Tools Chapter 15 Analysis and Strategic Choice

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Tools Chapter 15 Analysis and Strategic Choice

  1. 1. Tools Chapter 15 Analysis and Strategic Choice To know men is to be wise; To know one’s self is to be illumined. To conquer men is to have strength; To conquer one’s self is to be stronger still, And to know when you have enough is to be rich. Lâo-Tzu Tâo Teh Ching c. 565 B.C. The essence of analyzing external intelligence is extracting some semblance of truth from a maze of facts and faulty observations, mysterious connections and missing links, the obvious and the obscure. The enterprise is fraught with volume, complexity, and risk afloat in a plasma of uncontrollable energy. A profile of reality is distilled from the mass by applying knowledge, insight, creativity, discipline, and dogged determination. By contrast, internal assessment presents a much different picture. Here, data collection requires little more than fashioning an “honest mirror.” Facts are manifestations of our own past decisions and behaviors. Truth, the majority of the time, is a number, and, it has meaning relative to some desired state. If we do not like what we find, and we have the wherewithal, we can change it. The trick to understanding internal feasibility and desirability is an unbridled quest for self-knowledge and a willingness to see and accept discoveries when they are found. The assessment of internal capacities and abilities is more a matter of evaluation — comparing the status to a standard — than analysis. The analytic process is invoked to determine what we might change, internally, if the current state of affairs is unsatisfactory. Strategic analysis comes into play when we consider the relationships among reality, feasibility, and desirability; the implications of those relationships for adaptation; and, the practical strategic directions they suggest. The organization’s perceived reality is somewhat smaller than its absolute reality, its “feasibility envelope,” in most cases, is smaller than its perceived reality — because of internal constraints — and, its desirability function is even more discriminating than feasibility in its impact on strategic choice selection. A lot of potentially realistic and feasible actions may simply be deemed unattractive by the body politic of the organization. The relationships are depicted in Exhibit 15.1. Absolute Perceived Feasibility Desirability Reality Reality Exhibit 15.1. The Reality,Feasibility, And Desirability Filters At Work
  2. 2. Rev. 1 15— 2 Strategic Directions The purpose of strategic analysis is to identify those strategic directions that conform to the organization’s “realm of practical strategic choice.” The “realm,” of what is practical is determined by the size, shape, and relationships among the reality, feasibility, and desirability “filters” for a given organization. Once the “realm” is defined, the process becomes one of selecting practical strategies from the strategy menu — Blueprint Exhibit 7.3. The strategies covered in Blueprint Chapter 6, and summarized in the menu, are not strategic plans, per se, they are strategic directions. Humans are mammals, but they are merely one type of mammal . . . whales and bats are also mammals, but they are a far cry from humans and each other. Choosing one strategy over another (e.g. price differentiation versus image differentiation) does not provide one with a strategic plan . . . it provides one with a strategic direction. It directs us to what we must or might do but not how to do it. Choosing a strategy is not the same as developing a strategic plan. In fact, any single strategy might provide the nucleus for a wide variety of plans. Setting strategic goals and developing the means to achieve them are the next step in the process and are covered in the following chapter. Menu Choices The strategy menu offers us a considerable number of options at the corporate-, business-, and functional-levels of the enterprise. Not all of these options, however, represent practical choices for any given enterprise. An organization in a dying industry — late in the decline stage of its life cycle — with meager financial assets and dated technologies, is clearly more limited in its options than a well-financed firm in a growth industry. External reality, mitigated by internal feasibility, dictate the absolute limits of the enterprise’s realm of practical strategic choices. Within these constraints, desirability is the determining factor for selecting from among the practical strategic directions available. In the preceding chapters, we examined how intelligence is gathered, analyzed, and reduced to a set of planning assumptions (Exhibit 12.11) about the current and future states of markets, competitors, regulators, organization capacities and abilities, and management preferences and tolerances. These assumptions are the criteria by which the entire range of “known” strategies will be reduced to a set of practical strategic directions for the organization. Once again, by “practical” we mean those that are realistic, feasible, and desirable — those that will enable the organization to successfully adapt to the current and predicted forces that do and will dictate the conditions for its survival and growth. If you go back to Blueprint Exhibit 7.7, you will note that all possible conditions and combinations of the external context, the organization, and its strategic choices are captured on the left side of the model. It is the purpose of strategic analysis, through the process stages shown on the right side of the model, to determine which parts of the whole apply to a specific organization at a specific point in time. In the model, this phase of the process culminates in identifying the “alternative suitable strategies.” A by-product of the analysis will be the identification of those strategic directions that are realistic and desireable, but currently unfeasible. To chose such strategies for implementation would be impractical given the extant conditions, however, developing the ability to pursue them in the future may have merit. By isolating them, at this point we: a) eliminate impractical strategies from current consideration, and b) provide grounds for identifying specific development goals and designing remedial programs for enhancing future feasibility — Exhibit 15.2.
