What is a good strategy?

In my previous article, I mentioned that there is a gap between understanding a good strategy and creating a good strategy, and that in order to overcome this gap, it is important to do the Conscious(ISHIKI) Management that goes into creating a strategy.

In this article, I’d like to consider the premise of a good strategy as a step toward the Conscious(ISHIKI) Management when creating a strategy.

Among strategies, I would like to focus on the area of “competitive strategy” in management. In addition to competitive strategy, the concept of strategy can be used in many other areas, such as marketing strategy, financial strategy, career strategy, etc. However, if I were to include all of them, it would be too abstract, so I will focus on competitive strategy, which is often discussed in business.

A good strategy is a story

Take a look at this chart. This is a representation of one company’s strategy, do you know which company it is?

It’s a famous chart, so I’m sure many of you have seen it somewhere.

It is said that this is what Amazon’s founder, Jeff Bezos, wrote on a paper napkin while eating. And it still lives on as part of Amazon’s concept of a virtuous cycle focused on the customer. (From Amazon’s website)

A good strategy is told as a story. A story is a narrative woven by stakeholders with a unique intention. The story includes the following elements.

1) Stakeholders’ vivid stories

By telling the story of the strategy, we can see not only the company, but also its customers, suppliers, employees, and other stakeholders interacting with each other in a lively way.

→In the Amazon example, we feel the joy of customers being able to choose from a large assortment of low-priced products, and we feel the satisfaction of sellers due to the increase in customer traffic. In addition, the word “Growth” in the center of the chart gives a nuance of growth of the company and growth opportunities for employees.

2)A dynamic story with developmental potential

Telling a strategy in a story makes the strategy not a static picture, but a dynamic story with development. It is not just a picture of an ideal image at one point in time, but a developmental story about how to get closer to the ideal image.

→The Amazon example, expressed as a cycle, depicts how the relationship between customers and sellers, which began in a small scale, developed into a cycle in which customers call sellers and sellers call customers, and in which value for both customers and sellers increases and develops through a structure in which costs decrease as the scale expands.

3) A probable story

In a word, probability means certainty. A good strategy is told with a story of probability. A good strategy is told with a probable story, a story in which the individual elements and their connections are not unreasonable, yet the story as a whole delivers great value and differentiation.

In the Amazon example, the connection between each and every element is not unreasonable. For example, in terms of the connection between Traffic and Sellers, it seems very certain that as customer traffic increases, the market will become even more attractive to sellers and the number of sellers will increase. Even though each connection is not unreasonable, the chart as a whole tells a story of value and differentiation that no company has been able to achieve before.

Thus, I believe that a good strategy is a story that satisfies the following elements

1) Stakeholders’ vivid stories
2)A dynamic story with developmental potential
3) A probable story

Now let’s go back to the definition of strategy that we introduced in the previous article.

Definition of strategy (Ochiai’s idea)
A story of realizing a vision (future image) with probability and developability

※A story is a narrative woven by stakeholders with a unique intention.

In fact, this definition is an anticipation of the fulfillment of the three elements of a good strategy. Needless to say, the three elements of a good strategy are the background to this kind of definition.

What does it mean to be profitable?

Being profitable is an important part of running a business. Even if making money is not the goal, making money is an essential requirement to realize the goal.

Thinking about competitive strategy and being profitable are inextricably linked. Therefore, as a precondition for thinking about competitive strategy, it is necessary to accurately grasp what it means to be profitable.

To be profitable, in other words, to earn profit, is to leave the state of perfect competition.

In perfect competition, the excess profit of a company is zero. When there is perfect competition, no company can make a profit. The inability to make a profit means that it will be difficult for the company to survive in the medium to long term.

Perfect competition is defined as a situation in which the following five conditions are met.

Making a profit can be described as creating a state that departs from the five conditions of perfect competition. To put it more simply, making money is about being different from other companies on the premise that customers value it.

