Strategy, Constraints, and Compulsions

Business Strategy

Structural shifts in global markets impact businesses, even those that operate in fields that are unrelated or only tangentially related to the source of change. Catalysts such as changing demographics, living patterns, power generation and storage, and manufacturing technology affect virtually every industry, and reverberations from these shifts will be unavoidable.

It is important to note that change is not always negative. These shifts also present fantastic opportunities for value creation. This seems obvious, but there is a tendency to only view change as negative and equate it with risk, especially for more established companies in mature industries. Of course, avoiding disruption is prudent, but there are several sides to this coin.

The degree and directionality of impact of catalytic changes is variable and heavily dependent on industry dynamics and company structures. Catalysts impact businesses differently, based on the characteristics of their industry and market position. For example, companies in the transportation, aerospace, and energy industries are all affected by the growing trend towards urbanization and larger cities, but they need to make different strategic decisions to adapt based on the specifics of their industry.

Identifying what is happening and how these catalysts work is important, but understanding what they mean for a specific business and how that entity can respond is crucial. This requires a detailed understanding of how companies work, which in turn requires an understanding of the industries in which those companies operate. This is not as complex an undertaking as it may seem. Business strategy, distilled to its essence, is not very complicated once you are familiar with how the industry and operating environment works. To be sure, every industry has created a unique vernacular of jargon and acronyms to create community (and perhaps to confuse outsiders), but these are rarely as complex as they appear.

The root of this understanding is a constraint-based analysis. Businesses, especially the big brands that depend on recurring revenue and predictable buying behavior, cannot do whatever they want — they operate under certain constraints. When we evaluate the constraints that the market dynamics of an industry impose on its constituent companies, it becomes easier to understand a company’s strategic imperatives and the decision tree that is actually available to that company.

This is not to dismiss running a business as easy or unsophisticated; in fact, it is quite the opposite. Senior executives at important companies typically have been elevated to these positions because of demonstrated excellence and mastery of their craft. As masters, they understand the operating environment and the options available to them, as do their competitors. But while business strategy is not overly complex, executing a coherent strategy with billions of dollars of assets and tens or hundreds of thousands of people is incredibly complex.

Execution is where great companies differentiate themselves. Of course there are gains to be had by being first into a market or region or developing the newest technology. But most successes in developed markets, with multiple companies operating under the same constraints, are a result of execution. This applies to organizations of all sizes and types, from energy companies to soap manufacturers to armies.

To use an example from personal experience, military strategy, when distilled to its essence, is extremely simple. The “movement to contact” is a common example that serves well to illustrate this point. In this operation you move your people and machines until you encounter the enemy, at which point you fight. The general strategy is to move in such a fashion that you have a small force in front. When this force encounters the enemy, they attempt to either destroy them or prevent them from moving. The rest of your group (the reserve) then swings around to the right or left and attempts to attack the enemy’s flank.

It doesn’t matter if you are moving a group of 10 people on foot or 500,000 riding tanks, the strategy is the same and will be understood by professionals on both sides. Now, executing this maneuver effectively is incredibly difficult, requires thousands of hours of practice, and is the determinant for who wins battles and wars. All other conditions being the same, the better-trained and better-equipped force in this engagement will annihilate its counterpart. Execution is essential.

It is one thing to know what to do; actually doing it is another thing entirely.  With this in mind, we will focus on the principles that govern strategic business decisions.

Operating Realities

Company executives have a multitude of choices about how to run their businesses within the context of the industry and market structures in which they operate.   They decide what to make, how to sell, what to charge, and how to compete. These are not inconsequential decisions. Companies succeed or fail based on these types of decisions.

Early-stage companies have some degree of choice regarding what markets to participate in, and it is possible for small and medium-sized companies to pivot into different markets. Established, mature companies do not have this luxury and must operate in context of their industry. When evaluated at the strategic level, there are a series of constraints and compulsions that drive company behavior.

Different types of markets impose varying constraints upon the companies that operate within them. For example, some markets are in the growth phase; the market size is growing as the product or service is introduced to new customers. Other markets are mature; all potential customers know about the product or service and select between vendors. Yet other markets are contracting; market size is shrinking as requirements and/or addressable customers diminish.

Growing markets impose different constraints and compulsions, and thus drive different strategic behavior, than mature or contracting markets. Growing markets obviously compel companies to focus on reaching new customers, while mature and contracting markets compel companies to focus on outcompeting their peers. A series of cascading priorities is tied to market maturity, just as there are for markets with different degrees of connectedness (international, national, regional), non-market influences (government, regulatory, security), market size (millions, trillions), input characteristics (controllable, uncontrollable), etc.

Constraints

As we have discussed, understanding the constraints a business operates under goes a long way toward understanding how that business works. Constraints are limitations, and they are self-imposed in many cases. Kellogg could decide to make computers, but that would be self-destructive as all of their supplier relationships, talent, and customer buying preference are oriented towards cereal. As Kellogg is a rational actor, from a product perspective they are constrained to operating in a set of core and adjacent markets.

Common constraints that impact and compel company behavior include, but are not limited to:

• Customers: who they are, what resources they have available, and where your product fits in their hierarchy of needs and preferences
• Inputs: characteristics of the resources, materials, and subcomponents required for producing your products (abundance/ scarcity, in/out of your control, near/far away)
• Suppliers: characteristics of the ecosystem that provides inputs, processes them, and/or helps develop finished products and/or services
• Logistics: nature of the transportation and supply network that supports a given industry
• Governments: importance of the industry to national strategy or security, which generally drives the level of controls and oversight
• Ownership: public or private ownership and the influence of those structures on short- or long-term planning

Strategic Imperatives

Understanding constraints is a precondition to identifying compulsions, which are optimal responses to constraints and other competitive forces. For example, if a business is constrained by the requirement of using one particular resource to build its product, it is compelled to secure access to that resource at a reasonable price.

Compulsions are the foundation for business strategy and the strategic imperatives that underpin business strategy. This is the framework that enables us to understand how companies work, why they do what they do, and how catalysts impact companies in different industries.

In effect, catalysts change constraints or the underlying structures that influence constraints. Determining the impact of a catalyst on a business involves first evaluating how (or if) the catalyst changes the constraints that govern that industry. From there we evaluate how the changing constraints compel company behavior, based on that company’s specific position in that industry. The final step is to evaluate a company’s behavior and/or strategy to determine alignment with its strategic imperatives.

There is often a lag between a new strategic reality and a company’s understanding of and response to that reality. This gap is dangerous for companies and is often where winners and losers are determined. The best companies are able to grasp and respond to changes rapidly. Others become case studies, e.g., Eastman Kodak, Blockbuster, Borders Books, Bethlehem Steel, Yahoo, etc.

Final Thoughts

None of this actually matters on a day-to-day operational level. Most companies don’t pause to determine if their actions are consistent with the constraints and compulsions they operate under, nor should they. They are focused on execution: buying, selling, competing, partnering, and pursuing their near- and long-term objectives.

Nevertheless, the strategic precepts of constraints and compulsions are baked into the DNA of companies, and understanding them allows insights into how and why companies think, plan, and act. More importantly, this understanding is essential for helping companies recognize, navigate, adapt to – and prosper from – the catalytic changes on the horizon.