Keeping your business running from day-to-day is tactics, or execution. You’re making sure the donuts are made on time.
But all the big, long-term decisions–what kind of donuts to sell, what hours you’re open, the number and location of your stores, whether or not to sell your donuts at the grocery store or to sponsor a NASCAR driver or to branch out into bagels–are strategy.
You need both. Without execution, you won’t survive in the day-to-day operations of doing whatever it is that your business does. But without strategy, you’re just flailing, with no clear path for growth or success. It’s no different from regular life: someone merely tactical manages to pay the rent, but tends to live paycheck to paycheck. Strategy means having a retirement plan.
Michael Porter is like a god to MBAs, particularly in strategy. He came up with a lot of ideas about strategy.
One of his most well known is the “Five Forces” which you can use to analyze whether or not a particular industry is worth getting into–as it turns out, your profit margin over the long haul depends a lot more on your industry than on how good you are. So if you want to make huge profits, don’t open a restaurant. Try to make semiconductors instead.
The Five Forces are:
- Barriers to Entry: How hard is it for competitors to get into your business? If all they need to do is build a website instead of building an expensive factory, you don’t have much protection.
- Supplier Power: Do you need very specific raw materials that are only available from one source? If so, your profit can get squeezed by your suppliers.
- Buyer Power: Is your product sold only to a specific audience, or to a single buyer? If so, your profit can get squeezed by your buyers.
- Rivalry: Are lots of people competing in your space? If so, competition squeezes your margins.
- Substitutes: Is your product unique, or is it easy for somebody to replace it with something else?
Another tool is this general strategy quadrant:
| broad cost-competitor | broad differentiated |
| narrow cost-competitor | narrow differentiated |
In this sense, “differentiated” means “worth paying a premium for.”
“Broad cost-competitor” means that you try to be the cheapest product in a given industry; you make the cheapest generic golf equipment out there. To make money, you need to sell a lot of volume. There are a ton of companies who fit this description–this is the “Wal-Mart” or “McDonalds” strategy.
“Broad differentiated” means that you try to make a premium product for a given industry; you make a really expensive, high-end line of golf equipment. To make money, you need to make sure people think your product is worth paying extra for. There are also a ton of companies who fit this description–this is the “Rolex” or “Louis Vuitton” strategy.
“Narrow cost-competitor” means that you try to be cheap in a specific market; you make generic golf balls for driving ranges. You lower your costs by keeping your focus narrow, but you still need to move a lot of volume. This is a hard one to pull off, and no well-known companies come to mind.
“Narrow differentiated” means that you try to make a premium product for a specific market; you make a really high-end golf putter, but you only make putters. You mitigate some of the risk of trying to be premium in a broad market, but you still have to preserve your reputation of quality. This is a great place for entrepreneurs, and many companies start out addressing the needs of a niche market with a great product or service; a really good wedding planner or photographer is using this strategy.
MBAs love putting things in quadrants. Strategy is really, really fun.