Monday, 09 March 2020
Strategy is key when it comes to building a successful business. This is a universal truth that is acknowledged by companies worldwide.
But when it comes to understanding how to build that successful strategy, the situation becomes less clear. How can companies create the best conditions for their businesses to grow? And how can they leverage their strengths in order to increase their customer’s willingness to pay for their products and services?
Leading business expert and Professor of Strategic Management at HEC Paris and BMI Pierre Dussauge has spent his entire professional career investigating these questions and more.
Why are some firms more successful than others?
Because they have a better strategy.
Could you explain that a little more?
So, there are two sides to strategy. There’s business strategy and corporate strategy. On the business strategy side, it’s either because firms manage to have lower costs than their competitors, or they create what we call a higher willingness to pay. And the purpose of business strategy is to increase the gap between cost and willingness to pay.
So, somehow companies are able to do that by leveraging particular skills, through a different business model and these kinds of things.
Can you explain the difference between business strategy and corporate strategy?
Business strategy is all about creating a competitive advantage, and a competitive advantage comes from the gap you create between cost and willingness to pay. For instance, the most successful car company in the world is Toyota.
Toyota is not the most expensive, it’s not the cheapest; it’s not the best, it’s not the worst. But it’s the one that manages to charge a price and have a cost that gives them the greatest difference between the two. And they exploit economies of scale because they produce ten million cars a year, so obviously the cost of each car is lower than many of its competitors.
Corporate strategy, meanwhile, is about the scope of the firm, deciding what different businesses or markets to compete in.
Could you define corporate strategy as a kind of milestone that indicates that you have reached a certain point through your business strategies?
No, it’s just different facet of strategy. Very often what happens is when a company is in trouble in its main business, it tries to go into other businesses. In this case it has a business strategy problem that it tries to respond to through corporate strategy.
In 99% of cases that fails. So, that’s like saying if Nadal starts losing at tennis, he says look I’m not winning enough at tennis, so I’ll become a swimming champion. It’ll never happen. You first have to fix your business.
You first fix your problem in your business, and then you can decide if going into another business is a good idea. That’s a choice.
Is strategy in general somehow related to comparing yourself with your competitors?
It is always relative to competition, because in a market situation, customers will compare different brands. So, customers are willing to pay more for a BMW or a Mercedes than they are for a Volkswagen. Now why?
Because BMW or Mercedes have, either by chance or deliberately, cultivated different aspects in their business. Their quality is a bit better; their brand is a bit more prestigious — they pay attention to all this. And, on the other hand, their costs are not proportionally higher than those at Volkswagen, so they manage to do it.
I’m not saying they do it at a lower cost than at Volkswagen, but at least they don’t have to increase their costs more than they can increase their price relative to Volkswagen. So, in business strategy everything is comparative—everything is relative.
How would you define the way in which companies compete?
There is a traditional classification that companies compete either on cost or on differentiation. I don’t think that’s true. I think all companies compete simultaneously on cost and differentiation. And rather than differentiation, I would call it willingness to pay.
So, even Rolls Royce cannot ignore costs. Actually, Rolls Royce went bankrupt because of its cost position. Even though it can charge a lot of money for its cars, if its costs are too high, it can’t survive.
At the other end, the cheapest car company in the world is the Tata Nano. Their problem is that, although they produce the cheapest car in the world, people don’t want to buy it. The willingness to pay is too low.
People prefer to buy a motorcycle than what they perceive as a lower class of car. So, I think that every company within one business needs to worry simultaneously about cost and willingness to pay. That’s why at the business level, some companies outperform others.
Then at the corporate strategy level, it’s because there are combinations of businesses or markets that are better than others.
How do considerations like globalization affect strategy?
What we teach on globalization is that some industries are immediately global, so companies in such industries need to compete internationally. There’s no way they can operate only in one market.
For example, airplanes or automobiles. If a company tried to make automobiles just for one specific country, they’d go out of business immediately. Even only competing in Europe is not possible anymore. You need to be in America, in Asia, just because economies of scale are huge.
Other businesses are very local. In such businesses it’s an option rather than a requirement to be international. If you are a newspaper you can choose to remain very local. You could be a daily newspaper in Paris, and you are fine. So, globalization doesn’t affect all businesses in the same way, and that’s one of the very first questions to ask.
What strategies can best address the challenges of globalization?
I think it depends on the business you are in. So, in some cases, it’s fine to compete locally. There’s no issue. In some other businesses, you need to be one of the world leaders, and there are lots of businesses in between where there are lots of alternatives.
