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-Minimum of 250 words to receive a score greater than 50% Article notes should be formatted for professional presentation Use headings, bold face type (where appropriate), bullets, and descriptions www.hbr.org Can You Say What Your Strategy Is? by David J. Collis and Michael G. Rukstad It’s a dirty little secret: Most executives cannot articulate the objective, scope, and advantage of their business in a simple statement. If they can’t, neither can anyone else. Can You Say What Your Strategy Is? by David J. Collis and Michael G. Rukstad harvard business review • april 2008 page 1 C O P Y R IG H T © 2 0 0 8 H A R V A R D B U S IN E S S S C H O O L P U B L IS H IN G C O R P O R A T IO N . A L L R IG H T S R E S E R V E D . It’s a dirty little secret: Most executives cannot articulate the objective, scope, and advantage of their business in a simple statement. If they can’t, neither can anyone else. Can you summarize your company’s strategy in 35 words or less? If so, would your col- leagues put it the same way? It is our experience that very few executives can honestly answer these simple questions in the affirmative. And the companies that those executives work for are often the most successful in their industry. One is Edward Jones, a St. Louis–based brokerage firm with which one of us has been involved for more than 10 years. The fourth-largest brokerage in the United States, Jones has quadrupled its market share during the past two decades, has consistently outperformed its rivals in terms of ROI through bull and bear markets, and has been a fixture on Fortune’s list of the top companies to work for. It’s a safe bet that just about every one of its 37,000 employees could express the company’s succinct strategy statement: Jones aims to “grow to 17,000 fi- nancial advisers by 2012 [from about 10,000 today] by offering trusted and convenient face-to-face financial advice to conservative individual investors who delegate their finan- cial decisions, through a national network of one-financial-adviser offices.” Conversely, companies that don’t have a simple and clear statement of strategy are likely to fall into the sorry category of those that have failed to execute their strategy or, worse, those that never even had one. In an astonishing number of organizations, execu- tives, frontline employees, and all those in between are frustrated because no clear strategy exists for the company or its lines of business. The kinds of complaints that abound in such firms include: • “I try for months to get an initiative off the ground, and then it is shut down because ‘it doesn’t fit the strategy.’ Why didn’t anyone tell me that at the beginning?” • “I don’t know whether I should be pursu- ing this market opportunity. I get mixed sig- nals from the powers that be.” • “Why are we bidding on this customer’s business again? We lost it last year, and I thought we agreed then not to waste our time chasing the contract!” Can You Say What Your Strategy Is? harvard business review • april 2008 page 2 • “Should I cut the price for this customer? I don’t know if we would be better off win- ning the deal at a lower price or just losing the business.” Leaders of firms are mystified when what they thought was a beautifully crafted strategy is never implemented. They assume that the initiatives described in the voluminous documentation that emerges from an annual budget or a strategic-planning process will ensure competitive success. They fail to ap- preciate the necessity of having a simple, clear, succinct strategy statement that every- one can internalize and use as a guiding light for making difficult choices. Think of a major business as a mound of 10,000 iron filings, each one representing an employee. If you scoop up that many filings and drop them onto a piece of paper, they’ll be pointing in every direction. It will be a big mess: 10,000 smart people working hard and making what they think are the right deci- sions for the company—but with the net result of confusion. Engineers in the R&D department are creating a product with “must have” features for which (as the marketing group could have told them) customers will not pay; the sales force is selling customers on quick turnaround times and customized offer- ings even though the manufacturing group has just invested in equipment designed for long production runs; and so on. If you pass a magnet over those filings, what happens? They line up. Similarly, a well-understood statement of strategy aligns behavior within the business. It allows ev- eryone in the organization to make individual choices that reinforce one another, render- ing those 10,000 employees exponentially more effective. What goes into a good statement of strat- egy? Michael Porter’s seminal article “What Is Strategy?” (HBR November–December 1996) lays out the characteristics of strategy in a conceptual fashion, conveying the essence of strategic choices and distinguishing them from the relentless but competitively fruitless search for operational efficiency. However, we have found in our work both with executives and with students that Porter’s article does not answer the more basic question of how to describe a particular firm’s strategy. It is a dirty little secret that most executives don’t actually know what all the elements of a strategy statement are, which makes it impossible for them to develop one. With a clear definition, though, two things happen: First, formulation becomes infinitely easier because executives know what they are trying to create. Second, implementation becomes much simpler because the strategy’s essence can be readily communicated and easily inter- nalized by everyone in the