Developing Strategy: a Pragmatic Approach

Checking your actual performance

So far we have discussed strategic analysis, which tends to involve a lot of judgment and is thus prone to bias and misinterpretation. Therefore it is important to check whether your analysis is reasonable by looking at the actual performance of the organisations you have been evaluating. Typically this involves looking at some financial metrics - but which should you use?

Tools for evaluating competitive advantage

We present three frameworks for analysing competitive advantage. A systems diagram shows how the various capabilities and positions combine to drive cost and value advantage. A cost structure comparison puts that into numbers. The third approach is my go-to tool for a quick but thought-provoking analysis.

What drives competitive advantage?

We present a framework for understanding how capabilities and positions combine to create cost and value advantages. This framework integrates many theories about competitive advantage, which is one of the most critical concepts in strategy - even for non-profits!

Creating value for customers

Looking at your company, charity, product (or yourself) through the eyes of your customer is always instructive. We discuss one simple tool for doing so - the Value Curve, popularised by the controversial but interesting book "Blue Ocean Strategy". This bit they got right - thinking about how to improve the customer offer, not forgetting lowering price, is a great place to start with developing options. The first step is to understand your customer value proposition - a critical part of the "internal situation" and the value curve is a neat and easy way to do it.

Bonus episode: segmenting the YHA's customers with Caroline White

In this bonus episode we chat to Caroline White, ex-CEO of the Youth Hostel Association, about the role of segmentation in the revitalisation of the YHA. Caroline is an experienced strategist and didn't use the structure we covered in episode 2 but whether you use a tool or a more intuitive approach, the key is to be aware of the many segments that you can and do serve, and thus the range of options on offer. At the end we discuss how the segmentation approach we described in our episode might have been used at the YHA, so you have an idea about how to use this tool in practice.

Considering the broader environment

How does the the general context of an industry influence other factors, such as the five forces? PESTLE analysis is a common tool for developing a full analysis of this - PESTLE stands for Political, Economic, Social, Technological, Legal and Environmental factors.

Bonus episode: 5 forces in action with entrepreneur Daniel Hart

In this bonus episode, you'll learn a bit about how an entrepreneur thinks about strategy. You'll also get a great application of the 5 forces framework to what proves to be a very tough industry, and how Daniel pushed back on those forces to earn decent margins.

Market attractiveness

One of the most fundamental ideas in strategy is that success comes (partly) by investing in attractive markets. Attractiveness for a profit seeking business is typically defined as being from a mix of size, growth and profitability. Of these, the hardest to estimate is profitability because it is of the market (rather than your current profitability - which might be more or less than the average for the market). Porter's Five Forces is a famous framework that allows you to estimate, in a qualitative way, how profitable a segment is likely to be. 

A simple strategy matrix

Thinking of an opportunity in terms of its attractiveness (an external perspective) versus your chance of success (an internal perspective) is a good way to summarise the nature of that opportunity and the options you should consider.

Segmentation

Our next episode starts drilling down into how to answer the first question - what is the External Environment? The first thing you need to do to make sense of your environment is to segment it - which involves clumping the incredible range of customers, products, markets etc. into broad segments. We describe a clip from The Hunger Games to illustrate this, as well as a business example from the car rental market, and finally introduce a four step process for getting creative with segmentation.