In this post David Trafford and Peter Boggis propose that the act of strategy development is essentially about deciding where an organisation aims to operate along a small set of strategic axes, where each strategic axis represents a source of value. Making these positions explicit as a strategic signature is an effective way of helping an organisation understand what it needs to do to change its trajectory to its target future.
Regular readers of our articles will know that our view of strategy is that its primary purpose is to change an organisation’s trajectory; to take it beyond its default future to one that is not only better, but also achievable and sustainable. Furthermore, the essence of formulating strategy is making choices about the target (improved) future and the best way of getting there – the new trajectory. But what are these choices and how can they be best communicated? In this article we will argue that these choices are essentially about deciding where an organisation wants to operate along a set of strategic axes, and that strategic signatures are an effective framework for formulating and communicating strategy.
Strategic axes and sources of value
When leaders think about strategy they are essentially thinking about where they would like their organisation to operate in the future. They are thinking about how the current sources of value could be maximised and where new ones could be created. We call these sources of value the strategic axes of the organisation. Strategic axes not only define what an organisation does, but the extent to which it does it. For example, retail banking has a set of strategic axes (sources of value): one is the service it provides to enable customers to pay bills and transfer money. This axis is often called payments, current or cheque accounts. This strategic axis offers a spectrum of choice and where a bank chooses to position itself on this spectrum defines its strategy. At one extreme it could provide a full range of payment facilities available through its branch network, by telephone, via the internet or mobile devices. At the other extreme it could choose to offer a more limited set of payment services, for example only via the Internet. Most retail banks operate on the same strategic axes, but choose different positions along each spectrum of (strategic) choice.
If a bank also provides mortgages it would be operating on an additional strategic axis (source of value). This spectrum ranges from basic repayment mortgages through to offset mortgages linked to current accounts. Equally, if it offered insurance products it would operate on another strategic axis.
One aspect of strategy is therefore choosing where along the strategic axes (sources of value) an organisation intends to operate.
Examples of strategic axes in the mining and airline industries are given below.
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Examples of strategic axes in mining
Product portfolio: from single product focus through to multiple products. Geography: from a small number of synergistic locations through to global coverage. Processing: from exploration and extraction through to secondary processing and manufacturing |
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Examples of strategic axes in the airline industry
Passenger proposition: from low-cost, no frills through to full service within a global alliance. Ticketing and reservations: from booking flights through to providing an industry platform. Cargo: from carrying no cargo through to being an integrated global carrier. |
An organisation’s business model is defined by its strategic axes
What an organisation does – its business model – is defined by its sources of value, essentially how it delivers value to its customers and how it generates value for its shareholders. As discussed above, we call these sources of value the strategic axes of the organisation.
Strategy therefore comprises making choices about which sources of value the organisation decides to pursue and where along each axis it chooses to position itself. For example, when Apple launched iTunes in 1998 it pursued a new source of value, and as a result introduced a new strategic axis to the Apple organisation. At the time Apple may not have fully understood the full spectrum of choices available to it along this strategic axis, but over time it has continually repositioned itself from offering a simple music player to the sophisticated multimedia content manager, hardware synchronisation manager and e-commerce platform of today.
Amazon is an example of an organisation that began by operating on one strategic axis and over time introduced new axes, details of which are given below.
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The strategic axes of Amazon
When Amazon was launched in 1994 its business model had one strategic axis, ie e-retailing, initially focusing on books. Over the years it continually repositioned itself along this strategic axis to sell CDs, DVDs, online music and many other products provided by third-party suppliers. Today it is possible to get virtually anything from Amazon. In 2002, Amazon changed its business model when it launched Amazon Web Services (AWS). Over the years it has repositioned itself along this ‘web services’ strategic axis by launching Amazon Simple Storage Service (Amazon S3) in 2006 and Mobile Ads API for developers in 2013. In 2007 Amazon changed its business model again by launching the Kindle e-book reader. Over the past six years it has continually repositioned itself on this strategic axis and in October 2013 the sixth generation Kindle was released. Amazon’s success is a result of continually repositioning itself along its existing strategic axes – in order to give a better customer experience and generate more value – and by extending its business model by introducing new strategic axes that build upon it core organisational capabilities. |
So, organisations aim to change their trajectory by:
- changing their position along one or more strategic axes, and/or
- adding or removing individual strategic axes.
Let’s look at some examples where organisations have either significantly repositioned themselves along their strategic axes, introduced new ones or chose to exit a strategic axis on which they had once dominated the market.
