Strategic management is concerned with where we want to go. Development, assessment and implementation is their domain. But what is the process of developing a strategy?
There are (at least) two different perspectives on that.
Chandler: Strategy as the result of rational planning
According to Chandler it is the “determination of the basic long-term goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals.” (Chandler, 2003)
Mintzberg: Strategy as the result of various decisions
Mintzberg thinks that a strategy does not necessarily have to be the result of conscious, rational planning but rather a “pattern in a stream of decisions”. (Mazzucato, 2002) A strategy can be developed “accidentally”, or as a byproduct of decision making.
In this post we will focus on Chandler’s perspective only.
In every layer of a company there are goals. To fulfill these goals a company has to translate the often abstract goals of top-level management into strategies for the different layers of the organization. In this model a strategy has to be passed, broken down and communicated to the different layers. It often starts with a goal a company wants to reach in its respective strategic business segment. On the corporate layer a strategy is developed. This strategy is translated into recommendation/guidance for the SBUs. These recommendations/guidance are the goals of the SBUs. They again develop strategies on how to reach them and pass recommendations/guidance down to the functional layer (like marketing, manufacturing, etc.). If everything goes well, the necessary things get carried out and the corporation as a whole advances in the direct of its goal.
Corporate-level strategies often include content of the normative management, like visions or missions. Portfolio-Management, corporate development (i.e. M&A, change management), aligning structures and resources to support the strategy are also often tasks of this layer.
SBU-level (business) strategies are basically market-oriented strategies. They are dealing with resources and competition.
Functional Strategies are research and development (R&D), purchasing, production, sales, HR and financing strategies. On the operational level functional strategy has the responsibility to implement changes. Because corporate or even SBU-level strategies can be quite abstract, a lot of departments have to be coordinated in order to reach the desired results.
But what is a strategy anyway? Surprise, surprise, there is no universally accepted definition of it. But i guess you could say that a strategy should have the following features:
- Definition: in what situation is the strategy applicable?
- Long-Term orientation: The strategy should be designed to give guidance over a longer period of time
- global: the strategy should be inclusive and abstract enough
- recommended behavior: A strategy should name and align tools and methods of implementation and give a sense of orientation.
- fixed format: a strategy should be documented and binding
But what for? What are the core tasks of a strategy? Why should we bother developing one? Strategies are used to secure success factors (like growth, or HR). Maintaining growth often requires change in focus. You can imagine that changing the focus of a large conglomerate is not that easy. This is why a strategy can also be developed to guarantee for a certain amount of flexibility. By enabling the corporation to refocus fast and without complications a strategy reduces risk. A company is like a ship on the ocean. When there is a storm-front coming up, the crew needs a plan that helps them to navigate through. The act of planning is often used as a way to prepare for a complex situation. Especially in complex and difficult situations a company can use every help it can get. It is especially important for a strategy to allow for and use synergies as a force multiplier. The main goal of a corporate strategy is to establish a unique selling point. A key feature or characteristic that is significant, acknowledged by the customer and defensible against the competition.
This will remind you of something. In our first article of this series we spoke about Hahn’s process of corporate management. (here) This is the same thing but we will look into it in more detail.
Phase 1: Identify a goal
Not really difficult to understand. In order to develop a strategy we need to set a goal so we know where we want to go. A company is not a tree and cannot grow healthy without a purpose or direction.
Phase 2: Analysis
I like to image a strategy like a road-map. Imagine planning a hiking trip. After you identified where you want to go to you want to analyse how hard it will get. How is the weather? What kind of equipment will i need? Similar questions are relevant in corporate context. It is very important to analyse the way ahead thoroughly. Running into trouble unprepared can be costly and potential devastating.
The analysis phase has two sub-phases:
- Environmental Analysis
Are there any threats for the current business? Are there any chances we could use to improve our situation?
- Analysis of the Company
Do you know the saying: “You have to understand yourself in order to understand the world?”. Well, this is something very similar. By analyzing the own company regarding possible weaknesses, strengths and competitive (dis)advantages we understand who we are and what we represent.
