DB Forum 2

Introduction to Business Strategy  RSS  Download PDF

· Bhavik N. Patel MD, MBA

· and Frank V. Cespedes PhD

Journal of the American College of Radiology, 2016-06-01, Volume 13, Issue 6, Pages 747-749, Copyright © 2016 American College of Radiology

Introduction

“Our strategy is to be the leading provider of radiology services in the area.” “Having fast report turnaround time will be our strategy.” “Our strategy for the changing health care landscape is to increase our volume and decrease our costs.”

These statements represent goals and means, but not strategies. Managers often mistake operational objectives with strategy. As the paradigm of health care delivery changes, so does the competitive landscape. Thus, it is imperative for radiology managers to have a clear understanding of what strategy is and is not in order to make the right choices and compete in a changing marketplace. In this article we provide an introductory review of strategy.

What Is and Is Not Strategy?

Strategy is about making choices to create a sustainable competitive advantage (CA) in the marketplace. Your organization must make these choices; otherwise, your competitors or customers will choose for you.

At its core, a business strategy should provide actionable direction about how an organization competes, including which products or services in which markets, how it can win with the value proposition (VP) it offers in those markets, and how its activities or processes support that VP

. For example, Wal-Mart’s strategy is to have “everyday low prices” for a wide range of products that are readily available and convenient geographically. It accomplishes this by generating cost savings via volume purchases, limited selection, and from purposefully lacking in other dimensions typical of retail stores (eg, warehouse-type buildings with minimal in-store merchandising)

. All of Wal-Mart’s activities reflect its low-price strategy.

Although an organization’s mission (“why we exist”), values (“what we believe in and how we behave”), and vision (“what our aspirations are”) can provide motivation, they are not strategies

. Strategy is more concrete and specific about feasible CA with specific customer groups. Managers often do not have a clear understanding of their company’s CA and confuse it with operational effectiveness (OE). Successful organizations require both OE and a coherent strategy. OE is necessary to a company’s success but is not a sufficient cause of marketplace success. Best practices can and will be replicated, over time, by competitors. OE can be thought of as “I want to run in the same race faster,” whereas CA would be “I want to run in a different race altogether”

. For example, Google’s VP is not to have the fastest search engine, though that is part of its OE. Rather, its value lies in providing a “one-stop shop” online information platform that has a search engine, news, e-mail, and so on.

A good strategy will identify a company’s trade-offs, unique activities, and how activities “fit” toward that strategy

. The history of Southwest Airlines illustrates these concepts. Southwest offered frequent short-haul departures between midsize cities at low fares (ie, a unique activity). Its trade-off was having no amenities or assigned seating. This trade-off prevented full-service airlines from competing effectively with Southwest: they could not offer premium services at such a low cost, nor could they model their operations to that of Southwest without diminishing their brand equity. All of Southwest’s activities fit to reflect its strategy (eg, the same fleet size, no bag transfers, no first class). In radiology, practices must identify their VPs and what the resultant trade-offs are.

Strategy Recipe

A coherent strategy should specify three components: objectives, scope, and advantage

. Objectives indicate the ends that strategy seeks to achieve: the primary goals that will motivate behavior and resource allocations in the organization. Goals can be chosen from a range of possible outcomes: profit maximization, a good lifestyle business, and so on. However, if there are multiple objectives, the hierarchy of priorities should be clear, as a preference of objectives has a big impact.

Scope is the where-to-play element of strategy, and multiple dimensions are available to choose from (eg, segments, geography, product categories). But every organization, in its configuration of activities, is always making it easier or harder for certain types of customers and channel partners to do business with it. “Who is our core customer” should be answered by scope decisions.

Advantage refers to what an organization does differently, better, or as well as the best in that industry to deliver and extract value in areas in which it chooses to compete. The key question is, “What is the center of gravity in our approach?” Do we ultimately compete on the basis of our cost structure (like Wal-Mart) or on some other dimension that increases our target customer’s willingness to pay (like Nordstrom)? In other words, will we sell it for more (you believe that your products or services perform better on attributes important to target customers, who are therefore willing to pay a premium) or make it for less (your cost structure allows you to make money at prices that competitors or substitutes cannot match)

?

