Lets talk about strategy. Why is it important for engineers and engineering leaders to understand strategy? Because strategy is the bridge between the vision and the end state. It is the set of coordinated actions you need to take, to get to where you need to go. It’s just like an engineering project. You decide where you need to be, by when and then you make a plan, and you execute the plan until you get there. Nothing very business-y about it. Us engineers can do this.

So, what is strategy?

A strategy is a theory about how to achieve a sustainable competitive advantage through an integrated set of distinctive activities. A good strategy can provide a sustainable competitive advantage and lead to superior performance. And poor performance might be an indicator of the lack of competitive advantage and might need a shift in strategy.

What are the key elements of a strategy?

There are three critical elements of a strategy statement, 1. objective, 2. scope, and 3. advantage.

Any strategy statement should clearly lay out what the strategy aims to achieve. This is the objective. If you don’t know where you are going you likely are not going to get there.

Without a clear objective, you might end up doing a lot of things but not achieving anything. The objective is the single precise goal that will drive the business over the next five years or so. It cannot be a list of activities or actions. It cannot be marketing speak, like saying you want to build the best product in the world or that you want to be the Uber of Mortages or something like that. It must be specific and measurable, and must include a timeframe by when this needs to happen.

You need to clearly define the scope in which you expect to operate. Too broad a domain, and your efforts will be unfocussed and fizzle out. Which segment are you going to compete in, which customers are you going to build for? For example, building for Enterprise customers has different requirements compared to building for Small and Medium Businesses. Knowing clearly who we are building for allows your team to make better decisions. Define your boundaries and allow your team to focus on what is important.

Your competitive advantage is what sets you apart from your competitors. It is why customers buy your products and why investors fund you, instead of that other company across the street. You need to be clear about why you are better than your competitors and how you are going to maintain that advantage.

The strategic sweet spot of a company is where it meets customers’ needs in away that rivals cannot, given the context in which it operates. Bringing in employees into the process of developing the strategy and crafting a communicable version of your strategy is important. It allows the strategy to be well understood and increases confidence that frontline employees will be guided by the right princples, as set out in the strategy.

What are some other factors that affect the success of your strategy and your business?

The industry you are in

The industry you are in will have a significant impact on your strategy. Different industries have different competitive dynamics, different customer needs, and different ways of creating value. Understanding the industry you are in is critical to developing a successful strategy. Not all industries perform equally. Some do really well (like Software, Softdrinks, Pharmaceuticals etc) and others have a hard time staying profitable (like Airlines, Hotels etc). There’s published research that shows that average companies in a great industry might outperform great companies in a poor industry. Your strategy needs to account for the specific dynamics of your industry.

Porter’s five forces model is a great way to understand the competitive dynamics of your industry. It helps you understand the forces that shape the industry and how they affect your business. The five forces are the threat of new entrants, the bargaining power of suppliers, the bargaining power of buyers, the threat of substitutes, and the intensity of rivalry among competitors. Understanding these forces can help you develop a strategy that will allow you to compete effectively in your industry.

The internal capabilities and resources of the company

The resource-based view (RBV) is a model for firm performance that focuses on the resources and capabilities a firm controls as sources of competitive advantage. Resources refer to the tangible and intangible assets that a firm can use to implement its strategy. Capabilities refer to the ability of a firm to use its resources to achieve a particular end.

There are three kinds of resources,

  • Tangible resources: includes financial assets like cash, securities and physical assets like plant, equipment, land, and inventory
  • Intangible resources: includes technology assets like patents, copyrights etc, reputation and organizational culture
  • Human resources: includes the skills, knowledge, and motivation of the employees of the firm

There are two kinds of capabilities,

  • Operational capabilities: the ability of a firm to perform its core operations effectively and efficiently
  • Dynamic capabilities: the ability to integrate, build, and reconfigure internal resources to address new opportunities and challenge.

The VRIO (Value, Rarity, Inimitability, Organization) framework extends the resource-based view (RBV) to analyze all the resources and capabilities a firm possesses. The VRIO framework is used to determine a firm’s potential to generate competitive advantages.

The VRIO framework focuses on answering the following four questions for each resource and capability:

  • The question of value: Does the resource or capability allow the exploitation of an external opportunity or the neutralization of a threat? Resources are not inherently valuable. They must enable a firm to exploit an opportunity or neutralize a threat, to be considered valuable.

  • The question of rarity: Is the resource or capability controlled by a small number of competing firms? A resource or capability is rare as long as the number of firms with the resource or capability is smaller than the number of firms required for perfect competition. Thus, if many firms possesses a resource or capability, then it is unlikely to be a source of competitive advantage for any of the firms.

  • The question of imitability: Is the resource or capability costly to obtain for firms without the resource or capability? A resource or capability is inimitable if it is more costly for the firms that do not possess it to acquire or develop it compared to the firms that already possess it.

  • The question of organization: Are other policies and procedures organized to exploit the resource or capability? A valuable, rare, and inimitable resource or capability does not in itself provide a sustainable competitive advantage, the firm must be organized appropriately to fully exploit the resource or capability and turn a potentially unused competitive advantage into a sustainable competitive advantage.

How do you apply these concepts?

Say you’re thinking about a company, create five buckets, one for each of the resources and capabilities of the company. And then for each of the things you put in the buckets, ask the VRIO questions. Is this valuable, is this rare, is this inimitable, is the company organized to take advantage of this? If you can answer yes to all of these questions, then the company has a sustainable competitive advantage.

For example, let’s take Microsoft Azure Active Directory (Azure AD), a leading identity and access management service from Microsoft.

Lets put together the five buckets for Azure AD,

  1. Tangible resources: Microsoft’s data centers, servers, network infrastructure, and about $100 billion in cash and short-term investments
  2. Intangible resources: Microsoft’s brand, reputation, and customer relationships
  3. Human resources: Microsoft’s employees, including engineers, salespeople, and customer support staff
  4. Operational capabilities: Microsoft’s ability to develop, deploy, and maintain Azure AD
  5. Dynamic capabilities: Microsoft’s ability to adapt Azure AD to new technologies and customer needs
VRIO Conclusion for Microsoft Azure AD:
  • Data centers: valuable but not rare.
  • Servers/network infra: valuable but not rare.
  • $100 billion in Cash and short term investments: valuable, and quite rare.
  • Brand and Reputation: valuable, rare, inimitable.
  • Customer relationships: valuable, rare, inimitable.
  • Employees: valuable, not rare, inimitable.
  • Microsoft’s ability to develop, deploy, and maintain Azure AD: valuable, rare, inimitable.
  • Organization: Yes, Microsoft is highly organized to fully exploit Azure AD’s potential, with substantial resources and a strategic focus.

So in conclusion, Microsoft Azure AD has a sustainable competitive advantage because of its cash on hand, brand, reputation, customer relationships, and the ability to develop, deploy, and maintain Azure AD.

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