A story that makes a difference and makes connections

From what we have seen so far, we can say that competitive strategy is “a story that makes a difference and makes connections.” This is the definition of competitive strategy given in the book “Competitive Strategy as a Narrative Story” (Ken Kusunoki). This book, in my opinion, is an excellent depiction of the significance of strategy as a story and its methodology.

This book shows how to create a “difference,” or a pattern of competitive advantage, in four stages. (The following is a brief overview of the book, so you can skip it if you’ve read it before, or read the book if you want to know more.)

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In “Competitive Strategy as a Narrative Story,” it is stated that strategy is “making a difference and making connections. In many industries, there is competition, and in order to be profitable, we need to win the competition. In order to do so, we need to make a “difference” from our competitors. Strategy is the way to do that.

Level 1: Competitive structure of the industry (Five Forces Model)
In Michael Porter’s Five Forces Model, the profitability of an industry is defined by the five forces. If this structure remains unchanged, the current competitive advantage will be sustained (although it is better to assume that there are few such industries in today’s world).

Level 2: Strategic Positioning (SP) and Organizational Capabilities (OC)
Strategic Positioning (SP) is to position one’ s company differently from others in the competitive environment of the market.
Organizational Capability (OC) is to make a difference through management resources that cannot be easily imitated by other companies. Differentiation is based on organizational culture, operational systems, and other sources.

Level 3: Strategy Story
Combine the values and assets that serve as strategic elements into a story. The key to sustained advantage is “consistency,” “ reciprocal effect” (the strength of the connection between the elemental values and assets and the number of combinations), and “asset accumulation effect” (the positive effect of assets (customers, human networks, brands, data, etc.) that accumulate the more one does).

Level 4: Critical Core
An element that seems irrational at first glance but gains rationality when viewed as a whole story. Competitive advantage is sustained by the absence of incentive to imitate.

Examples of level 3 and level 4 strategy stories are Amazon and Starbucks. The value chain is connected as a story, and it is able to create a difference from other companies.

What makes the strategy stories of these two companies superior is the following.
・Strength = the certainty of the cause-and-effect relationship between each component
・Thickness = Many components are intertwined.
・Length = the number of steps in the causal relationship

The critical core of Level 4 is the “original distribution center” in the Amazon example and the “direct management system” in the Starbucks example. Both of these measures are “seemingly unreasonable” in the sense that they pose risks to the company and reduce the speed of expansion.

But when we look at the strategic story as a whole, it leads to a rational value chain. The critical core is a very strong source of competitive advantage because the competitors would not even be motivated to imitate the elements.

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The above is only a small part of the book’s content, but it should give us an idea of how revolutionary this book is. “Not only does it identify the elements of a good strategy, but it also reads it from a dynamic perspective (i.e., story) such as time axis and cause and effect.

We need a story that create stories

I have been telling you that a good competitive strategy is a story that makes a difference, but in terms of consciousness(ISHIKI) management, I believe this is still not enough.

What is not enough is that we have not yet answered the question, “So how do we create these stories?

At the beginning of this article, I introduced the strategy story of Amazon written by Jeff Bezos when he founded the company, and he said that he wrote it on a paper napkin. Was it something that came to him suddenly at that moment? There may have been some elements of that, but I think it is unlikely that he came up with the whole thing on the spot from scratch.

It would be more natural to assume that there was some sort of idea that had been conceived in the previous process, and that it was verbalized and illustrated on the “paper napkin.” There must have been a micro, causal, and differential flow that created a good strategy.

Thus, even if we know what a good strategy looks like, it is still very much macroscopic, consequential, and integral, and we have not yet been able to connect it to the microscopic, causal, and differential perspective at the level of the internal sensations that create a good strategy.

We need a story that creates a good competitive strategy story. I would like to discuss this point in the next article.

Here are the quests of the day. (If you’d like, please share your thoughts in the comments.)

・When you look at the five conditions of perfect competition, which conditions (by being apart from them) allow the company or business you to generate profits? (See the figure of the five conditions of perfect competition.)

・At what level in the competitive advantage level is your company or business differentiating itself from its competitors? (See the diagram of the levels of competitive advantage.)

Bunshiro Ochiai