Strategy Exemplified

For the last five decades or so, there has been an intense debate between those who believe that strategy is paramount to success in the business world and those that believe that success is influenced by other factors and that strategy may even be a hindrance. The argument put forth by those that do not view strategy as indispensable goes along the line that in today's business world there is no time to sit back and analyze a business or an industry as a whole and make decisions accordingly - they believe that a business' success is determined rather by the leadership skills of its executive team and the adaptability of an organization's culture to ever more rapid technological changes. Conversely, the proponents of strategy as the sole vehicle towards success advocate careful analysis of the companies' capabilities and its industry's trends through which a path is carefully plotted and consequently executed. While there are surely examples that point out the relevance of each argument and while the truth about the true determinant of success surely lies somewhere between the two extreme views, there is at least one current example of what seems to be a carefully thought out strategy that is being executed before everybody's eyes.

With roughly 400 million users around the world, Facebook is by far and away the largest social networking site in the world. Other, older, sites like MySpace currently pale in comparison and newer services like Google's Buzz have yet to make much of an impression. By all accounts, Facebook is still barely profitable. By the same token, it is widely acknowledged that it is only time before it figures out how to turn all of its users and, more importantly, all the information it has about its users into a reliable and surely extremely profitable revenue stream. While it is certainly the market leader in its domain, Facebook is certainly not resting on its laurels and is constantly looking to venture into other spaces in the online world. Most recently, Facebook has sought to expand its social networking capabilities to the internet as a whole - beyond simply connecting its users, it is now seeking to intimately connect its users to the internet as a whole by tailoring their general online experience to their desires as defined by their Facebook accounts and those of their Facebook friends.

Technological advances are certainly somewhat responsible for Facebook's latest expansion; however, it seems that it is a rather deliberate strategic action taken as a response to some of the underlying threats faced in the online world. For any internet company, the single biggest threat comes from expected new entrants, due to the extremely low barriers to entry and low switching costs. Online companies usually seek to mitigate this risk by providing a better service than its competitors or by amassing a critical mass that provides an enormous advantage to certain sites like eBay or Facebook, whose relevance increases as it gains more and more users. Despite the best efforts of certain companies to provide the best possible services or to amass the most amount of users possible, there have been countless examples of dynamic and innovative start-ups that swoop in and steal users - indeed, Facebook was once such a company, stealing millions of users from MySpace. By attempting to establish itself as its user's online identity, Facebook is seeking to increase the barriers of entry and reduce the risk posed by potential new entrants, all at a minimum cost and while increasing the amount of information it has about its users, in turn increasing its profit potential.

Especially with the proliferation of Beta launches of un-finished online products and services, it has long been argued that strategy is particularly irrelevant for Internet companies. It may therefore come as a bit of a shock to some that such a clear strategic move has come from the likes of Facebook, one of the largest and most technologically-proficient online companies.

The Volcanic Cloud's Lost Silver Lining

In a tumultuous week that saw hundreds of thousands of passengers stranded across the world and the leading Wall Street institution's reputation possibly permanently damaged, there were certain industries that were smiling. The eruption of a volcano in Iceland that nobody had ever heard of before and whose name no one can pronounce and no one is likely to remember a month from now, caused the already fragile airline industry to loose hundreds of millions of euros as a result of massive flight cancellations across Europe. While the conversation has revolved mainly around the troubles of the airlines and of stranded passengers, little attention has been paid to those that have greatly benefited from this exceptional weekend. Certainly, hotels, ferry operators and car rental and coach bus companies have had the best few days in a long time. The question that follows is whether those that stood to benefit from this adverse situation did so as best they could? The answer to this question depends in large part in how we define a company's success.

Despite the lessons that should have been learned as a result of the recent economic crisis from which we are emerging, it seems that we still live in a world ruled by short-term results: hotels across Europe began to charge more for rooms and bus and ferry tickets became more expensive as these companies looked to maximize their immediate revenues. While these price hikes can be explained by the simple law of supply and demand, the fact is that stranded passengers will surely not have taken well to these extortionist pricing policies. Had the goal of these companies been to maximize long- rather than short-term profits, surely alternative measures would have been taken. Sympathizing with passengers and offering them a break in these already tough times might have gone much further towards increasing the overall bottom line rather than aiming to reap immediate rewards. Beyond pricing policies, there are other things that these companies could have done.

