Strategy assessment - initial perspective

Strategy is about a consistent set of policies that has a good fit with the external environment. It could take several years to perfect a strategy. Unfortunately, every time a company changes its strategy it risks getting a misfitting new strategy. Despite the difficulties it is sometimes necessary to change a strategy. This note will look at successful and unsuccessful changes to a company's strategy, and how the stock market tends to evaluate these changes.

The most important change is when customers' change their purchase patterns. Customers can decide to to buy another product category; often made available by technological change. Or they can decide to buy the product of another company with uniquely-differentiated or lower-priced products. To the left in figure 1, purchase patterns are stable or only changing gradually. To the right, purchase patterns change substantially. Irrespective of whether customers change their purchase patterns, a company can decide to keep its strategy stable or to change it. At the top in figure 1, the strategy is stable or only changing gradually. At the bottom, the strategy is changed substantially. The two-by-two matrix provides a starting point for assessing a company's strategy. Figure 1 describes ideal situations and figure 2 describe what can happen when companies are less successful.

Figure 1. Good forms of change

Figure 2. Bad forms of change.

Stability. This is the much sought after situation with a stable environment and a stable strategy. IKEA (low cost manufacturer of furniture) and BMW (higher-end sporty cars) are two examples. These two companies have essentially kept the same strategy for decades, mainly because their customers' purchasing patterns have not changed in a major way. There are examples of stable strategies in stable environments that are much less successful.

The stock market generally likes companies in this quadrant. Even the less successful companies generally have a stable share price development, but, naturally, on a lower level.

Controlled decline. The company acknowledges that it is ill suited to deal with the changing purchase patterns. Since it is unable to adjust, it settles for managing the decline profitably. Very few companies willingly accept that they are unable to adjust their strategy (so they attempt a major change in strategy). A good example is Microsoft that makes all its profit on Windows and Office. Many analysts think that the company should just manage the two bestselling products, which are in a slow state of decline, and not enter any new industries. A more common situation is blind decline. In this situation, the company does not notice the changing customers or it might notice the change, but underestimate its importance.

The stock market generally accept if a company is mature enough to manage the decline. Even though the strategy does not change, this is still a very active choice. In contrast, the stock market really dislikes when a company fails to take any kind of action in response to the changing purchase patterns. However, very often the stock market is slow to realise that the purchase patterns are changing.

Smart move. This is a situation in which a company decides to change its strategy despite the customers not changing. The company might for instance be interested in growing faster and by changing its strategy it would be able to attract a larger portion of the customers. Sometimes this is a good approach, but it is all too easy for a company to get greedy and change to many aspects of the strategy. Companies that leverage on their existing competencies will do better. Companies that think they can change several aspect of their value chain quickly are normally found out to be deluded. Companies that change their strategy more gradually will perform better. Hence the label greedy move in figure 2.

The stock market generally likes companies that change strategy into a fashionable strategy. However, the stock market generally underestimates the difficulties associated with changing a strategy. After the initial euphoria in the stock market, disappointment sets it and the share price falls. If the company responds too directly to the changing share price it is likely to loose the long term perspective and end up losing even more in the longer term perspective

Big winner. This is a situation in which both the customers and the strategy changes. Instead of accepting the decline, the company uses its competencies in a clever way to develop a new strategy. This quadrant is important and will be discussed in detail in a forthcoming blog entry. Needless to say, when both customers and strategy change it is not obvious that the new strategy will be correct. So many companies end up being big losers instead. A good example of a loser is Nokia that bet the company on Microsoft's Windows Phone.