Are there cases where the effects of globalization killed the business?
Yes, in automobiles; all the British car makers have disappeared. There are no British car makers anymore. Rolls Royce is German, Jaguar is Indian. So, even brands we think of as British, they’re not British. But on the other hand, look at fast food. McDonald’s looks like a dominant player, and in Lithuania I see this chain called Hesburger which seems to be doing fine and growing faster than McDonalds, at least in some cities. So, it really depends on the kind of business you’re in.
This is because economies of scale are much greater in cars than in fast food. If you have one restaurant, you have certain costs; if you have ten restaurants, it’s almost ten times the cost. What does it mean? It means if you only have one restaurant, you can still compete against someone who is much bigger.
So, businesses can’t run without a strategy.
I think strategy is like prose. You don’t know you are doing it but as soon as you speak you are doing prose, right? Strategy is like that. Everything you do contributes to your strategy, but it may be a bad strategy. So, it’s better to think about it deliberately than not think about it.
What makes a strategy credible?
Well, that it makes it possible to increase willingness to pay and reduce costs more than the competition. So, you need to try to do things consistently, and again consistency is common sense.
But I don’t think people necessarily think about it, because everyone in their own job tries to do the best work possible. But sometimes good work can be too good, relative to your positioning.
So, there is an issue of knowing how to perform good work at every level. So, if you’re Volkswagen, you don’t want to make Mercedes, because it will be too expensive, and you won’t be able to charge the money for it.
Is market-share important?
Market share is more a result. It’s not the cause, but there is a bit of a snowball effect. So, if you already have a large market share, it’s going to allow you to have lower costs, especially if there are large economies of scale.
Economies of scale is just the fact that the bigger you are, the lower the unit cost. So, if you produce one car, the cost of that car is going to be millions. If you produce ten million cars, a lot of the costs, especially the fixed cost, are shared over that ten million, so it brings down the cost of a car. But economies of scale are a very important concept in economics, and in strategy.
Can you give us some examples of companies that changed their strategy and became more successful?
So, I guess one example is BMW. BMW in the 60’s was a medium to low end company, and they consistently over the years pushed the brand up — mainly between 1960 and 1975-80 — and they managed to be very successful and profitable. In corporate strategy, I guess Apple is a good example. They were making only computers, and the idea to launch Iphone, Ipad, made them very successful.
Is it possible for younger companies to gain competitive advantage over companies that are well established in the market?
What’s the secret?
I am not convinced there is a recipe that always works. Ryanair re-invented the business model for airlines in Europe…well, in fact, they copied a company in the US that’s called Southwest.
It’s just a different business model. Ryanair chose to operate an airline in a different way than most airlines were operating before.
So, being modern is just re-inventing things?
What does modern mean? Is Volkswagen modern? Although the economy changes, the rules of competition don’t change that much. They are just applied in different ways in different industries. I do think digital technology has created a lot of new businesses that did not exist before.
Most of these new businesses operate in a way that had already existed but was limited to particular industries. In many ways, Facebook operates like a newspaper.
The people who read it don’t pay the full cost. If you use Facebook you don’t pay anything, and those who pay are advertisers. That’s how newspapers operate. The difference is that a newspaper has physical constraints in how far it can be delivered, and there’s the cost of printing that Facebook doesn’t incur.
So, Facebook gets the advantage of economies of scale to a level that is unknown to newspapers, but it’s not very different, in fact. And language is less of an issue than in a newspaper, because most of the content is produced by the users themselves.
Does brand image matter for the success of a business?
It depends on the business. We’ve already talked about this, but only implicitly. The first side of business strategy is to understand the business in which you are. So, the restaurant business is what I call a fragmented business. Most customers don’t want to go to the same restaurants every time. What does this mean?
Actually, it means if you have been around for a long time, you have either managed to create a very particular positioning, or you are at a disadvantage just because people like to go for something new each time…maybe not each time, but they want a change. Because of that it is very difficult to get a competitive advantage in the restaurant business.
Even very famous three-star restaurants tend to be fashionable for a while and then decay. They may still have a bit of an advantage because people remember their reputation, but eventually it will disappear.
In other businesses, on the contrary, the more you do something, the better you become at it. And customers actually want quality, cost, and so on; so that’s going to affect your success. So, each business is different. It’s like saying what does it take to succeed in sports. Well, it depends on the sport, right?