Phase 3: Formulate Strategy
Only if the management knows what the company is capable of it can line out a plan on how to leverage own strengths and cover weaknesses from exploitation by using the environmental factors to the company’s advantage. The final choice over what strategy to pick should be made according to the approach the company wants to follow (stakeholder/shareholder, remember?)
Phase 4: Implement Strategy
After choosing a fitting strategy everyone has to know what has to be done to kick-start the implementation.
Phase 5: Evaluation
In essence, the evaluation is a benchmark between the desired end state and the results that were achieved during the implementation. But there is a problem. What if it turns out that something has changed and our actions were all in vain? What if important data cannot be collected in time? That’s the central danger to every strategy.
Failing to carry out a strategy is both costly and embarrassing. Both finances and brand suffer hard from this failure. To prevent that from happening we need an evaluation process that accompanies the strategic management process and can tell us fast if there is something off. Three things are of particular importance:
- Control of premises:
As we developed the strategy we relied on facts we gathered during the analysis. Since we do not live in a static world things are likely to change. Not always in our favor. We need to constantly monitor whether the premises we based our strategy on are still existent.
- Monitoring of implementation
Is there something coming up that endangers a successful implementation of our strategy? (Like key personnel quitting, or competitors making an aggressive move)
- Strategic monitoring
Monitoring the process as a whole is a good idea. Sometimes monitoring processes are to focused on a certain problem that they will not alarm us if something outside their field of vision is going wrong. This “supervising” procedure is like a back-up to the more focused monitoring activities.
Now let’s look into a very important tool of strategic management: The Gap analysis.
With this tool we will be able to identify gaps in our performance to determine demand for actions. In this model, there are two kinds of gaps
- Strategic Gaps
Strategic gaps emerge if we fail to build up our potentials and strengths to fully benefit from environmental circumstances. Let’s say we are especially good in creating quality product, but our time-to-market is too high to benefit from it.
- Operational Gaps
These gaps occur if we do not use our strengths enough. Maybe we have extraordinary creative people, but those guys are busy doing work less qualified people could do.
Gap-Analysis – Critical Appraisal
+ The Gap-Analysis allows for a fast determination for demand for strategic action
- Divestment and exit strategies are not covered in the framework
- There is too less appreciation of the competition and the market environment
- The model has a strong focus on optimizing existing structures and partly ignores the possibility of a complete reinvention of the company or products.
- It is not enough to identify weaknesses and eliminate them. The system behind weaknesses has to be understood to prevent future recurrences. Everything else is just “treating the symptoms, not the disease”.
The Product/Market-Matrix is best used in combination with a gap-analysis. The Product/Market-Matrix gives us a number of growth strategies to choose from.
- Market Penetration
We could intensify our strategic efforts in a market we are already in and with a product we already sell. We can do this by enticing customers away from the competition and or identify a new target group within the market.
- Market Development
If our situation demands that we access new markets, market development is what we are aiming for. A very easy example of market development is if we decide to sell our products in another country. We could also try to reach a different market segment. If we sell a product to a young audience, it might be profitable to brand it towards an older audience as well. (Without alienating our existing customer base, of course!)
- Product Development
A company must not stop innovating. Strategic product development is nearly a must to be able to keep up with the competition. If we sell mobiles, we could make sure that we deliver the latest operation system or software bundles. We could also include a brand new product into our portfolio.
There are 3 different kinds of Diversification:
- Horizontal Diversification
Let’s pretend we are a beach fashion manufacturer. If we would like to diversify horizontally we could start producing beach bath mats or towels. The idea is that we keep our customer base, but try to predict their additional needs and satisfy them with new supplies.
- Vertical Diversification
This one wants to optimize our value chain. As a beach fashion manufacturer we might start producing fabrics and cloth we need in our manufacturing ourselves. Vertical Diversification in a nutshell is cutting out the middle man.
