On September 1, I released a short evaluation quiz on Business Strategy.  There were 249 respondents over 10 days and it is now time to comment on the average performance.

Overall Average Results

The quiz consists of four questions, and I should start by stating that my personal score would have been 25%: One right answer out of four. But enough about my personal case. As you can imagine, I was eager to compare my own performance with that of the sample of the LinkedIn community that also chose to take the quiz.

The blunt conclusion is that, indeed, many people would benefit from a course in Business Strategy! The average score is 36%. Random answers would have produced a 50% score, which tends to prove that our intuition is misleading when it comes to answering the questions in the quiz and, more generally, to addressing Business Strategy issues!

The graph below shows the distribution of the scores achieved by the respondents to our quiz: only 5% got it all right and 40% had no more than one right answer.

Distribution of individual scores –

Distribution of Scores

Not all questions were addressed equally successfully. Questions 1, 2 and 3 appear to have been the most challenging:

Percentage of right answers for each of the four questions –

About Market Fragmentation

Question 1 refers to market fragmentation and its impact on the intensity of competition, and therefore, on profitability.

58% of us would prefer to be a shareholder in a company holding a 10% market share in a fragmented industry, rather than being a shareholder in a company having a 10% market share with two dominant firms sharing the remaining 90%.

That is probably because we see a greater potential for growth and expansion when competing against numerous equally-sized competitors. But, we overlook the fact that to gain market share, our firm will need to adopt an aggressive strategy, which will in turn trigger reactions from other competitors. Not to mention the fact that other competitors may also be tempted to increase their own market share, only making matters worse for everyone’s profits. In concentrated industries, in contrast, all competitors have an incentive to maintain the status quo by avoiding aggressive, mutually detrimental, behaviors.

As a consequence, a firm with a 10% market share in a concentrated market is more likely to be more profitable than a firm with a 10% market share in a fragmented business!

I earlier claimed that financiers should be strategy experts. As this question suggests, we should factor in the risk of fiercer competition in a fragmented market. More generally, we should pay attention to the structure of the industry to better understand and recommend effective strategies.

About the Use of Frameworks

Question 2 was about the logic of the famous 5-force model, put forth by Michael Porter. 65% of us got it wrong.

Originally an antitrust economist, Michael Porter had studied those factors that distort competition and are therefore detrimental to consumers. In developing the 5-force model, he flipped the question around to help managers better identify and deal with those industry factors that increase competition and thus impact the profitability of an industry and companies in that industry.

The five-force model is very useful when it comes to analyzing an industry, but remains silent when it comes to the strategy of any specific firm. Beware of not misusing this model, or any other framework, in Business Strategy.

About Competitive Advantage

Question 3 is a rather important one! 67% of you believe that to be successful, a firm must seek to be either the lowest cost competitor or highly differentiated.

Well … this is not exactly so. Consider Nescafé: it is not the premium coffee brand. Nor is it the cheapest coffee. Yet, it is by far the most successful brand of instant coffee! This suggests that the more successful companies in an industry need not be either the lowest cost or the most differentiated. Instead, firms somewhere in the middle may still be very successful.

Think twice when you hear a company is ‘stuck in the middle’. It might still be a winner. What is absolutely critical is for a firm not to simultaneously have higher costs and lower “willingness to pay” when compared to its competitors.

About Firm Assets

Luckily, the last question, about the firm’s resources, got more correct answers. In fact, it is the only question I, myself, got right. As most of you figured out, intangible resources are often a stronger source of advantage than, more easy to acquire or replicate, tangible resources.

All in all, despite the fact that the respondents to our quiz included bankers and executives from all around the world, some of them very seasoned professionals, very few got it all right…

Time to enhance your strategy skills? The Executive Online Certificate “Strategy@HEC Paris”, starting September 27, will provide you with many more insights to help you analyze and formulate successful strategies.

By |September 12th, 2016|Strategy|0 Comments

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