If you play basketball, you’d better be tall; if you do boxing, you’d better have a lot of muscles. You need to learn what I call the rules of the game — both the formal and the informal rules of the game. In basketball there are the formal rules of the game, but you know that certain tactics work better than others.
It’s better to have players that are tall than are very short. These are the rules that you need to know if you want to play with a good chance of winning. If you don’t even know them, you won’t win.
Does marketing play a part in business strategy?
It depends on the business. So, it works with some businesses and it doesn’t work with others. Like airlines: you can advertise as much as you want; people compare prices and the only thing they care about is whether it gives them a cheap price. I mean the ultimate objective is the same, but the game is played differently in each industry.
Could you tell us about the business strategies that you believe will become hot topics in the coming decades?
I think the big change that has happened is the emergence of platform businesses. So, if we think of Facebook, Airbnb, and Uber, it’s not only the gap between cost and willingness to pay, it’s also the ability to connect two different communities together in a particular way.
For example, Uber connects people who have a car and want to make some money with it, with people who want a ride that isn’t too costly and is immediately available. And it connects them; Airbnb does exactly the same.
And I guess that digital technology, and having it on our phones, has created a whole bunch of opportunities to exploit these kinds of connections. But again, it’s not new. The same thing existed 200 years ago with Christie’s.
Christie’s is a platform business — it connects people who want to buy art with people who’ve inherited art and don’t want to keep it. Why do people who want to buy art consult Christie’s? Because Christie’s manages to get a lot of good art from people who want to sell it.
Why do people who inherit art sell it through Christie’s? Because Christie’s knows a lot of people who want to buy art. That’s exactly the same as Uber.
Why do I have Uber? Because I know there are a lot of Uber taxis in most places. And why do drivers want to have an Uber app? Well, because they know that many people like me have the Uber app on their phone and will order an Uber, because they can’t be bothered to download another similar app. And because of that, there’s a snowball effect—the bigger you are the bigger you get.
So, I guess the big change in the world is the emergence of platform businesses. Now, if traditional businesses can complement their activities with a platform, and the platform helps to create success for their traditional business, I think this re-enforces their business. So, for example, the New York Times has been very successful at converting a physical platform into a digital platform.
What businesses, what areas of the market are going to do well in the next decade?
If I knew that I wouldn’t be here. I would be an investor or a business angel. I guess like everyone that green things are going to increase. But the problem is we’ve been saying this for fifteen years, and green businesses have gone out of business. It’s like when you speculate—it’s not whether you are right or wrong, it’s how soon you are right or wrong.
So, if you speculate too far in advance, you die of hunger before your prediction comes true. A lot of companies in wind power generation have gone out of business. It’s not because they were doing a bad job, it’s because they tried to become too big too early, and the market wasn’t ready to follow yet.
I think in the long run it will. It’s like electric cars. Everyone says it’s the future of automobiles, but nobody’s really buying them for now.
Are there some different business strategies for startups and Unicorns?
No. What I think here is that startups rarely think about strategy. They usually think about the good service or good product that they have come up with. And I believe the difference between those that fail, and those that succeed, is that the more successful ones start thinking about strategy early on. Because otherwise their success is likely to be confiscated by other companies who just see what they are doing, realize there is a market, and step in.
So, if you have been doing well, you should ask yourself why. It sounds obvious, but companies themselves don’t know why they are doing well. The first step in strategy is understanding why you are doing well.
Pierre Dussauge is a Professor in Strategic Management at HEC Paris, and will teach at the new UCLouvain BMI International EMBA programme opening In Brussels.
He was a visiting professor of Corporate Strategy and International Business at the Ross Business School of the University of Michigan (Ann Arbor) for many years. He has also taught at INSEAD (Fontainebleau, France), at IESE (Barcelona, Spain), at INCAE (Costa Rica), at the Indian School of Business (Hyderabad), at Tsinghua University (Beijing, China).
He is the author or co-author of several books in the field of strategic management (Strategic Technology Management, J. Wiley & Sons, 1992 ; Stratégie d’entreprise: études de cas, InterEditions, 1993; Les Stratégies d’Alliance, Editions d’Organisation, 1995; Cooperative Strategy, J. Wiley & Sons, 1999; Strategor, 2009) ; Les Stratégies d’Alliance received the 1995 McKinsey award for the best management book published in France.
In addition to his academic work, Pierre Dussauge has been a consultant, or management educator, with a number of firms in Europe and the US, including: Mars, Fiat, Schneider, Pechiney, EADS, Generali, SCOR, SNCF, American Airlines, DuPont de Nemours, and IBM.