Does this sound familiar?
Your company sets aggressive goals, creates a well-researched mission statement, prioritizes its work, and then re-positions its critical resources to deliver the work.
It calls this collection of goals, plans, and investments "The Strategy".
It even communicates The Strategy to every single person in the company, over and over again, to ensure the team really gets it.
A few quarters go by and you deliver on the work that was prioritized. You even see a jump in revenue growth. But, something feels off.
You keep falling short of your goals.
What's worse, you see your profits slowly start to thin out (maybe even turning negative for some time), some of your major projects miss key milestones, and the team starts to grumble.
You chalk it up to the market. Or a lack of communication. Or a lack of execution. Or a change in the culture.
Or all four happening at once.
Another year passes. Out of nowhere, a direct competitor catches up in market share. Or they beat you to a new market segment. Or they release a category-killing product. Or maybe an indirect competitor starts to neutralize your value proposition by providing better complementary services or products.
What happened? Did you fail to execute? Communicate? Maybe your goals were too aggressive...
It's true that planning, execution, and communication are all incredibly important. And culture is at the very core of running a business.
But more likely, you never had a sound strategy to begin with.
Strategy = Sustained Competitive Advantage
In this five part series, we'll dive into why strategies fail and what you can do about it.
We'll cover:
Part 1: What a strategy is and why it fails (this post)
Part 2: Picking a business architecture for your market
Part 3: Assessing the maturity of your market
Part 4: Deciding where you will innovate and where you will not
Part 5: Executing on your strategy
So to round out Part 1: what is a strategy and why does it fail?
A strategy is a series of decisions you make to create and sustain an enormous competitive advantage in the market(s) you serve, so that your advantage cannot possibly be duplicated without a prohibitively high cost.
In other words, your competitors would be out of business before they even replicated 30% of your business model.
A successful strategy not only gives you command of the market(s) you serve but keeps you in that position. Your customers reward you with high gross profit margins (generally greater than 50%) due to the price premium they are willing to pay and the monopoly-like position that your superior products and services have created.
And the numbers speak for themselves.
The Cases of Coca-Cola and Salesforce
You can quickly discover companies that have built and executed a highly successful (and sustainable) strategy by just reading their income statements.
Let's look at Coca-Cola and Salesforce's gross profit margins* since 2010 vs. their competition:
Coca-Cola vs. (Beverage Sector Average)
2010: 65% vs. (32%)
2016: 60% vs. (34%)
2022: 60% vs. (38%)
Salesforce vs. (Software Sector Average)
2010: 80% vs. (58%)
2016: 75% vs. (57%)
2022: 73% vs. (53%)
Source: Finbox.com, Macrotrends.com. We use gross profit margins as the primary determinant of competitive advantage because they capture the essence of what the customer is willing to pay relative to the direct costs of producing a good or service. Net income is important to understanding the overall effectiveness of a business model (specifically G&A as a percentage of gross profit), however we will not go deep into indirect costs in this series.
Over the course of over 100 years of existence, Coca-Cola has built a sustainable gross-profit margin nearly double its competition. Double!
Salesforce operates at gross profit margins that are 30% better than its competition, even with owning "only" roughly 25% market share (the dominant share in its business).
These are not only astronomically high returns but are remarkably consistent amidst the twists and turns of the external market.
How'd Coca-Cola and Salesforce do it? Both companies have built a sustainable, competitive advantage that cannot be duplicated by its closest competitors without that competition going out of business in the process.
Here's what they both did in their respective industries:
Positioning: They created a clear brand position that lives in the minds of their customers, even when they're not actively advertising. When you think of Coca-Cola and Salesforce, you know exactly what you're getting. And you're willing to pay a little more for it.
Innovation: They chose the correct innovation approach based on the maturity of the market they're in and the type of business architecture they run. Coca-Cola is in a volume-based, direct to consumer market whereas Salesforce is in a complex-system, direct to business market that is rapidly commoditizing. Both chose an innovation strategy that was fit to the maturity of their market and the economics of their business.
Disciplined Investment: They re-invested the profits that they were awarded with wisely, taking on appropriate risk within the flavor of innovation they each chose. They reinforced their competitive advantage as opposed to chasing the next high-growth market, building an ever wider and ever deeper moat around their competitive advantage.
Why Strategies Fail
Strategies fail because they don't build an insurmountable competitive advantage. They don't go all the way and, instead, tip toe around multiple 'ways' and therefore accomplish none of them. This occurs as the market matures, commoditizes itself, and creates an increasingly zero-sum race to the lowest price of increasingly feature-rich products and services.
They do not accomplish the three things above that directly create advantage. Specifically, failed strategies:
Try to support conflicting business architectures at the same time. A single company tries to sustain BOTH a volume-based, commodity-like business model AND a complex-system, tailored to business-partner model (Part 2).
Try to innovate in a) too many places simultaneously (Part 4) or b) in the wrong place relative to the maturity of the market (Part 3)
Are not disciplined in where and how profits are invested. They are scattered via too many experiments across the portfolio and suffer from poor execution and communication (Part 5).
Easy to fix, right? Well, as it turns out, building a competitive advantage through sound strategy is hard. Really hard. Made harder due to the tendency of bigger companies to be weighed down by the demands of both size and near term revenue.
But if a company can go from selling just 9 glasses of Coca-Cola a day in downtown Atlanta or a four-person prototype dubbed "An Ant at a Picnic" to the dominant international leaders in their markets, any company can.
You just need a better strategy.
#strategy #goals #competition #competitiveadvantage #technology #innovation #cocacola #salesforce #investment #profit
Additional Sources:
1. "Dealing with Darwin", Geoffrey Moore
2. "The Innovators Dilemma", Clayton Christensen
3. "Warren Buffett and the Interpretation of Financial Statements", Mary Buffett & David Clark
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