Tesco, one of the world’s most successful supermarket retailers, decided a few years ago to change its position on one of its strategic axes – that of geography. Having been a dominant and successful UK supermarket retailer for many years, it decided that a large amount of its future growth would come from outside the UK. It expanded not only into continental Europe, but also into Japan and China. It also decided to enter the North American market by opening ‘Fresh & Easy’ stores in the Western States of the USA. Despite considerable research, significant management time and attention and a large amount of investment, this venture has not proved to be successful and in 2012, Tesco decided to withdraw from this particular market as well as certain other geographies, resulting in a significant write-down of asset value – of around $1bn. It has now repositioned itself on this strategic axis by deciding to refocus on the UK market.
Another example is Morrisons, the UK’s fourth largest supermarket chain. However this time it is an example of introducing a new strategic axis. Compared with its competitors Morrisons did not offer its customers the opportunity to order groceries online and have them delivered to their home. However, in 2014 this will change as it launches such a service following a £200m deal with Ocado (an independent online grocery distributer) to acquire access to its technology and a distribution warehouse. Morrisons is pursuing a new source of value by operating on a new strategic axis, exactly where it has chosen to position itself on this axis will become apparent when the new service is launched.
Repositioning oneself on existing strategic axes – and even more so, introducing new strategic axes – involves risk and requires the organisation to ask itself: “Do we have – or can we acquire – the organisational capabilities for us to succeed and sustain our desired position on this strategic axis?” In the Amazon example discussed above each new strategic axis it introduced built on existing organisational capabilities, and in the Morrisons’ case it recognised that it needed to partner with an organisation that had the capabilities it needed.
There are many examples of organisations that failed to successfully reposition themselves along one of their strategic axes. Our first example is Rio Tinto, one of the world’s largest, global mining groups. The company has had a successful track record over decades of finding, extracting, processing and shipping commodity products such as iron ore, copper, bauxite and more prestigious minerals such as gold and platinum, and has done well out of the increase in demand for these raw materials from emerging markets such as China and India. However, in 2007, it decided to shift its position on one of its strategic axes – the degree to which it moved ‘downstream’ in processing – by buying Alcan, the Aluminium manufacturer of cans and other packaging products – for $38bn. In 2012, it decided to exit this strategic position and wrote off some $8bn in asset value. Did it have the organisational capabilities to move more downstream on this strategic axis? The verdict is clearly no and the consequences are significant. Its CEO and long-time executive, Tom Albanese, left in 2013.
Rio Tinto was not alone in the mining industry to have suffered significant write-offs in 2013: BHP Billiton wrote off $2bn on shale gas assets and Anglo American wrote off an eye-watering $48bn on an ill-conceived Brazilian iron ore mining venture.
Our second example is Hewlett-Packard, who in 2011 decided to change its position on one strategic axis – that of the product/service spectrum – by buying the UK-based software company Autonomy for $10bn in an attempt to move more downstream into value-added data mining and analytics services for end customers. Just one year later, in 2012, it wrote off some $8bn following the perceived failure to sustain the growth, profitability and innovation that it thought it was acquiring with this move. Most of the senior team in Autonomy left, the due diligence process was questioned and the threat of law-suits emerged. Did HP have the organisational capability to manage the acquisition of a fundamentally different business – one with very different organisational capabilities – that needed to be nurtured, ring-fenced and sustained? The press has reported that Autonomy felt ‘stifled’ by HP’s processes as they were more bureaucratic than those they were used to in a relatively new start-up, fast-growth business. Interestingly, HP has also written off large amounts relating to its earlier acquisitions of EDS, acquired for $13bn in 2008, and Compaq at $1.2bn in 2002.
Finally, an example of an organisation exiting a strategic axis is that of IBM. For a long time, a leader in PC and laptop manufacture, IBM decided that its position on this strategic axis could no longer be sustained as the product became increasingly commoditised. So in 2005 it sold its PC and laptop business to the Chinese manufacturer, Lenovo.
An organisation’s strategic signature is unique
All organisations in the same sector have the opportunity to operate on the same strategic axes, but where they position themselves on each axis will be different. This defines their strategic signature. Strategy is therefore about deciding which strategic axes (sources of value) form the organisation’s business model and where along each axis it chooses to operate.
A strategic signature can be presented in a number of ways. This example uses a set of ‘slider bars’ where each slider bar represents a strategic axis and the position of the slider indicates the strategic choice along the spectrum of possibilities. Typically, the left of the slider bar represents the less ambitious strategic choices and the right the more ambitious.
