Can You say what your strategy is?

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Can you summarize your company’s strategy in 35 words or less? If so, would your colleagues put it the same way?
It is our experience that very few executives can honestly answer these simple questions in the affirmative. And the companies that those executives work for are often the most successful in their industry.One is Edward Jones, a St. Louis-based brokerage firm with which one of us has been involved for more than 10 years. The fourth-largest brokerage in the United States, Jones has quadrupled its market share during the past two decades, has consistently outperformed its rivals in terms of return on investment through bull and bear markets.

It’s a safe bet that just about every one of its 37,000 employees could express the company’s succinct strategy statement: Jones aims to “grow to 17,000 financial advisers by 2012 (from about 10,000 today) by offering trusted and convenient face-to-face financial advice to conservative individual investors who delegate their financial decisions, through a national network of one-financial-adviser offices.” A well-understood statement of strategy aligns behavior within a business, allowing everyone in the organization to make individual choices that reinforce one another, rendering them exponentially more effective.

ELEMENTS OF A STRATEGY STATEMENT

What goes into a good statement of strategy? The late Mike Rukstad, who contributed enormously to this article, identified three critical components of a good strategy statement: objective, scope and advantage.

- DEFINING THE OBJECTIVE
It is always easy to claim that maximizing shareholder value is the company’s objective. However, the question to ask when creating an actionable strategic statement is, which objective is most likely to maximize shareholder value over the next several years? (Growth? Achieving a certain market share? Becoming the market leader?)

The strategic objective should be specific, measurable and time bound. It should also be a single goal.

At Edward Jones, discussion among the partners about the firm’s objective ignited a passionate exchange. One said, “Our ultimate objective has to be maximizing profit per partner.” Another responded, “Our ultimate customer is the client. We cannot just worry about partner profits. In fact, we should start by maximizing value for the customer and let the profits flow to us from there!” And so on. This intense debate not only drove alignment with the objective of healthy growth in the number of financial advisers but also ensured that every implication of that choice was fully explored.

Setting an ambitious growth target at each point in its 85-year history, Edward Jones has continually increased its scale and market presence. Striving to achieve such growth has increased long-term profit per adviser and led the firm to its unique configuration: Its only profit center is the individual financial adviser. Other activities, even investment banking, serve as support functions and are not held accountable for generating profit.

- DEFINING THE SCOPE
A firm’s scope encompasses three dimensions: customer or offering, geographic location, and vertical integration. Clearly defined boundaries in those areas should make it obvious to managers on which activities they should concentrate. The three dimensions may vary in relevance. For Edward Jones, the most important is the customer. The firm is configured to meet the needs of one very specific type of client: long-term investors who have a conservative investment philosophy and are uncomfortable making serious financial decisions without the support of a trusted adviser. Clarity about who the customer is has kept Edward Jones from pursuing day traders. Even at the height of the Internet bubble, the company chose not to introduce online trading.

Similarly, Jones is not vertically integrated into proprietary mutual funds, so as not to violate the independence of its financial advisers. Nor will the company offer penny stocks, shares from IPOs, commodities, or options — investment products that it believes are too risky for the conservative clients it chooses to serve. And it does not have metropolitan offices in business districts, because they would not allow for the convenient, face-to-face interactions in casual settings that the firm seeks to provide. Knowing not to extend its scope in these directions has allowed the firm to focus on doing what it does well and reap the benefits of simplicity, standardization and deep experience.

- DEFINING THE ADVANTAGE
Given that a sustainable competitive advantage is the essence of strategy, it should be no surprise that advantage is the most critical aspect of a strategy statement. Clarity about what makes the firm distinctive is what most helps employees understand how they can contribute to successful execution of its strategy. What is most distinctive about Jones is that it has only one financial adviser in an office, which allows it to have more offices — 10,000 nationally — than competitors do. (Merrill Lynch has about 15,000 brokers but only 1,000 offices.) To make it easy for its targeted customers to visit at their convenience, Jones puts its offices in strip malls and the retail districts of rural areas and suburbs.

These choices alone require Jones to differ radically from other brokerages in the configuration of its activities. With no branch-office management providing direction or support, each financial adviser must be an entrepreneur who delights in running his or her own operation. Since such people are an exception in the industry, Jones has to bring all its own financial advisers in from other industries or backgrounds and train them, at great expense. And because the company has 10,000 separate offices, its real estate and communication costs are about 50 percent higher than the industry average. However, all those offices allow the financial advisers who run them to deliver convenient, trusted, personal service and advice.

DEVELOPING A STRATEGY STATEMENT

How, then, should a firm go about crafting its strategy statement?

The process of developing the strategy and then crafting the statement that captures its essence in a readily communicable manner should involve employees in all parts of the company and at all levels of the hierarchy. The wording of the strategy statement should be worked through in painstaking detail. The end result should be a brief statement that reflects the three elements of an effective strategy. It should be accompanied by detailed annotations that elucidate the strategy’s nuances (to preempt any possible misreading) and spell out its implications. The strategy statement should be circulated throughout the company.

Cascading the statement throughout the organization, so that each level of management will be the teacher for the level below, becomes the starting point for incorporating strategy into everyone’s behavior. The strategy will really have traction only when executives can be confident that the actions of empowered frontline employees will be guided by the same principles that they themselves follow.

WAL-MART’S VALUE PROPOSITION

Wal-Mart’s value proposition can be summed up as “everyday low prices for a broad range of goods that are always in stock in convenient geographic locations.” It is those aspects of the customer experience that the company overdelivers relative to competitors. Underperformance on other dimensions, such as ambience and sales help, is a strategic choice that generates cost savings, which fuel the company’s price advantage. If the local mom-and-pop hardware store has survived, it also has a value proposition: convenience, proprietors who have known you for years, free coffee and doughnuts on Saturday mornings, and so on. Sears falls in the middle on many criteria. As a result, customers lack a lot of compelling reasons to shop there, which goes a long way toward explaining why the company is struggling to remain profitable.

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