I spent most of Nyepi going through equity investments. I noticed one CFA reading in particular did not have any practice problems, but provided very interesting insights into corporate strategy. It came with a quirky title “Your Strategy Needs a Strategy”, co-authored by Martin Reeves, Claire Love and Philipp Tillmanns (It’s in Reading 33 of CFA Level II, Equity if you want to look it up. It was originally published in Harvard Business Review as Adaptability: The New Competitive Advantage,” by Martin Reeves and Mike Deimler, HBR July - August 2011).
The reading described several strategies companies employ in their respective industries, ranging from classical (structured, long term focused), to being more adaptive, shaping or visionary (all of the last 3 self-explanatory). The adaptive and shaping strategy appealed to me most, because this is what the airline industry needs to overcome its challenges every single day - lower barriers to entry, unpredictable demand, high competition, where everything is in a constant state of flux, and innovation being a key breakthrough for the industry.
Currently, ASEAN LCCs are experiencing overcapacity by ~20%, driving yields down as competitors struggle to fill their planes. Highly reactive and unpredictable markets mean intensive revenue management. We can aim for the lowest CASK possible, make the planes as efficient as possible, but airlines also need to grow new markets and defend market share, without sacrificing load or yield. To achieve just that requires looking beyond just running an airline. There are many adjacency businesses worth investing in - branding, travel oriented businesses: hotels, OTAs, monetizing own CRM database through a proprietary FF program, innovation & tech, and so on.
The reading sums this strategy well: "[F]lexibility is paramount,… and the [shaping] strategy [is] most commonly implemented as a portfolio of experiments… [S]hapers focus beyond the boundaries of their own company, often by rallying a formidable ecosystem of customers, suppliers, and/or complementors to their cause by defining attractive new markets, standards, technology platforms, and business practices. They propagate these through marketing, lobbying, and savvy partnerships."
However every market is different. For example Indonesia has a low credit card penetration, and popular payment methods for travel is via a traditional agent or paying in cash at an Indomaret cashier. This is where the adaptive strategy states: "Plans take the form not of carefully specified blueprints but of rough hypotheses based on the best available data. In testing them out, strategy must be tightly embedded in operations, to best capture change signals…" An adaptive business continuously tests market reactions and adapts to keep building market share.
I particularly like this adaptive strategy case study the reading uses of Spanish retailer Zara:
"Zara does not rely heavily on a formal planning process: rather, its strategic style is baked into its flexible supply chain. It maintains strong ties with its 1,400 external suppliers, which work closely with its designers and marketers. As a result, Zara can design, manufacture and ship a garment to its store in as little as two to three weeks, rather than the industry average of four to six months. This allows the company to experiment with a wide variety of looks and make small bets with batches of potentially popular styles. If they prove a hit, Zara can ramp up production quickly. If they don’t, not much is lost in markdowns. On average, Zara marks down only 15% of its inventory, whereas the figure for competitors can be as high as 50%. So it need not predict or make bets on which fashions will capture its customers’ imaginations and wallets from month to month. Instead, it can respond quickly to information from its retail stores, constantly experiment with various offerings, and smoothly adjust to events as they play out."