organization. Elements of a Strategy Statement The late Mike Rukstad, who contributed enor- mously to this article, identified three critical components of a good strategy statement— objective, scope, and advantage—and rightly believed that executives should be forced to be crystal clear about them. These elements are a simple yet sufficient list for any strategy (whether business or military) that addresses competitive interaction over unbounded terrain. Any strategy statement must begin with a definition of the ends that the strategy is de- signed to achieve. “If you don’t know where you are going, any road will get you there” is the appropriate maxim here. If a nation has an unclear sense of what it seeks to achieve from a military campaign, how can it have a hope of attaining its goal? The definition of the objective should include not only an end point but also a time frame for reaching it. A strategy to get U.S. troops out of Iraq at some distant point in the future would be very dif- ferent from a strategy to bring them home within two years. Since most firms compete in a more or less unbounded landscape, it is also crucial to define the scope, or domain, of the business: the part of the landscape in which the firm will operate. What are the boundaries beyond which it will not venture? If you are planning to enter the restaurant business, will you provide sit-down or quick service? A casual or an upscale atmosphere? What type of food will you offer—French or Mexican? What geo- graphic area will you serve—the Midwest or the East Coast? Alone, these two aspects of strategy are insufficient. You could go into business tomor- row with the goal of becoming the world’s largest hamburger chain within 10 years. But will anyone invest in your company if you have not explained how you are going to reach your objective? Your competitive ad- vantage is the essence of your strategy: What David J. Collis ([email protected]) is an adjunct professor in the strategy unit of Harvard Business School in Boston and the author of several books on corporate strategy. He has studied and consulted to Edward Jones, the broker- age that is the main example in this article, and has taught in the firm’s management-development program. Michael G. Rukstad was a senior research fellow at Harvard Business School, where he taught for many years until his untimely death in 2006. Can You Say What Your Strategy Is? harvard business review • april 2008 page 3 your business will do differently from or better than others defines the all-important means by which you will achieve your stated objective. That advantage has complementary external and internal components: a value proposition that explains why the targeted customer should buy your product above all the alter- natives, and a description of how internal ac- tivities must be aligned so that only your firm can deliver that value proposition. Defining the objective, scope, and advantage requires trade-offs, which Porter identified as fundamental to strategy. If a firm chooses to pursue growth or size, it must accept that profitability will take a back seat. If it chooses to serve institutional clients, it may ignore retail customers. If the value proposition is lower prices, the company will not be able to compete on, for example, fashion or fit. Finally, if the advantage comes from scale economies, the firm will not be able to accom- modate idiosyncratic customer needs. Such trade-offs are what distinguish individual companies strategically. Defining the Objective The first element of a strategy statement is the one that most companies have in some form or other. Unfortunately, the form is usually wrong. Companies tend to confuse their statement of values or their mission with their strategic objective. A strategic objective is not, for example, the platitude of “maximiz- ing shareholder wealth by exceeding customer expectations for _______ [insert product or service here] and providing opportunities for our employees to lead fulfilling lives while respecting the environment and the commu- nities in which we operate.” Rather, it is the single precise objective that will drive the business over the next five years or so. (See the exhibit “A Hierarchy of Company State- ments.”) Many companies do have—and all firms should have—statements of their ultimate purpose and the ethical values under which they will operate, but neither of these is the strategic objective. The mission statement spells out the under- lying motivation for being in business in the first place—the contribution to society that the firm aspires to make. (An insurance company, for example, might define its mission as providing financial security to consumers.) Such statements, however, are not useful as strategic goals to drive today’s business decisions. Similarly, it is good and proper that firms be clear with employees about ethical values. But principles such as respecting individual differences and sustain- ing the environment are not strategic. They govern how employees should behave (“doing things right”); they do not guide what the firm should do (“the right thing to do”). Firms in the same business often have the same mission. (Don’t all insurance companies aspire to provide financial security to their customers?) They may also have the same values. They might even share a vision: an indeterminate future goal such as being the “recognized leader in the insurance field.” However, it is unlikely that even two compa- nies in the same business will have the same strategic objective. Indeed, if your firm’s strat- egy can be applied to any other firm, you don’t have a very good one. It is always easy to claim that maximizing shareholder value is the company’s objective. In some sense