  3. 3. Rev. 1 15— 3 Reality Unrealistic Goals Feasibility Realistic, Unfeasible Goals Desirability Realistic, Unfeasible, Desirable Goals Realistic, Feasible, Undesirable Goals Strategic Goals Strategic Plans Development Plans Implemantation Implemantation Control Control Exhibit 15.2. Separating Strategic From Developmental Alternatives Analytic Considerations A considerable amount of analytic power comes from the analyst’s disciplinary grounding. The strategy process is a conceptual tool for integrating and applying the knowledge gained from other fields of study. When addressing the subject of strategic analysis, there is an implicit assumption that the reader is familiar with the concepts and tools of finance, accounting, marketing, economics, organization theory, and administration. Although some of these concepts and tools may be revisited, teaching the fundamentals of each discipline is well-beyond the scope of this text. If you encounter some difficulty following any of the technical discussions, you may want to consult the appropriate field literature for more-detailed descriptions and explanations. For example, price-sensitivity is a function of supply and demand and price/quantity relationships are derived from price-elasticity. If you forgot the mechanics or how to perform the calculations, you may want to keep some of your old texts around as reference materials.
  4. 4. Rev. 1 15— 4 Planning Assumptions: The Strategic Map Before we can begin to consider which strategies are practical or impractical we need to develop a set of criteria for evaluating them. You already laid the groundwork for this by scanning and premising, auditing, polling, and then statusing and forecasting your results and capturing them as discrete sets of planning assumptions. What we need now is some structured means for “filtering” the simultaneously realistic, feasible, and desirable out of them. That is, going back to Exhibit 15.2, we want to determine what part of reality is also feasible for us to pursue and, of that which is feasible, what part is desirable. We can do this by simply using our combined planning assumptions — our strategic map — as the criteria. For each strategic consideration — filter — determine the critical conditions to which an appropriate strategy must conform. Do not confine yourself to the spaces provided and use additional sheets as necessary. Exhibit 13.3 The Strategic Criteria Worksheet _____________________________________________________________________________ Strategic Consideration Criteria (Derived from Analyses & Forecasts) General & Tast Environment__________________________ Reality _______________________________________________ _______________________________________________ _______________________________________________ _______________________________________________ _______________________________________________ _______________________________________________ _______________________________________________ _______________________________________________ _______________________________________________ Micro & Macro Organization __________________________ Feasibility _______________________________________________ _______________________________________________ _______________________________________________ _______________________________________________ _______________________________________________ _______________________________________________ _______________________________________________ _______________________________________________ Management Sentiment & Tolerance ___________________ Desirability _______________________________________________ _______________________________________________ _______________________________________________ _______________________________________________ _______________________________________________ _______________________________________________ _______________________________________________ _______________________________________________ _____________________________________________________________________________
  5. 5. Rev. 1 15— 5 The reality factors are structured around your external intelligence gathering and analysis, the feasibility factors derive from your internal audit and assessment, and the desirability factors precipitate from your internal poll and evaluation. The first category captures key market, competitive, and regulatory conditions. The second, profiles the limits of the organization’s capacities and abilities — plans, configuration, processes, assets — and details critical people, object, and event issues. The final category attempts to define the types of ideas and actions that will “fly or die” when brought to the attention of the organization’s key decision makers and constituents. Any strategy that will satisfy all three conditions, is practical. Any strategy that falls outside the parameters set by the criteria is impractical — Exhibit 15.4. The factors that make the excluded strategies impractical, however, may become the basis for development actions. If insufficient capital rules out a range of strategies, for example, the organization may undertake an initiative to increase its capital assets thus removing the restriction from future planning cycles. Reality IMPRACTICAL IMPRACTICAL Feasibility IMPRACTICAL IMPRACTICAL Desirability Practical Exhibit 15.4. Defining The “Absolute” Realm of Strategic Choice One of the major problems with establishing a solid set of criteria is that it seems so obvious and simple. Consequently, there is a tendency to rush through this little exercise so we can get on to the “fun stuff.” If you are harboring such ideas right now, be advised that you were not the first to feel this way. In 1965, General Electric and Time-Life, Inc. attempted to launch what would be the precursor of the modern electronic, on-line information service. Combining the advanced technological expertise of GE with the tremendous library resources of T-L, under the leadership of the former U.S. Commissioner of Education, General Learning Corporation immediately established itself as the dominant force in educational technology. Imagine, in 1965, being able to sit at a computer console and scan the information amassed by one of the world’s largest periodical publishers. One small problem, no school could afford to buy the system visualized by the joint-venture partners and the enterprise folded. Need another example? Okay. During the Carter Administration, the White House appealed to
