“The essence of strategy is easy to define: it involves making wise choices about where and how to compete, so companies can counteract the competitive forces that inexorably deplete profits.”

VENTURES AFRICA – The above quote was the opening quote from the McKinsey Quarterly report for Q4-2013. The focus was on ‘Strategy to beat the odds’. I would be sharing a few thoughts suited for entrepreneurs from the report today. Since, entrepreneurs are expected to be the ‘Chief Strategist’ of their enterprise, they can glean valuable wisdom in the bid to review year 2013 and in preparation for a prosperous new business year in 2014.

At first blush, “beating the market” might sound like an expression better suited to investing or financial management than to business strategy. When you think about it, though, overcoming the profit depleting effects of market forces is the essence of good strategy –  it  separates winners from losers, headline makers from also-rans.

The essence of strategy is easy to define: it involves making wise choices about where and how to compete, so companies can counteract the competitive forces that inexorably deplete profits. By this definition, perhaps 3 to 5 percent of the world’s companies have extraordinarily successful strategies, and a similarly small proportion have colossally poor ones. A great many operate in the dynamic middle ground, neither quite mastering, nor yet being overcome by, the market forces swirling around them.

Left unchecked, market forces continually conspire to deplete profits. Powerful business strategies can counteract those tendencies, but good strategy is difficult to formulate. Indeed, the latest McKinsey research finds that a very small number of companies create most economic profit. The research also shows that a significant number of good companies outperform even in so-called bad industries, where the average economic profit is less than the market average.

How do these companies do it? In other words, where do powerful strategies come from? Sometimes it’s luck, or good timing, or a stroke of inspiration.

Mastering the building blocks of strategy

According to McKinsey, it is possible to load the dice in favor of developing good strategies by focusing on the core building blocks that often get overlooked.

One is the need to gain agreementbefore creating strategy on the essential decisions and the criteria for making them. Another is to ensure that the company is prepared and willing to act on a strategy once it is adopted. McKinsey opines that – too much of what passes for strategy development, consists of hurried efforts that skip one or more of the essentials. The resulting strategies are often flawed from the start.

It’s also easy, though, to go too far in the other direction and make the creation of strategy a rigid, box-checking exercise. Appealing as a formula-driven approach might be, it ignores the truth that strategy creation is a journey – and an inherently messy one at that.

Entrepreneurs need to view the creation of strategy as a journey, not a project!

One central building block to strategy creation is deep insight into the starting position of the business: where and why it creates – or destroys – value (Diagnose). An entrepreneur need a point of view on how the future of the business may unfold (Forecast). By combining insights into the business’ starting position with a perspective on the future, the entrepreneur can develop and explore alternative ways to win (Search) and ultimately decide which alternative to pursue (Choose). With the strategy selected, the entrepreneur needs to create an action plan and reallocate resources to deliver it (Commit).

These five core building blocks of strategy creation – Diagnose, Forecast, Search, Choose and Commit – are book-ended by two others. One is an initial block (Frame) to ensure that the strategy is developed is made in context of the prevailing business situation/environment at hand. The final block (Evolve) is dedicated to the constant monitoring and refreshing of the strategy as conditions change and new information becomes available.

To some extent, the building blocks simply represent a thorough list of activities that all good strategists perform. And while all are important and should be included in the creation of strategy, slavishly following this or any other framework won’t bring success. Depending on the situation, some blocks will be more critical than others and therefore require more attention.

That’s why taking some time to frame issues at the outset is so important. When strategists do so, they are better able to identify the real choices and constraints facing their organizations and to see which building blocks are likely to matter most given the situation at hand. Unfortunately, many entrepreneurs feel that taking the time to frame strategy choices thoughtfully and to decide where to focus strategy-development efforts is a luxury they don’t have.

A focus on strategic building blocks also can help entrepreneurs develop penetrating insights. While “insight” conjures up visions of research, data crunching, and “aha” moments, real strategic insight also rests on a seemingly mundane and easy-to-overlook factor: a thorough understanding of how and why a business, its competitors, and others in the industry value chain make money. Absent dumb luck, a strategy that doesn’t tap directly into such an understanding will underperform.

I hope this has been very insightful for you. If yes, drop a comment in the section provided for it below and let the conversation continue 🙂

Till next time, ideas are worthless without action…nothing ventured, nothing gained!

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