The statistical link between corporate strategy and profitability was discovered by Richard Rumelt in 1972. He found out that the degree of diversification affected a company’s performance: the less the diversification, the better the company did.
What explains business success?
This discovery still stands after over 30 years of research. However, it was his 1991 paper “How Much Does Strategy Matter?” that controversially challenged the majority thinking. Published in the Strategic Management Journal, this paper demonstrated that neither corporate ownership nor the industry involved could explain significant differences in performance between businesses.
Although the nature of the industry has an influence on profitability, of far greater significance is being the best in your field. The way you do it is more important than what you do. Many companies have great strategies but end up in failure because they didn’t get it right.
Take the newspaper industry for instance, and their search for an online and offline model. This is a completely new business model, and how it will work out is equally unknown. It is easy to take your eye off how to make money in this situation, and the Boston Globe is losing more than $100 million a year.
Uncertainty Vs ‘Me-too’
To reach a logical conclusion in such situation it is essential to use logical thought processes, and strategic thinking enables us to reach a conclusion. Opportunity and risk are two sides of the same coin: you can choose to be a ‘me too’ but you don’t make money that way. Uncertainty can reap high rewards.
Take Bill Gates. In his book ‘Outliers’, Gladwell states that people like Gates saw an opportunity and grabbed it. That is what strategy is all about: getting it right first. Being the first to get it right is much more important than getting first to market. However, before you can achieve that, you have to understand what drives your own strategy before you can recognize an opportunity when it arises.
When ex Apple co-founder Steve Jobs’ company NeXT was bought over, Apple returned as Apple CEO. He recognized that there would be an opportunity of blending the MP3 player with its contents so that both could be use together. His strategic thinking was driven by the combination of the entertainment industry and technology, and its result was the iPod.
Bottom line
It is simpler and safer to be a ‘me too’ – a follower, and letting opportunities go because they are risky. However, the qualities that make a business rise and stand with the giants are strategic thinking and innovation.
‘Helping Leaders build great organisations”
(C) Daniel Lock.
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