Why strategic context is so essential to business growth
Let me ask you a question. What’s the best fruit in the world? Apples maybe? Or grapes? I might be thinking bananas. But if I qualified that question by asking what’s the best fruit in the world for sports performance? Then we might both agree on bananas. We’ve added some context.
Context is at the heart of strategy. And yet so few businesses grasp this. I ask people to explain to me their strategy, and instead of this, they give me a business plan full of tactical actions. Often, it’s an Excel spreadsheet with vague aspirations to get to a certain level of turnover or grow by 30%. But there’s no strategic context to this. There is no mention of a sustainable business model and recognition of the business culture underpinning this. Yet these are fundamental to strategy and planning.
Lack of contextual strategy leads companies to take on different types of customers. ‘Revenue is revenue’ is the attitude here, wherever it comes from. But if you’re constantly chasing revenue for its own sake, you’ll end up with a random mix of business and no clear idea of the direction you want to take the company. Coming back to the fruit analogy. You’ll have no grasp of what to eat to increase your stamina—just a load of fruit.
Getting agreement on the context
Every business needs a shared sense of destination. So you need to get a broad agreement on the context. History is littered with examples of conflicts that have been resolved through agreeing on a context. Take the Northern Irish Peace Process. Regardless of their different positions, everyone decided that economic prosperity was more important than the troubles. The same for post-apartheid South Africa. The reason the Truth and Reconciliation Commission worked was a shared aspiration for an economically viable South Africa. Context is everything here.
So you need an agreement with the rest of your Executive team on some fundamental things. Why does your company exist? Look at this from a contextual level. What’s the purpose of what you’re doing? What’s your BHAG (Big Hairy Audacious Goal)? These will give you a direction of travel 10 to 25 years into the future. Enough time for all of you who are setting this context to be long gone. Also, get clear on the thing that drives your economic engine. What is your sustainable business model? Without answers to these questions, you’re shooting in the dark.
Clarity on core customer
Lack of clear strategic context leads to a disparate spread of customers. This is fatal. You need to use your context to help you identify your core customer – the one customer or type of customer that will generate the most profit for your business. What unique value do you bring them? What problem of theirs can you solve better than anyone else? Work out the mix of ‘willingness to pay’ drivers necessary in your products and which activities will sustain these differentiators.
No matter the size of your business, it’s not easy to get this right. Take the experience of our client – one of the largest privately-owned companies in the UK. They asked us for help with a strategic makeover. The leadership team needed to work out the fundamental question of why their company existed.
They looked at their unique value. Part of this was working out which customers’ problems they would solve. And, even more importantly, which customers’ problems they won’t solve. What was their actual marketplace? Where did they want to be in 10 years? They didn’t know which products and services were genuinely driving their revenue without answering these questions. Similarly, there was no clarity on who their competitors were in the short and long term.
Context helps clarify decision-making
With their new context in place, our client can see why things haven’t worked before. They’re going to make changes to how they bring new products and services to market. Suddenly, there’s context to help with decision making.
All change is hard. These things tend to lead to inertia. People are emotionally attached to the decisions they’ve already made. If you’re bogged down in detail, keep stepping back and asking, why does this business exist? Where do you want it to be? Which customers will help you get to that destination?
Look at Starbucks. They took decisions to scale their business without a real sense of strategic context. They decided to go international, and their growth rate fell away. They thought they had a BHAG which was ‘Two thousand stores by the year 2000’, but this was dull. Jim Collins challenged them, telling them it wasn’t hairy or audacious. If they drew a straight line through their financials, they’d reach it.
So they went away and changed the context of their thinking. Their new BHAG was “To turn the Starbucks brand into the most recognised and respected consumer brand in the world, a position that Coca-Cola currently holds.” Now, this was something different—an absolute moonshot. And you know what? Starbucks became one of the most recognised brands in the world.
Hedgehog or fox?
Jim Collins knows the importance of context. He brings it into his brilliant hedgehog concept – something I repeatedly reference with clients. In his famous essay, ‘The Hedgehog and the Fox’, Isaiah Berlin divided the world into hedgehogs and foxes based on the ancient Greek parable, ‘The fox knows many things, but the hedgehog knows one big thing.’
Collins observed that people who built good-to-great companies were hedgehogs to one degree or another. They used their single-minded nature to drive towards what he came to call a hedgehog concept for their companies. The less successful companies were led by foxes and were scattered, diffused and inconsistent.
The hedgehog concept describes how a successful strategy is formed by overlapping 1) What you are deeply passionate about (your purpose) with 2) what you can be best at in the world and 3) what best drives your economic engine.
When deciding what they can be best in the world at, people can be delusional. Authenticity is critical here. Whatever you pick, it’s going to be damn hard. So it needs to be something you’re passionate about. You need to believe in it. And think you can sell it. Make sure you’re clear about the context of where you’re competing. You may want to be the best Indian restaurant in your local town. That’s fine. But if you say you’re going to be the number one chain of Indian restaurants in the UK… that’s quite different. There isn’t a chain of casual dining Indian restaurants in the UK. But there is, in the USA – Curry Up Now is expanding in California.
Context around pricing
Another part of your context worth considering is whether you’re going to be cheaper or more expensive than your competitors. There’s no middle ground here. Either you’re going to grow your business with a lower cost base than your competitors. Or you need to create a business where your customers are happy to pay you more. This comes back to the willingness to pay drivers. You need to identify, support and differentiate around them. Remember, your profit margin is your sustainable competitive advantage. It needs to be higher than your competitors to win in your space.
These two things are mutually exclusive. I can’t think of any high price and low-cost businesses. If anyone’s hit on that magic formula, please tell me! Two great examples of well-differentiated companies are Emirates and Southwest Airlines. The former is high cost offering a superior level of service. They’ve created brand prestige through the quality of their fleet, lounges and general customer experience. They’ve even put showers into First Class.
Southwest, on the other hand, is no-frills and has low prices. They’ve used their culture as a strategic advantage, and their economic model is built on the fact that their aircraft fly two extra flights a day compared to their competitors. This gives them a sustainable financial advantage. Then all the activities that help sustain this economic advantage are linked. Brilliant! Their stratospheric growth is an excellent example of strategic context at work.
- NAVIGATING AND COMMUNICATING CHANGE
- BUILDING COMPANY CULTURE
- CHOOSING THE RIGHT OPPORTUNITIES
- ORGANISING YOUR A-TEAM