What is the goal of a business’s strategy?
The goal of a business’s strategy is to maximize an organization’s value for its shareholders within a given period.
Maximizing an organization’s value implies that you must manage your business to extract the most you can from your available resources. These resources include money, people, knowledge, assets, relationships, intellectual property and anything else that can be leveraged to increase your organization’s value.
In other words, given a set of strategic alternatives available, you must pick THE “set” (i.e., the combination of options) that you believe would extract the most value of your organization’s resources during the foreseeable future at the least amount of effort.
See the next explanation for more detail.
Breaking down the goal of a business’s strategy
Classic strategy thinkers, Michael Porter among them, define the goal of strategy as to “outperform competitors within a given market”, which derives from the idea that companies compete with others at the “share” level, and that to win, they must outperform rivals on a “Return on Investment” or “ROI” basis.
While the idea captures the essence of the competitive thinking taught during the last 40 years, it doesn’t reflect the nature of today’s markets and nor highlights what a modern company needs to thrive and last in today’s competitive dynamics.
First, by defining your goals in terms of your competitors’ performance you are most likely leaving money on the table. In fact, focusing your attention on your competitor’s behavior may prevent you from realizing other potential sources of value for your organization and might produce a shortsighted strategy.
For example, you wouldn’t believe that Amazon’s CEO Jeff Bezos wakes up every day thinking that he doesn’t have any work to do because his company already outperforms Walmart and Barnes and Noble in its respective markets.
When asked about competition, Amazon’s Jeff Bezos said: “At every place we do business, we have great competitors. It is okay, that is how the world is supposed to work. I think we do well because we don’t think about that.”
In another interview, he added, “Let’s say you’re the leader in a particular arena, if you’re competitor-focused and you’re already the leader, then where does your energy come from?”
Those are wise words from a proven executive who left his competitors in the dust a while back, but that keeps growing his company as fast as he can.
What if all of your competitors suck, or had a bad year? Would you feel satisfied because you made 1 percent more return on shareholder’s investment than a poor-performing business?
Or what if your so-called competitors are just too big to be beaten? Should you stay away from that market turning down profits that you could be making there just because you can’t outperform the leader?
What if you have no competition at all?.
Defining your goals in terms of your competitor’s performance is a suboptimal metric, and the success of a new breed of companies, Amazon included, testifies that.
Apple’s strategy with its Music services is not to outperform Spotify, currently the leader in the digital music space, but to maximize its revenues from an already captive group of customers who love Apple’s products and who are locked into the company’s products ecosystem.
While Apple might seem like a direct competitor to Spotify, which must defend its position from the former, from Apple’s point of view, however, its goal is not to outperform Spotify but to extract the most value from its Music service. Apple will not go out, for example, to capture customers on Android devices just because they need to outperform Spotify.
Defining your goals based on the returns of other companies is not broad enough and doesn’t encourage you to look beyond your current markets and competitors.
In Apple’s case, its strategy with its Music service is part of a bigger goal which seeks to maximize the value the company extracts from its captive customers.
Second, the classic definition by default limits the scope of your business to the markets you are already in. If your goal is to be the best company (or stock) in your market, then by definition you are only looking to make money within the boundaries of that market.
That view doesn’t reflect what we see in today’s markets where companies are more often crossing the boundaries of their primary industry, entering markets beyond their “core business.”
If companies were to stay within their markets, Google wouldn’t compete out of internet search, nor Amazon would play other than in eCommerce.
The classic advice of delineating your strategy to the boundaries of established markets where you have “Competitive Advantages” although logically correct, is too limiting in scope.
Wu, Sun. Strategy for Executives, this book can now be downloaded for free here.
Sharma Punit, Itika; Mookerji, Nivedita. We do well because we don’t think of competition: Jeff Bezos. Business Standard. URL: https://www.business-standard.com/article/companies/we-do-well-because-we-don-t-think-of-competition-jeff-bezos-114092900061_1.html
Bishop, Todd. Jeff Bezos explains why Amazon doesn’t really care about its competitors. Geekwire. URL: https://www.geekwire.com/2013/interview-jeff-bezos-explains-amazon-focus-competitors/