Strategy precedes Planning

“…deliberately choosing a different set of activities to deliver a unique mix of value.” 

Michael Porter, American Academic and Author

A plan is not a strategy. A strategy is a set of decisions about the direction the business will take to create value. A plan is a predetermined sequence of activities to produce a specified result.

Let’s say you want to bake cake to sell. How would you go about it? It’s easier than you think. You obtain a recipe for a cake of your choice. Then you follow the instructions meticulously. Obtain the right ingredients, measure the ingredients out correctly, and mix the ingredients in the right order. Then bake the dough at the right temperature for the prescribed duration in the oven. If you follow the instructions, you will end up with a cake. But understanding what type of cake customers want, in what quantities to bake cake, how to best deliver cake to customers, and at what price to promote cake, requires much more than a recipe.

A plan is like a recipe. To come up with a plan simply look at what has been done before, learn and copy. Planning is about doing the same things but only better. Good planning allows your business to get onto the field. To participate in the game. To compete.

Strategy on the other hand is about winning. To create, in the words of Michael Porter, “…a unique mix of value”.

The Value Stick

Harvard Business School developed the Value-stick model to illustrate how value is created for various stakeholders. Value is subjective. From a customer’s perspective value is an indication of a willingness to buy whereas value from a supplier’s perspective is an indication of a willingness to sell.

Consider a commercial property owner, a landlord. The landlord seeks to sell retail-space to tenants. Smaller tenants will appreciate the value of a retail shopping mall where the landlord has secured large anchor tenants like a Woolworths or a Checkers store. Large anchor stores attract much retail traffic from which smaller stores may benefit. The presence of large anchor stores increases the willingness of smaller tenants to buy because of the perceived value of larger tenants in the mall.  Conversely, suppliers and service providers to the landlord are more willing to sell their services to the landlord as they perceive a shopping center with large tenants as a better prospect.

As the business owner implements a strategy that simultaneously creates value for customers, increasing their willingness the buy, and value for suppliers, increasing their willingness to sell, value for shareholders is created.

It is essential that the business leader adopt a strategy that results in value on all three levels of the value stick, the customer, shareholders, and other stakeholders. Neglect any one of these and the business will suffer.

Strategy and leadership

Managers, especially those from an employment background, are often very good at planning but seldom good at leading. It is the leader’s responsibility to craft a strategy which means doing different things differently. It’s uncomfortable. Insisting on a new strategy creates angst within an organization.

Managers enjoy planning because a plan promises a clear path to a specified outcome. Like a recipe for baking a cake, a plan is a tried and tested set of activities in sequence. Simply follow the instructions and you will get the cake.

In contrast, a strategy starts with a hypothesis, a supposition or proposed explanation based on limited evidence as a starting point for further investigation.

Somehow Steve Jobs, cofounder of Apple Inc, got it into his head that people might like to carry a small device in their pockets that would allow them to download and listen to music whilst walking, jogging, or riding their bicycles. It had never been done before. There was no recipe to bake the “cake” which later become know as an Apple iPod. There was no clear path to a specified outcome. Only a hunch, an idea, all of which based on intuition. 

From Idea to Strategy to Plan

To go from idea to coherent strategy, Steve had to ask the question:

What must be true for my hypothesis to stand?

People like technology.

People want to listen to music.

Internet access will become widespread.

People like to take music with them on a walk, jog, or cycle.

People will be willing to pay for such a device.

Only once Steve and his team had proven the validity of their strategy could they embark on formulating a plan, a set of activities in sequence to produce a specific outcome.

Strategy precedes planning. No plan will produce “a unique mix of value” if not preceded by a coherent strategy.  

Neglecting Strategy

Let’s say you are a property professional with many years of experience in your industry. You understand the game, and recently decided to start your own estate agency. Over the years you have seen what works and what doesn’t work in estate agencies. You have learned from the best and are able to design and build a super-efficient estate agency business. But you essentially do what all other estate agencies do, only you do it better, faster, and at lower cost to the customer.

What have you accomplished?

You have a very competitive business. You can outwork-, outsell-, and out-compete your competitors. But so can they. Your competitors can learn, just like you, and soon replicate better methods. You can compete on this basis, but it’s a treadmill!

 A strategy to dominate.

How is it that the overwhelming volume of groceries in South African are sold to consumers by only four grocery chains?  

·         Checkers,

·         Pick-and-Pay,

·         Spar, and

·         Woolworths

I, like many South Africans, visit grocery stores regularly and find little reason to differentiate between grocery store chains not in terms of products, pricing, or the interaction with store employees. No competitor in this field outwork, outcompete or outsell their rivals. What then explains their dominance?

On the surface the consumer sees a grocery chain but these businesses are in fact supply chain specialist. Their business is procuring, storing, and moving stock. A consumer in the Gauteng province, where seventy percent of the countries gross domestic product is produced, is unlikely to find himself at any moment any further than 2km away from one of these grocery stores. With thousands of stores nationwide grocery store chains are in a position to negotiate low cost prices from producers.

Strategy is a set of decisions aimed at occupying a position of dominance.

Conclusion

I did not set out to write a book on the topic of strategy. Many better authors have written on this topic. What I set out to do is to impress on you, an entrepreneur aspiring to develop a business into an asset of value, the importance of crafting a coherent strategy at the outset.

Don’t fall into the trap of blindly copying and then attempting to outwork competitors. There is no value in doing that apart from the immediate benefits of generating profits. Profits are important, no doubt about that. But investors, the people you want to ultimately sell your business to, don’t pay for past profitability.   

Investors seek shareholder value in a business that has somehow positioned itself to dominate a sector, geography, or market segment.