You’ll commonly hear that formulating a Vision – “What do you want to be? BE INSPIRED!” is the first step of developing a strategy. The only sensible response to that can be that these authors live in la-la land. If your company is a furniture producer and you set as your new Vision to build the world’s first flying car, this can only be described as certain economic suicide. We all understand this intuitively – yet management gurus across the web and beyond will skip right past all opportunities to gain understanding of your company’s concrete opportunities and limitations in order to jump straight to Dreaming Big™.
So let us remind you of what we wrote last week: business is war. The reality is that enemies lurk everywhere, the battlefield is ever-changing, and the conditions outside (and even inside) of your territory will tend to be hostile. If you can’t get a grasp of the lay of the land, learn who your enemies are – their strengths and weaknesses included – or even begin to understand whether you are a battleship, an infantry unit, or a jet plane at heart, forget about conquering a market. Those who own it do so for a reason, and if you don’t know what you’re doing, they’ll be plenty capable of defending it.
In the real world, strategy can only start with setting a direction. What is your position, and what are you trying to achieve? Are you defending a market you’ve already conquered? Or are you aggressively breaking new ground, attacking a major competitor? What are the challenges you’re likely the encounter along the way, and how do you plan to address them? What are the environmental conditions of the ‘battlefield,’ and how might they change during your ‘march’? If your head is in the clouds, you can talk about “vision” all you want, but clouded vision might just lead you off a cliff. Too many companies don’t realize they’re at war until it is too late and they have been thoroughly outmaneuvered. For that reason, the first step can only be analysis; plain old, down-to-earth reasoning. Clear a path before you move.
This analysis is going to cover three distinct but interconnected areas:
- The environment in which you operate
This may be addressed through a so-called PESTLE analysis, covering the Political, Economic, Social, Technological, Legal, and Environmental context of your business. Compare this to the environmental conditions of a military operation. Some of the greatest military strategic failures in recent history were due to inadequate environmental analysis – consider the American army’s difficulties fighting in the dense jungles of Vietnam.
To give an example of why this is important, think about Uber’s legal troubles. Uber and other companies operating on its “platform economy” model operate on contentious legal grounds; thus, they must have a detailed understanding of the labor law and political conditions of any country they seek to expand to. Just last year, Uber suffered a setback when Germany banned its ride-sharing service, set a fine of 250.000 euros per violation of the order, and required the company to invest in commercial taxi licenses for its drivers. Obviously, a company like Uber – whose investors appear determined to throw huge amounts of money at it – could weather the storm. But not every company is going to be so resilient; could you afford to lose a billion dollars this half year? It’s better to not face unpleasant surprises. Hence: do your environmental analysis.
- Your industry
This may sound extremely obvious – and yet it is rare to find a company who takes competitor analysis and industry trend analysis as seriously as they should. To return briefly to Sun Tzu, “If you know yourself but not the enemy, for every victory gained you will also suffer a defeat.” And yet, too many companies neglect to learn about their competitors.
As Fleischer and Bensoussan (2007) put it, many are content to rely on “informal impressions, conjectures, and intuition gained through the tidbits of information about competitors every manager continually receives.” Rigorous competitive analysis is essential to strategic direction: it is simply a bad idea to fight on your enemy’s terms. Take the example of Windows Phone: Microsoft’s ill-fated attempt to compete in the smartphone OS market in 2010. To quote a former Microsoft engineer, Balaji Viswathan:
“Microsoft on one end was trying to take on Apple on its #1 product. Apple put most of its energy on the iPhone, while phone was just among the 40 things Microsoft did. For a long time, the phone division didn’t even come into the top 5 priorities for Microsoft [with a lion’s share of attention going to Windows, Office, Online Services and Servers – for obvious reasons]. This was not wrong, but that is the reality.
On the other end, Microsoft was trying to compete with Android – with the power of Google, Samsung and the whole open source community behind it. Even if Google were selling Android as a proprietary software without other partners, Microsoft would have found it very hard as Google had its powerful range of services [search, maps, mail] to back it up while Microsoft’s comparative services significantly lag behind those of Google’s.
