In a perfect world of strategy theory, one would start by analyzing the existing industry structure and then proceed to formulate a unique position for his/her business. This would involve deciding on how to compete in the market place and designing a unique set of activities that would enhance and synergize the envisioned competitive position. This is also known as a Strategic Fit. For instance, you may decide to be a low cost leader in your segment; this would necessitate ensuing various cost optimization initiatives, having lower product variations and modest customer service.
However, in practice, carving a unique strategic position takes years; any rapid significant moves are likely to be detrimental to the existing business model and hence, would have a negative impact on the bottom line. Positioning in its pure form may deem practical only for the new entrants; incumbents are often overwhelmed with current issues and optimizing their existing processes and activities.
That being said, without a clear unique strategy, incumbents will see their performance deteriorate in the long run. This is the case due to the ever growing competitive pressures, threat of new entrants, disruptive technologies, continues optimization efforts from all market participants, etc. Incumbents also tend to become all things to all people as a result of a desire to fully serve existing and new customers. For instance, the same customer placing an order for multiple items with varying specifications may ask for a volume discount. Varying specifications are consistent with product differentiation while volume discounting is associated with the cost leadership strategy. Thus, this order may actually result in conflicting activities with deteriorating margins.
Business leaders must remember that strategy is about making trade-offs and every so often, saying No to your customers. Of course, no customer would want to hear a No; hence, one needs to bear in mind the consequences and the overall effect of potentially losing this customer permanently. Michael Porter, the guru of strategic management, have stated more than once that: "the essence of strategy is choosing what not to do". This is essential in helping incumbents reshape their strategy, creating a unique long-term position and obtaining higher profitability.
One of the first steps in framing a possible strategy is to identify activities and customer needs that are in fact, detrimental to the company's business. This is in line with understanding company's resources and capabilities; effectively it is a bottom-up approach to strategy formulation. Interestingly, incumbents should really use the bottom-up resource and activity-based approach in formulating their strategy while the new entrants are better off using top-down holistic view of the industry to carve their unique niche.
Once a company identifies value-destroying activities, it should really start saying No to a customer interested in the products resulting from these activities. At this point, the rough shape of the strategy starts to appear. At the same time, a company should become aware of the activities that actually create value; it can then proceed to excel in these areas even further. Strategy emerges from company's self-awareness, understanding of its resources and capabilities. Incumbents should not make any dramatic moves but instead progress gradually towards what they see as the optimum position in the industry, encompassing a unique set of activities that the company excels at.
Being all things to all people is detrimental for the long-term sustainability of a company. A clear strategy sends a distinct and understandable message to customers, employees and management. Clear positioning eventually results in higher profitability and sustainable competitive advantage.