The economics of strategy.

The economics of strategy. featured image

When business is a hamster wheel.

Who doesn’t love economic theory? OK, maybe you don’t. But bear with us. Good strategy starts with good economic theory. We’ll end up somewhere much more interesting. Promise.

Before the theory, a depressing observation. A study by a leading global consultancy showed that 80% of large companies make no material economic profit (remembering that economic profit is real profit, not accounting profit…which is pretty much just made up). The important implication of this finding is the top 20% of firms are very profitable indeed because they take all the profits off the table. In fact, the top 20% of firms are responsible for 90% of all economic profit.

Now the theory. In a perfect market there is no economic profit. Economic profits arise from exploiting market imperfections. By market imperfections we mean things like unrecognized customer needs (resulting from imperfect information, think of the success of Yellow Tail wine in the US who exploited the fact that traditional wine producers didn’t pay attention to what wine consumers were saying) or potential for innovation and product differentiation (resulting from imperfect substitution, think of the iPhone out-competing Blackberry). But identifying and taking advantage of market imperfections is really hard to do.

That’s the theory done.

So, the goal of every company has to be to putitself into the top 20%. Otherwise, it is just spinning the hamster wheel to keep the lights on.

It’s the process of identifying market imperfections and thinking of ways to effectively take advantage of them that we call strategy. Understood in this context, strategy is not what most people think of when they think of strategy.

Strategy is not a “to do” list for the next twelve months tied to some sales projections and dropped into an anodyne powerpoint presentation filled with the latest management buzz words. This is bad strategy. At best, this might be a useful strategic planning and budgeting exercise. At worst, this plans for the future by looking at the past. It prevents real strategic thinking by focusing on what is in the company’s control (“to do” lists and budgets) and not what has the power to effect the company’s future.

Moving into the 20%.

At Hoist, we believe real strategy comes from identifying the small number of crucial factors that distinguish success from failure. We use this insight as the basis of a specific approach to move into the 20%. Or if you are there already, staying there and growing your advantage.

The idea is not just to have a clear data visualisation; pretty pitch deck; a catchy tag; the best looking product; a really good looking identity; or an awesome user experience. Although Hoist will give you all of those. What is really important is to understand that brand and marketing, based on thought provoking design and informed by a data driven understanding of business, is part of an inter-related holistic approach. Each of these elements works in harmony to influence those one or two key elements that can drive real advantage and create sustainable economic profits. This is how Hoist lifts your vision.

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