In short, Windows phone had to compete with two of the best tech companies in the world – one that put phones at its #1 priority and the other expertly leveraging the open source community. It was a fool’s errand. It is crazy for Microsoft to compete in phones or online services when its real strength is in the enterprise.”
Microsoft spent a whopping $7.2 billion to buy Nokia in 2014, and took an impairment charge of $7.6 billion the next year in a reorganization of its telecommunications efforts. The worst part is that all of this could have been avoided, had thorough and level-headed competitor analysis and understanding of industry trends preceded high-flying Vision Statements. As Viswathan points out, “it was a fool’s errand.” Don’t be that fool.
- Your internal environment
The most common tool for this is the good old SWOT analysis. SWOT has been criticized for being somewhat simplistic and easily conducted without rigorous thinking; see, for example, Hill and Westbrook 1997. “Brainstorming” sessions where team members contribute sometimes upwards of a hundred factors to a flip chart without any critical discussion, substantiation, prioritization, or follow-up, are as ubiquitous as they are useless. Doing SWOTs well is not half as easy as the simplicity of its model suggests. Our view here is that SWOT can be useful for the setting of strategic direction, but only if certain conditions are met.
Thus, the six commandments of SWOT analysis:
- 1. SWOT analyses shall be founded upon adequate prior understanding of the company’s resources, performance relative to competitors, and industry trends; it is decidedly not a matter of managers haphazardly throwing unfounded preconceptions onto a diagram.
- 2. Thy SWOT shall be applied comprehensively – not just on the firm/corporate level, but also on the level of specific initiatives in the context of relevant product or service markets.
- 3. SWOTs are made for multiple strategy options; after all, as Koch (2000) points out, strengths, weaknesses, opportunities and threats are only such in the context of a particular strategy. If you’re a refrigerator builder looking to expand into the kitchen stove business, the market trends in that industry will be relevant. If you’re also considering an alternative strategic direction venturing into freezers, that SWOT landscape is going to look differently. SWOTs can only be useful to help choose a specific strategic direction among others if the specific advantages and disadvantages of these options are clear.
- 4. The SWOT analyses apply to the timeframe in which your strategy will be deployed; it should demonstrate enough foresight of upcoming opportunities and threats as well as growing strengths and weaknesses to be relevant two years down the road.
- 5. Strengths and Weaknesses are not simply the good and bad qualities of your company; they are only such in relation to your competitors. “We make a great product” is not a strength if your competitors make equally great products. SWOT should give insight into factors of competitive advantage, rather than being a list of things you think you’re good or bad at.
- 6. The SWOTs are used to facilitate critical thought and discussion. If a particular factor shows up as both a strength and a weakness (for example, you have an exclusive and lucrative contract with one prestigious client, but that one client is responsible for a disproportionate amount of your business) – this is something that should be discussed in the context of various strategic options.
If you conduct these three analyses – environmental, industry, and internal – with care and attention, you should now have a solid understanding of your company’s competitive and strategic positioning. You’ll know where the environmental pitfalls might be, you’ll know where the competition is toughest and what it soft spots are, you know the tools you have at your disposal. From everything you know about the market, your competition, their products, and their competitive strengths, you’ll be able to deduce some of their possible strategic paths. Now it is time to synthesize all this information into a strategic identity and a roadmap for your company. An operational battle plan, as it were.
We’ll get to that next week in Part 2, where we’ll discuss vision and mission statements; goals and objectives. Please stay tuned – and we’re always happy to engage in the comments section if you have any questions or feedback!
 http://www.theverge.com/2015/3/28/8306157/uber-will-reportedly-pay-for-commercial-drivers-licenses-in-germany  https://www.amazon.com/Business-Competitive-Analysis-Effective-Application/dp/0133086402/  https://www.quora.com/Why-cant-Microsoft-just-take-any-useful-steps-to-save-the-Windows-Phone-platform https://www.researchgate.net/publication/262890747_SWOT_analysis_It's_time_for_a_product_recall  http://www.westga.edu/~bquest/2000/swot1.html