Strategy Management


Published on

Strategy, of course, has engaged the attention of business people ever since it was first spoken, and many great books have been written in an attempt to expound it.

In spite of all that has been written about business strategy and not wishing to add anything further to the subject in an exhaustive sense, my plan is to contend with something of the advantages that are to be gained by strategists taking a dynamic view of strategy.
This small book covers a range of subjects connected with strategy formulation and management. It should not be taken as the be all and end all of strategy nor should it be considered as an exhaustive piece on the subject. But the 12 items included herein offer the tools to craft superior strategies - without the verbiage!

Published in: Business
  • Be the first to comment

  • Be the first to like this

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

Strategy Management

  1. 1. by Andrew PearsonTurning good businessinto unique businessesStrategy Management13 Insights of Strategic Management
  2. 2. 2COACHING BUSINESS01280 844966 MANAGEMENT13 Insights of Strategic ManagementA Great Company Takes a Great Idea That Puts It in Tune With ItsCustomers and Two Steps Ahead of Its Competitors - An EvenGreater Company Will Exploit This Success With Another GreatIdea!Second Edition 2012© Copyright 2012 Andrew M. PearsonALL RIGHTS RESERVED. No part of this report may be reproduced or transmitted in any formwhatsoever, electronic, or mechanical, including photocopying, recording, or by any informationalstorage or retrieval system without express written, dated and signed permission from the author.DISCLAIMER AND/OR LEGAL NOTICES:The information presented herein represents the view of the author as of the date of publication.Because of the rate with which conditions change, the author reserves the right to alter and update hisopinion based on the new conditions. The report is for informational purposes only. Whilst everyattempt has been made to verify the information provided in this report, neither the author nor hisaffiliates/partners assume any responsibility for errors, inaccuracies or omissions.
  3. 3. 3COACHING BUSINESS01280 844966 ManagementStrategy, of course, has engaged the attention of business people ever since it wasfirst spoken, and many great books have been written in an attempt to expound it.In spite of all that has been written about business strategy and not wishing to addanything further to the subject in an exhaustive sense, my plan is to contend withsomething of the advantages that are to be gained by strategists taking a dynamicview of strategy.This small book covers a range of subjects connected with strategy formulation andmanagement. It should not be taken as the be all and end all of strategy nor should itbe considered as an exhaustive piece on the subject. But the 12 items included hereinoffer the tools to craft superior strategies - without the verbiage!
  4. 4. 4COACHING BUSINESS01280 844966 this strategy paperWhen you have read this paper you will have gained further knowledge on how to: How to craft a breakthrough strategy How to define the capabilities and competencies that best serve a company’scustomers How to be positioned, visible and credible How to create a great reputation and outstanding relationships How to put innovation into strategy How to decide ‘what business you are in’ How to decide ‘who you customers are’ How to segment markets effectively How to analyse competitors And…much much more.
  5. 5. 5COACHING BUSINESS01280 844966 The Story of William Cook7 The Need for A New Model11 Business Purpose16 Creative Insight18 Market Standing22 Segmentation27 Creative Strategic Grouping31 Competitor Analysis35 Industry Analysis38 Competitive Strategy43 Sustaining Competitive Advantage51 Competence and Capabilities6069THREE Distinctive CapabilitiesFurther Support
  6. 6. 6COACHING BUSINESS01280 844966 THE STORY OF WILLIAM COOKMuch of what is emphasised here reflects the story of Andrew Cook who in the1980s transformed William Cook, a well established British manufacturer ofsteel castings, into a market leader when all was against him.Output in the industry had been falling for a number of years but Cook ontaking over the company invested in increased efficiency, quality and capacity inthe least value segment – at a time when capacity was double the amount ofindustry sales. Rivals thought he was mad.Cook’s didn’t have the image of a Mercedes or an IBM amongst its customers.Neither was it a technological leader, nor did it possess secret processes toguarantee extra income. Conventional thinking would have suggested that Cookmilk the business and leave the industry or go into a higher value anddifferentiated niche. But no Cook invested in capability and quality. In a fewmonths his efforts yielded results quickly.Within a few years sales had risen 10% against industry losses. He was the firstto invest in BS5750. Within a couple of years he had acquired two of his majorcompetitors and by the ‘90s he had become the market leader.Cook’s investment in a hostile environment transformed the business. Hisimprovements raised customer service levels saved customers money andincreased demand for his product. Cook had understood the importance ofquality, reliability, and service could reduce his costs. Thus Cook generated adouble advantage – higher value and lower cost.When others saw what he had achieved they changed too. They sought to catchup and invoked intense battles …but that’s another story.Even though the industry was changing, Cook’s action was grounded in theinsight and vision – coup d’oiel - of its leader. And it triggered a change in theconfiguration and management of internal and external structures andnetworks to raise profits and contribute to the transformation of the industry.
  7. 7. 7COACHING BUSINESS01280 844966 THE NEED FOR A NEW MODEL!Take a look at this for a moment and note what you think about strategy formulation.What are your impressions?Let me tell you what mine are.When I first looked at the case of Honda in the US, I was studying for an MBA. As anavid student of strategy I just couldn’t see how Honda, heralded by business schoolsand gurus alike as an icon of Japanese success, had hit all the right strategic buttons.Their success, it seemed to me, was just good fortune; a company on the point of exitrather than on the brink of success.Full marks for being there, or hanging on in there, but was this strategy or was itluck?The Case of HondaHonda one of the leading manufacturers of motorbikes is credited withidentifying and targeting an untapped market for small 50cc bikes in theUS, which enabled it to expand, trounce European competition and severelydamage indigenous US bike manufacturers. By 1965, Honda had 63 % ofthe US market.But this occurred by accident…not by designHondas planned strategy for the US was to compete with larger Europeanand US bikes of 250ccs and over. These bikes had a defined market, andwere sold through dedicated motorbike dealerships. Disaster struck whenHonda had to recall the larger machines as they couldn’t cope with the wearand tear imposed on them by US motorcyclists.But then something extraordinary happened! Sports goods shops andordinary bicycle and department stores had expressed an interest inHonda’s smaller 50cc bikes. Despite its wish to enter the US with its largermodels, Honda had no alternative but to sell the small 50cc bikes just toraise money. They proved very popular with people who would never havebought motorbikes before. Eventually the company adopted this newmarket with enthusiasm with the slogan: You meet the nicest people on aHonda.
  8. 8. 8COACHING BUSINESS01280 844966 fact Honda’s strategy evolved – it simply emerged! It had materialised againstmanagers conscious intentions, but to their credit they eventually responded to thenew situation.And here is the point. Strategic management has been seen as a rational model; aformal approach to achieving a stated objective, all encompassing, top down andlikely to be ponderous.Formal strategic planning and control processes look something like this.• Strategic planning starts with the identification of strategic business sectors,in other words, areas of activity where there are identifiable markets andwhere profit, management and resources are largely independent of the othersectors.• Strategic plans are drawn up, based on a comprehensive analysis of marketattractiveness, competitors and so on. There are three important aspects tothese plans. Long term objectives. Key strategies. And funds requirements• At corporate levels, these plans are reviewed. Head office examines all thedifferent plans, and, with a 7 to10 year planning horizon, the total risk,profitability, cash flow and resource requirements are assessed. Businesssectors are allocated specific targets and funds.This very approach though carries with it limitations. Here are some of them;• Defining strengths and weaknesses, part of the planning process, is actually verydifficult in advance of testing them. The detached assessment of strengths andweaknesses may be unreliable, all bound up with aspirations, wishes and hopes.Discovering strengths and weaknesses is a learning process. Implementing astrategy is necessary for learning - to see if it works.• Planning assumes that the environment can be forecast, and that its futurebehaviours can be controlled by a strategy planned in advanced and deliveredagainst schedule. In conditions of stability, forecasting and extrapolationmake sense of things. But forecasting cannot cope with discontinuities (e.g.the change from mainframe computing to PCs).