  6. 6. Rev. 1 15— 6 American military contractors to quit waiting for juicy government development contracts and to show some entrepreneurial initiative. Rising to the challenge, Northrop Aviation spent millions of its own money to develop the F-20 “Tigershark,” an exceptionally versatile and economical defensive aircraft well-suited to the needs of many small countries. At the same time, the military was pushing for the sale of the F-18 to American allies. Since this was the aircraft they used, mass production and foreign sales would hold down their procurement costs and help underwrite their development expenses. Even though the F-18 was ill- suited to the markets targeted by the F-20, the military was able to squelch every sale. Although they received hundreds of orders, Northrop never sold a single airplane and was forced to scrap the program. In both instances above, a good reality check would have saved the companies involved a lot of time, money, and headaches. The GE/T-L venturists would never have started General Learning Corporation had they first made a quick scan of school system budgets. Northrop would have “scrubbed” the Tigershark project before it began had they first done a little cursory premising. There was never any love lost between the Administration and the Pentagon, or the rest of the Washington establishment for that matter, during the Carter years. The President came up out of state politics and never quite meshed with the local scene. The presidency was subject to a limited term of office, the establishment went on forever. Furthermore, the military had always maintained a strong position to ensure that U.S. allies flew the same planes they selected for their own use. The outcome was actually quite predictable. In both examples, the companies pursued courses of action that were feasible and desirable, but that were also unrealistic. Stories of firms venturing beyond the limits of their financial feasibility abound, but what about other feasibility limitations such as expertise and technology. Greyhound Bus Lines’ near catastrophic experience in the rent-a-car business and Holiday Inn’s brief and unhappy flirtation with the intercity bus business quickly revealed the importance of planning within one’s limitations. When Coca-Cola bought into the wine business, they soon learned that “all beverage sales are not created equal.” Beatrice Foods had a similar experience when they bought out Stiffel Lighting. Technological feasibility limits came into play when Westinghouse bought into a joint-venture called United Disposal. UD developed a process by which garbage could be reduced to fertilizer and feed pellets. One problem with the process, however, was the noxious odors emitted from the plant. Not waiting to work out the technical problems, UD contracted with Fort Lauderdale, Florida to handle the city’s waste disposal. It was assumed that the odors could be eliminated from the process before the contract expired. With a successfully operating facility and a contract renewal, UD could harvest the garbage and a lot of profits from every municipality in the country. By the time the initial contract was due to expire, the city had been besieged with citizen complaints about the smell and UD had made little progress toward eliminating it. When the city refused to extend or renew the contract, UD and several millions of investment dollars slipped into oblivion. We have already noted how extreme desire can eclipse reality and feasibility, but what about a case where a firm ignored its own desirability function? When Roy Ash became CEO of Address-O- Graph/Multi-Graph, a manufacturer of mailing equipment, he found an R&D program that, for years, was working toward making the company’s equipment more compatible with the supplies of other vendors. At the same time, the new CEO also learned that about 80% of the firm’s business came from supply sales (e.g. inks, labels, printing plates, etc.). In short, the company was spending a lot of scarce assets on eliminating its major source of income. One of the nice things about retrospectives is they allow us to feel so insightful, clever, and . . . smug. Really, how could such large organizations with such “big bucks” management teams have been so foolish? The answer? Pretty much the same way we all do foolish things . . . they seem like pretty good ideas at the time. How do we defend ourselves from chasing the unrealistic, unfeasible, and undesirable? Do a particularly thorough job of filling out the strategic criteria worksheet . . . no matter how simple and obvious it may seem.
  7. 7. Rev. 1 15— 7 The Strategic Analysis Once we develop a clear picture of the conditions that bound our decisions and choices, we need to do a little sifting and sorting. Our purpose here is to find those patterns among our criteria that match with specific sets of strategy menu items. Actually, we want to identify promising matches at two levels: 1) the corporate-level, and 2) the business-level. We are going to work from the outside- in because we are looking for practical strategies that will facilitate effective and efficient adaptation. The best place to start is to get a fix on some temporal positions. Specifically, we need to know where our products/services and our industry segment are situated in their respective life-cycles. Next, we will consider some institutional forces — sociopolitical, economic, and technological — to get a feel for the social “mood.” We will take a look at the regulatory atmosphere and wrap it up by extracting some implications from market and competitive activity. Taken together, these analyses will provide a pretty good picture of our reality in operational terms. If we then create a similar profile of our organization, we can compare how the two mesh and derive some broad strategic directions that hold promise for consideration. Glimpsing ahead, we are going to determine how “permissive” or “restrictive” the conditions are in our life-space. Following that, we are going to assess our asset position — “asset rich” or “asset poor.” Since these analyses will be conducted in absolute terms — based on our criteria — we can determine direction by evaluating them in relative terms — as they relate to each other. We will harness the generic strategy perspective — discussed in Blueprint Chapter 6 — to facilitate our initial evaluation and then add some of the other perspectives to refine it. The process may come across as a bit “fuzzy” right now, but it will sort itself out as we move along. Getting A Grip On Your Life-Cycle Position Life-cycle positions are defined by characteristic market patterns. A product or industry segment occupies an introduction, growth, maturity, or decline position because of the events happening around it. It is important to hold this idea in mind because life-cycles are functions of “relative time” not “virtual time” — recall the relativity discussion in Blueprint Chapter 10. The various life-cycle positions and their associated market conditions are shown in Exhibit 15.5. Stage Sales Number of Product Profits Trait Volume Competitors Differentiation Low— Slowly Introduction Negative Few None or little increasing Increasing- High— Rapidly Growth Rapid growth Attracted by Increasing increasing high profits Decreasing- Flat — Slowly Maturity Stable Departure of High decreasing Inefficient producers Few - Relatively Decline Decreasing Diminishing homogeneous Very Low producers Exhibit 15.5. Life-cycle Positions and Their Characteristics
