This article continues a series on interpreting strategy documents. It will give you a framework for determining if the scope of a strategic initiative is correct by identifying three types of strategy (see the graphic), and indicating how the definition of the business model can affect the scope of the strategic initiative. You need to understand business models:
- When you are leading a strategic initiative for executing a corporate-level strategy, you are creating a new business model
- When you are leading a strategic initiative for executing a business-level strategy, you are improving several or all of the nine elements of a business model
- When you are leading a strategic initiative for executing a functional level strategy, you are optimizing one or more of the nine elements of a business model.
The word strategy is ambiguous in many ways, not the least which is the distinction of corporate-level strategy, contrasted to business-level strategy, and functional strategy.
This kind of strategy is concerned with market definition: what businesses and markets do we want to be in? A strategic initiative might be launched to answer that question, or more likely to realize the strategic intent of a new chosen business or market.
The Red-Ocean-Blue-Ocean metaphor has been popular over the last few years. A red ocean is a market where competitors bloody each other up fighting for market share. A blue ocean is an emerging, growing business arena; potential competitors have not yet identified it and the opportunity for success is large.
An example of corporate-level strategy: The February 2011 announcement an alliance between Microsoft and Nokia Corp. The alliance involve Nokia will produce phones running Windows Phone 7, a recognition that Nokia’s investment in its own operating system has failed. The alliance gives Microsoft access to the world’s largest phone maker and its huge mindshare—in many developing nations a mobile phone is known as a Nokia. The deal with Microsoft gives both Nokia and Microsoft a route to the future in the smart-phone market.
This kind of strategy is concerned with succeeding in chosen markets.
An example of a business-level strategy was Domino’s Pizza Turnaround which required all areas of the organization to pull together to achieve a simple understandable business goal: have a clear win against competitor in a taste test.
This kind of strategy is concerned with making improvements to business functions that support business and corporate strategy.
Functional strategy include IT strategy, marketing strategy, IT strategy, human resources strategy, and operations. Typically, documents portraying functional strategy will list estimates and plans for operating expenses, headcount, and continuous improvement.
As implied by the graphic, functional-level strategy is the foundation that supports both corporate-level strategy and business strategy. Many strategic initiatives are simply the implementation of functional strategies, but often a strategic initiative straddles numerous functions and businesses.
An example of functional-level strategy: In 2008, Swiss Life Group, a Zurich-based insurance company (ranked #373 on the Fortune Global 500 list) announced a change in its Information Technology functional strategy priorities. The implications of this was a decision to considerably scale back the number of IT projects in order to reduce costs through re-prioritization. This was successful as shown in this November 2010 announcement,
“Swiss Life increased its net profit in the first half of 2010 over the prior-year period from CHF 139 million to CHF 269 million. This improvement is mainly attributable to the significant operational progress made.”
What is a Business Model?
The nine elements are identified in the boldface font below.
A business model is a strategic management tool that managers use to describe the creation, capture, and delivery of economic value, commonly called the value proposition. You can understand the value proposition as the answers to (and optimization of) these two questions:
- Where does the money come from? What are the revenue streams?
- Where does the money go? What is the cost structure?
For more on this, see Osterwalder’s Business Model Canvas (you can find numerous illustrations with on images in your favorite search engine). The canvas includes the two above questions on cost and revenue and adds seven others elements (key partnerships, key activities, key resources, customer relationships, customer segments, channels).
One Reason Why Strategy Execution Flounders!
I don’t think that you’ll get too much argument that the priorities for selecting strategic initiatives should be in this order:
- Strategic Alignment
- Business Value
- Resource Availability
The problem occurs when managers miss the nuance about the three types of strategy and make too many assumptions about strategic alignment and the scope of change that is needed to (or within) the business model. Too often, project portfolios are driven by less-strategic priorities such as ROI (a business value metric) or resource availability.
Two examples of poor understanding of strategic alignment. Google could have captured the social networking space before Facebook came along, but missed that opportunity. Sony could have easily beat Apple to the digital music distribution market; but the strategic initiative leader reported, “I just didn’t understand the significance of the opportunity.” Clayton Christiansen has earned a reputation for his work on explaining disruptive innovation where companies continued to operate with old and entrenched business models instead of recognizing the appropriate use of “strategy innovation.”
An example of prioritizing resource availability over strategy. I saw a strategic initiative where the program manager’s top priority was keeping programming staff utilized, rather than meeting the value proposition. The initiative was cancelled after burning through several million dollars and delivering no value to the organization.
Business Model Innovation
When we are considering strategic initiatives, we are more concerned with what Fortune Magazine (June 13, 2011, page 27) wrote,
“In the good old days, a strong business model lasted for decades. No more. CEOs in almost every industry will have to innovate at their business’s deepest level.
This isn’t just theory and semantics! You need to have a working knowledge of concepts if you are going to accomplish a vision. Do you agree?
- Two Tools for Describing Strategic Context (Strategic Thinking Part 3) (leadingstrategicinitiatives.wordpress.com)
- Growth as a Strategic Initiative (leadingstrategicinitiatives.wordpress.com)
- How to Energize Strategic Initiatives with Outcomes (leadingstrategicinitiatives.wordpress.com)