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Xavier Van de Lanotte

[March 23, 2004]

The Strategy Corner


What’s In YOUR Strategy? Shaping Up The Competitive Advantages

The new calendar year is underway and the numbers for 2003 are in. Despite recent trepidations, Wall Street is making its bets on corporate plans for 2004 and beyond with optimism so far, believing that the worst of the latest recession is now behind us. Investors believe that there is a new wind powering up the sails of the economy and are shifting their portfolios accordingly. Yet, Wall Street is NOT the economy, but merely a reflection of the expectations investors have of it. And while we should applaud the improvement in corporate results, we shouldn’t let our enthusiasm get carried away without grasping how the trend will be sustained.

You may wonder what this has to do with corporate strategy. Strategy is about understanding the bigger picture surrounding the corporation and, within that broader landscape, guiding the corporation through the proper steps in order to achieve an expected outcome. Thus, it is my intention in this article to first take a look at what may be behind the positive uptrend. Companies should take heart in the numbers, but must realize that in the end, they are fueling the engine of the economy. An understanding of what is occurring in the economic environment hopefully will reveal the current opportunity they have at hand. Next, I will provide some guidelines that every company should follow in assessing their strategy: To contribute to the prosperity of our economy and to win within their respective competitive environment; and to develop the proper foundation for successful execution of their strategies.

Though corporate results are up and GDP has risen on average by more than four percent for the year in 2003, the jury will be out for quite some time to determine whether we are truly recovering from the economic slump. To sustain growth, two fundamental things need to occur: (1) Disposable consumer income needs to rise and (2) New products and services need to compel consumers to open up their wallets and increase spending. With lack-luster employment figures and the current focus of corporate restructuring initiatives, we may fall short of the necessary ingredients to an expedited recovery.

So far, much of the economic stabilization and the consumer spending increase have been carried by the government’s actions to vote into law temporary tax relief packages and the Federal Reserve’s cut of the prime interest rate. These actions have freed up disposable income through tax savings, lowered mortgage payments, cash-out on the refinancing and reduced interest payments on credit cards and other big ticket items. Though quantifiably significant purchasing power has thus been unleashed, its marginal contribution to future growth stimuli is limited as we run out of opportunities to further cut taxes and the Federal Reserve Chairman, Alan Greenspan, is more likely to lean toward hiking up the rates rather than further lowering them. According to the National Federation of Independent Business’ survey for February, average selling prices picked up, signaling some inflation pressures. Furthermore, if in fact we deal with a protracted recovery, future growth may be hampered by the need for consumers to increase marginal savings to compensate for pension plan losses and other personal wealth squashed by the 2000-2002 market downturn.

Another source for the positive GDP and earnings trends is the tepid resurgence of corporate spending that may have more to do with forestalling extreme obsolescence and decrepitude of current corporate infrastructures than with investing in future business models and growth opportunities. Much of the spending so far is merely catching up with some expenditure in productivity improvement and IT upgrades that were halted after the first signs of market weakness appeared. And although there is definitely opportunity for stronger demand levels in corporate spending, the outlook for 2004 is cautious at best. We must also note that government and military spending significantly increased since 2000 and added to the positive numbers, but these sources of spending are typically unsustainable long-term growth contributors.

Our greater concern to get us through the recovery phase and into a new growth trend seems to reside in the ability for corporations to play their part in stimulating the economy. So far, and understandably so I must admit, corporations have taken a very defensive approach by focusing much of their energies on cost cutting and restructuring. Due to the uncertainty of future demand and the turmoil in the corporate and financial spheres, companies are sometimes given little choice but to drastically slash their cash outflows. With it, invariably a certain degree of downscaling of the capabilities occurs, and may cloud the future goals and vision. Priorities, organization, objectives and budgets need to be revisited to help corporations cope with the times. Yet as drastic as the downfall began this time around, I believe that companies must now be as diligent in reversing that course with a renewed energy for growth strategies in a post-depressive environment.

What defines a post-depressive era is a general lack of direction and conviction as to when the opportune time to start hiring and invest in new growth and innovation strategies is. In times of growth, hiring decisions are easy to make; demand is on the rise, new people come on board and new innovative approaches and new product developments pay off. In times of depression, the relief valve is layoffs; demand sinks, capacity and inventories build up, the hemorrhaging must be stopped and innovation is usually stalled. At the peak of an expansion period, companies are at risk to overextend themselves. By failing to recognize the signs of a downturn, they could endure harsh consequences when the results of their innovation efforts fail to materialize. At the bottom, the mood is generally grim, the organization is chaotic and the resources and motivation tend to lack in order to effectively jolt the organization to recommence a new ascent.

Inaction and lack of preparedness when the economy starts picking up can be detrimental to businesses as well, locking companies into a downward spiral when by contrast their competitors emerge with improved value propositions. History has shown that it is at such moments of economic upturn that companies encounter their greatest opportunity for shaping their future direction and determining their capacity for success. Small start-ups have grown into giants, while former giants’ empires just wilted away.

In the current economic environment, long-term survival is not going to be granted to companies that are satisfied to just scale back operations and wait until the economy has recovered to make their move and deploy new growth strategies. The responsibility for the economy to resume its growth sits with the corporations that must actually start hiring people, build up their creative and organizational capabilities and go out to the market to execute new growth plans with new product and service offerings. Today’s competition intensity is too fierce, both amongst corporations as amongst nations, for bystanders to have a chance at recovering from a late start. The competitive advantages will lay with first movers and those that have the proper foundation to seize the future growth opportunities. They gear up their organizations, create exciting and innovative new products, stimulate demand, spur GDP growth and job creation and lead Wall Street higher.

While strategy deals with “how to lead a corporation into the future,” it constantly gets influenced by events in the present. A common misconception about strategy is to think about it as a mere collection of long-term plans. Another misconception is to think that strategy formulation should only concern itself with current and future environmental factors. Many well thought out strategies have failed because they were based solely on those principles. What these strategies lacked was a plan to take the current organization and progressively transform it to meet the requirements for the future.

The foundation of the corporate strategy is the current state of the corporation itself. What goes into that foundation is the basis for your competitive advantages and is not merely as constant as you may believe it to be. The foundation of the strategy is supposedly embedded in the corporate philosophy, mission and vision statements. Yet, this is only as effective as management succeeds at having the organization embrace these concepts and apply them toward meeting the corporate objectives.

To maximize the effectiveness of strategies, four elements characterizing the state of the corporation must be dealt with in the current timeline to ensure successful accomplishment of the long-term corporate goals: customer value, future vision, organization, and technology. For each, corporate strategists must establish guidelines, goals and objectives along three dimensions: Baseline, process and congruence. As we’ll describe these concepts below, it should become clear that in today’s competitive environment corporations can’t just buy their way to success, they must actively create (and invest in) their own future.

Customer Value
Do you remember when you described your company as a manufacturer of a product (or as a service provider) and that your competitive objectives were to implement JIT and zero defect? Well, today this is still necessary, but no longer sufficient. In the current competitive environment, companies are asked to create positive customer experiences. The relationship with the customer must stretch beyond delivering quality products and services at a fair price and increasingly contribute to making customers’ lives better. The service and value components of corporate offerings move increasingly away from the core product and warranty components. Customers expect their suppliers and providers to become accountable for the outcome of the solutions they provide and lower their total cost of ownership. Hence, companies must learn from the customer value chain what the nature of the relationships of their products and services with the customer environment is and manage those relationships to unleash maximal value.

Part 2

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