  8. 8. Rev. 1 15— 8 Capturing the Social “Mood” Recall that conditions in the institutional environment are principally used for forecasting. The institutional forces, save political/legal forces, “trickle down” and become strategically significant at the task environment level of analysis. Our concern here is the general atmosphere of the institutional environment and not so much its future implications. If we are in a period of rapid technological change, for example, consumers may be less-reticent to try new products or services. “Technophobia” is a resistance to incorporating new technologies. When change is slow or intermittent, people tend to be more technophobic or to wait until new technologies have become perfected and well-established before adopting them. When technological change is rapid and on-going it may not only be impractical to be technologically conservative, it may be unfashionable. Furthermore, periods of rapid change also tend to produce “leap-frog technologies” that permit producers to accelerate process and method improvements rather than developing such improvements in cyclical stages. Healthy economic conditions breed a sense of hopefulness, weak conditions foster pessimism. Sociopolitical realities dictate whether “anything goes” or if everything will be subject to careful scrutiny and parochial criticism. What we are after is a sense of the social “mood” or “attitude.” Surrogate measures like investment rates, contract purchases, inventory sizes, housing starts, stock market activity, discretionary spending patterns, vacation travel volume, box office receipts, public rallies, voter turnout, fashion colors and styles, prevailing forms of humor, and a host of other data points provide little “snap shots” into how people are thinking and feeling. The data may be a bit “soft” but they provide some “tint and texture” to the harder data. Regulation Whether an industry is regulated, unregulated, or somewhere in between is, of course, important. Additionally, we want to know if regulatory activity, in general, is increasing or declining or if some industries or products are being targeted for greater or lesser regulation. Understanding the regulatory constraints under which we must operate is a must, but, also, we need to know the constraints under which our suppliers and customers are operating. Institutional Conditions Reality Life-cycle Sociopolitical Economic Technological Regulatory Favorable Rapidly General or Permissive Early Healthy Upbeat Changing Unregulated Unfavorable Regulated Restrictive Late Weak Stable Pessimistic or Targeted Exhibit 15.6. Summary of Non-Market Conditions Market Conditions This would be a good place to apply Michael Porter’s “Competitive Rivalry” model that was introduced in Tools Chapter 12 and expanded in Chapter 13. Our choices of customers and suppliers and their strength, the presence or absence of entry barriers to our industry or industry segment, the availability and acceptability of substitute products, and the general nature of competition in our industry constrain a lot of our strategic choices.
  9. 9. Rev. 1 15— 9 Market Conditions Reality Suppliers Customers Barriers Substitutes Competition Plentiful Plentiful Permissive Weak High Few Benign Weak High Demand Scarce Scarce Restrictive Strong Low Many Heated Strong Low Demand Exhibit 15.7. Summary of Market Conditions Exhibits 15.6 and 15.7 summarize the conditions that may be gleaned from our criteria. It would be nice if everything fell neatly into one or another category, but, most likely, you will find that your analysis will yield a mix of conditions. That is, some of the findings will suggest a permissive reality and others will suggest it to be more restrictive. What we want to conclude is a composite of the various dimensions — is the overall picture generally permissive or restrictive? This is a judgment call. Do not worry about coming up with a perfect assessment right now, because we can tailor specific strategies to deal with the “outlier” conditions later on in the process. For example, we may find generally permissive conditions, but the economy is weak and we are dependent on a few, very strong suppliers for our inputs. After we establish a general strategic direction, we can develop specific strategies for accommodating these factors within our larger strategic framework. Our Asset Position Here we want to consider what we have to work with within our own organization. Recall from Blueprint Chapter 7, we can “rearrange the furniture,” but from a practical perspective, we have to use the “furniture” we currently possess. What we need is an inventory of our products and services, core technology, work force capabilities, finances, physical location, and organization commitments — Exhibit 15.8. These factors determine the outer limits of what is feasible for us. Once again, we are looking for an overall assessment. We will deal with the specifics at a later point. Asset Products/ Core Physical Position Services Technology Work force Finances Location Commitments Skilled Distinguished Sound Rich Contemporary Stable Good Flexible Established Good Credit Trainable Unskilled Generic Weak Poor Dated Unstable Poor Rigid New Poor Credit Untrainable Exhibit 15.8. Summary of Feasibility Factors Putting It Together
  10. 10. Rev. 1 15— 10 Putting It Together Now we can start to have some fun. Given the boundary conditions, that we so carefully elicited from our strategic criteria, what strategic avenues are available to us? If we cross-map what we have concluded from our initial analyses, we find that we can isolate four broad strategic categories delimited by the realities and feasibilities we just defined. From our discussion in Blueprint Chapter 6 we know we can only attack, defend, flank, or retreat. Our conclusions, this is why we had to make the “judgment call,” will lead us to one of the four. The options are provided in Exhibit 15.9. External Reality Restrictive Permissive Rich Internal Feasibility Defend Attack Poor Retreat Flank Exhibit 15.9. Finding the Generic Strategy Each of the generic strategies, by definition, embodies a set of corporate- and business-level strategies from the strategic choice menu. This “first cut” directs us to strategic “families” that correspond to our unique reality and feasibility conditions. Within each “family” are sets of growth pattern and firm-, product-, customer-, and market-oriented strategies — Exhibits 15.10 and 15.11. Generic Growth Pattern Strategy Status Quo Defend Concentrated Growth Concentrated Growth Attack Diversification Flank Concentrated Growth Retrenchment Retreat Liquidation Exhibit 15.10. Generic and Corporate-level Strategies
  11. 11. Rev. 1 15— 11 Generic Emphasis Strategy Firm Product Customer Market Location Cost-leader Differentiation Focus Defend Penetration Redefinition Development Market Development Geo-Development Location Cost-leader Differentiation Focus Attack Penetration Redefinition Development Market Development Geo-Development Flank Redefinition Differentiation Focus Location Retreat Withdrawal Exhibit 15.11. Generic and Business-level Strategies It bears reminding that any organization that is asset rich is not limited to the asset-dependent defend and attack strategies, however, those who are asset-poor must, of necessity, stick to the asset independent flank and retreat approaches. The strategic directions indicated in Exhibits 15.10 and 15.11, are those that best conform to the four reality-feasibility combinations. There remains considerable latitude within those frame works for fine-tuning. For example, at the corporate-level, Ansoff’s Product/Market Status — Exhibit 15.12 — could be applied to move father out on the strategic branches shown in Blueprint Exhibit 6.9. PRODUCT STATUS Existing New Existing Product Concentration MARKET STATUS Development Market New Diversification Development Adapted from: Ansoff, H.I., Corporate Strategy: An Analytic Approach To Business Policy For Growth And Expansion (New York: McGraw-Hill, 1965). Exhibit 15.12. Product/Market Matching
