What we need when there is great future uncertainty
Over the years, I’ve taught many concepts that are vital to good strategy. One of the key struggles many have with strategy is that our assumptions can turn out to be incorrect, rendering some of our strategies less useful. Right now, many of us are struggling to revise our strategies because we simply cannot predict what the future will look like because of future uncertainty. Unfortunately, not changing your strategy is not really useful – you are simply betting that the old recipe will work in the future.
Good strategic planning calls for good assumptions, but great future uncertainty makes it extremely difficult to make reliable assumptions about the future. We are certainly in a time when it has become very difficult to make good assumptions. When you cannot make good assumptions about what will happen next year or even next month, there are a couple of key strategic concepts that come into play:
- Flexibility becomes more valuable
- Having reserve resources is key
- Multiple paths to success are required to win
With these concepts coming to the fore, there is one strategy that is much more likely to yield positive results – and it’s the one strategy that many companies have had trouble embracing. This strategy maximizes flexibility, builds intangible resources of support with employees, suppliers and customers, and enables profitability in multiple scenarios. This strategy is the specialty strategy, and you will see companies using it prosper at the expense of their commodity competition in the next few years.
Why a different strategy works better with future uncertainty
Why is this strategy so useful in times of uncertainty? Partially, it is because the specialty strategy at its core is about making more money because you do something well. The alternative approach – the commodity strategy – involves making money because you do something cheaply. There are three reasons why the commodity strategy is particularly difficult in times of change:
Volumes are unpredictable
Commodity strategies in the modern world involve thin margins which only create large profits when volume is high. In most high fixed cost businesses, this translates into much higher volume sensitivity. In a world where volumes are unpredictable or reduced, finely tuned commodity businesses struggle to make ends meet.
Distribution channels are stressed
Distribution is one of the most critical processes that a commodity focused business can optimize for. In many industries, distribution is the key element to gaining a critical 4-5% advantage on cost that enables a commodity to succeed. Unfortunately, the companies that make up those channels are the most likely to focus on a highly tuned commodity strategy, which makes them less flexible and resilient. When the people who make up your channels don’t have predictable futures, the whole system suffers, and that cost advantage disappears. In a true commodity business, loss of cost advantages are the kiss of death.
Caring about what you do is a two-way street
As we’ve said many times, the commodity strategy ultimately causes companies to focus more on what thing cost rather than whether they are good. A well-tuned commodity-oriented business applies this thinking to its suppliers, products or services, and people. Unfortunately, this means that customers come to expect whatever you sell them to be barely adequate. Customers simply do not expect excellence from their commodity suppliers – and focus almost entirely on the cost. This means there is nothing you can do for commodity customers besides lowering your prices, and there is nothing they are going to be willing to do for you.
Key advantages of specialty strategy with future uncertainty
Beyond these critical problems for commodity-focused businesses, specialty strategies offer some excellent advantages when properly executed:
Specialty strategies are more flexible.
Imagine you are running a restaurant. You local government (if not your market) has probably shut down your operation for the past several weeks. As restrictions loosen, you’ll likely find you can re-open with reduced capacity. This is ok for the specialty restaurant, because you have the margins to profit with reduced seating. But what about the commodity restaurant? With thin margins, reduced capacity means you’ll have to pay for your fixed costs with even less money – and you aren’t nearly as likely to make it, in that scenario. Specialty strategies give you both price and volume flexibility that are not available to commodity strategies.
Specialty strategies create advantages that don’t disappear when there is disruption.
The main benefit of the specialty strategy over commodity strategy is the preference of the customer. Disruption is far more likely to damage the advantage of the commodity strategy, which is price. This is because the superiority of the specialty product or service is simply less disruptable than the cost advantage of commodity products and services.
Being good at something in business involves a mindset that works for customers, employees and suppliers. It’s easier to be good at what you do with the full support of those three groups. Also, you have many options to make a profit this way that don’t take anything away from customers, employees or suppliers. With commodity strategy, the simplest, easiest way to increase profit is to take something away from those players – by paying employees less, paying suppliers less, or delivering less than your customers expect. If you want your customers to care about your business, you have to care about your customers, your employees, and your suppliers. If you do that, you will find a great reserve of support for your company in all three of those groups.
With these advantages in mind, now is a good time to take a closer look at your business to see where your specialty strategies are working for you, and how you can build on these for success in multiple scenarios for the next few years.
Simplified Strategic Planning is an excellent framework for examining and re-thinking your strategy in times of great future uncertainty. If your business is looking to prosper in the coming years, consider attending the Simplified Strategic Planning seminar online on August 10. A live instructor will both guide you through how the process works and give useful tips on how to make the most impact with your strategic planning. Sign up here!