- Lateral Diversification
In this, we introduce new products that we did not produce before. As a beach fashion manufacturer we might start selling car polish.
The choice of what strategy to pick heavily depends on our environment, the market and our needs. All of them could lead to a better result, but it is also thinkable that some might ruin our business. In-depth understanding of both the market and customer is required to make a sound judgement of these options and their feasibility.
Product/Market-Matrix – Critical Appraisal
- While certainly practical, the Product/Market-Matrix only really focuses on growth-strategies, which is not always enough. Customer and competitors are ignored to an extend.
- The strategic directions the Product/Market-Matrix offers it too general. You cannot just go ahead an say: “let’s do some vertical integration!” The major part of the thought process that leads to the successful implementation of a strategy is not included by this tool
As we said, knowing one’s environment is key to developing a sound strategy. We have to find a way to discover any threats and opportunities that might arise from our environment and use it to our advantage. Globalization and the huge progress in information technology made the world more dynamic, complex and heterogeneous. Our picture of our environment cannot be 100% accurate. Even more so when we try to predict future trends or events.
Because we cannot look into the future and have no hope of getting all that data reaching us from our environment processed, we have to limit our observation to certain dimensions. We have to zoom in on us, if you like.
First, we want to know what roughly is going on around us. This will be our strategic global environment analysis. Next, it is interesting what is going on in our industry-sector. So we employ a industry analysis. Finally, we look at our direct surroundings. We are using a competitor analysis to find out what our “neighborhood” is up to.
By gathering all this data we might be able to recognize trends. But we have to be careful when extrapolating recommendations out of trends.
- We have litte way of knowing which trend will be important for us. (Problem of choosing a trend)
- Even if we find a coherent trend, there is no way of knowing whether this trend will continue as we think. (Problem of projection)
- Is our business more affected by political or cultural trends? We cannot safely say either way. (Problem of Weighting)
- How can we connect (and benefit) from a trend? Can we connect trends in different spheres or have we to look on them separately ? (Problem of connecting)
But in some way we have to use all the data we connected. And we can, we just have to acknowledge that there is no tool that will provide us a 100% solid basis. There is always some gut feeling involved regarding strategic decisions.
Methods that can help us with trends are:
-> The Delphi-Method
Describing them in detail would lead us far astray from our current topic. However, those methods emphasize the importance of a thorough understanding of a strategic system.
When working with trends and a huge amount of raw data
- identifying the central key figures (descriptors),
- analyzing existing linkages between powers
- Constructing alternative scenarios
- and developing premises for further strategic planning
helps us get a better understanding of the nature of the system we are dealing with and reduces our error significantly.
Porter’s Five Forces
Maybe one of the most famous models out there. It is useful for us, too, because it paints a quite accurate picture of our environment. It is used to find out how attractive a certain market is and employed when developing certain strategies.
- Threat of new market entries:
First thing we need to know: How easy is it to enter our market? Do we have to fear that a particular market might be overrun by competitors quickly or can we sit back and enjoy a large customer base all by ourselves? How easy it is to enter a market can be influenced by a number of factors. Lets name a few examples:
- Capital requirements: The energy-market is a market that demands considerable investment. You cannot just say you want to enter the energy market without bringing some suitcases full of money with you. Capital requirements are usually powerful deterrents to new entries.
- Economies of scale: Closely linked to capital requirements, in my opinion. If there are big players in the market that already benefit from economies of scale, it is hard for new entries to 1. establish a similar powerful base, 2. catch up to the others.
-Access to distribution channels: Not something one might think of first, but tremendously important. A new entry will not be able to survive for long if she/he does not have access to powerful distributors. What use is excellent quality if you cannot sell your product? Or buy resources?
- Bargaining Power of Suppliers
Image a market where there is one big supplier that serves most of the market participants. If this supplier thinks of increasing prices, nobody is able to stop it, because there is no alternative. Negotiation Power of Suppliers can best be measured with the number and quality of suppliers in a market. Many/few good quality suppliers= low/high bargaining power of suppliers
- Threat of substitution
How easy is it to find a comparable product on the market? How much cheaper is it? How much better is the brand? These are some questions we might ask if we want to assess the threat that our customers might take there money elsewhere to get the same thing.
