Why strategic context is so critical to business growth

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Let me ask you a question. What is the best fruit in the world? Apples maybe? Or grapes? I’m thinking maybe bananas. But if I qualified this question by asking what is the best fruit in the world for sports performance? Then we could both agree on bananas. We added some context.

Context is at the heart of strategy. And yet, so few companies understand this. I ask people to explain their strategy to me, and instead they give me a business plan full of tactical actions. Often it’s an Excel spreadsheet with vague aspirations to reach a certain level of revenue or grow 30%. But there is no strategic context to this. There is no mention of a sustainable business model and recognition of the corporate culture that underpins it. Yet these are fundamental to strategy and planning.

The lack of contextual strategy leads companies to prey on different types of customers. “Income is income” is the attitude here, wherever it comes from. But if you’re constantly looking for income for fun, you’ll end up with a haphazard mix of activities and no clear idea of ​​where you want the business to go. Let’s go back to the fruit analogy. You won’t have any idea what to eat to increase your stamina, just a load of fruit.

Obtain agreement on context

Every business needs a shared sense of destination. So you need to get broad agreement on the context. History is littered with examples of conflicts that have been resolved by agreeing on a context. Take the Northern Irish peace process. Regardless of their different positions, each decided that economic prosperity was more important than unrest. Ditto for post-apartheid South Africa. The reason the Truth and Reconciliation Commission worked was a common aspiration for an economically viable South Africa. Context is everything here.

So you need agreement with the rest of your management team on some basic things. Why does your business exist? Look at this from a contextual perspective. What is the purpose of what you are doing? What is your BHAG (Big Hairy Audacious Goal)? These will give you a direction of travel 10 to 25 years into the future. Enough time for all of you who have been setting this context for a long time. Also, clarify what drives your economic engine. What is your sustainable business model? Without answers to these questions, you are shooting in the dark.

Clarity on the main client

The lack of clear strategic context leads to a disparate distribution of customers. It’s fatal. You should use your context to help you identify your primary customer – the customer or type of customer that will generate the most profit for your business. What unique value do you bring to them? What problem from them can you solve better than anyone else? Determine the mix of “willingness to pay” factors needed in your products and what activities will support those differentiators.

No matter the size of your business, getting it right isn’t easy. Take the experience of our client – one of the largest private companies in the UK. They asked us for help with a strategic makeover. The management team had to solve the fundamental question of why their company existed.

They looked at their unique value. Part of that was figuring out what customer problems they were going to solve. And, more importantly, what customer issues do they won’t to resolve. What was their real market? Where do they want to be in 10 years? They didn’t know which products and services were truly driving their revenue without answering these questions. Likewise, there was no clarity on who their competitors were in the short and long term.

Context helps clarify decision-making

With their new context in place, our client can see why things didn’t work out before. They are going to make changes to the way they bring new products and services to market. Suddenly there is a context to help with decision making.

Any change is difficult. These things tend to lead to inertia. People are emotionally attached to decisions they have already made. If you’re mired in the details, keep stepping back and asking yourself why does this company exist? Where do you want it to be? Which customers will help you get to this destination?

Look at Starbucks. They made decisions to scale their business without a real sense of the strategic context. They decided to internationalize and their growth rate plummeted. They thought they had a BHAG that was “Two thousand stores by the year 2000”, but that was boring. Jim Collins challenged them, telling them it wasn’t hairy or bold. If they drew a straight line in their finances, they would reach it.

So they left and changed the context of their thinking. Their new BHAG was to “make the Starbucks brand the most recognized and respected consumer brand in the world, a position Coca-Cola currently holds.” Now it was something different – an absolute moonshot. And you know what? Starbucks has become one of the most recognized brands in the world.

Hedgehog or Fox?

Jim Collins knows the importance of context. He incorporates this into his brilliant hedgehog concept – something I reference many times with clients. In his famous essay, “The Hedgehog and the Fox”, Isaiah Berlin divided the world into hedgehogs and foxes based on the ancient Greek parable: “The fox knows many things, but the hedgehog knows a great one”.

Collins observed that people who build good to great businesses are hedgehogs to one degree or another. They used their single-minded nature to move toward what he came to call a hedgehog concept for their businesses. Underperforming companies were run by foxes and were scattered, diffuse and inconsistent.

The hedgehog concept describes how a successful strategy is formed by overlapping 1) what you are deeply passionate about (your purpose) with 2) what you can best do in the world, and 3) what best drives your economic engine.

When deciding what they can be the best in the world at, people can be delusional. Authenticity is key here. Whatever you choose, it’s going to be damn hard. So it has to be something you are passionate about. You must believe it. And think you can sell it. Be sure to be clear about the context of your competition. You might want to be the best Indian restaurant in your town. It is very good. But if you say you’re going to be the number one Indian restaurant chain in the UK… that’s quite a different thing. There are no casual Indian restaurant chains in the UK. But there are, in the United States – Curry Up Now is growing in California.

Context around pricing

Another part of your context worth considering is whether you are going to be cheaper or more expensive than your competitors. There is no middle ground here. Either you will grow your business with a lower cost base than your competitors. Or you need to build a business where your customers are happy to pay you more. It comes down to the willingness to pay the drivers. You must identify them, support them and differentiate yourself around them. Remember that your profit margin is your sustainable competitive advantage. It must be superior to your competition to win in your space.

These two things are mutually exclusive. I don’t see high-priced and low-cost companies. If anyone has found this magic formula, please let me know! Emirates and Southwest Airlines are two excellent examples of well-differentiated companies. The former is expensive and offers a higher level of service. They have created the prestige of the brand thanks to the quality of their fleet, their lounges and the customer experience in general. They even put showers in first class.

The Southwest, on the other hand, is no-frills and offers low prices. They have used their culture as a strategic advantage, and their business model is built on the fact that their planes perform two more flights per day than their competitors. This gives them a lasting financial advantage. All the activities that contribute to sustaining this economic advantage are then linked. Awesome! Their stratospheric growth is an excellent example of strategic context at work.

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