As one of the hundreds of thousands of stranded passengers - my flight from London to Dublin on Sunday was cancelled - I looked for alternative travel plans and decided on a train-ferry combination offered by a British operator. When I attempted to book the journey, I encountered a message stating that payment for travel dates within 7 days of the booking date could only be made by telephone and upon calling the ticketing number I obtained a message saying that the offices were closed on Sundays. Surely, on what was set to be the company's busiest Sunday in, perhaps, its history, it would have done well to open their offices on that day in expectation of the increased volume. Whether their failure to open their offices was due to a lack of flexibility or disdain for passengers looking for alternative travel arrangements, it was the wrong action to take.

All in all, it seems that through their collective actions, the industries that were set to profit from the otherwise extremely negative effects of the volcanic ash cloud that paralyzed European air travel most certainly did so in terms of this weekend's bottom line but miserably failed to do so in terms of their longer term brand perception. What this signals is faulty strategic thinking that values short-term results over long-term viability. Unfortunately, this faulty strategy is one that seems to plague all sorts of businesses across myriad industries.

What Sovereign Debt Means for Businesses

A few weeks ago, when discussing the issues that many MNCs may face in far-away markets like China, we emphasized the need to fully understand what your business is getting into as it attempts to amass customers around the world. While the discussion then mainly revolved around the risks that surround differing political and cultural norms, businesses that are looking to expand globally need to understand that there may be significant risks when entering markets that are politically and culturally similar to one's home country.

As we leave behind the worst financial crisis in a generation, a sovereign debt crisis looms large, particularly in Europe but also in several American states. While discussions about sovereign debt crisis are more often then not analyzed in political terms (as in, what does this mean for the incumbent government?), the reality is that such a crisis can have devastating effects on businesses. As the governments of PIGS (Portugal, Italy, Greece and Spain) attempt to control their ballooning and by now out of control debt issues, they are realizing that the only instruments at their disposal are a combination of increased taxes and decreased spending. The existence of the Euro means that countries in peril are not able to devalue their currency to increase exports (and therefore increasing GDP) nor are the able to inflate their debt away. Were these troubled economies able to devalue their currencies, the realities face by businesses that operate within their borders would be less onerous than it currently is. In fact, businesses that produce made-for-export goods would stand to profit greatly. However, as it stands, the prospect of increased taxes and spending cuts, while politically challenging is even worst news for businesses.

As taxes inevitably rise in debt-laden countries and social spending programmes are cut, the risk of a double-dip recession rises. However, the consequences of another recession, this time brought on by a sovereign debt crisis, stand to be far worse, far more wide-reaching and long-lasting than those of a traditional recession brought on by an aggregate decrease in demand. Increased taxes, for example, will mean a decrease in demand as the population sees its disposable income dwindle and will impact businesses' bottom line further as corporate taxes will surely also go up. Decreased spending, in turn, will also have a negative impact on people's disposable incomes but it will also have dire consequences for the country's long-term competitiveness as infrastructure, health-care and education spending decreases.

The iPad and Apple's strategy

Since January, Apple fans have only had one thing on their mind. The subject of their dreams finally became a tangible reality for those in America on Saturday, April 3rd when the iPad was officially launched. While reviews are still coming in from all angles and users in general seem to be far from certain about the iPad, investors and analysts seem almost unanimously in accordance that the iPad is good news for Apple.

Pre-launch reports suggested that Apple's manufacturing partners expect to ship 2.5 million iPads between March and May, many more than the previous estimate of 750,000 units during the same period. It is because of estimates like these that investors are so keen on Apple, doubling Apple's market capitalization in the past year, driving it past the likes of Google and Walmart and at US$214 billion, making it worth more than every other American company other than ExxonMobile and Microsoft.

Because of an array of reasons, most of them rooted in practicality, it is readily accepted that a company's stock price should be used to gauge the success of that company and its strategic decisions. Apple's incredible recent performance in the stock market could be seen as affirmation of its strategy, which has wildly differed from that of many other players in the industry. While Silicon Valley has tended towards a culture of greater openness, Apple has maintained a stranglehold on its products, deciding exactly what kind of content can be used on them. The question that arises from the varying success that these divergent strategies have seen is which one is most representative of the way the industry will look in the future? While the answer is obviously far from certain, it may be that there is room for both strategies, even if each one's success is weighed in terms of their stock value: if Apple is a good example of maintaining control over its products, Google can be offered as an example of a company leaning the other way - Apple is trading at 23 times its profit from the past 12 months, Google's price-to-earnings ratio is 28.