- Bargaining power of customers
Arguably the most important factor in this is customer concentration paired with total numbers of customers and threat of substitution. If there are only a few big customers in the market that are serves by high number of companies, their bargaining power is immense. They can change their suppliers in an instant without drawbacks.
So that is Porter’s Five Forces. I am quite a big fan of these model because it is both easy and practical and increases the sensibility to what is going on around us.
The big picture
All these tools and methods only want to enable us to do one thing: Get to know in what kind of environment we are operating. We can look at our whole industry and find out what characteristics it has. We can employ, for example, Porter’s Five to do that. Another interesting sphere is our strategic group. A strategic group is a group of companies that operate in the same industry as our company that share a similar strategic approach with us. Our “spiritual brothers” if you will. So what is the definition of “similar approach”? Companies with a similar degree of vertical integration (we already dealt with what that is, remember?), similar product portfolio and distribution channels could be members of our strategic group. We can learn interesting things from our strategic group. How fierce is our competition? How are those guys doing? Are there problems we all have to deal with? What is their solution to it? In what direction can we not diversify because a competitor already made some actions in the same direction? You see, the answers to these questions are quite interesting. Neglecting the strategic group means neglecting a big and important part of our environment. So we are zoomed in to our direct environment. So let’s do the obvious thing: Look at who did it best. The Competition-Analysis benchmarks goals, strategies, strengths and weaknesses with the smartest company on the blog.
Strengths and Weaknesses
Speaking about strengths and weaknesses. Now that we know what is going on around us, its time to look at ourselves. This can help us do two things: Warn us about our vulnerabilities and identify starting points for creating a competitive advantage.
There are basically two big approaches we can use.
The resource-based approach:
With this we are trying to look at our company inside-out. Meaning that we mainly focus on our own value-chain.
The idea of this approach is that strengths/weaknesses and ultimately the success of a company are based on own resources and capabilities and their performance compared to the market.
The resource-based approach has a lot of names like Chicago-School or Ressource-Conduct-Performance-Paradigm. As resources this approach defines the following:
- tangible resources (IT Systems, facilities, machines)
- intangible resources (Organisational Structure, Brand, Credit-Standing)
- human resources (Top-Managers, Engineers)
- to align and organize own resources to put them to use
Hidden and buried underneath all those different skills and resources are our extremely valuable Core Competencies. These are either skills or resources that enable us to maintain a durable competitive edge. Here is the checklist to whether a competency really is a core competency:
- Core Competencies have the potential to open gates to new markets
- Our customers consciously appreciate especially these competencies in us.
- The competency should be hard to copy or imitate.
The market-based approach:
This time we are on the outside looking in.
The market-based approach points out that success is determined by how well its products are received by the market and how well the company manages to follow market trends.
Things that influence purchase decisions are key to corporate success.
Like the resource-based approach, the market-based approach has many names: Outside-in perspective, Harvard Schools and Structure-Conduct-Performance-Paradigm.
Think about your own purchasing criteria. What is important for you in a product? Price, Quality, competence of sales reps are some examples.
Strategic Tools and Methods
No matter what approach we choose, we can even combine them, we have a number of tools at our hands that will help us in our analysis.
With this tool want to check how our success factors are doing.
- We identify around 10 success factors that are relevant for our industry
- We weight them, meaning that we sort them according to their priority
- We compare our performance in relation to our best competitor (competition analysis, remember?)
- We create our profile
The result is a sheet similar to a school report. We might score an A in “Product Quality”, a C in “Price” etc.
But we have to be careful with this direct comparison. A “C” in “Price” might sound alarming, but look at what Apple does. High-Price policy is a legit strategic approach. This is why grades that are the result of this benchmark must be interpreted with care. Scoring high and low in certain aspects can often be caused by a conscious strategic approach rather than negligence.