  9. 9. 9COACHING BUSINESS01280 844966• A business cannot allow itself to wait every year to go into annual strategicplanning mode to address problems. Such an approach is dependent on anumber of conditions – of stability, of maturity, of limited competition, and ofthe significance of economies of scale for the achievement of competitiveadvantage.Managers lower down the hierarchy, operating in ‘fast moving conditions’,faced with dealing with problems and opportunities may require differentform of strategic management.So where do we go from here?Surely it is to accept that alternative approaches are required in conditions wherestability is uncertain or in early phases of industry evolution (where certainty and,therefore, rationality has yet to emerge).Well here are three possibilities1. That strategy is a pattern of management decision. Corporate strategycan only determine its purposes and goals, which in turn produces the principalpolicies and plans for achieving those goals, defines the range of business thecompany is to pursue, the kind of economic and human organisation it is orintends to be, and the nature of the economic and non economic contribution itintends to make to its shareholders, employees, customers and communities.2. That strategy exploits competences. Strategic opportunities must be relatedto the firms resources and involves identifying a companys competences. Thedistinctive competence of a business is what it does well, uniquely, or better thanrivals. For a relatively undifferentiated product like castings, the ability of amanufacturer to run a transport fleet more effectively than its competitors willgive it competitive strengths (if, for example, it can satisfy orders quickly).• These competences may come about in a variety of ways.• Experience in making and marketing a product or service• The talents and potential of individuals in the organisation• The quality of co-ordination
  10. 10. 10COACHING BUSINESS01280 844966 That Strategies Emerge.1 The rational approach also fails to identify emergentstrategies, or allow for them. Emergent strategies arise out of patterns ofbehaviour. They are not the result of the conscious intentions of senior managers.At Honda, the planned strategy of selling large bikes had to give way to a strategywhich had emerged almost by accident.The point to note is that emergent strategies do not arise out of consciousstrategic planning, but from a number of ad hoc choices, perhaps made lowerdown the hierarchy. They may not initially be recognised as being of strategicimportance. Emergent strategies develop out of patterns of behaviour, in contrastto planned strategies or senior management decisions which are imposed fromabove.And the point of all this? Is this. Even though the rational approach to strategicmanagement provides us with prescription and process it’s the more “irrational”approach that is key – and often overlooked.Strategic thinking as an intuitive processIn practice, managers are limited by time, by the information they have and by theirown skills, habits and reflexes. Strategic managers do not evaluate all the possibleoptions open to them in a given situation, but choose from a small number ofpossibilities.Strategy making necessitates compromises with interested groups through politicalbargaining – or “partisan mutual adjustment.” Managers do not take optimal (i.e. thebest) decisions but satisfactory ones (decisions which will do). On the whole theytake small-scale decisions, building on what has gone before (Incrementalism).Incrementalism does not work where radical new approaches are needed, and it has abuilt in conservative bias.1H. Mintzberg is the key writer on the subject or emergent strategies. See The Strategic Process, 1999,Pearson
  11. 11. 11COACHING BUSINESS01280 844966 story below illustrates the pointClearly successful strategic thinking involves a creative and intuitive approach to thebusiness, not just logic. Some even argue that formal strategic planning processeshave withered strategic thinking and that strategy is essentially a creative process.Successful strategists have an idiosyncratic mode of thinking in which company,customers and competition merge in a dynamic interaction out of which goals andplans crystallize. In other words successful business strategies result not fromrigorous analysis but from a particular state of mind. And this means that a strategistshould be able to see beyond the present, think flexibly, ask what if questions, avoidperfectionism. Keep details in perspective - especially uncertain ones.3. BUSINESS PURPOSEWhat is Our Business - and What should it Be?Nothing may seem simpler or more obvious than to answer what a companysbusiness is. A supermarket retails food, an airline flies planes to carry cargo andpassengers, and an engineering company makes castings. In fact the question looksso plain and the answer so obvious that it is seldom asked.Actually “What is our business” is a difficult question to answer. It is a challenge. Andthe right answer is usually anything but obvious.Why is this? Well it is because “What is our business” is not determined by theproducer, but by the customer. It is not defined by the companys name, statutes orarticles of incorporation, but by the want the consumer satisfies when he buys aproduct or a service.Yes Minister!Sir Humphrey Appleby pops in to see his boss, the Minister for AdministrativeAffairs. The Minister has a proposal. Ive examined all the options, and I believethat strategy C is the best. My planners have done a great job, dont you agree? Yes,Minister, Sir Humphrey replies, But Ill have to run it past Horace in the Treasury,and of course, the Prime Ministers office - I hesitate to predict what the EuropeanCommissioner in Brussels will think ... do you want me to suggest to your plannersthat we try again?
  12. 12. 12COACHING BUSINESS01280 844966 question can only be answered by looking at the business from the outside, fromthe point of view of the customer. What the customer sees, thinks, believes and wantsat any given time must be accepted by management as an objective fact deserving tobe taken as seriously as the reports of the salesman, the tests of the engineer or thenumbers of the accountant - something few managers find easy to do. This meansthat they have to make a real effort to get honest answers from the customer himselfrather than attempt to read his mind.That the question is so rarely asked is perhaps the most important single cause ofbusiness mediocrity and failure. On the other hand, wherever we find anoutstandingly successful business we will almost always find, as in the case of Cooks,Ryan Airways and Tesco that their success rests to a large extent on tackling thequestion objectively, and on answering carefully.What is Our Business?Most important for successful business is that this question be asked at its inception,in its decline and when a business is successful.At the very inception of a business, the question often cannot be raised meaningfully.The man who produces potato crisps and sells them to retailers need not know morethan that his products are tastes a lot better than other mass produced products. Butwhen the product catches on; when he has to recruit people to produce and sell them;when he has to decide whether to keep on selling it directly or through retail stores,decide whether to sell direct or through wholesalers, or through supermarkets orthrough all three; what additional products he needs for a full `line - then he has toask and to answer the question; ‘What is my business?’If he fails to answer it on the way to success and or even when successful, he will,even with the best of products, find himself spending most of his time selling and notget on with the job of running and directing a business.The question at first glance appears to have little to do with what a companyproduces. An airline flies passengers or cargo. So if there no demand for seats it willhave to close down. But whether there is demand for seats depends substantially onmanagements action in creating markets, in finding new uses, and in spotting, well
  13. 13. 13COACHING BUSINESS01280 844966 advance, market or technological developments that might create opportunities forpassenger travel or threaten existing uses.This means deciding which of the wants that customers most want to satisfy with acompany’s products are for the most part important or most promising.The fate of British motor bike production and the steady decline of the car industryreflect management failure to determine and come to terms ‘What business are wein’.Who is The Customer?The first step towards finding out ‘What our business is’ is to ask the question: Whois the customer? - the actual customer and the potential customer? What does hebuy? Why does he buy? Where is he? How does he buy? How can he be reached?Nespresso’s Strategic ChoicesOne of Nestles’ subsidiaries; Nespresso, set up in the late 80s had produced an easyto use coffee making system to produce a fresh cup of espresso coffee. A challengethat took more than 10 years to resolve was what business was the company in; coffeeproduction or coffee machine production or both.It decided to focus on coffee and sub-contract skills in the coffee machine productionbusiness.It also had to decide whether its customers should be restaurants and offices orresidential users. To reach the first would require a major effort at building adistributive and service organization; whereas the homeowner could be reachedthrough mail-order and up market retail stores such as Harrods, Selfridges, Lafayetteand Bloomingdales.The question ‘How does the customer buy’ was another tough question to answer too.Ultimately, Nespresso evolved a further innovative solution; coffee distribution wasorganized through a "club." Once a customer bought a machine, he or she became amember of the “Nespresso Club”. Coffee orders were made over the phone, email orby fax direct to the club, and coffee was sent to the customers home within twenty-four hours. The club currently takes 7,000 orders per day.
  14. 14. 14COACHING BUSINESS01280 844966 the future the company has plans to target two new customer segments: smalloffices and young internet users. Eventually, the objective is to have a Nespressomachine in every kitchen in the world. Shades of Microsoft’s vision for its software.What Will Our Business Be?So far all questions regarding the nature of `a business have been concerned with thepresent. But management must also ask: `What will our business be. This involvesfinding out four things.• First, what is market potential and market trend for our business to be in five orten years? And what are the factors that will determine its development, assum-ing no basic changes in market structure or technology?• Second, what changes in market structure are to be expected as the result ofeconomic developments, changes in fashion or taste, or indirect as well as directcompetition?• Third, what innovations will change the customers wants, create new ones,extinguish old ones, create new ways of satisfying his wants, change his conceptsof value or make it possible to give him greater value satisfaction? This has to beNepresso’s Strategic Choices(in terms of "who," "what," and "how).Who is the customer • Individuals and households, not restaurants oroffices.What is offered • Coffee, not coffee machines.• Training so that retailers can show consumershow to use coffee making machines.How best to deliverthese services• Focus on the manufacture of high-quality coffee• Subcontract the manufacture of the Nespressomachine to prestigious OEMs.• Sell the Nespresso machine throughprestigious retailers, such as Harrods, GaleriesLafayette, and Bloomingdales.• Sell coffee direct through a "Nespresso Club."
