The Laws of Strategy

Wednesday, January 30, 2013 | Category :

By Peter Mulford

Peter Mulford Photo

In viking mythology, Skoll and Hati chased the sun and the moon. When the wolves caught either one, there was an eclipse, and the Vikings would rush hysterically to rescue the sun or moon by making as much noise as they could in hopes of scaring off the wolves. But with time, people noticed that the eclipses didn't just happen at random. They occurred in regular patterns that repeated themselves. Once grasped, the patterns made it clear that the eclipses were not dependent on the whims of supernatural canines, but rather governed by laws. And with an understanding of these basic laws, they were able to make better decisions, faster, in the teeth of an otherwise inexplicable, volatile world.

And so it is with business. The behavior of large organizations is so complicated and subject to so many influences that, not unlike the ancient Vikings, at times managers struggle to discern any clear patterns or laws governing how the business works. And things aren't getting any easier. Confronted with a disruptive innovation or market shock, many firms respond much as the Vikings once did — running around making as much as noise as possible, restructuring, reacting, rushing; or dashing headlong into the tents of business gurus and Shaman, who, armed with a dazzling array of books, technique, frameworks, models, theories, and tools, stand ready to help firms rescue the sun.

The good news is that beneath all the complications and challenges of business today, there are three fundamental business laws whose impact and certitude have not changed over time. The surprising reality is that firms can master these laws on their own, without outside interference, and ensure successful strategy execution. And, once mastered, these business truths will serve firms in any situation, against any competitor, anywhere.

Law #1: Firms survive only when they develop a customer advantage they can sustain.

Every entrepreneur, from Henry Ford to Mark Zuckerberg, knows that life begins when a firm identifies a customer need and then finds a way to serve that need better than anyone else. Moreover, while there is a limit to how much you can achieve through operational excellence, there is no upper limit to customer-centric value creation. So it is strange, in our experience, that many of the seasoned managers we work with have entirely forgotten this fact. In the quest for better returns in a volatile, changing world, many firms have focused on operational excellence over the customer. But doomed to fail is any strategy that doesn't consistently give customers a reason to choose your offering over others, year after year.

Law #2: Firms can survive only if they can deliver a return on capital greater than their cost of capital over time.

Delivering a unique customer value proposition is Law #1. But firms that deliver customer value without earning adequate returns for shareholders do not last long. (Or, as we saw in 2009, they rasp their way through corporate intensive care awaiting a mercy takeover by a competitor or a government). If suppliers of capital do not receive a fair return to compensate for the risk they took by investing in a firm, they will move their capital elsewhere. Thusly, firms that don't provide shareholder value to their stakeholders are doomed to fall behind in the race for global competitiveness relative to those that succeed to deliver significant value.

Law #3: It is the coordinated combination of management activities alone that determine the level of customer value and economic return that is created over time.

When start-up firms are born, it is very clear to everyone involved the role they play in delivering the customer value proposition as well as cash flow — how everything they do or don't advances or retards — their ability to deliver both a superior customer value proposition and an economic return. As firms grow this system of cause and effect relationships doesn't go away, it simply expands, and with that expansion, the number of decisions that are made on a daily basis to sustain its survival increases.

Now what?

These three laws have a number of implications. Specifically, to drive effective strategy execution at any firm, managers should develop:

  1. A clear understanding of what makes their company's value proposition distinctive.
  2. A strong understanding of the financial drivers of their firm's strategic success.
  3. A keen understanding of how their daily work can impact both of the above and the capability and skill development needed to make said decisions better and faster than anyone else.

Summary: Managers at all levels are called upon to make thousands of decisions every quarter. The most important of these involve making trade-offs, such as increasing prices at the expense of volume growth, outsourcing production to increase efficiency at the expense of employment. Given the ever-changing nature of the business universe, it can often seem difficult to know where and how to make said decisions. Fortunately, even as the world changes, there are certain fundamental laws and patterns of success that remain the same. In any market conditions, anywhere, grasping these laws is a first step towards ensuring strategic success. And keeping the wolves at bay.

About the Author- Peter Mulford is an Executive Vice President at BTS.


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