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Why do Companies Need a Good Business Strategy?

By Jon Sawyer on 28/09/2017 - 0 Comments

Michael Porter (The E-Myth) describes the journey most entrepreneurs go through as they charter the course of their business.

He describes the process as the owner becoming focussed on the operational aspects of the business (becoming a ‘technician’), which can be to the detriment to developing sound business strategy.

Michael Porter (Competitive Advantage) goes further as he argues that having a sound operational strategy is simply not enough. Companies must be flexible if they are to respond to the needs of an ever changing market place, and must develop core competencies if they are to stay ahead of the pack. They must not just focus on being operationally effective. Faced with this, what are the ingredients of good business strategy and why is it so important?

Being operationally sound should be a pre-requisite of any business. Simply to focus all efforts on having operational effectiveness is essential to any business, but will not in itself set it apart.

For the past decade managers have been focussed on making small improvements in operational strategy and this has heralded the rise of programmes such as TQM and BS5750. Many companies have adopted such approaches and so any potential marginal gains against those of competitors may be nullified.

The result of such myopic focus is to even out any potential advantage for any specific operator as all face static or declining prices and pressure on costs that compromise a companies’ ability to invest in the business in the long term.

Porter argues that being operational effective is a pre-requisite to business. In essence, as the gap in operational effectiveness narrows, companies are unable just to compete on the basis of only quality and price – they must adopt a more balanced strategy.

What is the Essence of a Good Strategy?

Having a good competitive strategy is essentially about being different in some way. For example, EasyJet offers short-haul flights, based on a low cost fares whereby the whole operation is geared to fast turnaround times, and no frills so that they can keep their planes flying longer each day. Its customers include business travellers, families and students.

The strategic positioning for EasyJet is in terms of price and convenience for travellers, but their competitive edge is in the way they combine their activities to make this work.

This is why BA and other ‘full-service’ carries cannot compete profitably in this sector.

Finding a strategic position is about finding a market niche that a company can service profitably. A good example is in the furniture retail sector where companies specialise in supplying a specific type of product e.g. World of Leather and Oak Furniture World. Others such as IKEA have found an edge by offering a range of home furnishing items of good design and function, excellent quality and durability, at prices so low that the majority of people can afford to buy them.

The competitive edge that IKEA then has is the way that it combines its activities to deliver this. They offer a vast choice but merchandise a limited product range in massive retail units and product is gathered in store in flat pack units and assembled by the customers. Porter calls these areas activity systems and says that these are at the heart of effective business strategy.

It is important to recognise that the differences in customer need (e.g. price) do not translate into a meaningful competitive position unless the best set of activities to achieve this are compatible. If this were not the case then every competitor would be able to meet the same needs.

Why do Companies Fail to Have an Effective Strategy

Business owners are faced with many choices and this impacts decision making as they try to eradicate any perceived loss in competitiveness. This may lead to them imitating everything about their competition which has the effect of damaging their own competitive edge. This is where often competition becomes the race to the lowest price.

Porter argues that effective business strategy delivers sustainable business advantage and is based upon the combination of the following:

It is leadership that is the vital ingredient to drive the review of strategy. Most companies owe their initial success position to a unique strategy position that will be copied by competitors over time.

The key challenge is to start over, and review which products and services are the most distinctive and profitable and to build the strategy around this as a hub.

Failure to develop a sound strategy will run the risk of having a ‘cookie cutting’ approach to business where the chances of long term sustainability and profitability are at risk.

To ensure you are taking the *correct* approach - speak to your local Icon Advisor. 

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