all strategies are designed to do this. However, the question to ask when creating an actionable strategic statement is, Which objective is most likely to maximize shareholder value over the next several years? A Hierarchy of Company Statements Organizational direction comes in several forms. The mission statement is your loftiest guiding light—and your least sp ecific. As you work your way down the hierarchy, the statements become more concrete, practical, and ultimately unique. No other company will have the same strategy statement, which defines your competitive advantage, or balanced scorecard, which tracks how you imple- ment your particular strategy. MISSION Why we exist VALUES What we believe in and how we will behave VISION What we want to be STRATEGY What our competitive game plan will be BALANCED SCORECARD How we will monitor and implement that plan The BASIC ELEMENTS of a Strategy Statement OBJECTIVE = Ends SCOPE = Domain ADVANTAGE = Means Can You Say What Your Strategy Is? harvard business review • april 2008 page 4 (Growth? Achieving a certain market share? Becoming the market leader?) The strategic objective should be specific, measurable, and time bound. It should also be a single goal. It is not sufficient to say, “We seek to grow profitably.” Which matters more—growth or profitability? A salesperson needs to know the answer when she’s deciding how aggressive to be on price. There could well be a host of subordinate goals that follow from the strategic objective, and these might serve as metrics on a balanced scorecard that monitors progress for which individuals will be held account- able. Yet the ultimate objective that will drive the operation of the business over the next several years should always be clear. The choice of objective has a profound impact on a firm. When Boeing shifted its primary goal from being the largest player in the aircraft industry to being the most prof- itable, it had to restructure the entire organi- zation, from sales to manufacturing. For example, the company dropped its policy of competing with Airbus to the last cent on every deal and abandoned its commitment to maintain a manufacturing capacity that could deliver more than half a peak year’s demand for planes. Another company, after years of seeking to maximize profits at the expense of growth, issued a corporate mandate to generate at least 10% organic growth per year. The change in strategy forced the firm to switch its focus from shrinking to serve only its profit- able core customers and competing on the basis of cost or efficiency to differentiating its products, which led to a host of new prod- uct features and services that appealed to a wider set of customers. At Edward Jones, discussion among the partners about the firm’s objective ignited a passionate exchange. One said, “Our ultimate objective has to be maximizing profit per partner.” Another responded, “Not all finan- cial advisers are partners—so if we maximize revenue per partner, we are ignoring the other 30,000-plus people who make the business work!” Another added, “Our ultimate customer is the client. We cannot just worry about partner profits. In fact, we should start by maximizing value for the customer and let the profits flow to us from there!” And so on. This intense debate not only drove align- ment with the objective of healthy growth in the number of financial advisers but also ensured that every implication of that choice was fully explored. Setting an ambitious growth target at each point in its 85-year history, Edward Jones has continually increased its scale and market presence. Striving to achieve such growth has increased long-term profit per adviser and led the firm to its unique configuration: Its only profit center is the individual financial adviser. Other activities, even investment banking, serve as support functions and are not held accountable for generating profit. Defining the Scope A firm’s scope encompasses three dimensions: customer or offering, geographic location, and vertical integration. Clearly defined boundaries in those areas should make it obvious to managers which activities they should concentrate on and, more important, which they should not do. The three dimensions may vary in rele- vance. For Edward Jones, the most important is the customer. The firm is configured to meet the needs of one very specific type of client. Unlike just about every other brokerage in the business, Jones does not define its archetypal customer by net worth or income. Nor does it use demographics, profession, or spending habits. Rather, the definition is psychographic: The company’s customers are long-term investors who have a conservative investment philosophy and are uncomfort- able making serious financial decisions with- out the support of a trusted adviser. In the terminology of the business, Jones targets the “delegator,” not the “validator” or the “do-it-yourselfer.” The scope of an enterprise does not pre- scribe exactly what should be done within the specified bounds. In fact, it encourages experimentation and initiative. But to ensure that the borders are clear to all employees, the scope should specify where the firm or business will not go. That will prevent manag- ers from spending long hours on projects that get turned down by higher-ups because they do not fit the strategy. For example, clarity about who the cus- tomer is and who it is not has kept Edward Jones from pursuing day traders. Even at the height of the internet bubble, the company chose not to introduce online trading (it is Can You Say What Your Strategy Is? harvard business review • april 2008 page 5 still not available to Jones customers). Unlike the many brokerages that committed hundreds of millions of