  12. 12. Rev. 1 15— 12 Within the isolated business-level strategy set we could apply Porter’s Competitive Strategy argument and reduce the number of strategies considered. His perspective is discussed in Blueprint Chapter 6 and presented in Exhibit 15.13. The model can be used to analyze the consistency among strategies currently in place and to focus on the development of finite strategies within the generic sets. COMPETITIVE ADVANTAGE Lower Cost Differentiation Broad Target COMPETITIVE SCOPE Narrow Target Cost Leadership Differentiation Cost/ Differentiation/ Focus Focus Porter, M.E., Competitive Advantage: Creating and Sustaining Superior Performance (New York: Free Press, 1985). Exhibit 15.13. Competitive Scope and Competitive Advantage We could move forward from Porter’s model by more closely examining the “Competitive Scope” parameters with the Natural Selection Model presented in Blueprint Exhibit 6.5. The model is provided again in Exhibit 15.14 so you can see how the two perspectives relate. Favors Favors Favors innovative/ efficient/ innovative/ opportunists problem-solvers opportunists Broad Prospector/ Analyzer/ Identify and develop Niche Breadth Generalist Generalist narrower niches Narrow Entrepreneur/ Defender/ Develop new strategy Specialist Specialist or exit niche Low High Saturated Population Density Exhibit 15.14. Niche Breadth and Scope Again, it should be noted that the various perspectives on strategy, presented in Blueprint
  13. 13. Rev. 1 15— 13 Again, it should be noted that the various perspectives on strategy, presented in Blueprint Chapter 6, are not mutually exclusive. The developmental, adaptation, natural selection, generic, and competitive perspectives have all been incorporated in the previous examples. What about the evolutionary perspective? It picks up after we reach the narrow and saturated position — lower right cell — in Exhibit 15.14. This issue was covered in Blueprint Chapter 7 when we looked at the life-cycles of strategic plans. Essentially, when we reach this cell, we have hit the “erase it and replace it” point. Because they are “perspectives,” each contribution sees the process from a different angle and thus provides us with a different point of view. Taken together, the multiple perspectives give us a very comprehensive picture of how to proceed. Strategic Choice Characteristics We have already determined the criteria by which the identified strategies will be evaluated. Now we determine the characteristics of each strategic direction under consideration in each of the criteria categories. Once again, you are going to have to overcome your natural reluctance to “write things down.” Experience tells us that it is difficult to keep a lot of complex and interactive ideas in our minds at one time. What we end up with is a lot of ill-defined, in operational terms, “fuzzy thoughts.” Until we capture our ideas in writing — this includes graphics — we really cannot critique the logic of our reasoning or the comprehensiveness of our conclusions. Equally important, so long as our ideas reside only in our minds, no one else can critique them or participate in their development in any concrete fashion. In time, the process may become second-nature as you internalize the model and make it part of your natural thought processes. It is also likely that you will personalize it by adding your own unique refinements and “shorthand” notations. Until that time arrives, however, it behooves you to “slog” through the process as suggested. Develop a profile of characteristics for each identified strategy using the expanded worksheet. Elaborate in as much detail as possible and add more space as necessary. Exhibit 15.15 The Strategic Choice Worksheet _____________________________________________________________________________ Strategic Consideration Strategy Characteristics General & Tast Environment__________________________ Reality _______________________________________________ _______________________________________________ _______________________________________________ _______________________________________________ Micro & Macro Organization __________________________ Feasibility _______________________________________________ _______________________________________________ _______________________________________________ Management Sentiment & Tolerance ___________________ Desirability _______________________________________________ _______________________________________________ _______________________________________________ _______________________________________________ _____________________________________________________________________________
  14. 14. Rev. 1 15— 14 Eco, Social, Techno, Economic & Political ________________ Implied Risk _______________________________________________ _______________________________________________ _______________________________________________ Plans, Configuration, Processes & Assets________________ Changes Required _______________________________________________ _______________________________________________ _______________________________________________ Suppliers, Customers, Competitors, Regulators & Profits_____ Anticipated Outcomes _______________________________________________ _______________________________________________ _______________________________________________ _____________________________________________________________________________ Start, Sequence, Duration & End ______________________ Timing _______________________________________________ _______________________________________________ _______________________________________________ Capital, Labor, Space & Opportunity Costs _______________ Asset Requirements _______________________________________________ _______________________________________________ _______________________________________________ Uniqueness, Specialization & Commitments ______________ Flexibility _______________________________________________ _______________________________________________ _______________________________________________ _____________________________________________________________________________ As you develop your descriptions of how the identified strategic directions satisfy your selection criteria, you will also be preparing a foundation for a few other process actions. First, the strategic characteristics will become the criteria for developing strategic plans in the next stage of the process. Second, you will have a basis for