  15. 15. 15COACHING BUSINESS01280 844966 not only in respect to production, but in respect to all activities of thebusiness.• Finally, what wants does the consumer have that are not being adequatelysatisfied by the products or services offered him today?It is the ability to ask these questions and the ability to answer them correctly thatusually makes the difference between a growth company and one that depends for itsdevelopment on the rising tide of its economy or industry. And whoever contentshimself to rise with the tide will also fall with it.And What Should It Be?The analysis of our business is not yet complete, however. Managers must still ask;‘Are we in the right business or should we change our business.’Many companies get into new business by accident. We have already seen howHonda stumbled into the US motor bike business, rather than steering their way intoit. But the decision to shift major energies and resources to new products and awayfrom old ones, the decision, in other words, to make a business out of an accidentshould always be based on tackling the question; “What is our business and whatshould it be?”There are many reasons for Canon’s success but the kind of campaign canonlaunched against Xerox is actually very common. New players enter markets withnewly created strategic positions all the time.How Canon Shaped The Copier BusinessIn the ‘60s Xerox dominated the dry paper copier market by concentrating oncopiers designed for the high speed, high volume needs of the corporate market.As such a precise strategy was adopted critical choices were made as to productfeatures, distribution (direct sales and machine leasing). And so for more than20 years Xerox prospered with high returns on capital.Canon on the other hand, mindful of Xerox’s success, deciding to move fromcameras into copiers, targeted small and medium sized users, choosing to sellmachines through a dealer network. Canons strategy succeeded; within 20 yearsof entering the copier market Canon became the market leader with a highlydistinctive position in its own patch – and Xerox’s too!
  16. 16. 16COACHING BUSINESS01280 844966 examining ‘What a business must be’ we are simply saying that a business must bemanaged by setting goals for it. These goals must be set according to what is right anddesirable for a business – rather than on expediency or some adaptation to economictides.Goals can be compared to the compass bearing by which a ship navigates. Such abearing is fixed, offering a straight-line route to the port of destination. In realitythough a ship will veer off its course, it will do this to avoid a storm, ice-bergs, fog oreven war. In such circumstances she may slow down, or alter course, she might evenheave too for a while in a different port before sailing to the port of destination. Thepoint is in the absence of a compass bearing, the ship would neither be able to findthe port nor be able to estimate the time it will take to get there.Similarly, in business, to reach goals, detours may have to be made round obstacles.Indeed, the ability to go round obstacles rather than charge them head-on is a majorrequirement for managing by goals. In recession progress towards the attainment ofthe goals may be slowed down considerably; there may even be standstill for a shorttime. And new developments; the introduction of a new product by a competitor -may change goals. And this, of course, is one reason why all goals have to be re-examined continuously. Yet, goals enable a business to get where it should be goingrather than riding a wave of the sea driven and tossed by the wind.4. CREATIVE INSIGHTIn working with a variety of business owners I always felt that business planningseemed to be a bit of a chore. Indeed some were compelled to move through planninghoops to acquire large and small sources of funding. You always felt it took up a lot oftime – too much time and if that was the case you asked yourself what was thepurpose?But then I remember talking to a senior sale manager in a food business who told me;“We spend 5 minutes on strategy every morning before we get down to sales?” And Icame away thinking this surely isn’t enough! This is like moving from the sublime tothe ridiculous.What is important is to have some sort of broad purpose, a clear opportunity and anexpectation of results. A further imperative is to engage with customers and prospects
  17. 17. 17COACHING BUSINESS01280 844966 plan round them with what I call ‘creative insight’So what is creative insight and how does it helps contribute to successful businessdevelopment?Successful business strategiesPerhaps I can start with a story. I once knew a man who thought you could look at theworld through 4 box-matrices! For a while I believed; a convert you might say. In factI soon saw men (and women) running around with bifocals inventing formulae tounlock – and implement - the secrets of successful business development…But I soonlost confidence in such a stereotype...this was no way to build business….you can’treduce business success to a formula – let alone a pair of bifocals!In my mind’s eye, I was also aware that detailed planning is not going to help findsuccess either. True it gives you the nuts and bolts, but it won’t necessarily give youthe all important idea — or flash of insight.I remember a former CEO of Mars Pet Foods – a man that I would have walked overa cliff for - showing me the light on this many moons ago. He told me to find theinsight and then let the planning kick in. It was a great lesson.The ‘Flash of Insight’ — A Vital Element!Detailed business planning necessarily fails, due to frictions inevitably encounteredin the planning process: chance events, imperfections in execution, and theindependent will of customers and indeed competitors. Instead, human elements:ambition, leadership, people, morale, and above all intuition, or ‘coup d’oeil’;(pronounced coo doy) a quick recognition of truth—or opportunity, as the Frenchsay, are paramount.Simon’s Story“…if you work with a management team some time they get to know the ways inwhich you think about certain aspects of the business. They know your attitudeto certain things in the business. If you come to them and say we need to do thisor change that they might say (straight or behind your back) that this is just awaste of time. And that’s when you have to make your mind up to do somethingyou really believe in…”
  18. 18. 18COACHING BUSINESS01280 844966 most successful business owners and managers do?The finest business owners and managers perfect such concepts in practice. They donot expect a business plan to survive beyond the first contact with customers. Theyset only the broadest of objectives and emphasise unforeseen opportunitiesas they arise. Business development is not a lengthy action plan. It is the evolutionof a central idea through continually changing circumstances in which a businessowner sees the opportunity to drive his business forward, through an interaction ofvarying attributes; intuition, determination, leadership, motivation and centralpurpose, around different plans – or strategies as and when required!Creative insight should be the true focus of business success and achievement.What are the implications for managers?Well I think there are four.• The first is that you enter business with a ‘presence of mind’ – you expect theunexpected. Don’t go around thinking that you’ve arrived or you already knowwhat to do. Be ready for surprise and change!• Second you are ready to cut through the fog with an insight that comes from outof the ordinary or after prolonged reflection and what has worked in he past.• Third, you are ready to go forward with resolution particularly when you can’tconvince doubters with all the facts. Simon the produce manger summarises thepoint succinctly when he said;• Fourth, all planning is directed to support the combinations of insight andintuition with what has worked in the past.5. MARKET STANDINGA company’s standing and orientation can be simplified to two dimensions only –products and markets. Or even more simply it’s about; ‘What is sold (the product)and who it is sold to (the customer).’
  19. 19. 19COACHING BUSINESS01280 844966 standing has to be measured against the market potential and against theperformance of suppliers of competing products or services - whether competition isdirect or indirect.The comment you sometimes hear; ‘We dont bother about what share of the marketwe have, just so long as our sales go up’, is pretty common. And it sounds likelyenough; but it does not really stand up. By itself sales reveal little about performance,results or the future of the business.A companys sales may go up - and the company heading for collapse. Alternatively acompanys sales may fall - because its marketing may well be poor, or that it is in adeclining industry.Here’s an example of what I mean.The point is this! Not only are absolute sales figures meaningless alone, since theymust be projected against actual and potential market trends, but market standingitself has intrinsic importance.A business that supplies less than a certain share of the market becomes a marginalsupplier. Why?Well first its pricing becomes dependent on the decisions of larger rivals. In anybusiness setback it risks being squeezed out altogether. As competition intensifies,distributors cut back on slow-moving merchandise and customers concentrate theirpurchases on the most popular products the marginal supplier may not be able tocompete with required service levels. Therefore being a marginal producer is alwaysdangerous.Getting it Right!A printing equipment manufacturer reported rising sales year after year. Thefact was though that new printers and their equipment were being supplied bythe companys competitors. But because the equipment it had supplied in thepast was getting old and needed repairs, sales shot up for replacement parts asthis sort of equipment is usually bought from the original supplier.
