How can we distinguish between good and poor strategy?

This question was raised on LinkedIn a while ago and received massive feedback from professionals from a wide variety of industries.

One of the respondents answered the question by referring to a blog by Roger Martin for Harvard Business Review and argues that a good strategy “provides the road map to future with data driven sign posts. It tells you what to do and which way to move forward depending upon key big events (e.g. if Event A occurs we will move to doing this and if Event B occurs then we will move to doing that)”.

This view gained a fair share of support in the discussion and other participants provided their insights by claiming that the major difference between a “good” and a “poor” strategy comes from the execution of the strategy. “An excellent strategy (on paper) which is poorly executed is always worse than a fair strategy which is exceptionally executed”, a participant claimed.

Another participant stressed the importance of building the strategy upon the company’s existing capabilities and resources and the opportunities and threats posed by the environment.

The reason why I found this discussion interesting is that, although strategy making goes thousands of years back, we are still struggling in defining the term – let alone distinguishing between a good and a poor strategy.

Furthermore, most of the answers on LinkedIn seemed to be made on the following two assumptions:

•         Strategy is prescriptive.
•         Strategies are developed at the top of the organization

Therefore, in my next posts I will challenge these two assumptions and come up with alternative strategy development processes.

Winning the Talent War in China

As stated in my last post, I was quite disappointed with McKinsey Quarterly’s article on employer branding in China.

As this subject seems to be quite relevant to managers today, I intend to share some of our findings in the Chinese talent market in order for managers to make up more concrete thoughts of what they need to be aware of when entering such an emerging market.

To illustrate the importance and the differences to more “common” markets, I will compare the Chinese market with [at least according to Hofstede] a completely opposite market.

According to our annual ranking in China, traditional strong employers such as McKinsey, BCG, Bain, Accenture and the “Big Four” all drop considerably from last year’s ranking. The company who dropped the most was KPMG who fell 36 places and is ranked as the 75^th most attractive employer among business professionals. As we can see from our Global Ranking below, this differs significantly from other markets.

In Europe, and maybe particularly in Scandinavia, employers often emphasize the development opportunities available within the company when communicating with talents. According to our survey, this seems to be even more important in China! Therefore, when winning the talent war in China, you have to think about how your company is structured in order to give the talents personal development opportunities. In Norway, a large amount of employers have done this by developing trainee programs. Does your company offer such opportunities in China?

Furthermore, while Scandinavian talents seem to call for leaders who support their development, the Chinese talents seem to neglect having a supportive leader and instead appreciate a good future prospect for future earnings (hence the McKinsey interview that talents in China does not come cheap). Potential future earning is even more important than a competitive base salary which suggests that they are more receptive to reward system linked to company performance.

There is a tremendous difference between China and Norway and this could very well be the case in your main market as well. In order to give a simple overview, I would like to finish off with the thirty most attractive employers in China according to the Universum Professional Survey. If you have any questions regarding employer branding in China, I suggest you contact Johan Ramel as this market is far from my expertise.

China Mobile	1
Google	2
Procter & Gamble	3
SGCC	4
China Development Bank	5
PetroChina Company	6
Bank of China	7
Apple	8
CICC	9
ChinaTelecom	10
China Merchants Bank	11
Sinopec	12
HSBC	13
ICBC	14
Citi	15
Morgan Stanley	16
Baidu	17
L'Oréal	18
Alibaba	19
Air China	20
McKinsey & Company	21
China Construction Bank	22
TENCENT	23
IBM	24
The Coca-Cola Company	25
IKEA	26
BMW	27
CITIC	28
CNOOC	28
Nokia	30

Is Porter wrong?

In the 1980s, Michael Porter presented the “generic strategies” – which consist of three basic strategies of cost leadership, differentiation strategy and niche strategy. He argued that these three strategies were the only fundamental strategies that any organisation could undertake (thereafter the term “generic strategies”).

However, as discussed earlier in this blog, Porter has been challenged in his view in the later years and I came to think about these generic strategies as I am currently analysing a Polish real estate company as a part of a strategy course at the university.

As the organisations are using standardized material producing standardized products, organisations are finding it difficult to differentiate themselves from each other. Furthermore, apart from the building process itself, the largest share of their costs come from acquiring building locations.

Acquiring prime locations is also identified as a key success factor in this industry, meaning that companies buying less expensive land (less attractive locations) will not be able to sell their products at the average price of the market – meaning a low-cost leadership is close to impossible.

At last, the buyers (in this case Property Investment Funds) are only looking for investment opportunities which will give them a predictable return of investment at a low risk, so where are the niche markets?

Before writing this post I read even more about Porter’s generic strategies, and I always end up with the same conclusion: Generic strategies are more suited for B2C markets than B2B markets.

Porter (left): "By making the buildings smaller, real estate 

companies could gain low-cost leadership"

What is the principal source of profits – Part Two

Continuing from my last post is the never-ending discussion of which factors drives organizational profitability. As mentioned earlier, the relative importance of industry in this context has been challenged by a series of studies in the later years.

For the sake of clarity: Such empirical studies take a large sample of firms and compare the extent to which variance in profitability is due to firms or industry (controlling for other effects). If firms within the same industry tend to bunch together in terms of profitability, it is industry that is accounting for the greater proportion of profitability and an external approach to strategy is therefore supported. The chief advocate of such an external approach is of course the well-known Michael Porter.

If firms within the same industry vary widely in terms of profitability, it is the specific skills and resources of the firms that matter most, and naturally an internal approach is most appropriate. An influential study of this was done by Richard Rumelt in 1991, and since world-famous strategists and researchers still haven’t come to some sort of conclusion, I am going to keep it all simple by comparing the two important studies done by Rumelt and Porter & McGahan.

As we can see, the two most important studies find that more of the variance in organizational profitability is due to firms rather than industries; in Rumelt’s study the organization’s resources, capabilities, structure and so on, counts for 47 % while Porter & McGagan suggest that the firm accounts for 31 %, but with higher industry effect as well (19 per cent)

It should also be noted that Roquebert, Phillips and Westfall published a meta anslysis where they compared Rumelt’s analysis up against Richard Schmalensee’s analysis from 1985. Their research does not only confirm most of Rumelt’s findings, but also suggest the existence of a corporate effect. If you have access to the Strategic Management Journal, it is a highly recommended read (Vol 17, pp. 653-664 (1996))

Such discussions will probably go on, but it will be interesting to see how the environmental changes in recent years (especially technology development, shorter life cycles and so on) will affect these factors in the future.