There are lots of kinds of benchmarking tools with the same benefit to us. By comparing our performance with the performance of a smart competitor, we can identify gaps we need to work on. Benchmarking often leads to the creation of an action plan that aims at closing these gaps and closing up to our competitor in the market.
As shown in this graph, there are quite a number of different benchmarking techniques to choose from that have their individual advantages and drawbacks.
A benchmark has a number of dimensions that we will outline quickly.
- Examination Dimension (what shall be compared?)
- Unit (What unit shall be compared?)
- Methods (How do we do it?)
- Methods of the benchmarking partner (How does she/he do it?)
This is the benchmarking process:
- Choose benchmarking object
- Choose relevant performance indicators
- Choose relevant benchmarking partner
- Collect data
- Analyse gaps in own performance
- Develop an action plan to close these gaps
- Implement the action plan
As we mentioned earlier it is not that easy to collect relevant data. It is not surprising that our competition does not want us to get stronger. This is why the most interesting sets of data (like price structure, strategies, etc.) are usually well guarded. However, there are some ways we can circumvent those obstacles. We can simply walk around in our environment and ask:
- public databases
We could also just go ahead and look at the competitors products ourselves. Do some engineering on them and learn how those things were made.
You see, there are plenty of ways to get some data for our benchmark. Benchmarks are powerful tools that enable us to compare our performance with the performance of our peers. It can reveal surprising possibilities to cut cost or increase quality.
But on the other hand: What we can do our competition can do as well. Even more critical: Because benchmarking is so practical it is easy to discard own innovations and ideas and rather implement those of the competition. This harmonizes the competition and makes it even harder for companies to work on a defined competitive edge.
Maybe the most popular analysis tool out there. But its popularity does disguise its pitfalls a lot. The effectiveness of a SWOT-analysis depends on a thorough definition of key issues.
Identification of opportunities and threats is done by looking at our environment, its market and products.
Identification of strengths and weaknesses is done by looking at the comparison between our company and competitors.
When analyzing our environment we can derive certain assumptions of how our environment looks like. The same goes for analyzing our competition and competitive situation. These assumptions are the basis for our opportunities and threats.
The find out about our strengths and weaknesses we gather assumptions about our competition and our own resources and competencies.
As you can see our SWOT is based on assumptions of how our current situation is. In order to plan, we need to make assumptions about future developments. Think of it this way: Our SWOT-analysis is a good basis for developing success factors and identify key issues we need to work on.
We can use SO (Strengths-Opportunities)-strategies to push our standing. If we manage to coordinate our strengths with the opportunities of the market, we will have more success. We also need to cover some ground to keep up with the competition.
WO (weakness-opportunities)-strategies can do exactly that by identifying weaknesses that block our way to further opportunities and strategically minimizing them.
But a company is not only about offense. We need to do something for our defense as well. ST(Strengths-Threats)-strategies help us direct or develop strengths to meet the threats that are coming our way and defend us from their negative impact.
But there will be a number of things we can do little about. Some things just take their time. We need to avoid threats we are (still) vulnerable to. This is called a WT (Weakness-Threats)-Strategy.
In a nutshell: Strength and Weaknesses are something we have to work on internally to meet external threats and opportunities.
So after this introduction, let’s do a quick critical appraisal of the SWOT-analysis-tool
+ We can discover strategic option
+ We learn a lot about the market and our competitiors
+ Holistic overview of relevant data
- The tool is only as good as the data (“garbage in – garbage out”) and (in some factors) can be quite subjective
- Data might not be available in abundance. Quantitative validity is in jeopardy.
- Our SWOT is just a “screenshot” of the presence. Things change over time and give the SWOT-results an expiration date.
The experience curve effect is a phenomenon that can be observed if some premises are met. Image we live in a world with only one product, market share is determined by the number of produced products. All competitors have the same cost developments.
