The Role of Strategy. What Makes a Strategy Successful?
A simple definition of the term strategy indicates that these are the means by which companies achieve their goals. The word has been originally used in the military and more recently adapted for use in business. It descends from the Greek expression stratēgía, meaning “general ship” or commanding an army. Both armies and companies need strategies in order to use their resources in the most effective way and to establish a favourable position.
Over the past five decades the business environment has changed dramatically and continues to evolve at a really fast pace. It is also less predictable than ever before, which makes analytical reasoning and strategic positioning even more important today.
Most strategies applied by companies that are successful have four elements in common:
- They are based on goals that are simple, consistent and long-term;
- The goals that the company wants to achieve have been formulated after a deep analysis of the competitive environment;
- They objectively take into consideration a company’s resources and exploit them in an effective manner;
- And finally, the people responsible for achieving these goals are strong willed and have solid decision-making capabilities.
Michael Porter, the American professor at Harvard Business School who has influenced the business world more than any other academic and revolutionized the concept of Strategy, says that “Strategy is about making choices; it’s about deliberately choosing to be different”.
That’s quite straightforward, isn’t it?
And yet so difficult to achieve. There are thousands of companies competing for a place under the sun, but only few of them manage to come up with original ideas and be different.
Zara, the world’s largest clothing retailer, is a typical example of how different Strategies can lead to success. Founded in 1975 in Spain, the successful retailer now runs over 6,500 stores in 88 countries. Its founder, Amancio Ortega, is the third richest man in the world according to FORBES. So, what makes the company’s strategy so successful?
Zara changed the fashion industry by breaking up the biannual cycle of fashion. Its designers need only three weeks to have an item in stores, starting from concept to reaching the stores shelves. While other fashion retailers prepare their collections six months in advance, Zara locks approximately 50% of its stock by the start of the season. In this way if a new fashion trend appears the company can immediately react and quickly produce what customers really want and look for. On the other hand, if there is no demand for a certain item, Zara can simply discontinue production. Low levels of stock and a frequently updated offering reduce the company’s risk. Moreover, this makes customers want to visit Zara shops frequently given that the collections are changed relatively quickly. Another key element in the company’s strategy is that Zara produces its clothing mainly in Spain and in Europe, where we can find the large portion of its retail stores. This enables shorter lead times and faster replenishing of stock, with turnaround as short as two weeks. Higher production costs are offset by the reduced amount of money that the company spends on advertising. This is a strategy model that is original, hadn’t been implemented before and a true success story.
Things aren’t always as rosy, though.
In some cases, companies make wrong strategic choices and struggle to adapt to a changing environment.
Kodak, is a well-known example of a company that was not able to adapt to the changing business circumstances. In the late 19th century, the American company invented the roll film, which easily replaced the old photographic plates. The company was perceived as an emblem of the industrial innovation in the US. Kodak was a leader in a market it had pioneered. Sounds great, right? For many years, Kodak dominated the photography market, and was the leading company in this industry. However, about 20 years ago, film photography started to decline, and Kodak made a losing bet. The company did not capture the potential of digital photography on time, and instead focused on investing capital in new technologies for taking pictures with mobile phones.
Now in retrospect, we can definitely say that Kodak did not invest in the development of digital cameras as much as it should have. But other companies did. Japanese companies such as Canon, renowned for their market innovations quickly embraced digital photography. Kodak failed to recognize that the competitive environment was changing and underestimated the importance of digital photography. Such strategic mistakes are more than costly. The company filed for bankruptcy in 2012.
The two stories we examined here, are good examples of the importance of Strategy, and it’s no coincidence that the Strategy module is the first one in this course. These are some of the most critical decisions a company needs to make. They are as important as having the right direction is for a ship in the ocean. If you don’t sail in the right direction, it is very unlikely that you will get where you want to get. It’s the same with companies – excellent strategic decisions are what gets you where you want to be.