  20. 20. 20COACHING BUSINESS01280 844966 the other hand leadership that gives market dominance tends to lull the leader tosleep. Many have foundered – or almost foundered - on their own complacency. Suchleadership generates enormous internal resistance to innovation so that adaptation tochange becomes dangerously difficult. A further peril is that such a business begins tooperate with too many of its eggs in one basket and if not careful becomes vulnerableto economic fluctuations and competitive pressure.So there are dangers in operating an upper as well as a lower margin - though formost businesses risks attached to leadership may appear a good deal more remote.To be able to set market-standing objectives, a business must first find out what itsmarket is - who the customer is, where he is, what he buys, what he considers value,what his unsatisfied wants are. On the basis of this study a company must examine itsproducts or services according to the lines it produces according to the wants of thecustomers they satisfy.The point is amplified in the section of Business Purpose above. The example belowtells the story.This means that each market in terms of its size, potential, direct and indirectcompetition, economic, innovating trends for each product – or service has to bedetermined. Such a definition is what might be described as market or customeroriented. Only then can marketing objectives actually be set.In most businesses not one, but seven, distinct marketing goals are necessary. TheseA Weighty Problem!A confectionary manufacturer’s count line products may be made roughly ofthe same ingredients and produced on the same production line. But themarkets for count line products may, however, be an entirely different linefrom count lines for leisure, travel and retail, and again be quite differentfrom count line products that go for export and into multi-packs. Count linesfor retail may even be different lines if customers in one region judge theirvalue by size, and customers in another by their calorific content.What the manufacturer didn’t know was that their customers were going to theircompetitors to buy new and efficient equipment rather than continue to patch upold machinery. The company was thus threatened with going out of business -which is what actually happened.
  21. 21. 21COACHING BUSINESS01280 844966 fact break down into those goals that are directly related to product - marketpenetration and development, diversification and those that support theirachievement.Here they are, the key marketing goals set out below.• Existing products in their current market, expressed in value and volume aswell as in percentage of the market, measured against both direct and indirectcompetition.• Existing products in new markets set both in value and volume as well as inpercentage of the market, measured against both direct and indirectcompetition.• Existing products that should be abandoned - for technological reasons,because of market trend, to improve product mix or as a result ofmanagements decision concerning what its business should be.• New products needed in existing markets - the number of products, theirproperties, value and the market share they should gain for themselves.• The new markets that new products should develop - in value, volume and inpercentage points.• The distribution, promotional and appropriate pricing systems needed to bringabout marketing goals.• A service objective that reflects customers’ wants and needs for value in termsof the company, its products, its sales and service organisation.Service objective should be in keeping with the targets set for competitive marketstanding. In most cases it is not enough to do as well as the competition inrespect to service because for service is the most effective and easiest – but oftenoverlooked way - to build customer loyalty and satisfaction. Service performanceshould never be assessed with best guesses or on the basis of an occasional chatwith important customers. It should be measured by regular, systematic andunbiased questioning of the customer.
  22. 22. 22COACHING BUSINESS01280 844966 SEGMENTATIONConventionally, industries are defined broadly; the automobile industry, the com-puter software industry, the shipping industry. But competition tends to occur atmore localised levels - within specific product groups and specific national or regionalmarkets which means that we need to segment industries into markets.Segmentation is vital in determining the most attractive part of a market to enter – orcreate, and for established firms in deciding how to allocate resources amongdifferent segments.The ability to identify and shift resources to attractive segments can help a companyoutperform the industry average by a significant margin. In the PC industry, DellComputers has been highly effective in focusing on products and customer groupsthat offer higher margins. Its direct distribution model allows it to analyseprofitability on a customer-by-customer basis.Differences in customers and competition between segments may also meandifferences in key success factors. In the UK beer industry, competing effectively inthe market for standard, keg beer requires cost-efficient operation in the form oflarge-scale, automated production, national distribution through a network offranchised distributors, and heavy investment in advertising and promotion. How-ever, in the market for specialty beers, success is far more dependent on a carefullycrafted, high-quality, highly flavoured product, local mystique and localiseddistribution that emphasises authenticity and careful handling.The Basis of SegmentationCharacteristics of Buyers• Industrial, size, technicalsophistication, OEMreplacement• Household , benefits,lifestyle, demographics• Channels, size, exclusive,general, specialist• Geographical locationCharacteristics of products• Physical size• Price level• Product features• Technology design• Inputs used (e.g., raw materials)Performance characteristics• Pre-sales and post-sales services
  23. 23. 23COACHING BUSINESS01280 844966 in Segmentation AnalysisSegmentation analysis proceeds in five principal stages. Let’s look at this in thecontext of a number of examples.1. Identify Key Segmentation VariablesThe first stage of segmentation analysis is to determine the basis of segmentation.Segment decisions essentially are choices about products and customers, hencesegmentation variables relate to the characteristics of the product or characteristics ofcustomers.The most appropriate segmentation variables are those that distinctly partition amarket in terms of substitutability among customers. Market segments tend to berecognisable from price differentials.A good example of price-based segmentation is seen in the form of General Motorsduring the 1920s. In contrast to Henry Fords single-model strategy, GM identifiedsix market segments ranging from the lowest price category, $450-$600, to thehighest, $2,500-$3,500. Each of GMs divisions targeted a separate price segment,with Chevrolet at the bottom and Cadillac at the top.Typically, there are many customer and product characteristics that can be used as abasis for segmentation. In order for a segmentation analysis to be manageable, weneed to reduce these to two or three. This requires that we do the following:• Identify the variables that are most are the most strategically relevant in creatingmeaningful divisions in a market. In metal containers, location is critical (cansare expensive to transport long distances), as is raw material.Segmentationby Product Type and Industry SectorFood FruitJuicePet food SoftdrinksOil BeerAluminiumSteelGeneralAerosol
  24. 24. 24COACHING BUSINESS01280 844966• Combine segmentation variables that are closely correlated. In the case ofrestaurants, possible segmentation variables such as price level, service (waiterservice/self-service), cuisine (fast -food/full meals), and alcohol license wineserved/soft drinks only) could be combined into a single variable, restaurant type,with three categories: full-service restaurants, cafes, and fast-food outlets.2.Identify Key SegmentsOnce the segmentation variables have been established, individual segments may beidentified by buyer type (industry, household, channel or region) and product.Thus a car manufacturer might segment by vehicle type (product) and geographicalregion (buyer type).And the European metal container industry might be analysed by industry andproduct type.Further variables might be added, including regional, channel and benefits required.Segmentation analysis can also be useful in identifying unexploited opportunities inan industry or market. For example segmentation of the restaurant business in atown or region might reveal a number of empty segments. The intriguing question toanswer is whether such empty segments represent unexploited opportunities orwhether they reflect a lack of customer demand.Take the market for kitchen appliances. In the early 1960s, microwave ovens anddishwashers were manufactured almost exclusively for the catering trade.Segmentationby Product Type and RegionEurope NorthAmericaLatinAmericaAustralia China AfricaLuxuryFull saloonsSmall saloons4 x 4Sports
  25. 25. 25COACHING BUSINESS01280 844966 analysis of the appliance industry might have alerted playersestablished in these segments to opportunities for developing these products for theconsumer market.3.Assess Segment AttractivenessProfitability within an industry segment maybe determined by Porters Five ForceAnalysis.2 But it is important to note some important features regarding competition.First, when analysing the pressure of indirect competition or substitute products, it isimportant to be aware of substitutes from other industries together with substitutesfrom other segments within the same industry. For example if one company, in thecare industry plans to introduce a new 4 x 4 researchers might wish to considercompetition from people-carriers.Second, should a people-carrier competitor wish to enter the 4x4 segment with a 4x4of its own, in other words a producer from another segment within the same industry,any decision to enter depends on whether there are barriers that restrict entry offirms from other segments. Such barriers are called barriers to mobility. They aredifferent from those barriers that offer protection from companies outside theindustry.Barriers to mobility are key factors in determining the ability of a segment to offersuperior returns to those available elsewhere in the industry. Unless there aresignificant barriers to the mobility of firms other segments, a segment will be unableto maintain superior profitability to that of the industry. The increased flexibility ofdesign and production made possible by computer-aided design and flexiblemanufacturing systems has had the effect of reducing barriers to mobility.In the car industry, high-margin segments such as luxury cars, people-carriers andsports cars have seen a sharp rise in competition as volume car manufacturers haveentered them.Identify a Segment’s Key Success FactorsDifferences in competitive structure and in customer preferences between segmentsimply differences in the basis of competitive advantage. Taking buyers purchasecriteria we can identify the key success factors for individual segments.2See Chapter 7
  26. 26. 26COACHING BUSINESS01280 844966 example, the UK retail food industry can be segmented on the basis of the agegroup of the customer (infants, children, youths, and adults), price, branding, andrange. Combining and categorising these segmentation variables results in threemajor segments, each with different key success factors. All as shown above.4.Select Segment ScopeA final issue relating to the choice of segments to enter concerns the relativeadvantages of segment specialisation versus segment diversity. In other words theadvantages of operating with a broad over a narrow segment focus depend on twomain factors; similarity of key success factors and the presence of shared costs.In an industry where key success –factors are similar across segments, a business canadopt a similar strategic approach in relation to different segments. If differentstrategies need to be adopted for different segments, not only does this poseorganisational difficulties for the company, but also the credibility of the firm in onesegment may be adversely affected by its strategy in another.During 1999-2000, Mercedes’ introduction of its A-class compact car was a failure,not only because Mercedes could not compete with the Japanese in this segment, butalso because of the damage to the firm’s reputation in the larger saloon segment.Segment Key success FactorLow price, products sold under theretailers own brand with littleambience• Low costs through global sourcing and• Little demand for packagingMedium priced products soldunder the makers’ (and retailers’)brand and distributed throughvolume retailers• Cost efficiency through large scaleoperations• Reputation for quality through effectivemarketing to consumersHigh priced products for ‘gourmet’enthusiasts• Quality of products, ingredients andcreativity in design• Reputation through effective brandmanagement• Strong consumer loyalty