In average, by doubling the number of produced products, production cost will drop by 20-30%. Why is that so? Easy: Because the more you do a thing, the better you get in doing it. If you want to get technical:
During the production process there are a number of things at work. We have learning effects as we learn from failures and successes.These are dynamic effects of scale.
Static effects of scale are for example: Cost cuts that are possible because we reached a certain business scale. Fix cost degression through economies of scale is also part of the static effects of scale.
Now, why is that all important? Because if we can produce cheaper and sell our products with the same price as before we are maximizing our profits. The message the experience curve sends is:
- concentrate on business that allow for economies of scale
- Market leader has the best cost structure because she/he has the highest market share
- Advantages in cost structure should be used aggressively to boost on position and deny access to the market (Remember Porter’s Five Forces?)
Besides from giving us some valuable advise on what to focus experience curves can also help us make a more accurate assumption on how the cost structure of our competitor looks like.
To sum it up, let’s look at whether the experience curve is any good:
+ The experience curve effect is empirically tested
+ It is a dynamic analysis of relevant cost effects
+ High acceptance in the industry
- The assumption that make this model work the most precise are somewhat unrealistic ( for example: only one, standardized product)
Portfolio Management is a very important tool to steer a company in the right direction. We can understand a company as a collection of SBSs (Strategic Business Segments). The central question is: How should we treat the various SBSs to optimize our strategic heading? Where do we invest and where do we divest?
We got to know different tools and analysis methods and understand that our company is influenced by internal and external factors. Same goes for our portfolio. We cannot influence the how the market (external factors) will develop, but what we can influence is our portfolio and strategy (internal factors). Portfolio management aims at integrating external and internal factors and giving us a holistic overview about the strategic position of our portfolio. On its basis we can derive strategies to move in a more profitable direction on the market.
Here is how it goes:
- Identify SBSs (What kind of SBSs are there in our company? We can sort them by products, customer groups or regions). Most important is to define them closely enough to create independent segments that have independent tasks. Only then we can develop a strategy for them.
- Rate SBS: How attractive is our SBS? What kind of market share do we have with it?
- Position SBS within Portfolio
- Derive Strategy
Within the portfolio-method there are two ways of rating:
- The analytic way (like in the Boston-Portfolio (BCG Matrix))
The BCG Matrix is based on two theoretical pillars:
Every product has a limited life-span. This means that a product can not always perform equally. Just like a person: When we were young we needed a lot of help to learn the things we need to perform later on. During our adulthood we work hard and at the end of the line death awaits us. A new product needs some investment (market developing methods, advertisement, etc.). After that it can (not must) perform for a while until the product dies. This life-span exist because of customer preferences that influence market trends. These underlying factors are key to understanding the BCG Matrix.
Another pillar of the BCG matrix is the experience curve effect we have dealt with before. And this makes perfect sense. As we said, the life span of a product depends on its position in the market and the market developments themselves. To be able to assign our product to a group, we need to know something about our market position. The experience curve can help us find out where we are standing.
+ The BCG Matrix is great because it is easily understandable and sensitizes management to their products and market development.
- It shares some of the experience curve’s problems
- SBSs are rarely completely independent to one another
- It reduces the products and portfolio to its market share and market growth (sort of)
- The synthetic way (like the McKinsey Portfolio/ G.E. multi factoral analysis)
There is not so much to say about the GE multi factoral matrix. It is really similar to the BCG Matrix, with the characteristic that it is more detailed. It think you will get the gist when comparing both matrices.
Alternatives to changes to the portfolio
There are alternatives to portfolio changes. And i promise this chapter will be very easy. How can we push our standing without fiddling around with our products and various matrices? Organic growth for example. If we are hiring new people, buy new machines, open new subsidiaries we are growing. It has a some advantages to grow. We can be flexible with our growth plan. Unless we are being chased by the competition (in which case growth might not even be the best choice of action) we can take or time with thorough planning. We can work on explicitly developing our skills as we grow and our corporate culture benefits from the feeling that something is truly in motion. However, growing has its pitfalls: We cannot be sure how long it will take to get to a certain stage. There can be retaliation by the our market environment. Not everybody is keen on seeing a competitor growing. And of course, there is the uncertainty whether what we are planning is actually feasible and a good idea in the first place.
