… talking about strategy

A method, approach, framework or whatever is likely a ‘professional’ tool if two skilled people, given the same problem, would pick the same tool, seek the same information, process that information in the same way, and come out with something like the same answer.

DCF analysis, for example, is likely to be used in the same way and produce rather similar results if two good finance professionals were to appraise the same new project. We’d never get 100% matching for most cases, because of nuances of interpretation, but those small differences would be quite clear as well.

So what strategy tools, I wonder, come close to that definition of being ‘professional’? Any thoughts?

It is interesting to learn that Chinese companies are finding it increasingly difficult to find the technical, functional and managerial talent they need to sustain their break-neck growth. We have seen the ‘war for talent’ raging amongst organizations in already mature economies for many years, and I guess it was inevitable that China would hit this wall before long. Which raises an intriguing question …

Organizations’ growth rates are in principle limited by their ability to win and retain key resources, and we have implicitly assumed in the past that the ultimate ’scarce resource’ is customers. In market after market, firms compete to win and retain customers and to grow their purchase rate. But maybe for many firms that is an illusion? They have great products or services, can provide them at appealling prices, and have no trouble at all winning customers. But … can they attract and retain the people they need to develop, sell, deliver and support those products and services?

It would be ironic if it turned out that competitive rivalry for many firms had little to do with the demand-market, and much more to do with the market for labour supply. And don’t imagine that this only applies to the super-skilled specialists - I recently heard of a fast-food chain planning to bus large numbers of people from one region to another, and put them up in paid-for accommodation, just because they couldn’t find enough minimum-skill people to staff their restaurants.

The Economist reports that the Baltic Capesize index, which measures the cost of chartering huge ocean-going vessels used to transport iron ore and coal, has hit record highs, driven by surging demand for raw materials.

Let’s guess what happens next – construction of these vessels will surge, so new capacity becomes available just in time to overtake a fall in the very demand they hope to exploit, resulting in an equally dramatic collapse in prices. This is a well-known phenomenon in a surprising variety of industries with long capacity-expansion lead times – from office-space to insurance to petrochemicals. Hopefully, firms in these sectors are employing those ‘Chief Strategy Officers’ [see earlier post] and checking what the future might hold. 

Management and investors really do need to understand ‘total returns to shareholders’ (TRS), so all such folk would do well know how TRS really works. A better way to understand TRS would be pretty good as class 1 in any MBA strategy class too, and strategy profs [and their economist colleagues] could try explaining how their theories - largely based on crude, static profitability ratios - fit with this over-riding imperative for corporate management.

I have just come back from an academic mini-conference looking at the resource-based view of strategy [RBV]. Though this has been around for about 20 years, and increasingly dominates business-school research and teaching on strategy, it does not seem to touch the real world too much. Central to the idea is that only resources that are ‘valuable, rare, hard to imitate and embedded in organizational routines’ can contribute to competitive advantage [the VRIO criteria – don’t blame me, I didn’t make this up!]. My question is – does anyone out there in the real world actually use this concept? If so, I’d love to hear how you do it. When, for example, did anyone in a large strategy consulting firm go to a client and tell them “You know what you really need? - a VRIO analysis on your strategic resources” .. or perhaps I’m wrong and this kind of work goes on all the time?

Don’t get me wrong – I have no problem with the idea that resources are important. This is central to my own strategy dynamics approach, but these VRIO things seem way too abstract to be usable. The good news is that our little conference did seem to find some ways to operationalize the RBV and make it useful.

I see in the Economist that Starbucks will close a further 500 stores in America (in addition to the 100 closures it announced earlier this year), and reduce its workforce of roughly 172,000 by around 7%. I am still waiting for anyone in McKinsey to confirm that they stand by their recommendation for firms to grow their way out of recession – as Starbucks did in 2001-02 [see earlier post].

I recently had cause to re-read the Michael Porter classic ‘What is Strategy?’ [Harvard Business Review Nov-Dec 1996, pp. 61-78] - great of course on strategic positioning, which it contrasts with ‘operational effectiveness’, and while it describes OK the need for internal consistency in the ‘activity system’ that supports the strategy it says little about how that system actually works or how to steer its performance. … and I haven’t seen anything since that does address those issues.

I was reminded by a recent conference of the one-time popularity of the idea that strategy is ‘crafted’ by leaders, rather than planned [we can thank Henry Mintzberg for that one]. But there’s a puzzle in all this. Henry and friends got this idea by watching and talking with management about how strategy actually develops. My problem is this – just because that is how strategy is done in practice, why on earth do they think that’s how it should best be done?

A few nice articles in the July-August edition of HBR [‘Honing Your Competitive Edge’] including Amy Edmonson on the Competitive Imperative of Learning, and Anita Elberse asking Should you Invest in the Long Tail? [the idea that modern markets and distribution can support very, very large numbers of low-volume products].

This last one is critically important, because it has long been recommended [correctly] that a product range should regularly be reviewed to cut out the slow-moving, unprofitable items. Whilst this principle is not being overturned, the long tail extends massively what can be viable.