determining how well each strategy accommodates the “outlier” issues you discovered when you developed your reality/feasibility profile in the first stage of analysis. Recall, we got here by making a “judgment call” that reality is “generally” permissive or restrictive and the organization is “ostensibly” asset-rich or asset-poor. Now we have to tailor the general strategies to conform to the conditions that did not fit the profile. Usually this is done by digging deeper in the the strategy menu: for example, moving from the broader to the narrower strategies covered in Blueprint Exhibits 6.9 and 6.10 and/or formulating appropriate functional-level strategies that fit the general strategic direction and simultaneously deal with the “outlier” concern. Third, if the process has not led you to a set of strategies that will satisfy all the criteria, you are alerted to the fact that you may have “goofed” somewhere along the way — e.g. misjudged reality or feasibility, misclassified the organization’s strategic position, misunderstood a strategic implication, etc.. At this point you would want to review how you got to this point and make the necessary adjustments. Another posibility is that one of your “outliers” is so critical that it outweighs the other factors used to construct your profile. For example, all the reality factors are favorable, but we are so highly regulated we
  15. 15. Rev. 1 15— 15 have little legal maneuvering room or all the feasibility factors are positive, but we are so “strapped” for capital there is little we can financially afford to change. In such cases, we would have to plan “around” the critical factor . We would, correspondingly, reclassify our stragic location in Exhibit 15.9. How we might get out of “the restrictive loop” would become the focus of our development efforts. Finally, by capturing the range of practical strategic choices in detailed terms, you create an entry point for applying your desirability criteria. Of all the realistic and feasible strategies under consideration, some, based on their specific characteristics, will be deemed desirable and others, undesirable. Suffice it to say, developing a comprehensive description of each isolated strategy and how it “works” is a critical step toward formulating a “winning” strategy to guide the organization. Exhibit 15.16 shows how we got to and through the strategic analysis process in graphic form. First, we developed discrete planning assumptions from our scanning and premising, auditing, and polling. Second, we consolidated them on the strategic criteria worksheet as a set of combined assumptions. Third, we analyzed the reality and feasibility relationships and identified a strategic position and its associated strategies from the strategy menu. Finally, we described each identified strategy on the strategic choice worksheets, evaluated how well they satisfied the selection criteria, identified indicated refinements, used them to assess the validity of the process to this point, isolated “critical factors” that demanded special attention, and provided a basis for assessing desirability. Scan/Premise, Poll, & Audit Analysis & Forecast Expert Knowledge Develop Assumptions Collateral Information Reality Feasibility Strategic Analysis Desirability Select practical strategies Refine Strategies to deal with “outlier“ conditions Validate the analytic process and make necessary adjustments Identify “critical factors” and facilitate revising strategic position conclusions Provide a basis for applying “desirability” criteria Exhibit 15.16. Strategic Analysis and Outcomes
  16. 16. Rev. 1 15— 16 Notice that after the practical strategies are identified and described, they are are subjected to another “decision loop” in which they are refined, validated, and revised. This step calls for a little patience as it might be reiterated several times until all the “bugs” are worked out and the voids are filled. In the end, we should have a set of strategic directions that are realistic and feasible . . . and that cover all the critical success factors. Evaluating Desirability To determine desirability, we haul-out our strategic criteria one more time. At this point, our concern is those planning assumptions that describe our desirability function. Since the reality and feasibility parameters have been met in the previous process stage, we can skip those elements and direct our focus to the implied risks, change requirements, anticipated outcomes, timing, asset requirements, and flexibility associated with each strategy. Our goal is to “weed-out” any courses of action that may run afoul of our organization’s preferences and tolerances as opposed to “selecting-in” what might be the most desirable actions. This logic is predicated on the fact that we want to keep our range of options as broad as possible for as long as possible in terms of our overall strategic thrust. That is, we want to find all the strategies that exhibit reality, feasibility, and desirability. Choosing from among them will come at a later stage when they are reduced to sets of competing strategic plans. Why? Well, if all of the identified strategies will work and be able to garner sufficient organizational energy and enthusiasm to make them work, selecting the best course of action might best be deferred until we can see how each one translates into potential actions. Put another way, the entire process is aimed at eliminating the unrealistic, unfeasible, undesirable strategic directions from consideration. We can do this because we know what all the possible strategies are before we even begin — by virtue of the strategy menu. What we do not know is which of the surviving strategies will provide us the greatest net benefit. Since all the identified strategies meet the choice criteria, we have no rational basis for choosing one over the other. Therefore, selection is best determined by the strength of the individual plans flowing from those strategies as opposed to simple conformity with our preferences. We do not want to limit our options too early in the process because this may lead to the arbitrary exclusion of some very promising and creative ideas for execution. At the point where desirability comes into play, we are most concerned with identifying those strategies that will not receive sufficient organizational support to reach fruition because they embody undesirable characteristics — e.g. liquidation is realistic and feasible under any set of conditions, but it may only be desirable in very few instances. By allowing our planners to exercise the greatest latitude in their efforts, without compromising our choice criteria, we provide ourselves the broadest selection of plan options from which to ultimately choose. The final plans can be evaluated on their relative merits and then be selected or excluded and prioritized for implementation. Development Another place our preference function applies is to the targeting and selection of feasibility limitations for development. Again, critical factors may come into play. Some critical factors can be altered and eliminated and others cannot. Generally, the former relate to internal conditions and the latter to external conditions. We can plan to remedy the former but we must plan around the latter. Chester I. Barnard, the father of administrative theory, defined something he called “limiting factors” as “those which if absent or changed would accomplish the desired purpose.” Development is concerned with removing or changing those limiting factors that can be affected and that are seen as