There is another method of growing: Mergers and Acquisitions. Because this is growth that does not originate from within our company it is called inorganic growth. Many examples in the industry warn us that this kind of growth can be dangerous. If we annex another company we have the task of integrating their employees and structures into our own. Because of differences in corporate culture (we dealt with that here) this operation often fails. There area number of different forms of acquisitions:
- Horizontal Acquisition: If we would by a competitor of us, we would do a horizontal acquisition. The idea is to buy a company in the same industry to benefit from synergies. One might have a better cost structure, the other might have better distribution channels. So why not combine the strengths of both into one bigger company?
- Vertical Acquisition: We buy a supplier of ours to integrate a part of our supply chain directly into our company. This intensifies our control over our supply chain.
- Conglomerate Acquisition: We buy a company from another industry. The company has different products. We can do this to get access to new markets quickly.
Benefits of M&As are that we can eliminate competition by just buying them. We can take over their portfolio and have a decrease in time-to-market. Also we gain access to a new customer base, distribution channels and HR. But there is a significant risk we have to account for. Integrating a culture into another so that both cultures can merge and develop synergies is something that can hardly be done. This is the main reason why many M&As or Joint Ventures fail. Then there is the risk of paying to much money for something that is not worth very much. Especially in the case of an hostile takeover, we do not have much information at hand. Unsurprisingly our target does not really want us getting data that would allow us to assess the real value of the company. So we have to buy the pig in a poke. There are many things that can go wrong during a M&A. But focusing to much on the M&A and its problems is also a mistake. A market is like a rough sea. Imagine you are a pirate and try to take over another ship. You have to divide your attention between the fight that is going on between the two ships and the sea. Otherwise you might get crushed by the waves or strand.
Cooperation is another method of growing. With very similar advantages and drawbacks like mergers and acquisitions starting joint ventures is the most official form of visible cooperation between companies.
I do not really think we have to go into the details of what advantages and drawbacks cooperation have since we did nearly the same for the M&As. So lets keep this one short:
+ Less time to market
+ More flexible than a M&A
+ Shared Risk
+ Acquiring new skills
- Because of the shared risk, we also have shared leadership
- Sometimes Joint Ventures are only started to spy out knowledge and intangibles
As with the M&As there are certain forms of cooperation that follow the same scheme.
- horizontal cooperation: Together with another company of the same industry we try to work out synergies and take on the market together
- vertical cooperation: We cooperate closely with one of our suppliers to optimize our supply chain towards peak efficiency.
- conglomerate cooperation: We work together with a company from another industry to increase customer satisfaction. Like a luxury car manufacturer cooperating with a fashion designer.
Concepts of competitive strategies
The core of every competitive strategy is to overcome a competitor. We have to equip our SBUs with the necessary strategy to enable them to compete with a competitor’s. We need to construct competitive advantages.
What everything boils down to are relations with certain groups.
- Our Company
Our company is in a “price/performance” relationship with the customers. So are our competitors. Between ourselves and them stands cost structure. Who is able to manufacture the cheapest/with the best quality.
It is not always about the price. We can convince people to buy our product by our superior quality, our brand, or our services. Companies like Apple show to us that customer engagement is something that really pays off. Customer engagement can only be created by offering something unique, something that customer will feel great about.
On the other side of the coin, there are enough people out there that might only by motivated to buy by a lower price. If the performance of the product is just right, why should we pay a higher price?
In theory, we can walk both ways. In practice our market environment tells us what might work best with our customers.
Regarding the scope of our strategy there are two alternatives, according to Porter:
- industry-wide: We want to apply our strategy for the whole market
- niche: We want to apply our strategy only for a smaller segment of the market.
Combining these thoughts with our rough categories of competitive strategies we have the basis for Porter’s model of generic growth strategies.
