Strategic Thinking for the Finance Professional

Strategic Thinking is an extremely valuable competency that any finance professional worth her salt should have. As a strategic thinker, the finance professional operates not just as a business partner, but as a trusted advisor. Here, her input shapes strategic decisions and strengthens operational effectiveness. This input is often supported by robust financial analysis that produces the data-driven insights business leaders need to successfully navigate the competitive landscape. But to get to that level, she must first understand what strategy is.? Its aim is to achieve for the business, a market position that delivers a competitive advantage vis-a-vis rivals, i.e. to establish a strategic position for the business. Harvard’s 10 Must Reads On Strategy described this strategic position as having three legs:

1.?Formulating a unique and valuable competitive position that involves performing a different set of activities or performing similar activities in different ways from rivals.

2. Making trade-offs in competing; choosing what to do as well as what not to do.

3. Creating and strengthening fit among the activities chosen, with the activities mutually reinforcing, making it difficult for competitors to imitate the system of activities.

With the first leg, the activities chosen are the ones that go into creating, producing, selling, and delivering a product or service that produces a competitive advantage to the business; creating a unique and valuable strategic position. An example is IKEA, the Swedish furniture retailer which designed its activities to target a subset of customers, i.e. cost-conscious young furniture buyers less concerned with wide product choices and high service levels, but more attracted to low-cost product offerings with self-service pickup, delivery and assembly. Thus, the essence of strategic positioning is to choose activities that are different from those of rivals (Porter et al 16).

With the second leg, strategic positioning requires making clear trade-offs. It is the place for defining uniqueness, which includes choosing what to do and what not to do, such as which customers to pursue, which customer needs to serve, and which features to offer. The example here is Southwest Airlines. It managed its myriad activities of fast gate-turnaround, serving no meals, providing no seat assignments, and serving only select routes that offered its customers higher convenience and lower fares compared to its rivals. When one such rival, Continental Airlines, tried to imitate Southwest by offering strip-down service on some routes while maintaining full-service on others, it failed miserably. The activities required to service both types of routes were incompatible with one another, rather than re-enforcing and complementary. ?The lesson learned is that a successful strategic position is not possible unless trade-offs are made. Continental needed to choose whether to provide full-service or discounted service, not both (Porter et al 17).

This concept also applies to choosing a customer segment rather than pursuing all customers at once. The late Jack Welch, former CEO of General Electric, advised on making such choices: If a business cannot compete effectively in a segment, by being number one or number two in that segment, it should exit that segment. I recalled an initiative I worked on as the finance lead where we took that advice to heart. Given the strategic position of two of our competitors in a particular drug franchise, the analysis showed that it was better for the company to divest the ??portfolio of products in that franchise and instead redeploy its resources to other franchises more aligned with its capabilities. Michael Porter’s research also supported our conclusion, “finding a new strategic position is often preferable to being the second or third imitator of an occupied position” (Porter et al 27).

In addition to choosing the correct set of activities and making trade-offs, the business must have a seamless integration of these activities. With this third leg, the business must be able to combine and perform effectively the many activities of serving its customer needs, thereby creating a strong fit among the activities. Together these activities give the business a competitive advantage, grown out of the entire system of activities that fit together and complement one another well. This fit makes it difficult for individual activities to be decoupled from the system and be copied, as Continental found out the hard way when it tried to imitate a portion of Southwest’s system of activities (Porter et al 21).

Once a strategic position is established, to ensure growth and sustainability, a business should next seek to deepen and strengthen that position. Deepening a strategic position involves making the activities more distinctive, strengthening the fit among them, and leveraging them to penetrate adjacent markets or segments where the activities provide a distinctive advantage. It should not be a process of simply adding features, products, or services in a market or segment where the business does not hold a distinctive advantage. ?Instead, the business should offer features or services it already performs at an advantage, and which rivals would find difficult to emulate (Porter et al 33). In addition, it should wrap that advantage into an innovative business model, squeezing even more juice out of that competitive position.

?As an example, Apple, foremost a computer company, leveraged its computing technology into adjacent offerings such as the iPhone (essentially, a mini-computer) and the iPod, its digital music player.? In addition, it wrapped its offerings into a great business model, squeezing even more (apple) juice from its computing technology. For example, what is not well known is that Apple was not the first to bring digital music to market. Diamond Multimedia introduced the Rio in 1998 and Best Data introduced the Cabo 64 in 2000. Both were quality products, but it was the iPod that dominated that space, primarily because Apple was able to leverage its distinctive computer technology into the adjacent digital music market and further wrapped it into a great business model. ?Borrowing from Gillette’s strategy of “giving away” razors in order to sell blades, Apple “gave away” low-margin iTunes music to lock in purchases of high-margin iPods, squeezing even more juice out of its technology (Porter et al 103).

Strengthening and extending one’s strategic position can be greatly enhanced by operational effectiveness. While strategy is about combining activities, operational effectiveness is about achieving excellence in individual activities. It means performing these activities better than rivals--faster or with fewer inputs and defects. It’s a means of making the strategy even more effective. The two work together to maximize the competitive impact of the business.

To elaborate, by itself operational effectiveness can be easily copied by rivals, leading to what Porter called competitive convergence. This is where everyone in that market segment copies each other’s best practices, moving the entire segment onto the productivity frontier, defined as the maximum value a company can deliver at a certain cost, given available technology, skills, and management techniques (Porter et al 3). Such a practice produces absolute improvement in operational effectiveness, but relative improvement for no one. It is strategic positioning that produces real differentiation, though operational effectiveness cannot be ignored.

With these two elements working together, however, your business will be a force to contend with. This is where partnership with a finance professional as trusted advisor can bring a lot of value. ??

References:

Porter, Michael E. et al. HBR’s 10 Must Reads On Strategy. Harvard Business School Publishing Corporation, 2011.

Bower, Joseph. “Jack Welch: General Electric’s Revolutionary.” Harvard Business School, April 1994.