  17. 17. Rev. 1 15— 17 concerned with removing or changing those limiting factors that can be affected and that are seen as desirable areas for improvement. The organization’s feasibility limitations do not automatically translate into development initiatives. First, the organization possess no immune system that initiates spontaneous self-healing. Since it is a “contrived system,” remedial action must also be contrived. Second, not all limitations are of equal importance. Development is only indicated if the remedy is realistic and desired. Finally, few if any organizations have the resources to make all realistic options organizationally feasible. Development, like strategic adaptation, has a cost and, therefore, represents a tradeoff decision. An important part of strategic analysis, is to target areas for development: to first identify realistic, desirable, but unfeasible directions and then to select the more critical limitations for development. The preference function plays a significant role in prioritizing which limitations will be attended. As was the case with strategic choices, development choices become the basis for subsequent planning, implementation and control. Furthermore, since development “filters out” at the strategic analysis stage and seeks to expand the organization’s “feasibility envelope,” it requires working from the inside-out. Adaptation, as noted earlier, follows a process that operates from the outside-in. Strategic Analysis Outputs If properly executed, strategic analysis will produce two outputs. One output will be a set of documents that profile the characteristics of our practical strategic choices. The other output will be a set of documents that profile the characteristics of indicated feasibility improvements — enhancements to current capacities and abilities. Together, these profiles will become the criteria against which our strategic and development plans will be formulated and evaluated. Although there is a logical flow to the strategic analysis process, we have made a conscious effort to avoid prescribing it as a series of “check lists” and “fill in the blanks” exercises. Analysis is not a recipe where a cup of this and a pinch of that will produce world-class results. Within each process stage, successful execution still depends on the insight, knowledge, wisdom, and creativity brought to it by the analyst. The process provides a framework for harnessing diverse bodies of knowledge and personal skills and keeping them on track, but no process can compensate for a lack of knowledge and skill, patience and determination, and common sense. We can provide you with general directions, but any attempt to define precise execution denies the human spark that ignites the artistic dimension of the strategy process. Like any decision process, strategy must be approached rationally and rigorously, however, its power is diminished when it is undertaken mechanically. The process is paralleled by the game of chess. Reality is defined by the squares on the board, the game rules, and the positions of the pieces. Feasibility is determined by the number, location, and types of pieces each player has at his or her command. At any point in the game, every possible move is known — the strategy menu. Players will consider only those moves that are realistic and feasible. As the game progresses, each move dictates the range of choices each player will face in subsequent moves. Every individual move is dictated by reality, feasibility, and desirability. The conditions and process are the same for novices and masters alike. What sets them apart is how they incorporate their unique personal qualities into execution. We must be careful not to over-generalize the chess example, however. Chess rules and chess boards never change, the pieces are inanimate and each has finite and stable properties, an entire game can be played in a matter of hours, and each game is independent of every other. Chess is played in two dimensions and it requires the players to think in three —remember temporal considerations. The broader strategy process is far more complex and dynamic. The playing field and game rules are ill- defined and keep changing. The pieces are infinite in their numbers and properties. Results take longer
  18. 18. Rev. 1 15— 18 to achieve and they create more profound consequences. Temporal issues transcend the mere selection of proper sequences. It is played in three dimensions and successful play demands that we think in four. Like chess, however, the game should be approached with humility and flexibility if victory is to be achieved. To this point we have “filtered” everything down from some absolute reality to a set of concentrated directions that we will pursue. As we move into the planning stage, we will begin to diffuse these directions into discrete goals, diffuse them further into sets of plans for each identified goal, and then diffuse them some more into implementation stages and control systems. Strategies Versus Strategic Plans: An Example It may be helpful at this point to explore an example. Our purpose here is to “get a feel” for how strategic analysis shapes the follow-on strategic planning process. Ideally, “knowing where we are going” will provide a helpful context for understanding the subtleties and importance of the analytic process. Since we introduced price differentiation already, let us follow it through and see if we can come up with some potential plans that conform to its definition. Basically, the strategy dictates that we distinguish a given product or service from others of its kind by the price we attach to it. One does not have to be an expert to realize that this gives us only two options — we can only charge a higher price or a lower price than the competition. At first blush this seems to be a pretty straightforward decision. We can sell our product for less and try to appeal to the bargain-conscious consumer, or we can sell it for more and try to imply that it must be of higher quality or is tailored for the discriminating consumer — that is, it has “snob appeal.” Here is where the obvious trips us up. What is price? About now you should be kicking yourself for not having paid more attention in Economics. Price is simply what the buyer is willing to give up to posses a thing and what the seller is willing to exchange it for. Nowhere in this operational definition is there any mention of “pay for,” “price tag,” or “money.” Viewed from this perspective, price differentiation is rooted in our ability to create a distinctive and desired “give up” difference. We now have some new options. We can charge more for more, less for less, or less for more. “Charge” refers