It think it is pretty easy to understand this model. The only thing that might require some explanation is the “Danger” in the middle. If we design a strategy we have to go for it. All the way. We cannot just sit between chairs. However, this is what many companies actually do. They cannot decide what to go for. To pick up the picture from before again: A ship with a captain that cannot decide where to go is lost. This model is a clear statement: No matter where you are going, go there with full determination and focus. And here is why: The argument of consistency tells us that differentiation strategy and price leadership can hardly coexist. The Convexity argument tells us something about the importance of our market share: There are basically two ways of making profit in a market. Either by having a large, low price market share, or a small, but high price market share. If you get caught in the middle you are not competitive.
But there is something that we need to discuss to fully understand what the model is trying to tell us. We cannot simply say: “Hey i feel like we should go for a differentiation strategy!”. There are certain requirements we have to look out for.
- Differentiation Strategy: Leader in product quality
Requirements: Our customers need to be sensitive towards quality. If they do not require quality or do not wish for it, we do not have a basis for business. Second, we need to have a strong brand that is associated with quality. There is no chance we will manage both reorientation of the brand and reorientation of market strategy.
- Segment Specialization: Leader in product quality in a particular segment
Requirements: A niche is smaller than the whole market but it must provide a sufficient customer base. This customer base must have very special desires we can try to satisfy. For this to work, our customer must be willing to pay a premium price.
- Cost-Leadership Strategy
Requirement: For this we have to already “own” a large share of the market. We have to bring down the price at nearly any cost by exploiting all the benefits our large scale can bring us. (like economies of scale). We need to have efficient controlling. It does not hurt if we were to first in the market. That we would have had enough time to work on our market share longer than the competition.
Basis for every strategy is a solid value chain. According to Porter a value chain consists of
- Supporting Activities: Corporate infrastructure, Human resource management, Research and Development, and purchasing
- Primary Activities: Inbound-Logistics, Operations, Marketing and Sales, Out-bound logistics and customer service
Those activities lead to a companies (hopefully positive) margin. The Primary activities can be seen as a companies core tasks, whereas supporting activities can be understood as side-tasks that enable us to do the primary tasks better.
Don’t get me wrong, Porter’s models are very helpful, practical and easily understandable. This is what makes them great and popular. But no model is flawless. I guess you could say, that there are a lot more strategies to choose from. Differentiation strategies do not always just go for quality leadership. There are a lot more “fuzzy” things involved, like fashion, taste or even color (Mac vs. PC). The biggest problem however is, that companies can (and should) make an effort to differentiate and cut cost at the same time. Disregarding one of these factors can be a fatal mistake. Of course, Porter makes perfect sense when stating that you can hardly have the best of both worlds, but the statement is just a little too absolute. If the strategy should take into account market developments, it must allow for a certain amount of dynamics and flexibility.
A nice example of how flexible strategies that are a combination of both differentiation and cost-leadership strategies could work is the outpacing-strategy developed by Gilbert and Strebel.
So, just because we decided we want to be cost leader, it is not impossible for us to bring out a high quality product once in a while. This drastic shift in strategy often surprises the competition and allows us to cash in on a market segment we usually do not have access to. This has the positive effect that we can grow our brand. Outpacing strategies are very powerful if there are designed appropriately. Customer are easily irritated if a quality leader throws a low price/low quality product on the market. But Customers might react positively to our cheap products, if we try to come up with something of higher quality once in a while.
Strategic management is complicated and it is understandable that people have a hard time learning it. Especially because all those models and best practices are theories packed with premises and requirements. There is a huge gap between what is written in the books and what is actually realistically usable “in the field.” However, it still helps to get a feeling for what is the theoretical basis for the behaviors of all these companies we buy our products from. Reading the newspaper and watching the news gets more interesting, because trying to find out what kind of strategy some companies are following can be quite exciting.
I hope this gave you a good overview about what strategic management is all about. If you have any questions or you would like to discuss things. Just write a comment!