Developing Strategy

In formulating a strategy, always begin with an analysis of the external market. In any business, value is created or destroyed in the market with customers and business partners. This analysis requires understanding the industry forces that tend to shape competition

. Key forces include the threat of entrants (ie, what are the barriers to entering the industry, such as capital costs?), the bargaining power of suppliers (eg, suppliers with differentiated products have more power), the bargaining power of buyers (eg, volume buyers such as big hospitals versus individuals), the threat of substitutes (ie, other ways customers can get what they need), and rivalry among existing competitors (eg, do firms in this market compete on price, product innovation, or service?)

. Strategy is fundamentally a going-forward issue: it is about how these forces align today and tomorrow in a market, not yesterday. Hence, market analysis is especially important in a changing industry like health care.

Figure 1 provides a way of thinking about generic choices in a market showing the scope and sources of competition

. A low-cost provider (box A) that targets a broad market competes on cost leadership (eg, Wal-Mart). A low-cost focus on a limited group of customers is represented in box B (eg, IKEA, Dollar General). Having a differentiated product or service that appeals to a broad target is represented in box C (eg, Apple, Nike), whereas box D describes differentiation focus (eg, Louis Vuitton, Rolex). Each box in the matrix describes a potentially coherent and profitable strategy. However, a company at point E, at which the organization is trying to straddle different strategies simultaneously, is typically in an unsustainable position in a competitive market. Why? There is always someone out there who can beat that organization on cost and price; simultaneously, there is someone else in the market who focuses on a given customer group, tailors its operations and VP to that group, and beats company E that way. Over time, the forces of competition force companies to choose who they are and are not and make the corresponding trade-offs. Where does your practice fall on this matrix?

Fig 1

Four-by-four matrix illustrating how to compete in a target market

. Each box (A-D) has advantages and disadvantages, and any one of them may be used to successfully compete. Box E is the worst place companies can be, as they often find themselves unsuccessfully competing with everyone.

Strategy Execution

Determining a strategy is only one step toward successfully competing. A strategy must be well executed in order to produce benefits. Managers who are removed from everyday operations may succumb to a strategy that is not practical or is unreflective of current market conditions and target customers’ buying behavior

. Companies successful at implementing their strategies are those in which each individual has a good sense of his or her responsibilities . To achieve that understanding, these organizations reflect their strategies in core performance management practices: hiring, training and development, compensation and incentives, the right performance metrics for reviews, and so on. Strategy is important, but people execute strategy, and human performance ultimately drives market and financial performance

.

The authors have no conflicts of interest related to the material discussed in this article.

References

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2. 2. Porter M.E.: What is strategy? Harv Bus Rev 1996; 74: pp. 61-78 View In Article

3. 3. Gadiesh O., and Gilbert J.L.: Transforming corner-office strategy into frontline action. Harv Bus Rev 2001; 79: pp. 72-79 View In Article

4. 4. Cespedes F.V.: Aligning strategy and sales. Cambridge, Massachusetts: Harvard Business Review Press, 2014. View In Article

5. 5. Porter M.E.: The five competitive forces that shape strategy. Harv Bus Rev 2008; 86: pp. 78-93 View In Article

6. 6. Porter M.E.: Competitive advantage: creating and sustaining superior performance. New York: Free Press, 1998. View In Article

7. 7. Cespedes F.: Putting sales at the center of strategy. Harv Bus Rev 2014; 92: pp. 23-25 View In Article | Cross Ref

8. 8. Mankins M.C., and Steele R.: Turning great strategy into great performance. Harv Bus Rev 2005; 83: pp. 64-72 View In Article

9. 9. Neilson G.L., Martin K.L., and Powers E.: The secrets to successful strategy execution. Harv Bus Rev 2008; 86: pp. 60-70 View In Article