This blog entry is about consistency in strategy. It talks about the benefits it can bring, and contributes some examples from our everyday life. Initially I was motivated to write about consistency by US pharmacy CVS’s recent announcement to terminate the sale of cigarettes.
“Good Strategy is Unexpected” – Richard Rumelt
It is interesting how the world reacts to a follow-through in strategy. I for my part find it not too surprising if a pharmacy, which should generally serve the mission of improving customer’s health, stops selling something that is incredibly endangering that very mission. All in all, people seem to perceive this as a sacrifice of short-term profits for growing profits in the long run, especially from the other and growing healthcare services (such as walk-in clinics) of the retailer. The often stated benefits are believed to be:
- Positive media exposure (as first to drop cigarettes)
- Internal motivation for employees
- Clear message to investors and customers
The media exposure appears to be very short termed to me. I find the benefits to be within the message being sent to employees, investors and customers as a whole. The employees and investors will be aware of no longer working for or being investing in a retailer also selling pharmaceuticals, but being involved with a company improving the health state of the American customer base. The customers will, not necessarily only because of this action, start to perceive the company as a healthcare provider – and cigarettes really just do not fit in.
I think the “sacrifice” will be rather low, especially in the long run. I read an interesting bit claiming that the margin on cigarettes is rather low (15%), so the store space could be better used with higher margin products (30%). Of course the sales from people coming to the stores for cigarettes, but buying more items than that, would have to be taken out of the increased profits. Sales are expected to drop by overall $2 billion, with $500 million lost from non-cigarette sales. This would result in a “sacrificed” of roughly $375 million in profits. But with overall cigarette sales going down in the US sales/profits are destined to decline anyway.
When it comes to generic strategies (i.e. low cost vs. differentiation) consistency in approach and action is even more vital. In those cases it is not just about soft facts such as employee perception of the company, but directly impacting pricing and cost structure of the business. In the last blog post Prof. Porter explained low-cost strategy and showed how dedicated one has to follow the decided path in order to gain competitive advantage. I was told a story by a manager at a company that decided to pursue a low-cost strategy, due to commoditization of its products. Their CEO would ask people to take pens from hotels during business trips to the office. While this was clearly not a method to reduce operating cost, it did send a clear message over culture to everybody in the organization. This was combined with a rigorous portfolio management process. Together this resulted in great strategy execution and doubled the company’s market capitalization within a few years. A similar company once used to be able to demand a premium price from differentiated products, but now competition from emerging markets put heavy pressure on the company. The approach should have been the same as with the above example; and in part it was, but the communication by management seemed uncommitted and the execution therefore lacked in effectiveness. The old strategy, wealth of the company and negotiation position was still engrained in minds of mid-level management and sales force. This resulted in a higher cost structure from slack control of costs and investments. Margins eventually came down further with increasing competition.
This is what Porter calls “stuck in the middle”. In those cases a company in neither the lowest cost provider, nor providing a superior offering. When looking around, one can find some examples in which this still works (e.g. airlines with government funding/ special hubs magically offering great service quality for a competitive ticket price) in somewhat regulated industries or not level playing fields.
This paradigm of consistency in strategy can be applied to other situations outside of business, too. What comes to mind are political crises such as the world financial crisis, which would require consistent actions such as system and structural changes in finance and education sectors. Currently we rather see a postponing of adverse effects.
The example I want to illustrate is long the lines of the US’s foreign policy. Not as a whole, but the dealing with terrorism, from a strategy and values perspective. When different decision makers need to come up with smaller policies and tactics, what bigger strategy are they referring to? I my opinion all the clichés about the US would be a great overall strategy. The US should aspire to be the society of equal rights, democracy and global philanthropists. So when it comes to anti-terror the approach derived from that should consider playing by the rules, i.e. no imprisonment without a trial, no torture, and no killing commandos in covered ops against US citizens. The US would aim to rather be a role model than a manipulative force. This would not only eliminate a lot of the recruits flocking to the US’s opposition, but also make it easier for allies to support any endeavors (due to less pressure from citizens) and for the soldiers, since they will have to face less collateral damage and mistreatment of prisoners. The dealing with NSA espionage etc. is a topic on its own, but should follow an overall democracy strategy, too.
For those of you who wish to further dive into the strategy of nations, I recommend having a look at Porter’s Competiveness of Nations.
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