Corporations are established and developed
based on a combination of vision, strategy and execution. Amongst these three,
strategy sets the pathway to accomplish the vision through execution. Strategy
differentiates one firm from the other, not necessarily in terms of performance
but more in terms how it seeks to achieve its vision. Firms are commonly viewed
as specialized, diversified, integrated, local, global, and so on. Strategy, in
its core elements, has not altered much over the years but the environmental
information and internal awareness that sets the tone for strategy has not only
become more complex but also volatile. The number of players has also
significantly increased in any industry. The corporations are finding it
increasingly difficult to develop unique strategies. Strategy, in this context,
is not about which industry or business to operate in but is about how to
achieve competitive advantage in any chosen business or industry.
For good measure, we do have a few strategic
templates from management gurus; the principal ones being the theory of generic
competitive strategy by Michael Porter and the theory of core competence by C K
Prahalad. There are also several theories for firms and organizations to become
effective and competitive, for example, the model of balanced scorecard by
Robert Kaplan and David Norton, the theory of constraints by Eliyahu Goldratt
and the theory of reengineering by Michael Hammer. All these theories,
developed in the 1980s and 1990s, do not take into account the perfect spread
of information and options that is now available for strategists and firms. Every
leader, for example, is aware of the generic strategies of cost leadership and
differentiation, and even the sub-strategies to achieve them. What strategy
officers must now focus is on developing an elegant balance amongst multiple
strategic options. This blog post proposes a paradigm of strategically balanced
corporation.
Strategic balance
An optimal strategy is one that is open to
environmental opportunities but also one that hedges against environmental uncertainties.
It also plans execution based on available resources or resources that can be
acquired to execute the strategy. This requires that the strategy must always
balance rewards and risks on one hand and aspiration and attainability on the
other. Seeking this balance is a delicate and complex process; with strategists
requiring to be both conservative and aggressive as the situation demands. The concept
of strategic balance is relevant for mono-product firms as well as for
multi-product and multi-business firms. The concept is also not necessarily
limited to only products or services but covers all the essential parts of a
firm’s value chain such as products and services that are delivered, the
manufacturing or delivery process used, the customer outreach methods, the
human resources deployed, and so on.
Research has focused on firms adopting
certain extreme strategies. For example, it has been well researched if market
share and profitability are correlated. It has also been researched if
specialized and conglomerated businesses have unique sustainability characteristics.
There is, however, practically negligible research on what constitutes a
strategic balance and whether strategic balance leads to superior performance. In
this context, this blog post creates a fundamental platform to understand and
analyze strategic balance. We may define strategic balance as a firm-specific
balance that exists by design amongst various key components of a firm’s value
chain and between strategic options that exist in respect of each component of
the value chain. Strategic balance must not be misconstrued as striking a
middle ground; rather it should be seen as a quest for optimality of a firm. The
concept of strategic balance is amplified below.
Value balance
There is a concept, in some schools, that it
is not important for a firm to operate across all segments of the value chain. This
school of thought argues that a firm could just develop and stick to a core
competence and stick to it. An analogy could be that a firm could be a design
house but could manufacture and market products with external alliances as
successfully as a fully integrated firm. Such outsourcing hypothesis could be
true to an extent but not to a sustainable extent. Corporate history has enough
chapters of firms which mimicked a full value chain operation on certain basic
internal strengths and a large extent of external support but withered away
when the alliance partners denied support or failed to respond to growth
opportunity because of lack of internal capabilities. As a matter of
fundamental principle, a firm which does not ensure value chain balance with
appropriate attention to key components such as R&D, manufacturing, supply
chain, marketing, human resources and information technology would be suboptimal
and sub-sustainable in a competitive world. By no means, this is an all-inclusive
listing of value chain components.
Portfolio balance
Every firm exists and grows based on products
and services in a particular business, be it hospitals or healthcare business and
automobiles or transportation business. The notion that portfolio concepts are
valid for only diversified businesses is archaic. Even a business of coffee
chains can apply and benefit from portfolio balance concepts. Once a business
is defined, and however narrowly the business is defined, there would be creative
ways to in-build a portfolio into the products or services. A portfolio
approach is based on the strategic truism that a service or a product offers
more than the product or service functionality to the customer. A restaurant
may serve only food but it can provide umpteen choices in terms of culinary
streams to its customers. Even Starbucks, known for its pioneering coffee line
of business, has multiple beverages, hot and cold, besides several eats and food
accessories as its portfolio. The strategic challenge lies in developing the
right balance between specialization and diversification. Any business provides
the opportunity of strategic portfolio balance; a company manufacturing only heavy trucks can
offer a wide portfolio from bare chassis to fully built custom application vehicles
on one hand and from civilian to defence vehicles. Strategic portfolio balance
ensures an optimal exploitation of environmental opportunity and appropriate
hedging against volatility.