dollars and endless executive hours to debates over whether to introduce online trading (and if so, how to price and position it in a way that did not cannibalize or conflict with traditional offerings), Jones wasted no money or time on that decision because it had set clear boundaries. Similarly, Jones is not vertically integrated into proprietary mutual funds, so as not to violate the independence of its financial ad- visers and undermine clients’ trust. Nor will the company offer penny stocks, shares from IPOs, commodities, or options—investment products that it believes are too risky for the conservative clients it chooses to serve. And it does not have metropolitan offices in business districts, because they would not allow for the convenient, face-to-face interactions in casual settings that the firm seeks to provide. Know- ing not to extend its scope in these directions has allowed the firm to focus on doing what it does well and reap the benefits of simplicity, standardization, and deep experience. Defining the Advantage Given that a sustainable competitive advan- tage is the essence of strategy, it should be no surprise that advantage is the most critical aspect of a strategy statement. Clarity about what makes the firm distinctive is what most helps employees understand how they can contribute to successful execution of its strategy. As mentioned above, the complete defini- tion of a firm’s competitive advantage consists of two parts. The first is a statement of the customer value proposition. Any strategy statement that cannot explain why customers should buy your product or service is doomed to failure. A simple graphic that maps your value proposition against those of rivals can be an extremely easy and useful way of identi- fying what makes yours distinctive. (See the exhibit “Wal-Mart’s Value Proposition.”) The second part of the statement of advan- tage captures the unique activities or the complex combination of activities allowing that firm alone to deliver the customer value proposition. This is where the strategy statement draws from Porter’s definition of strategy as making consistent choices about the configuration of the firm’s activities. It is also where the activity-system map that Por- ter describes in “What Is Strategy?” comes into play. As the exhibit “Edward Jones’s Activity- System Map” shows, the brokerage’s value proposition is to provide convenient, trusted, personal service and advice. What is most distinctive about Jones is that it has only one financial adviser in an office, which allows it to have more offices (10,000 nationally) than competitors do. Merrill Lynch has about 15,000 brokers but only 1,000 offices. To make it easy for its targeted customers to visit at their convenience—and to provide a relaxed, Wal-Mart’s Value Proposition Wal-Mart’s value proposition can be summed up as “everyday low prices for a broad range of goods that are always in stock in convenient geographic locations.” It is those aspects of the customer experience that the company overdelivers relative to competitors. Underperformance on other dimensions, such as ambience and sales help, is a strategic choice that generates cost savings, which fuel the company’s price advantage. If the local mom-and-pop hardware store has survived, it also has a value propo- sition: convenience, proprietors who have known you for years, free coffee and doughnuts on Saturday mornings, and so on. Sears falls in the middle on many criteria. As a result, customers lack a lot of com- pelling reasons to shop there, which goes a long way toward explaining why the company is struggling to remain profitable. Low prices Selection across categories Rural convenience Reliable prices In-stock merchandise Merchandise quality Suburban convenience Selection within categories Sales help Ambience Wal-MartSearsMom & pop stores Customer purchase criteria* poor excellent Delivery on criteria Source: Jan Rivkin, Harvard Business School * in approximate order of importance to Wal-Mart’s target customer group Can You Say What Your Strategy Is? harvard business review • april 2008 page 6 personable, nonthreatening environment— Jones puts its offices in strip malls and the retail districts of rural areas and suburbs rather than high-rise buildings in the central business districts of big cities. These choices alone require Jones to differ radically from other brokerages in the configuration of its activities. With no branch-office management providing direction or support, each financial adviser must be an entrepreneur who delights in running his or her own operation. Since such people are an exception in the industry, Jones has to bring all its own financial advis- ers in from other industries or backgrounds and train them, at great expense. Until 2007, when it switched to an internet-based service, the firm had to have its own satellite network to provide its widely dispersed offices with real-time quotes and allow them to execute trades. Because the company has 10,000 separate offices, its real estate and communication costs are about 50% higher than the industry average. However, all those offices allow the financial advisers who run them to deliver convenient, trusted, personal service and advice. Other successful players in this industry also have distinctive value propositions Edward Jones’s Activity-System Map This map illustrates how activities at the brokerage Edward Jones connect to deliver competitive advantage. The firm’s customer value proposi- tion appears near the center of the map—in the “customer relationship” bubble—and the supporting activities hang off it. Only the major connections are shown. PRICE one-time commission TARGET CUSTOMER individual conservative delegates