  27. 27. 27COACHING BUSINESS01280 844966 costs mean that broad-segment suppliers can achieve lower costs than theirmore focused competitors. The vulnerability of narrow segmentation to broad-linecompetitors is constantly being revealed, as the following examples suggest.The relative merits of focused and broad-segment strategies vary among industries.The critical issue concerns the benefits of specialisation versus those of sharing jointcosts.7. CREATIVE STRATEGIC GROUPINGA strategic group clusters companies within an industry around one or morecompetitive characteristics in common. Strategic group analysis is a useful way ofsegmenting markets based on an understanding of customer perceptions of variouscompeting products.For example, the restaurant industry can be divided into several strategic groupsincluding fast-food and fine-dining based on variables such as preparation time,pricing, and presentation.Often companies become so preoccupied with improving their competitive positionswithin their strategic groups that they neglect and fail to see opportunities to achievemajor gains by changing the way in which they compete.Apple’s success with the iPhone is a great example of a company which created aunique strategic position by breaking free of conventional strategic group thinking. Incombining mobile communications with Internet functions and the iPod, Applecreated a new handset to take business from three strategic groups’; mobilecommunications, the Internet and music.The Vulnerability of Single-Segment Players• In soft drinks, Seven Ups reliance on a single lemon-lime drink made it vulnerableto competition from broad-line competitors such as Coca-Cola and Pepsi.Ultimately, Seven Up was acquired by Cadbury Schweppes.• The acquisition of specialist car makers Saab, Lancia, Jaguar, AMC-Jeep, Maserati,Audi, Alfa-Romeo, and Rolls-Royce by broad-segment car makers was a result ofthe inability of these specialists to spread their development costs over a largeenough sales volume.
  28. 28. 28COACHING BUSINESS01280 844966 means that it is most useful in finding new or emerging customer needs andrequirements, customer needs that are not being served that your business couldsatisfy and customers that your business might not be serving with its current range.A further example of the technique in action is given in Appendix 2 which follows atthe end of this chapter.The example of a farm management companyA strategy session with a national farm management provider categorized a numberof strategic groups, including; the larger traditional players, land agents, landownersmanaging their own units and taking over other farming units and smaller family-runfarming units that are cooperating or being managed by one of their members. Whatwas also interesting was that each competitor group was recognisable by the set ofrules with which rivals competed, their strategies, assumptions about industrybehaviours and their strengths and weaknesses.Figure 1. Current Strategic GroupingKey: Strategic GroupsA = Chemical, fertiliser companies offering fringe servicesB = Small farm/estate farming enterprisesCurrent Strategic GroupingFigure 1BDACCCHiHiScale of activityLevel ofCommitmentto FarmManagementActivity
  29. 29. 29COACHING BUSINESS01280 844966 = The client and other direct competitorsD = Land agents, land management is part of the portfolioSuppliers have caught up our client’s bulk purchasing and sales advantages. In R andD the company had a competitive edge, but since the early ‘90s technology haschanged, become simpler and others have caught up so that returns from technologyhave declined.A review of customers’ and prospective customers’ perceptions suggested thatpotential customers perceive the company as remote, commandeering andunassertive in its marketing while exiting customers recognise and appreciate thevalue of the company’s service offer.The analysis suggested that our client has scope to improve the way it markets itsservices with superior propositions of value, compelling communications and marketsupport to expand its customer base.It was also felt that the company’s core business skills in practical farming andconsultancy, as well as customer focus could be exploited to support further customerincrease and the development of new services in a more general land-managementopportunity in support of farming and rural business in transition.Compared with competitors these skills are important strengths and could enable thecompany to create a new positioning offering a wider range of opportunities. Arevised strategic group map given over the page serves to illustrate the point.
  30. 30. 30COACHING BUSINESS01280 844966 2. Revised Strategic GroupingKey: Strategic GroupsA = Chemical, fertiliser companies offering fringe servicesB = Small farm/estate farming enterprisesC = The client and other direct competitorsD = Land agents, land management is part of the portfolioE = A new strategic group – new brand.Small farms and estate farming enterprises (B) are cheaper but not as capable. Landagents (D) offer traditional services and farm management such as our client (C).These competitors have made up the rules for their groups, which include pricing,promotion and profitability, but they have weaknesses - they are not good farmmanagement advisors. This means that our client could build on its core capabilitiesand strengthen its brand. In so doing it may reposition against B and D and create anew strategic group (E) where its brand may be associated with superior competencesand results in areas that it chooses to operate in.The gains - summarisedThis is what you can expect to find out from strategic group analysis...• Gaps in your market that can be exploitedCurrent Strategic GroupingFigure 2BDACCCHiHiScale of activityLevel ofCommitmentto FarmManagementActivityBarriers tore-positioningEEE
  31. 31. 31COACHING BUSINESS01280 844966• Customer needs your competitors have neglected• New customer needs that have evolved or been created• New needs that are being, or have been, created by competitors’ own marketingtactics.8. COMPETITOR ANALYSISIn highly concentrated industries, the key characteristics of a companys externalenvironment are determined by the behaviour of a few competitors. In householddetergents, Unilevers industry environment is dominated by the strategy of Procterand Gamble. The same is true in soft drinks (Coke and Pepsi), jet engines (GE, UnitedTechnologies, and Rolls-Royce).Similar circumstances exist in more fragmented markets. For the owner of a Shellfilling station in a British village, the dominant feature of the local petrol stationmarket is the competitive behaviour of the Esso station across the road.Whatever the circumstance, conventional approaches to competitor analysisconcentrate on three main aims:• To forecast competitors future strategies and decisions.• To predict competitors likely reactions to a company’s strategic initiatives.• To determine how competitors behaviour can be influenced to make it morefavourableInterestingly corporate interest in competition has grown to such an extent that manycompanies operate with intelligence units. It is said that around a fifth of UScompanies are so equipped.A starting point for understanding is a simple framework that prompts lines ofenquiry as shown below:Let us look at these four areas of analysis in some detail.A Framework for Competitor Analysisi. Strategy (Business Purpose)ii. Objectives (Current and future goals)iii. Assumptions (About itself and the industry)iv. Resources and Capabilities (Strengths and weaknesses)
  32. 32. 32COACHING BUSINESS01280 844966 Current StrategyIn the absence of any forces for change, a reasonable assumption is that a companywill continue to compete in the future in much the same way as it competes at thepresent. These two are not necessarily the same; there may be a divergence betweenintended strategy and realised strategy.Important and explicit statements of strategic intention can be found in the annualreports of companies, particularly in the chairmans message to shareholders, and inother statements by senior managers, especially in meetings with investmentanalysts.With regard to emergent strategy, emphasis must be given to competitors actionsand decisions; what capital investment projects are being undertaken, whatrecruitment is taking place, what new products are in the pipeline, what acquisitionsor strategic alliances have recently been undertaken or rumoured, and what newadvertising and promotional campaigns have been planned?Because of the importance of communicating both to employees who implement thestrategy and to the investment community who need to appraise the company,companies are becoming more explicit about their strategic plans. Thus, mostcorporate web sites include not only company reports, financial statements, and pressreleases, but also copies of presentations and speeches to analysts.Identifying a Competitors ObjectivesTo forecast how a competitor might change its strategy, some knowledge of its goalsis crucial. Identifying basic financial and market objectives is particularly important.A company driven by short-term profitability is a very different competitor fromcompany that is focused on long-term market share goals. A company with marketshare goals is likely to be much more aggressive in responding to a rivals competitiveinitiative than one that is mainly interested in the bottom line.The collapse of the British motorcycle industry can be attributed in part, to thewillingness of domestic companies to cede market share to Japanese competition inthe interests of maintaining short-term profitability.By comparison Procter & Gamble and Coca-Cola are obsessed with market share andtend to react much more aggressively when a newcomer threatens to take away
  33. 33. 33COACHING BUSINESS01280 844966 share. When a rival is not subject to profitability disciplines at all, this cancause destructive price competition.During the early 1990s, the world aluminium industry was plagued by, depressedprices resulting from heavy sales by Russian producers on to world markets. Theprices of petrochemicals are frequently depressed by sales from state-ownedcompanies in the Middle East and Asia that are interested more in revenue thanprofit.If the competitor is a subsidiary of a larger corporation, it is important tocomprehend the goals of the parent, since these goals affect the strategy of thesubsidiary the means by which the parent controls the subsidiary is also important.How much autonomy does the subsidiary have? A subsidiarys ability to respond tocompetitive assaults may be restricted by corporate control mechanisms.The level of current performance in relation to the competitors objectives isimportant in determining the likelihood of strategy change. The more a company issatisfied with present performance, the more likely it is to continue with the presentstrategy. If, on the other hand, the competitors performance is falling well short oftarget, the likelihood of radical strategic change, possibly accompanied by a change intop management, is increased.Competitors Assumptions About the IndustryA competitors strategic decisions are conditioned by its perceptions and by itsassumptions about the industry and about business in general. Both are likely toreflect the beliefs and actions that senior managers hold about their industry and thedeterminants of success within it. Evidence suggests that not only do these systems ofbelief tend to be stable over time, they also tend to converge within an industry.These industry-wide ‘industry recipes.’Industry recipes may limit the ability of a business, and indeed an entire industry, torespond dynamically and effectively to external change. The result may be thatestablished firms operate with a ‘blind-spot’ to the competitive initiatives of anewcomer. During the 60s, the three largest American car makers firmly believedthat small cars were unprofitable. This belief was based on their own experiences -which were, in part, a consequence of their own cost allocation procedures.
