Eddielogic

– Thoughts on Strategy and Management

What competitive strategy is all about

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Today I like to share a nugget from my current reading.

I am a big fan of the classic writings on strategy. The original writings of the big strategic thinkers of the past still reveal valuable insights for today.

Bruce D. Henderson is the man who we have to thank for the Boston Box (or Growth-Share-Matrix). He wrote in 1976:

Effective strategy analysis requires that you find a way to proceed and progress from wherever you start to a dependable competitive advantage at maturity and equilibrium. This in turn requires that you foresee both the shifting economics and the changing behavior of your competitors. If you succeed, than you must translate that insight into the action required now and at each stage as the market matures. Strategy is action now consistent with a required sequence of actions until a defensible competitive superiority is achieved.

That is what competitive strategy is all about.

(from The Boston Consulting Group on Strategy: Classic Concepts and New Perspectives; The real objectives)

What is Henderson telling us with these sentences?

First of all, it is essential to understand how Henderson is defining success:

Business success cannot be measured until the direct investor’s cash input has been returned with his profit. Until then, all profit and all apparent success is merely a promise. Reported profit is only a signal. It is a misleading signal unless it represents the probable ultimate competitive position. Cash is all that counts.

  • Competitive advantage is mainly attributed to cost superiority.
  • When market growth has stopped, little or no investment should be needed in order to maintain the achieved strategic positon. This is when cash generation and business success start.
  • At this stage, a business should already have a leading market position.
  • With a superior cost structure, a business needs to reinvest only a small proportion on the cash generated in order to defend its strategic positon, compared to the closest competitor
  • Hence, a higher cash surplus is attributable to the direct investors. Business success is achieved.
  • An effective strategy is one that leads to this stage.

Sure, there are more complex forces at work today. The pace of our economy has increased significantly. Market dynamics have become much less predictable. Disruption can happen about everywhere. A classic product strategy that is based on a reliable product lifecycle may not seem as suitable as almost 40 years ago.

However:

I don’t see anything that is wrong with the basic message of Hendersons statements:

  • From an investor’s perspective, cash return is a great measure of success.
  • A high market share isn’t worth much if it has to be defended by reinvesting a high proportion of the profits.
  • The same holds true for a high growth rate.
  • A thorough understanding of expected shifts in economic conditions and competitors’ moves in combination with the derivation of appropriate measures is still a prerequisite of a sound strategy.

In the end of the day, this is what strategy is all about.

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