chain of activities gives the products more added value than the sum of the independent activities’ values.Porter1

The value-chain concept has been extended beyond individual firms. It can apply to whole supply chains and distribution networks. The delivery of a mix of products and services to the end customer will activate different economic factors, each managing its own value chain. The industry wide synchronized interactions of those local value chains create an extended value chain, sometimes global in extent. Porter terms this larger interconnected system of value chains the “value system”. A value system includes the value chains of a firm’s supplier (and their suppliers all the way back to the basic raw materials of the product), the firm itself, the firm distribution channels, and the firm’s buyers.

Author: Carlo Olmi

What does strategy means?

Leonardo da Vinci ArtworkA strategy is a plan of action designed to achieve a vision. It derives from the Greek “στρατηγία” (strategia), “office of general, command, generalship” e.g., (Wikipedia, 2014). Dixon P. suggests that Business strategy “is the battle plan for a better future”.

Strategy is about changing unfavorable circumstances into a favorable situation by reorienting an existing business in a new competitive environment. In order to achieve this goal, strategists will shape the future of an organization involving every part of the company in the business process redesign/reengineering.

Business’ can have more than one strategy. For example, a firm may have an overall corporate strategy guiding the business as a whole, whilst its individual branches have their own strategies that compliment and support the main strategy.

Strategy aims to guarantee the long-term success and survival of the company. In doing this, the strategy is often far longer than one year. Due to changing markets and consumers the business strategy must adapt alongside market evolution.

Strategist aim to anticipate the market changes, thus only needing small changes to be made to the strategy canvas.

In order to monitor the market evolution a feedback structure is set to anticipate market changes, thus allowing the firm to react and to minimize their impact for the company.

The essential elements of a strategy are:

1)     Value based orientation

2)     Profitability

1)  All relevant stakeholders have to see clearly the advantages (added value) related to the product or service offered by the company. Most of all the added value must be clear to customers to encourage adoption of the product or service. Such advantage can be established and defended through superior values in customers key competing factors.

2) The strategy must display profit potential through a clear and structured business plan.

The business plan is the direct consequence of a strategy and it is a set of, well documented, actions to be followed to implement the strategy in the real world. This action plan will include numbers and information to give strength to the strategy and to direct the business redesign/reengineering.

In game theory, a strategy refers to one of the options that a player can choose. That is, every player in a non-cooperative game has a set of possible strategies, and must choose one of the options that a player can choose. e.g., (Wikipedia, 2014)

Chess is a classic high-end strategic game. It is a two-player board game played on a ‘chessboard’, a square-checkered board with 64 squares arranged in an eight-by-eight grid. Each player begins the game with sixteen pieces; each of these types of pieces moving differently.

A chessboard is the equivalent to the business market in which the company competes in. The Chessboard’s boundaries are known and unchangeable. In the company business market boundaries should also be well known but changeable. One of the strategists’ tasks is to figure out how to enlarge the company market boundaries in order to increase the number of customers.

In chess there are two players. In the company business market there could be several players that have an interest in competing with the company. Strategists need to know those players and their strategies to be able to better focus the company business plan.

In chess, both players start the game with the same type and number of pieces being allowed to move within a strictly defined set of rules. In company business market there could be big, small, national and international players. Some of them will be able to move aggressively (ex. dumping price policy) to conquer a new market. This gives them an advantage over other firms and therefore various firms must adapt their strategy to play on their own strengths and against the competitions weaknesses.

In the company business market legal rules are set but it is left great freedom to act. A good strategist needs to be aware of the environmental (legal, political, consumer) changes to be ready to re-focus company strategy. A better strategist will anticipate these occurrences.

The object of chess game is to ‘checkmate’ the opponent’s king by placing it under an inescapable threat of capture. In addition to checkmate, the game can be won by the voluntary resignation of one’s opponent,

which may occur when too much material is lost, or if checkmate appears unavoidable.

In the company business market the objective is to reach a position of value based orientation and profitability that are unchangeable like checkmate for chess players.

Chess strategy consists of setting and achieving long-term goals during the game – for example, where to place different pieces – while tactics concentrate on immediate maneuver. These two parts of the chess-playing process cannot be completely separated, because strategic goals are mostly achieved by the means of tactics, while the tactical opportunities are based on the previous strategy of play. e.g., (Wikipedia, 2014)

In chess, tactics mainly concentrate on short-term actions – thus allowing them to be calculated in advance by a human player or by a computer. The possible depth of calculation depends on the player’s ability. In quiet positions with many possibilities on both sides, a deep calculation is more difficult and may not be practical, while in “tactical” positions with a limited number of forced variations where much less than the best move would lose quickly, strong players can calculate long sequences of moves in order to give them the best possibility of winning. e.g., (Wikipedia, 2014)

A great strategist will be able to evaluate more variables while defining the strategy and like a good chess player he will be able to reconsider the strategy, analyzing the other players’ actions through an effective and efficient feedback system. Unlike chess, where only two players are involved in the game, strategists have to deal with several direct and indirect players (stakeholders) and they need to be aware that underestimating their influence will increase the risk of failure. Since companies are made of people, a good example could be found looking at employees. People tend to create a comfort zone around themselves, where they don’t feel in danger and where they are not stressed. Some of them may be reluctant to accept changes related to the introduction of a new strategy since changes would move them out from their comfort zone. On the other hand, it is also possible that some of these people may have a vested interest in the status quo and they will try to obstacle any change in the existing strategies. A strategist has to deal with this problem by himself and by using facilitators. A facilitator is someone who helps a group of people to understand their common objectives. Some facilitator tools will try to assist the group in achieving a consensus on any disagreements that preexist or emerge in the meeting so that it has a strong basis for future action.

Author: Carlo Olmi