  34. 34. 34COACHING BUSINESS01280 844966 a result, they were willing to yield the fastest-growing segment of the USautomobile market to Japanese and European imports. Similar beliefs explain thecomplacency of British and US motorbike manufacturers in the face of imaginativeJapanese competition.Identifying a Competitors Resources and CapabilitiesThe critical issue for a company is to evaluate the gravity of a potential challenge froma competitor! The extent to which this is possible is dependent on the quality of thecompetitor’s resources and capabilities.We will explore this subject later; however, analysis of a rival’s key resources is alsorequired, including financial reserves, capital equipment, work force, brand loyal andmanagement skills, together with an appraisal of capabilities within each of majorfunctions: R&D, production, marketing, distribution, and so forth.Caution in evaluating a competitors capabilities is essential before embarking on astrategy that may provoke an aggressive response. Many brilliant and innovative newcompanies have failed to withstand the aggressive reactions of established, wellfinanced incumbents.Conversely, Microsoft’s entry into network software, internet browsers, onlineinformation and entertainment results from Microsofts huge financial resources, itsmarketing muscle, and its fearsome reputation for market dominance.IKEAMore and more, for manufactured goods cost advantage is based oncheap labour in the developing world. IKEAs expansion of manufacturingin Vietnam, from where it sourced more than £70 million in products in2003,is expected to triple in value over the next four years itsVietnamese business.Such trade speeds development and growth in less developed countries,allowing them to make use of their main source of economic advantage,and provides cheap goods to consumers in more developed countries.In IKEAs case, it expects to work closely with its Vietnamese partners,providing advice on purchasing, productivity and expansion. Despitesome privatisation, the market-based approach to production is notwidely understood in this still largely planned economy.Differentiation is the exploitation of a product or service which theindustry as a whole believes to be unique.
  35. 35. 35COACHING BUSINESS01280 844966 the Results of Competitor AnalysisFor the purpose of strategy formulation, competitor analysis is useful both inpredicting how competitors are likely to behave, and in influencing theirbehaviour.First in predicting competitor behaviour, the first question we seek to answer is;‘What strategy shifts is the competitor likely to make?’ This means that we shouldcarefully identify forces that are likely to arouse a change in strategy. These may beexternal - a shift in consumer preferences or regulatory change that may haveimportant consequences for the company - or they may be internal - a failure toachieve current financial or market share targets, or divisive conflict within thecompany.Whatever the sources, a careful identification of each competitor’s current strategyand goals, assumptions about the industry and its capabilities provides a sound basison which to forecast the direction of any change.Second, we may wish to forecast a competitors likely reactions to a projected strategychange that our own company is initiating. If this strategy change involves an attackon a competitors market base, its reactions may be crucial in determining thedesirability of any competitive move. The same four elements together provide usefulguidance as to the nature, likelihood, and seriousness of a defensive reaction by thecompetitor.9. INDUSTRY ANALYSISA key stage of external analysis is that of the industry and market. When carryingout such an analysis the starting point is to formulate a wide definition of acompanys market in terms of both the industry and the geographical boundaries.In defining markets by geography a firm needs to determine whether it iscompeting in a single global market or a series of separate, national or regionalmarkets and, if the latter, how wide a geographical area can be defined as itsmarket.In defining market boundaries by geographical criteria, the ease with which cus-tomers can switch from buying in one geographical market to another as well asthe ease with which a company can offer its products and services to anothergeographical unit, will determine market boundaries. With the emergence of e-
  36. 36. 36COACHING BUSINESS01280 844966 and speedy global communications customers are increasingly sourcingproducts from outside their traditional national markets in the search for cheapprices.Thus many markets are global in nature and certainly most markets now crossnational boundaries in terms of competitive activity. Even if a company itself isonly competing within one national boundary, it may be facing competitors fromother countries and perhaps sourcing itself from around the globe. Manymanagers in the health service or local government view themselves as being in anational market. However, with the privatisation of many of the functions in theirsupply chains and in the services they offer, international competitors have movedinto these markets. Strategic decisions have to be made in the light of trends andchanges in the international environment.Industry market boundaries likewise have to be defined broadly. Industry marketboundaries are defined by the potential of substitute products and services. Anindustry is a group of firms that supplies any given market. Thus, in defining itsmarket a firm needs to consider also the boundaries of its industry. On the demandside a market will be defined by the ability of customers to substitute a firmsproduct or service for another. Mobile phones being so versatile (pictures, TV,radio, communications and news) have redefined traditional boundaries of thecamera, radio, video and information markets.On the supply side an industry’s boundaries are defined by the ease with which a firmcan transfer products and services to new market segments. On the supply side of theautomobile industry it has been relatively easy for firms such as Toyota and Honda toshift their efforts from the mass car market to the luxury car segment, as well as vansand trucks. They use the same manufacturing plants and distribution channels andoften even use the same engines and parts, so the different sectors are classified asbeing of the same market.M.E. Porter (1985) suggests that in carrying out competitor analysis within anindustry, or market, five competitive forces should be assessed and evaluated. Theyare:1. New entrants to an industry: the likelihood and ease with which newentrants may increase the competitive pressure on existing companies.
  37. 37. 37COACHING BUSINESS01280 844966 Substitute products/services: the possibilities of alternative products orservices substituting for existing offerings in the marketplace.3. Bargaining power of buyers: the structure and concentration of buyers inthe market, particularly in markets where business or government organisationsmay wield considerable buying power relative to suppliers.4. Bargaining power of suppliers: the size of suppliers and their potential todictate the terms and supply of goods and services to the market relative tobuyers.5. Rivalry between existing industry competitors: this can be affected bythe size and number of competitors, the level of differences between theproducts and services and the level of barriers to entry into a market.In order to carry out such an analysis firms need to ask a number of questions to forma coherent view of key opportunities and threats in any industry or market which canthen inform the necessary strategic decisions. Questions would include:• What is the size and value of the sector/industry?• Who are the major players (market leader, market followers), and what are themarket shares of the major players?• What factors taken for granted within the company and industry could bechanged or eliminated?• What factors that the industry competes in could be made more efficient?• What are the levels of concentration or fragmentation in the sector/industry?• Is the industry growing or declining and what are the growth/decline rates?• What are the product characteristics and nature and pace of technologicalchange within the industry?• What is the availability of product/industry substitutes?• What is the power balance among suppliers, buyers and competitors in thesector/industry?• What are the entry and exit barriers?• What products/services could be created that the industry has never offered?• What economies of scale are present in the sector?
