We are in an era of start-ups, venture capitalists, Private Equity firms and Angel Funders.
Facebooks, Amazons, Twitters are not only the order the day but are competing to become the most valued firms in the stock market. Yet, many of these new-gen firms are not making profits and they never have.
We all know that ‘For profit’ organisations exist precisely for that, ‘Profits’. However, whether it is Flipkart or Amazon, we witness rounds after rounds of funding at ever increasing and sky-rocketing valuations in spite of the fact that many of these companies hardly made any profits.
Business of making money
While the common man may be puzzled about how these things work, as a teacher of strategy and strategy management, one is often asked this question: what does this mean to the field of strategy?
Michael Porter, the world’s most famous strategy guru, stated in one of his seminal work on industry analysis that every business is in the business of making money and hence any force that impacts the profits that a company makes is its ‘competition’: fellow industry players, suppliers, buyers, new entrants or substitutes.
The ‘anti-positioning’ school — resource-based view school — again advocates that profits are the result of building competitive advantage through acquiring and managing critical resources in a superior fashion. Both focus on profits as the objective of business organisations. Now we have a set of investors who don’t care when the company in which they are investing huge amounts, will break even or make profits. They are just interested in how fast you can scale your top line.
What’s changed?
So what has changed and hence what should we teach as strategy going forward?
Let us examine some of the foundational aspects of business strategy with a view to understand how they are impacted by these new trends. Strategy is planned based on assumptions about future in terms of environment, competition and industry. The strategy is as good as the assumptions made. All of us know that no one and no company can get all their assumptions correct. If they could, they would be god. The interesting and not so successful experiment of ‘Scenario Planning’ by Shell and a few other companies is an illustrative example.
VUCA World
We are in a Volatile, Uncertain, Complex, Ambiguous (VUCA) world. Not only the future is uncertain but the present itself is volatile, complex and ambiguous. My prediction is as good as yours. So should companies stop doing any kind of planning and live each day?
Disruptive technology
Conventional theory tells us that competitive advantage is built by offering either unique value or by low price. Today with the kind of disruption that is happening due to technology, the companies are not only offering quality but at low prices. Disintermediation (doing away with the army of middle men by using technology) has made this happen. Now, what should be the basis for developing competitive advantage? How are companies going to deal with the pressure mounting on manufacturers due to the conflict between conventional brick & mortar distribution channels versus the click & order online market place players such as Flipkart and Amazon. No one has any clue about where this is headed. Actually, online players should logically charge a premium as they make the shopping so very easy and comfortable but, the reality is the opposite.
And, with the market model (aggregator /market player) adopted by the e-commerce companies, the brands and products offered are the same by and large and the differences come down to pricing and may be delivery/installation/service. There’s reduced scope to differentiate.
What else is happening?
There are many complementary/supplementary players who have emerged riding on the back of the digital technology and the same technology has transformed the equation with suppliers and customers. Aggregators channelise the buyers and suppliers across businesses and have put enormous power in the hands of customers/consumers.
What should be the focus of strategy, then?
Companies should focus on managing employees and customers in a superior fashion leveraging technology (SMAC, for example) and the core and heart of strategising should prioritise these as two top most on the agenda. What is also happening is that there is no time available to do planning separately and implementing at leisure. Both have to be concurrent.