Manufacturing
balance
Manufacturing represents a part of value
chain which converts a proven design into a saleable product or service. Manufacturing
can vary between complete integration and complete outsourcing. The former is
highly resource intensive with high fixed overheads that could be highly catastrophic
in the event of a precipitous demand downturn. The latter is certainly resource-lean
with low overheads but could be highly vulnerable in the event of a sharp and
sudden demand uptick. Each industry offers a paradigm of optimal manufacturing
balance. A highly evolved industry where each component or material has also evolved
into its own industrial structure provides several solutions for manufacturing
optimality. On the other hand, a newly developing industry has fewer degrees of
freedom to offer. The former implies an established quality and cost base that
could afford higher outsourcing. The latter could have doubtful engineering and
quality fundamentals that could demand greater control over manufacture through
integration. An automobile manufacturer outsourcing differing components based
on differentiated internal capabilities is an example of the former. On the
other hand, a coffee chain seeking control over coffee plantations, roasting
technologies and coffee making is an example of the latter. Strategic manufacturing
balance ensures optimal quality, cost and delivery capabilities for a firm.
Marketing balance
The best of design and manufacturing
optimality could come to naught with strategic marketing imbalance. Marketing balance
is not about regional marketing effort allocations or domestic-export balance. It
is about striking the right balance between the product and the sales channel,
between different marketing channels and between sales and service. Some of the technical marvels, Tata Nano car
to quote an example, have failed to fulfill the potential of design and manufacturing
brilliance due to marketing sub-optimality. Had Tata Nano been marketed through
an exclusive car dealer network, with appropriate emphasis between different
marketing approaches and a special after-sales package, potentially Nano would
have caught the imagination of the target market segments. By way of another
example, the best of marketing cannot make up for strategic imbalances in
either design or manufacturing. Godrej Interio comes across as a prime example
of lack of strategic portfolio balance (dependence on all-steel design and manufacture,
as is Godrej wont) adversely influencing the final low-business outcome,
despite some great strategic market balance. These examples also illustrate how
a strategic balance amongst the various components of a value chain is also
extremely important for a firm to achieve sustainable successful performance.
Talent balance
Firms are a complex cascading network of
leaders, managers and executives on one hand, and another equally complex
network of organization, teams and individuals. Adding further complexity is
the network of businesses, functions and processes. Across all this complexity,
two components stand out: individuals
and teams. Organizations are often unable to comprehend and convey whether it
is the individual performance or the team performance that determines
performance. Talent management thought keeps swinging between the typical Western
practice of individual superstar performance and the equally typical Oriental practice
of consensual team performance. This leads to somewhat strange positions taken
by leadership experts wholly deprecating either ‘we’ or ‘I’ in performance
management. The concept of strategic talent balance requires that individual
performance be treated as important as team performance. For organizations to
be successful, meritocracy based on individual performance (and individual
recognition) and organizational harmony based on team performance (and team
recognition) must co-exist. Without overwhelming each other, ‘I’ as well as ‘We’
are equally important for strategic talent balance.
Strategically balanced corporation
The aspects discussed above are illustrative
and not comprehensive. The value chain of a firm varies significantly,
multi-functionally, depending on the industry. It is important for a firm to
understand and map out its value chain in its entirety and then select the
components that are critical for performance. The next step would be option
mapping for each function and establishing the optimum strategic balance in
each case. Exercises of long range planning which seek certain goals and
develops strategies to execute towards the goals would not be effective unless
they are set in the perspective of strategic balance. Strategists (whether they
are chief executive officers, chief functional officers or chief strategic
officers) must also be balanced professionals without any biases as to what
constitutes the appropriate strategies; for example, some tend to seek
diversification and some seek specialization preferentially as a
pre-experienced panacea for success. Such biases limit the openness and
effectiveness in developing true strategic balances.
A strategically balanced corporation is able
to move through the economic and business cycles successfully while exploiting
opportunities with agility. The journey of a small-cap startup through the
phase of mid-cap company to the goal of a blue-chip company is based on
strategic balance adding strength and resilience to exploit opportunities and withstand
uncertainties. A strategically balanced mid-cap or blue chip firm leads to the
evolution of a conglomerate. While a conglomerate provides much flexibility to
define varied businesses under its fold (for example, salt to software and
chips to ships), it is essential that each business or firm under the
conglomerate umbrella is a strategically balanced corporation. The seeding,
screening and weeding of individual businesses adopted by big conglomerates,
from time to time, is proof enough of the need for the individual firms to be
strategically balanced and sustainably effective. If research were to be undertaken
on the performance of strategically balanced corporations, the results would
surely support superior performance by, and superior competitive advantage for,
such firms.
Posted by Dr CB Rao on November 24, 2013