  38. 38. 38COACHING BUSINESS01280 844966• What are the future trends in the sector/industry? What is the industryprofitability?An important feature of ‘Five Force Analysis‘ is that it pinpoints the attractiveness ofan industry. It highlights profitability and shapes generic strategy – or positioning,(differentiation, cost or focus) that a business may follow to achieve competitiveadvantage.10. COMPETITIVE STRATEGYNow we tackle the question of HOW TO COMPETE.Competitive strategy provides a company with the actions to create offensive ordefensive positions in an industry and thereby yield a superior return on investment.According to Porter a business should adopt a competitive strategy to secure acompetitive advantage. Competitive advantage is anything which gives oneorganisation an edge over its rivals in the products it sells or the services it offers.Firms have discovered many different approaches to this end, and the best strategyfor a given firm is ultimately a distinctive creation reflecting its particularcircumstances.The Choice of Competitive StrategyThere are three generic strategies for competitive advantage; cost leadership,differentiation and focus. (Porter, Competitive Advantage, 1988)Cost LeadershipA cost leadership strategy seeks to achieve the position of least-cost producer in theindustry as a whole. By producing at the lowest cost, the manufacturer can competeon price with every other produce in the industry, and earn higher unit profits, if themanufacturer so chooses.How to Achieve Overall Cost Leadership• Set up production facilities to obtain economies of scale• Use the latest technology to reduce costs and/or enhance productivity (or usecheap labour if available)• In high technology industries, and in industries depending on labour skills forproduct design and production methods, exploit the learning curve effect. By
  39. 39. 39COACHING BUSINESS01280 844966 more than any other competitor, a firm can benefit more from thelearning curve, and achieve lower average costs.• Concentrate on improving productivity• Minimise overhead costs• Get favourable access to sources of supply• Relocate to cheaper areasDifferentiationA differentiation strategy assumes that competitive advantage can be gained throughparticular characteristics of a firms products. Products may be categorised as:• Breakthrough products offering a radical performance advantage overcompetition, perhaps at a much lower price.• Improved products which are not radically different from their competitionbut are obviously superior in terms of better performance for a similar price.• Competitive products which derive their appeal from a particular compromiseof cost and performance. For example, cars are not all sold at rock-bottomprices, nor do they all provide immaculate comfort and performance. Theycompete with each other by trying to offer a more attractive compromise thanrival models.How to Differentiate• Build up a brand image• Give the product special features to make it stand out• Exploit other activities in the value chainFocus (or niche) StrategyIn a focus strategy, a firm concentrates its attention on one or more particularsegments or niches of the market, and avoids serving an entire market with a singleproduct – or service.A cost-focus strategy aims to be a cost leader for a particular segment. This type ofstrategy is often found in the printing, clothes manufacture, food and drinkproduction and car repair industries.A differentiation-focus strategy pursues differentiation for a chosen segment. Luxurygoods are the prime example of such a strategy.
  40. 40. 40COACHING BUSINESS01280 844966 of a focus strategy• A niche maybe more secure and if so a business can insulate itself fromcompetition.• The firm does not spread itself too thinly.Drawbacks of a focus strategy• The firm sacrifices economies of scale which would be gained by serving awider market.• Competitors can move into the segment, with increased resources (e.g. theJapanese moved into the US luxury car market, to compete with Mercedes andBMW).• The segments needs may eventually become less distinct from the mainmarket.Which strategy?What is important though is to pursue one generic strategy.Tyrrells Potato CrispsWilliam Chase, owner of Tyrrells Potato Crisps, a nichemanufacturer of crisps, set up in part to escape from dependence onthe major supermarkets and in part to add extra value to his basicproduct, potatoes. Thus Tyrrells strategy, to sell through smallretailers at the upper end of the grocery and catering markets may besummarised under six key success factors.• Brand. Marketing taps into the publics enthusiasm forauthenticity telling the story of Tyrrells from seed to chip.• Quality. Crisps are made from traditional varieties of potato and‘hand-fried in small batches.• Distribution. Concentrates on direct sales to 80 per cent of itsretail stockists. Students from a local agricultural college areemployed to trawl through directories and identify fine-foodshops to target with samples. After winning their business,Tyrrells develops the relationship though personal contact.• Diffusion. Sales to the most exclusive shops creates a showcaseto target consumers insensitive to price, so allowing the businessto grow profitably.New product development. New flavours and products arecontinuously sought and produced in sample runs and given free toshops to test with customers.
  41. 41. 41COACHING BUSINESS01280 844966 stuck-in-the-middle strategy is almost certain to return low profits. This firm lacksthe market share, capital investment and resolve to play the low-cost game, theindustry-wide differentiation necessary to obviate the need for a low-cost position, orthe focus to create differentiation or a low-cost position in a more limited sphere.But guess what! Getting stuck-in-the-middle is what many companies actually do –and believe it or not - quite successfully too!In the end any number of strategies can be pursued, with different approaches toprice and perceived added value in the eyes of the customer. What are thecompetitive strategy issues raised in the story below?Like anything, it’s rarely straightforward to draw hard and fast distinctions betweeneach generic strategy simply because there are conceptual problems underlying them.Let’s take a look at some of them here starting with cost leadership.Cost leadership• The focus for strategy is an internal one. Strategists pursue internal measures,rather than the market methods to gain market share. And herein lies thepoint; it is market share which is important, not cost leadership as such.• Only one firm will pursue cost leadership strategies successfully across thewhole industry.• A cost leader can choose to invest higher margins in differentiation, R & D ormarketing. Thus operating with low costs does not mean you have to chargeHermes Telecommunications PlcHermes has invested a great deal of money in establishing a network whichcompetes with that of Telecom UK, a recently privatised utility. InitiallyHermes concentrated its efforts on business customers in the South East ofEngland, especially the City of London, where it offered a lower costservice to that supplied by Telecom UK. Recently, Hermes has approachedthe residential market (i.e. domestic telephone users) offering a lower costservice on long-distance calls. Technological developments have resultedin the possibility of a cheap mobile telecommunication network, usingmicrowave radio links. The franchise for this service has been awarded toGerbil phone, which is installing transmitters in town centres and stationsetc.
  42. 42. 42COACHING BUSINESS01280 844966 prices or compete on price. Being a cost leader gives producers morefreedom to choose other competitive strategies.Differentiation• It doesn’t necessarily follow that differentiated product may be sold at a higherprice; it may sell at prices similar to competing products to increase marketshare.• An important issue is to differentiate away from competitors. We’ll cover thislater but for now let us remember that differentiation is a MAJOR challengeand requires a large amount of thought on positioning and targeting• The source of differentiation may include many or all attributes of a company’soffer. Restaurants aim to create an atmosphere or ambience, as well asserving food of good quality.FocusThere are probably fewer difficulties tied up with this strategy, as it ties in very neatlywith ideas of market segmentation. In practice most companies pursue this strategyto some extent, by designing products/services to meet the needs of particular targetmarkets.11. SUSTAINING COMPETITIVEADVANTAGEThe issue you now face is to ‘play the game’ with REAL differences; differences infact that not only matter to customers but differences that will SUSTAIN yourpositioning.A vital starting point is to settle on the key activities required to deliver asuperior offer of value to the targeted customer group.Moreover, any unique strategic position is far more likely to offer sustainablecompetitive advantage if it is built on systems of interlocking activities geared to highlevels of customer service and productivity, than on an array of individual anddysfunctional activities.
