The quad effect: where to spot strategy traps

How many wrong assumptions have you made that have led to bad decisions? You’re not alone; many people need a broader view.

Strategy frameworks are a way to expose why we think the things we do. Why are these customers seemingly more attractive than others? Are bigger customers really better? How much do the best and worst customers cost?

While frameworks can bring rigour to your thinking, a model won’t stop you falling into traps. Here are four all-too-common strategy snares.

1. Concentrating on bad growth

Some revenues aren’t worth chasing. You need to ask, “What is the real profit pool here?” and not simply, “Is this a large, growing market?” Frameworks like Porter’s ‘Five Forces’ model can help you understand the strength of your current competitive position as well as your potential one. If there are 60 other companies doing the same thing, even if it’s a healthy, growing market, your future margins will be squeezed. If that’s the case you must decide whether growth is sensible in that area. Equally, if a market is shrinking, the best way to make money may involve abandoning aggressive growth targets altogether. The UK retail market for DVDs is a good example. As demand for an in-store offering declined, one leading retailer, HMV, bought competitors to beef up its market share. But as customer habits continued to shift, the company’s position became untenable. Stationery store WHSmith took a different approach. Over the past 10 years, it shrunk its business by focusing very carefully on what its customers wanted and therefore created more value by becoming smaller. It’s unfashionable for companies to shrink their way into value. Growth and size are important, but managers are inclined to exaggerate both.