Magazine article Strategic Finance

Supporting Tenets of Return Driven Strategy. (Strategic Management)

Magazine article Strategic Finance

Supporting Tenets of Return Driven Strategy. (Strategic Management)

Article excerpt

How do great companies connect their myriad strategic activities with the underlying goal of maximizing financial value creation? The June column discussed how companies can leverage and excel in the right combination of strategic competencies--innovation, operational excellence, and branding--to fulfill unmet customer needs in large, growing market segments.

Now let's take a look at what strategic activities support the strategic competencies in these companies. Research on Return Driven Strategy found the use of key strategic activities to support the innovation, operations, and branding that the goal tenets--and therefore customers and markets--demand. The supporting tenets of Return Driven Strategy as shown in Figure 1 are means to an end--enabling the organization to excel in the higher-level strategic competencies with the aim of achieving the goal tenets.

Great companies use the supporting tenets creatively to leverage Genuine Assets and continuously adjust their overall business strategy to significant forces of change. Activities these companies employ range from partnering activities, use of options strategy, engaging employees through superior leadership, reengineering value chains, and strategic communications.

Five Supporting Tenets of Business Strategy

The five supporting tenets of Return Driven Strategy are Partner Strategically, Utilize Options and Portfolio Strategy, Engage Employees and Others, Reengineer the value Chain, and Communicate Strategically. They highlight activities that companies use to better innovate offerings, to operate more efficaciously, and to enhance brand management.

Partner strategically refers to the variety of ways companies collaborate to achieve higher strategic goals. The spectrum ranges from the lightest level of partnering, where organizations may simply exchange information, to the extreme end that results in a merger or acquisition. Of course, there are all the levels in between that simply allow a company to share the focused capabilities of another organization so it can focus on its own strengths. These can include arm's length transactions, outsourcing, co-branding ventures, and legal joint ventures.

Companies should partner to achieve strategy they couldn't accomplish by themselves, such as to create competitive advantages based on Genuine Assets of your company or others. Companies should choose partnership arrangements that will maximize the value of the partnership yet protect the overall strategy and execution of each company. Careful strategic partnering analysis should always consider how the partnering will achieve one or more of the higher-level competency tenets of strategy shown in Figure 1.

If the partnering relationship is truly valuable, it will help a company innovate offerings, operate better, or brand in ways that will fulfill unmet needs for a large customer base that it couldn't do alone. Home Depot, for example, is partnering with ServiceMaster to test the sale of cobranded residential maintenance and repair services. This arrangement should leverage one of Home Depot's Genuine Assets--specifically, customer traffic in Home Depot stores. Charles Schwab, the investment company, has partnered and collaborated strategically to innovate offerings by establishing AdvisorSource, a referral network of independent financial service providers that have been screened by Schwab; by creating alliances with insurance companies; by acquiring US Trust Co.; and by creating alliances with investment banking firms to sell shares in IPOs.

Utilize Options and Portfolio Strategy. What's successful here is an attention to options management that doesn't speak to financial options involving derivative securities but that encourages an "options thinking" or attention to flexibility and risk taking in business strategy. This ranges from the rigorous options-based management of research and development at successful pharmaceutical companies to more flexible, intelligent means of corporate resource allocation methods in corporate finance and strategic planning groups. …

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