Dr David Blyth

C O N S U LTA N T + A DV I S O R

The purpose of strategy

The term strategy has acquired a certain ‘Humpty Dumpty’ quality:
“it means just what I intend it to mean, nothing more, nothing less”.
Before we explore what strategy is, we should be clear around the
purpose of strategy.

The purpose of strategy is to create a sustainable competitive advantage (SCA). It is

useful to distinguish the essential terms: ‘sustainable’ and ‘competitive advantage’.

Competitive advantage is the capacity to deliver the same value at lower cost, more
value at the same cost, or more for less. This is the genesis of Porter’s now famous
dictum that there are essentially two generic strategies: low cost or differentiation
(putting aside the choice of a ‘narrow’ versus ‘broad’ target market).

The Purpose of Strategy - Competitive Advantage

Greater value
for same cost
Same value for
less cost
Price

Cost

How do we get there? There are just two pathways to competitive advantage.
Relative to its competitors, an organisation must either:
• undertake different activities within its value chain (or ecosystem); or
• do the same activities differently.

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It takes a certain arrogance to imagine you can do the same as your
competitors and somehow sustain a competitive advantage.

Let’s illustrate these two options in practice.

Consider Zara, one of the world’s most profitable fashion houses. Traditional
fashion houses have embraced a model where fashion houses design and sell,
but manufacturing is entirely outsourced. By contrast, Zara undertakes a lot of
manufacturing in-house. Different activities within the value chain.

What about the same activities done differently? BHP chose years ago to market its
portfolio of minerals products through an integrated marketing centre in Singapore.
By contrast, Rio maintained a product centric marketing structure, wherein each
product group was responsible for marketing their individual products. The same
activities done differently.

But it is the sustainability of competitive advantage that is the holy grail of strategy.
Warren Buffett describes this as building a moat:

“The most important thing to me is figuring out how big a moat

there is around the business. What I love of course, is a big castle
and a big moat with piranhas and crocodiles”

It is this ‘moat’ that stops someone from imitating your competitive advantage. Absent
some ‘structural’ barrier to imitation, ‘excess’ profits guarantee that competitors will
copy your model.

Some experts challenge the traditional view of SCA. Rita Gunther McGrath argues that
today SCA is the exception rather than the rule.

What can we say about sustainable competitive advantage?

Firstly, as McGrath acknowledges, SCA still exists. The value being generated by
some companies suggests there are still plenty of moats which have not been bridged
(numbers are Q3 FY2017 unless otherwise shown).

For example:
• Apple: $9.5B free cash flow (FCF) from $52B revenue
• Google: $7B FCF from $20B revenue
• Microsoft: $8.7B FCF on $23B revenue
• BA Tobacco: £2.8B FCF on £8.1B revenue (6 months to EODec 2016)

Firms could not produce these results without large moats around them. Secondly,
data from McKinsey and elsewhere suggests that around 20-25% of firms earn
economic profits across 5-year timeframes. So, we can reasonably presume these
firms have a level of competitive advantage which they’ve been able to sustain beyond
5 years.

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The more complex question is how long is the ‘competitive advantage period’
(a construct developed by investment analysts).

Finally, we understand industry cycles well. The early stages are characterised by
competition for the dominant design. As this battle matures, the competitive focus
shifts to product innovation, as players seek to take their offering to the next level.
In turn, the innovation shifts to process and efficiency innovation. And McKinsey
data shows through this process the degree of strategic differentiation within an
industry is reduced.

This results in the Red Queen effect:

“It takes all the running you can do to keep in the same place.
If you want to get somewhere else, you must run at least twice
as fast as that”
Lewis Carroll (Through the Looking Glass)

Gary Hamel once quipped (apropos Avis): “we try harder might be a great customer
slogan, but as strategy it sucks”. Perhaps ‘running twice as fast’ falls into the same
category.

Despite McGrath’s own observation that sustainable competitive advantage is

becoming the exception rather than the norm, her research into growth outliers found

“Although these companies are nimble and adaptive, their

leadership, strategy and values are very stable”

My advice: keep your sights set on building a sustainable competitive advantage

but recognise every day someone else is doing everything they can to overcome that
advantage. Remember the advice of Andy Grove, a former CEO of Intel: only the
paranoid survive.

About the author

Dr David Blyth works as a consultant/advisor with Boards, executives and senior leaders on
business and organisational strategies. He also mentors and coaches senior leaders. David’s
pragmatic blend of expertise and experience helps organisations meet tomorrow’s challenges.
He is an Adjunct Associate Professor at UWA’s Business School where he teaches business strategy,
and is a part of DukeCE’s global educator network.

+61 419 968 267 | david@2ndhorizon.com.au | 2ndhorizon.com.au