We are forever reading about great companies who have come to dominate – even define – the markets they operate in. Did these heroes get to be where they were with strategies based on ‘market forecasts’? No way – each of them spotted and exploited a potential to create a market by offering powerful products and services. Put simply, these markets are as they are today because these organizations made them that way!

Many of us routinely get involved in doing strategy studies or developing strategic plans, without any worry about what exactly we are taking part in. But embedded in this work are a whole load of assumptions about what strategy is, how it should be done, and what the product of this work should be. Take the following simplified process that is widely used for developing a strategy:

1. Assess the market and competitive environment for opportunities and threats.
2. Identify a position that promises a profit opportunity.
3. Develop a value-proposition to capture that part of the market.
4. … and then work up an implementation plan.

Something like this has been used for decades, almost without question, but it makes some big assumptions that deserve questioning.

‘The market is not an independent variable
Strange how we have fallen into this mental trap. We are forever reading about great companies who have come to dominate – even define – the markets they operate in. Airlines like Southwest or Ryanair, the eBusiness stars like Amazon, eBay, and Expedia, technology giants like Microsoft or Apple, and clever niche operations like Cirque du Soleil or Skype.

Did these heroes get to be where they were with strategies based on ‘market forecasts’? No way – each of them spotted and exploited a potential to create a market by offering powerful products and services. Put simply, these markets are as they are today because these organizations made them that way!

So if that’s what a powerful strategy looks like, how come we spend days of time and thousands of dollars trying to create, or buy, market forecasts? You might push back with something like “It’s all very well for them. They could start with a blank page, but we have to work from the business we have got.” True enough, but even there the focus needs to be on opportunity, not current reality. I recently worked with a professional service firm obsessed [and depressed] by the inevitable decline in the market for its core service business. They had given no attention either to the common opportunity in declining markets – to thrive by driving out weaker rivals – or to the emerging opportunity for value-added services that depended on the very core, low-value service they were thinking of abandoning because of lousy ‘forecasts’ for the market.

This is hardly new – I first came across the concept of focusing on ‘opportunity share’ rather than ‘market share’ in Hamel and Prahalad’s ‘Competing for the Future’. As it happened, that came out 10 years after I had done exactly the same thing when designing the strategy for what was then the most successful multiple restaurant and leisure retail group in Europe – Whitbread. Time after time, we identified opportunities to create new markets, then set out to dominate them. Of course there are some markets that are so mature or commoditized that broad-scale market trends are dominant, such as utilities or supermarkets, but even in these cases strong players like Tesco or Walmart effectively say ‘stuff the market forecast – we are going to drive growth and value.

[Sorry, by the way, to those of you who make your living from selling market forecasts!]

Success is not just about picking a ‘position’
Yes it would be nice, would it not, to find that unique place in the market where only you operate and no-one can get close. Nice, but almost never possible! Fortunately, there is plenty of opportunity, even where unique positions can’t be found. So how come this search for the Holy Grail dominates strategy development efforts?

Like many things in life, we can thank the economists for this one. Firms in an industry show a distribution of profitability levels [‘economic rents’], with typically a few outliers at the top end making super-profits, a broad mass in the middle, and a tail of weaker folk. We want to ‘explain’ why the top dogs are on top, so we look at the data we can find, and guess what – looking in from outside, all we can measure are indicators of position, such as relative prices, margins and cost fractions. Add a few more pieces of external data, like numbers of competitors, new entrants, customer-size and fragmentation and voila – you have explained superior performance in terms of ‘industry conditions’ and proved that firm A wins because it has chosen a superior ‘position’ vs. its rivals.

Unfortunately, we have known now for 15 years or more that these external factors are very weak explanations for variances in crude profitability. ‘Firm factors’ are much more significant. Translated into everyday language – you can do very well in tough industries [e.g. Tesco/Walmart, or Ryanair/Southwest], and you can mess up in ‘attractive’ industries all on your own, with no help from anyone else [Northern Rock].

There’s much more to strategy than a ‘value proposition’
One thing people don’t seem to own up to about that simplified process is that it is mostly done only once – when working out your position in the first place. Think about it – if you did a ‘positioning’ assessment and defined the value-proposition for all those stellar organizations, you find virtually no change between how those look today, last year, five years ago or, frankly ever. In other words, there has been virtually no change to their strategy – at least as evidenced by the process above.

This is anathema both to strategy academics and consulting firms who have almost made it an article of faith that strategy requires ‘continuous change’. Sorry, but on the ‘positioning’ issue, that’s just untrue. Successful organizations find and define a position and value-proposition that works and drive it relentlessly forward. Of course, they extend and adapt – Amazon extended itself from books to other high-value, low-weight products and then into other categories, added the affiliate system and so on – but its fundamental position and offer to customers is virtually identical to when it launched. Likewise Ryanair, Southwest, Walmart, eBay and the rest.

From strategic ‘positioning’ to strategic management
Let’s be blunt, then, about what most strategy studies and strategic plans actually are – they are one-off statements of position and offer – and what they are not – they are not plans for the strategic management of the enterprise. And business plans are most often little more than 3-5 year budget forecasts, with little concrete explanation of how exactly those forecasts are going to be brought about.

The management of strategy consists of the continuous stream of decisions, choices and actions taken by management that seek to improve performance sustainably into the future. Those decisions are distributed around all the main parts of the business – marketing, product development, HR, logistics etc. They are also massively interdependent. If we want to launch a product, enter a new market, or take out a competitor, then a whole stream of decisions in all these functions and more have to work together to bring about success. The extended management team needs to know what to do, when, how much and with what likely consequences for all other parts of the system. They also need to know how to adjust those choices as events unfold.

So what tools do we have to help in this challenge? Our textbooks and articles that claim to talk about ‘strategic management’ should all be retitled, because none of them show how to do this. At best they offer a chapter on implementation or a description of a typical firm’s strategic planning process. Management, meanwhile, have been getting on with their task as best they can. They use their raw intellect and experience to put together plans on what to do, and revise and adjust those plans in the light of what seems to work or not, but they don’t get any help from the books, frameworks, or methods of the strategy field. Consultants too have got pretty skilled at helping clients steer strategy over time, but that knowledge too is proprietary and fragmented.

As we have seen in recent years, first with the disasters triggered by the DotCom crash and more recently with the catastrophic consequences of the sub-prime lending fiasco, strategic management is too important to be left to the chance that CEOs and their teams just happen to be smart enough to work things out for themselves. Strategy requires professionalism, and professionalism implies tools, processes and standards that are fit-for-purpose and reliable. So let’s start the search!




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Kim Warren is the author of Strategic Management Dynamics (Wiley, 2008) - www.wiley.com/go/smdand www.strategydynamics.com/smdresources.