A strategic signature drives an organisation’s trajectory
An organisation’s strategic signature acts as a ‘navigation system’ steering the organisation on its chosen trajectory. That is not to say that organisations are like machines that can be programmed. They cannot, but they can be guided and managed onto a different trajectory and resultant future. Strategic signatures are a way of making that guidance explicit as they define where and how the organisation should operate in the future. One of their uses is to give guidance as to what needs to be done to ‘pull’ the organisation away from its current trajectory to its target future.
An organisation’s current strategic signature is as important as its target
Our focus up until now has been on the target strategic signature – as a proxy for what the leaders want their organisation to be in the future. But in reality all organisations have a current strategic signature, which may not be explicitly articulated or even understood, but is driving the organisation’s current trajectory.
Understanding the current (default) strategic signature is important as it helps inform what needs to be put in place in order to make the target signature a reality. Most leaders focus on the wrong future – the one they hope to achieve rather than the one they’re likely to get. As a result they are often surprised and disappointed when the organisation doesn’t respond in a way they hoped and continues on the same trajectory as if nothing had happened. What is often not appreciated is that the destiny of an organisation is determined by a set of powerful forces that determine the current strategic signature and act as invisible ‘rail tracks’ taking it to its default future.
By describing the current strategic signature and comparing it with the target signature, it is possible to assess the magnitude of the gap and formulate actions that bring the target signature to reality. The bigger the gap, the greater the challenge in implementing the strategy. A strategy that is not achievable and sustainable can be as damaging as having no strategy.
An example of the gap between current and target strategic signatures is shown on the right.
A target strategic signature needs to be balanced
As we’ve previously discussed, the essence of formulating a successful strategy is making informed choices, often the most difficult of which is balancing the strategic signature. We know that the majority of strategies don’t achieve their target outcomes. John P Kotter, author and professor emeritus at Harvard Business School, believes this figure to be only 5% and the The Standish Group published research in 2011 showing that only 16% of change projects are completely successful – ie delivered the benefits that were expected. Some 53% under-performed and 31% were cancelled.
One reason for this is that organisations try to do too much and underestimate the capabilities needed to deliver success. It is therefore important that the target strategic signature reflects what is possible, which will inevitably mean pulling back on the target positioning along some of the strategic axes. Our experience is that leaders of organisations are ambitious – rightly so – yet it is this ambition that often leads to failure due to a lack of collective leadership. In this context collective leadership means taking a collective position on the target strategic signature and making choices that balance what is best for the organisation with what is collectively achievable. A successful strategy for the organisation is rarely the sum of individual divisional or functional strategies.
Using strategic signatures as a tool for effective governance
Strategic signatures can be a powerful way of ensuring that both the executive team and its non-executive directors are aligned around the organisation’s future trajectory. They can be used to facilitate the debate and discussion with the executive team to create shared understanding of, alignment around, and collective leadership and commitment to the desired future. Many leadership teams pursue strong individual leadership of their part of the signature, but often fail to demonstrate collective leadership around the overall signature. This can create internal conflicts, tensions and confusion about priorities.
Similarly, non-executive directors are often asked to ‘validate’ or ‘confirm’ the strategy developed by the executive team, while not having been involved in the process of formulating the strategy and perhaps not being as informed as they might be. We argue that the strategic signature across the chosen strategic axes is a powerful way of creating the right debate and discussion between executives and non-executives about the choice of those axes, the positioning on each axis and the organisational capabilities needed to sustain success.
New strategic signatures require different organisational capabilities
An implication of operating on a new strategic axis or repositioning the organisation on an existing axis is that it requires very different organisation capabilities. In our blog Using Organisational Capabilities to Pull the Present into the Future we argue that the role of these new organisational capabilities is to ‘pull’ the organisation to its target future. We also argue that existing organisational capabilities can put a strategy at risk as they can be so embedded that they anchor the organisation to the present. Understanding the organisational capabilities needed to introduce a new strategic axis, or operate at a different position on existing axes, is one of the most important conditions for success when developing strategy.
Five key questions
If you are currently developing or implementing a strategy, consider these five questions:
- What are the four to five key strategic axes for your organisation?
- What is your organisation’s current and target position on each strategic axis?
- Is your target strategic signature balanced?
- Does your strategy define how the target positioning on the strategic axes will be realised?
- Do you have the organisational capabilities needed to operate at your target strategic signature?
We welcome your thoughts.
David Trafford
david.trafford@formicio.com
Peter Boggis
peter.boggis@formicio.com