to the monetary part of the price. If we try to charge more for less, and are relying on price differentiation for our success, we will distinguish ourselves, but not for long . . . most likely, we will soon be out of business. “More for less” might be more consistent with other strategies, however. Part of the sales transaction will generally require the buyer to “give up” some money. But does the money represent everything the buyer has “to give up to posses the thing?” What about opportunity cost, convenience, energy, shopping and decision making time, and other resources consumed to consummate the purchase such as transportation, telephone calls, and media subscriptions? Media subscriptions? Sure. How does one find out what products are available and where they can be purchased? From the standpoint of both the buyer and seller, the price and the “thing” purchased represents money and “bundles of utilities.” More specifically, time, form, use, and place utilities. If the buyer can get the same product for the same amount of money at two different stores, and one store is located closer to the buyer, he or she will “give up” less by making the purchase at the nearest store — an example of place utility. If the seller does not have to advertise the product, he or she can sell it for less money without “giving up” anything. See it? 1) We can charge more money for the same product with a larger bundle of utility, 2) Less money for the same product with a smaller bundle of utility, 3) Less money for the same product with the same or larger bundle of utility if we can produce it for less money, or, 4)
  19. 19. Rev. 1 15— 19 less money for the same product with a larger bundle of utility so long as the increased buyer utility does not diminish the seller’s bundle of utility. Premiums conform to options one and four. Premiums are additional utilities added to, but not an integral part of, the product or service. For some products, the monetary price itself is a premium. There as those who will purchase simply because “ it is the most expensive __ money can buy.” Cellular telephone services use a variation on the #4 approach. Connection, monthly, and air-time charges are the same if you take the “free” telephone or not. If you take the phone, you are obliged to use the service for a certain period of time, usually two years, or be charged for the instrument. By getting the telephone and the service for the same price as the service alone, the customer pays less money for total cellular connectivity. The premium comes from staying on the system. The customer does not get a larger bundle of utility from buying the package, only a lower price. The “package” is cheaper than buying the telephone and the service separately. Utility is reduced, however, if he or she switches providers before the end of the contract period — this is called “switching cost.” The additional utility comes from avoiding the penalty. By having a large number of term-contract subscribers, the provider smooths service demand and can operate more efficiently. The cost savings offset the price of the telephone, thus the provider loses nothing. If the premium is the basis for differentiation, the seller is following a support strategy, if price is the distinctive feature and the premium adds utility, it constitutes a price differentiation strategy. The two are not mutually exclusive. Both could be used at the same time to differentiate a product or service. The distinction depends upon whether the seller plays-up the monetary price of the product or the inclusion of the premium to differentiate it. Discount warehouses, no-frills hotels and airlines, off-peak pricing, and self-service gas stations and restaurants fit into the second category. By eliminating convenience, ambiance, and/or services for customers who are willing to absorb the utility part of the price, the seller can set monetary prices based more closely to the monetary cost of the product alone. This is not quite the same as being a low-cost producer or cost-leader because the buyer is actually getting less for less money. A hard-core discount warehouse would locate in a low rent area far from major shopping areas. To shop there, a customer has to sacrifice a lot of time and place utility. No-frills and self-service compel the customer to give up use utilities. Off-peak pricing is only attractive to those customers willing to forego time utility. The third option mentioned above allows a cost-leader to follow a price differentiation strategy. Since the cost-leader can produce for less expense, the savings can be passed along to the customer as lower prices. Volume discounting is a good example of the fourth option. The buyer gets each unit of product for less money and simultaneously reduces his or her research, shopping, decision making, and transportation expenses. The seller accepts less money for each unit of product and simultaneously reduces his or her storage, advertising, inventory financing, and transaction expenses. Bonus packaging that puts more product in the same container for the same monetary price works much the same way as volume discounting as do frequent-flier programs where the bonus points, earned from travel volume, are redeemed to buy “free” travel. Frequent-flier programs also have a switching-cost element. Passengers are penalized when flying off-line because they do not earn the bonus points necessary to reduce their total travel expenses — off-line ticketing does not help one earn a volume discount — when the opportunity cost is factored in, the off-line ticket costs more than an equivalent on- line ticket selling for the same monetary price. A price-differentiation strategy, therefore, can be executed by: 1) Selling at a high price to a “snobbish” target market through exclusive outlets, 2) selling at low price to a price-conscious target market through no-frills outlets, 3) selling at a low price to a general market if the product is produced inexpensively, 4) selling at a low price to a general market through volume discounting if a) the product is
  20. 20. Rev. 1 15— 20 price elastic, and/or b) volume sales reduce unit production or selling expenses — as might be the case if production is subject to economies of scale, 5) selling at a low price in a general market if a) the product is price elastic, and/or b) the customer faces high switching costs, or 6) combining high and low price strategies simultaneously — this is called price-lining. Price-differentiation is the strategy in all six cases mentioned above, but each of the six represents the nucleus of a different strategic plan. Note also that the practical selection of price differentiation as a suitable strategy and how it is interpreted into action depend on the marketplace realities, the organization’s production and selling feasibilities, and the desirability of using price as a distinguishing characteristic. Other factors permitting, desirability might be the single determining factor for selecting a high-price, low-price, or price-line means for differentiation.

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