decisions BRANCH SUPPORT branch-office assistant PRODUCT blue chips mutual funds ONE FINANCIAL ADVISER PER OFFICE advisers run their own offices MARKETING local mailings knocking on doors INVESTMENT PHILOSOPHY long-term buy and hold BROKER TYPE entrepreneur member of community HIRE & TRAIN hire from outside industry internally train all financial advisers VALUES & CULTURE volunteerism mentoring OWNERSHIP partnership, not public COMPENSATION each financial adviser is a profit center TECHNOLOGY satellite (historically) HEADQUARTERS St. Louis home office for all activities REGIONAL STRUCTURE no regional management LOCATION rural suburban strip mall CUSTOMER RELATIONSHIP face-to-face convenient trusted financial adviser Can You Say What Your Strategy Is? harvard business review • april 2008 page 7 and unique configurations of activities to support them. Merrill Lynch. During the five-year tenure of former CEO Stan O’Neal, who retired in October 2007, Merrill Lynch developed an effective strategy that it called “Total Merrill.” The company’s value proposition: to provide for all the financial needs of its high-net-worth customers—those with liquid financial assets of more than $250,000—through retirement. While a lot of brokerages cater to people with a high net worth, they focus on asset accumulation before retirement. Merrill’s view is that as baby boomers age and move from the relatively simple phase of accumulating assets to the much more complex, higher-risk phase of drawing cash from their retirement accounts, their needs change. During this stage, they will want to consolidate their finan- cial assets with a single trusted partner that can help them figure out how to optimize income over their remaining years by making the best decisions on everything from annuities to payout ratios to long-term-care insurance. Merrill offers coherent financial plans for such customers and provides access to a very wide range of sophisticated products based on a Monte Carlo simulation of the probabil- ities of running out of money according to different annual rates of return on different categories of assets. How does Merrill intend to deliver this value to its chosen customers in a way that’s unique among large firms? First, it is pushing brokers—especially new ones—to become certified financial planners and has raised internal training requirements to put them on that road. The certified financial planner license is more difficult for brokers to obtain than the standard Series 7 license, because it requires candidates to have a college degree and to master nearly 100 integrated financial- planning topics. Second, Merrill offers all forms of insurance, annuities, covered calls, hedge funds, banking services, and so on (unlike Edward Jones, which offers a much more limited menu of investment products). Since several of these products are technically complex, Merrill needs product specialists to support the client-facing broker. This “Team Merrill” organization poses very dif- ferent HR and compensation issues from those posed by Edward Jones’s single-adviser offices. Merrill’s compensation system has to share income among the team members and reward referrals. Wells Fargo. This San Francisco bank competes in the brokerage business as part of its tactic to cross-sell services to its retail banking customers in order to boost profit per customer. (It aims to sell each customer at least eight different products.) Wells Fargo’s objective for its brokerage arm, clearly stated in a recent annual report, is to triple its share of customers’ financial assets. The brokerage’s means for achieving this goal is the parent company’s database of 23 million customers, many of them brought into the firm through one particular aspect of the banking relation- ship: the mortgage. Wells Fargo differs from Edward Jones and Merrill Lynch in its aim to offer personalized, rather than personal, service. For example, the firm’s IT system al- lows a bank clerk to know a limited amount of information about a customer (name, birth- day, and so on) and appear to be familiar with him or her, which is quite different from the ongoing individual relationships that Jones and Merrill brokers have with their clients. The Strategic Sweet Spot The strategic sweet spot of a company is where it meets customers’ needs in a way that rivals can’t, given the context in which it competes. CUSTOMERS’ needs COMPETITORS’ offerings COMPANY’S capabilities CONTEXT (technology, industry demographics, regulation, and so on) SWEET SPOT Can You Say What Your Strategy Is? harvard business review • april 2008 page 8 LPL Financial. Different again is LPL Finan- cial, with offices in Boston, San Diego, and Charlotte, North Carolina. LPL sees its brokers (all of whom are independent financial advisers affiliated with the firm) rather than consumers as its clients and has configured all of its activ- ities to provide individualized solutions and the highest payouts to its brokers. This means that the vast majority of the activities per- formed by the corporate headquarters staff are services, such as training, that brokers choose and pay for on an à la carte basis. As a result, LPL’s headquarters staff is very small (0.20 people per broker) compared with that of Edward Jones (1.45 people per broker). Low overhead allows LPL to offer a higher payout to brokers than Jones and Merrill do, which is its distinctive value proposition to its chosen customer: the broker. By now it should be apparent how a careful description of the unique activities a firm performs to generate a distinctive customer value proposition effectively captures its strat- egy. A relatively simple description in a strategy statement provides an incisive characteriza- tion …