Strategy is Saying Yes to Lasting Margin Increases

For years I have said, “Strategy is systematically saying no.” But, while saying no is a discipline that establishes a habit of operational excellence, there is more that must be proactively pursued. You must say yes to something of greater value than your competitors. So, what is that strategy which is worthy of your focus?

I finally read Hamilton Helmer’s “7 Powers: The Foundations of Business Strategy” and dare I admit, it was excellent. Wow. Truly. My biggest takeaway? Select a strategy that produces a long-term differential margin versus competitors. Your options of what you can reasonably select vary based upon the phase of your company.

As a young CEO, I assumed that operational excellence was a viable means to victory. Unfortunately, Helmer points out that operational excellence is a given in a large and attractive market. The top competitors will always produce operational excellence. This is table stakes to remain in a large and competitive market, let alone sustain a top 1-3 position within your niche. In order to produce a very large value, you must be a powerful shareholder of a very large market.

As an entrepreneur, I have been drawn toward stale old industries where I could disrupt the status quo. These are typically very large markets, and if the disruption is super new, you can often introduce a new sub-market. Frankly, I’m naturally a challenger. It’s fun to ask, “Why not?” Seriously… “why not make it 10x more valuable for 80% of the current cost?” Use your brains and willingness to be different to carve out a new solution. Helmer calls this “counter-positioning” and it’s most likely established in the origination phase of the company’s strategy. The big and established leader simply cannot risk his proven zone of control and power. As an entrepreneur there is usually an underserved, profitable niche to be carved off and dominated with smaller resources. The problem with this is it’s very hard to grow very large if the market does not grow along with you. And starting an entirely new market is dangerous and expensive.

Usually, my entrepreneurial hunch is to develop a new method, which is not easily replicated, because it’s not easily seen. Helmer simply calls this “invention.” I’m cool with that. However, this may not be a large enough insight to matter.

Some colleagues of mine where recently saying that almost all strategic power comes down to scale economics. You have to be big enough to own the equipment that lowers your unit economics, or big enough that your brand owns the mind share. Everything else is simply a means to get to one or both of these positions. The company with the scale gets lower cost per unit first and the lead perpetuates an extension of the lead. Without large-scale disruption, the leader will retain it’s leadership.

The key then, when small, is getting a unique insight early, and investing in a way that the unit economics improve as you go faster than your competitors.

What if you are on the back side of leadership? What if you’ve already got the leadership position? Well, first off, be sure you don’t screw it up. Keep doing the thing that is working. Reinforce that reputation by remaining consistent. Finally, invest in “process power” derived from your empirical data and experience.

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