Over Christmas, I discovered an article published in last April’s Harvard Business Review by Andrew Campbell (blog | Twitter). Andrew was a colleague of mine when I was a director at the Ashridge Strategic Management Centre in the UK, and he’s one of the most astute strategic thinkers I know.
Andrew argues that the basic principles of strategy haven’t changed for 30 years. In his view, the basic principles of strategy number just four, and he thinks we’d do far better to re-visit them than to chase after the Next New Thing:
1. You can only earn a profit by earning a higher return than your average competitor;
2. To earn a higher return than your average competitor, you must either have an advantage, or you must compete in an unusually attractive sector;
3. You can earn an advantage by charging higher prices than competitors (I’d edit in that this usually boils down to competition in the premium sector) or by having lower costs (me: which is usually about volume: not the best, but the most).
4. A sector is unusually attractive if there is more than enough to go around, usually because there are few competitors (pharma), or the sector is protected (air traffic control), or demand is growing faster than supply (smartphones, for a very long time).
To Andrew’s four principles, I’d add a fifth:
5. Strategy is about allocating resources. On the one hand, that means deciding where to put your resources. Bruce Henderson, founder of The Boston Consulting Group, where I drank from the strategy firehose, said it much more succinctly: a strategy that is not implemented is merely a good idea.) But the corollary is equally important: strategy is about deciding what you’re no longer going to do, and cutting resources from that. If you decide to switch to strategy B, but leave people and money invested in legacy projects from strategy A, you’re creating drag and making it harder for your preferred strategy to fly.
When I think about it, 85% of the conversations I’ve had with clients about strategic direction over the past few years boil down to one of three discussions, all of which fall under one of the five basic principles of strategy above:
- It’s not enough to be amazing in your own right. You have to be better than the next best thing on offer. (Andrew’s four points are all about competition.)
- It would be fine to decide to compete in Sector X because of our brand and our heritage. But we need to be clear-eyed about the fact that the more attractive return is in Sector Y, and consciously decide which one to go for. (Strategy is about seeking return. If you’re not going to seek it, you should at least know what you’re turning down.)
- We’re going to adopt differential customer account management based on lifetime customer value. Awesome! But now we have to deprioritise low-value clients, as well as adding resources to those who are most valuable to us. (Strategy is about deciding what not to do, and cutting resources from things that aren’t in the strategy you decide on.)
Any other core principles of strategy – ones that can’t be subsumed under the five above?