STRATEGY VS OPERATIONAL EFFECTIVENESS – ARE YOU CLEAR ON THE DIFFERENCE?

Author: Dominic Monkhouse

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Step back for a moment.  Imagine you’re looking at your industry as a whole. What do you see?  My bet is a whole host of companies doing roughly the same thing.  With no discernable differences between them.  Yes, some may be more profitable.  Others might offer slightly different services or products.  But, by and large, it’s hard to tell them apart.

This is called strategic convergence and it happens when you focus too much on operational effectiveness at the expense of strategy.  You see one of your competitors doing something, so you copy it.  They in turn copy something that you’re doing. A third company notices this activity and copies both.  Over time, instead of having a map with companies widely dotted around it doing different things, the activities converge.  Staff move from one to another, products and services lose any differentiation, the cost to deliver is the same and there’s no sustainable competitive advantage in the marketplace.

We see this often in the businesses we coach.  They tell us they have a strategy. We delve deeper and discover an Excel spreadsheet with a basic business plan.  What they need is a business model based firmly on a differentiated strategy.  However, when we start discussing strategy, many of the things they suggest as strategic elements are actually around operational effectiveness.  It seems it’s hard to tell the difference.

So how about you?  Are you clear on the difference between strategy and operational effectiveness?  Because one thing’s for sure.  If you’re not, it’s unlikely that you’ll achieve the growth you crave.

What is operational effectiveness?

Operational effectiveness is all about achieving or extending best practice.  Fundamentally, you’re in business to generate a surplus.  So, it follows that to do this, you need to be more effective. Always looking at the things that cost you money and finding ways to do them more efficiently. Anything that drives cost out of your business can be reviewed.

And of course, it’s relative to your competitors.  You can look at any company that looks like yours and use their example to improve your operational effectiveness.  Examining how, why and what they do to find ways of doing it better. Or you can push best practice, becoming the most efficient business in your industry or creating a new process that’s transformational.

And what is strategy?

The art of creating strategy, or effective strategic positioning, boils down to creating a unique and sustainable competitive advantage.  You’re trying to create a willingness to pay in your customers because you’re different from your competitors, offering a unique mix of value that’s more desirable.

Strategy is the context of why you’re doing what you’re doing. And all too often, you see examples where this context is missing and it makes no sense. Like the time I travelled to Bulgaria for a staff Christmas Party back when I was MD of Peer 1.  My wife and I checked into an Apart-Hotel. You know the kind.  The best bits of a hotel crossed with a luxury apartment. Except it wasn’t like any Apart-Hotel we’d stayed in before. Some bits were as you’d expect – lovely bed, luxurious bathroom etc. But on closer inspection, we found the kitchen only had cupboards.  With nothing inside them! There was no cooker, no fridge, no sink and no crockery.  It was obvious that the people who designed it had never been to an Apart-Hotel in the US or UK – they’d just copied the look from photographs.  This still makes us chuckle today.  But it’s a great illustration of copying something and not understanding the strategic context.

Operational effectiveness without strategy

It’s pretty common for companies to see others succeeding in their space and copying them.  But, like the Bulgarian designers, there’s no understanding of the strategic context underlying their competitors’ business decisions.  They see a new approach and think, ‘Brilliant! Let’s introduce it’ without any consideration of their own core customer or brand identity.  Take the disastrous introduction of Continental Lite by Continental Airlines.  They were threatened by the growth of the budget-focused South West Airlines. So they copied their model without understanding that it was an integrated system based on a different set of core customers.

Continental tried to bring in the fast turnaround times, point-to-point and single aeroplane model that had been the hallmark of success for their competitor. But because Continental Lite wasn’t completely separate from their main brand, it broke some of their core business model.  For example, they had to change what they paid travel agents in commission and they lost a load of money by continuing with baggage handling.

As brands, Continental and South West Airlines were completely different. Crucially, they were aiming at completely different core customers.  When they introduced Continental Lite, it didn’t sit well with customers who were expecting a certain level of service.  They’re not the only airline to make this mistake.  British Airways had a similar disaster with its ill-fated ‘Go’ low-cost experiment.

The productivity frontier

The graph above, designed by Michael Porter, sums up why operational effectiveness without a differentiated strategy will fail to provide sustainable profitability. On one axis you have value to the customer and the other your cost position relative to your competitors. Operational effectiveness pushes you towards the productivity frontier (which is the state of best practice) and your strategic positioning decides where on the frontier your business is going to live. When businesses copy each other, they all end up in the same place.

However, when strategic positioning is part of the mix, you may, for example, consider reducing your cost to bring you further down the arc.  Or maybe you improve your product/service resulting in a greater willingness to pay, which takes you further up.  Either way, you need to decide where you’re going to play in your market. And the bits of execution that you should focus on are those that enable this strategy.

A good way to illustrate this is to imagine you’re selling a laptop.  If the customer has a desktop, they’re likely to be willing to pay for a lighter weight, lower-powered hard drive.  But they wouldn’t want to pay for cooling and size. Trying to sell the same hard drive to people with a different set of needs is pointless.  There’s a cost there that your ideal customer won’t care about or want. So the product needs to be designed to suit the core customer.  You need to be completely clear about what segment of the market you’re going to serve.

Finding competitive advantage

Competitive advantage is all about being more profitable, generating a large surplus from your activities. And in order to be more profitable than your competitors, you have to have a strategy that’s unique and sustainable.  There are a series of things you can do to take you and your team on a journey of discovery, coming up with a plan that everyone buys into. I’m going to expand on this series of interconnected activities in future blogs, but together, they will give you a unique position in your marketplace.

Firstly, you need to look at your current strategy. Some elements might already be hard wired into your business. It’s important to recognise what these are. There may be a set of core beliefs that are fundamental and when we look at the culture canvas, we surface these and agree that they’re not going to change. Because of the management team that you have, they’re not shifting.   Without this acknowledgement, there’s a danger your new strategy might deviate too much. Then it would be impossible for the organisation to follow through.

We see this in the tech businesses we coach.  Are they a product or service business?  Is customer experience important or not?  Sometimes not everyone agrees. The business has got bigger and hired new people who don’t necessarily share the core beliefs of the founders because they’re not explicit. Alarm bells ring. There’s going to be inherent tension in the Exec team around the strategic planning process. Far easier to navigate this if you get these things out in the open at the beginning.

Then there’s a great set of great tools we use to define your new strategy. We map out the core and supporting activities in your firm, work on identifying your core customer and get clear on the barriers that might stop you from making this strategic shift. More on this later, but the emphasis will always be on finding a competitive advantage.  This is the one thing that will set your business apart – whether it’s your prices, culture, product design or customer loyalty.

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Ultimately, businesses need to master both operational effectiveness and strategy to grow.  It’s about trade-offs. Learning to say no when something doesn’t fit with your strategy.  This is harder than saying yes to things that take you in the wrong direction.  It’s why companies hit strategic convergence – people say yes too often. Without strategic positioning as a context, it can really hold them back.