  43. 43. 43COACHING BUSINESS01280 844966 let’s look at how positioning not only determines the activities required todeliver a superior position, but also influences their configuration and relationshipwith each other.Creating a value chain, together with appropriate functional policies, is important forany business. However, strategy formulation requires more than the design anddevelopment of individual activities. It involves uniting these activities into a systemthat creates the necessary fit between the needs of the market and the actionsrequired by the company to meet those needs.In this Section, we look at how a company can design and develop a system ofreinforcing activities to achieve such a fit. I am going to refer to such a system as a‘game plan’ or rather the means to ‘play the game’ with REAL differences;differences in fact that not only matter to customers but differences that willSUSTAIN a company’s positioning.A vital starting point is to settle on the key activities and capabilities required todeliver a superior offer of value to the targeted customer group.Moreover, any unique strategic position is far more likely to offer sustainablecompetitive advantage if it is built on systems of interlocking activities geared to highlevels of customer service and productivity, than on an array of individual anddysfunctional activities.Now let’s look at how positioning not only determines the activities required todeliver a superior position, but also influences their configuration and relationshipwith each other.Create a System of Reinforcing ActivitiesImagine a time when easy Amazon’s top management is trying to decide how todiversify the business. Three opportunities made the hit list:1. Electronics2. Health and Beauty3. Sports and Leisure
  44. 44. 44COACHING BUSINESS01280 844966 we know Amazon has successfully diversified into each business but thinkabout this for a moment, possibly with your colleagues, and decide whichcapabilities allowed Amazon to successfully enter each business.Well you might have chosen a few of these:• Commanding attention• having the ability to manage a large distribution system• offering the largest selection of just about everything• providing a good online customer experience• recognising the value of technology• innovation can only come from the bottom• project management• having a good knowledge of database management• having good data-warehousing systems• website design and content• providing good customer service• having strengths in online traffic generation• recognises the value of managing scale• having good supplier relationships.And you would be spot on. Now ask yourself this question: Which capabilities, thatyou have chosen, were transferred to each new business?The Right Combination of the Right CapabilitiesA key point to note here is that Amazon’s success actually rests on quite a fewcapabilities. Trying to ‘find’ the one, or even two, sources of Amazon’s success missesthe point. It isn’t really possible to single out the odd one or two capabilities– oractivities – that might be considered to be critical for success – the fact is all of themare important!Breaking up capabilities into new combinations to support new business can destroysome of their worth. A core capability in isolation might not be as valuable as it iswhen coupled with other capabilities.
  45. 45. 45COACHING BUSINESS01280 844966 question to ask is: Is this capability or activity, more important to have inisolation or in combination with all the other activities?Amazon’s success in online retail is really attributable to two factors:1. a combination of activities designed to support one another2. the fit between them and the demands of the online retail market.What makes Amazon successful is not one or two individual activities butthe uniqueness of their combination.The issue to bear in mind...No single factor can be separated out as the reason for Amazon’s success.Decisions made in one part of the system eventually affect other. For example, thedecision to move into another business would eventually influence the growth rate of
  46. 46. 46COACHING BUSINESS01280 844966 company, which would, in turn, influence productivity and eventually the qualityof the service.It should also be remembered that, as these activities are interdependent, a decisionto change one will have an impact on the others. For example, Amazon’s expansioninto new business, even though offering more scalability, would affect web design,data warehousing and so forth.This would have some bearing on the number of new customers the site would attract(and the number of existing users it retained), which would, in turn, influence thenumber of support services the company would need to buy (or outsource).Every business has similar interdependencies. However, because it is very difficult forpeople inside (as well as outside) a company to comprehend the complexity that isembedded within it, they tend to focus on one or two aspects of the system and try tooptimise these subsystems independently.The key thing to note here is that organisational structure is about activity and apattern of linkages between each activity and the core determinants of success: fullrange, high service and frequent demand. This has nothing to do with thefunctions of marketing, human resources, finance and operations.If anything, it is more to do with operations, in the sense that it concerns a number oftransforming activities, which are set out to deliver optimum levels of customerservice and productivity.Further learning pointsThe Amazon example highlights what a business should aim for when designing anetwork of individual activities to support any new strategy.The importance of taking a holistic or ‘big picture’ approach in designing acombination of related and interdependent activities cannot be understated.The intention to find and prioritise the ‘global’ optimum ahead of numerous minutiaeprovides the means to define, and set out, the right activities and arrange them into a’unique‘ system that creates a fit within between the business and the new market, toensure a strategy’s success.
  47. 47. 47COACHING BUSINESS01280 844966 point I would like to underline at this juncture is this: that any new, andestablished, strategic position is based on a unique system of activitiesPutting the system togetherIn designing a company’s ‘activity system’ or game plan, we need to bear in mind fourprinciples:1. A system of activities will collectively form an interrelated system.Invariably, such systems drive behaviour, so if a change in strategy isplanned, it will be necessary to change the structure of the system.2. Individual activities must fit marketplace demands. For example, there isevery reason to focus activities on the Internet, where demand exists for ourproducts and services, rather than attempt to develop more traditionalroutes to market. This might sound obvious – but it happens!3. Each activity we decide to perform must fit together. For example,manufacturing, engineering and distribution must perform activities thatprovide optimum levels of customer service.4. All activities must be in balance with one another. For example, forecastdemand must be met by sufficient and adjustable levels of capacity. TheAmazon case shows how increasingly sophisticated data management andwarehousing provided the means to handle an increasing number ofdemands placed on the business – yet still achieved customer service andproductivity goals.The point is that it is not possible to invest in one activity without investing in theother. While this might sound simplistic, the whole subject of balance can be quitecomplex, as all activities might be affected.How a Company’s Activity System Forms the Basis ofSustainable Competitive AdvantageConsider the spectacular success of Direct Line for a moment;
  48. 48. 48COACHING BUSINESS01280 844966 is the issue behind this little story? In short the relevance of sustainability.What this story leaves untouched is the question of how sustainable differentiationcan be achieved. Superficial differentiation of products and services, that areeffectively identical, is not sustainable. And may I say this is something that manypeople overlook - or if they don’t, they fail to leverage!So if business strategy is about being different then the essence of sustainablecompetitive strategy is to select and perform DIFFERENTIATING activities.Basically there is one of two ways of doing this. The first is to choose to performactivities differently and the second is to perform different activities tocompetitors.This is a line of reasoning that raises many important questions, amongst which forexample is: What differences can be created and exploited between a company and itscompetitors? In what ways would these represent superior value for customers? Andcan these differences be defended in the face of competition?Let’s move away from online retail to the airline business for an illustration (on thefollowing page).Both types of airline operate viable and valuable strategic positions which are bothbuilt on entirely different systems of interlocking and differentiating activities.But there is something more. Something really fundamental about the way thesecompanies succeed against their hungry rivals. Can you see what it is?The Reinvention of the Insurance BusinessThis business pioneered telephone based selling of insurance products with theeffect of transforming standards in how insurance is sold in the UK, drasticallyreducing policy prices and stunning traditional competitors, but virtually everycompetitor can imitate telephone selling, and after recovering from the initialshell shock, this is exactly what they did.
  49. 49. 49COACHING BUSINESS01280 844966’s strategy illustrates the point that approaching competitive positioning anddifferentiation in this way only produces a sustainable competitive advantage if twofurther conditions exist:• Competitors cannot imitate or equal a company’s positioning with their currentoperations, and the• Activities needed to support any positioning a company wishes to adopt fit withinthe company and within the market itself.In short this means for a company’s strategy to be effective, it needs to reflect what itsbest at doing – its super productive activity3 – not what its competitors can do just aswell.Thus if a company’s competitors try to imitate its company’s strategic position theywill be forced to replicate not only the company’s key activities, but also the way itcarries them out. And this is not easy.Let’s move on to the last issue. And that is to decide which collection of capabilities isunique to you and which would enable you to do more for customers than yourcompetitors?3See Section 6 for a full description of Super Productive CapabilityOperating Differences in the Airline BusinessXoject’s strategic positioning, as a short-haul, ‘high value’, premium pricedservice for corporate business travellers, in the USA, rests on an interlockingsystem of the activities it performs to support its convenience positioning.These include, private jet travel, customised on board services, on-timedeparture, multiple aircrafts for clients on a single day and a single class ofaircraft to cut down maintenance and fuel costs based on fractionalisedownershipIn contrast, a full-service airline, such as BA or Qantas performs activities tosupport a high-cost, full-service programme. It will provide customers withservices to reach any number of destinations with a larger range of aircraft, aswell as providing comfort, offering in-flight meals, arranging connectingflights, and checking and transferring baggage.
  50. 50. 50COACHING BUSINESS01280 844966 we go onWhen deciding how to deliver a product or service to your customers – or, in short,how to ‘play the game’ efficiently – a company should decide what activities it needsto carry out and how to combine these into a reinforcing system that will provide theright fit between what the customer wants and what the company does in such way asto create a sustainable point of difference.However, since customer wants – and the wider business environment – are alwayschanging, it is important to retain a flexible approach to this concept of fit. Flexibilitycan be achieved and sustained via a variety of tactics that question the status quo andallow a business to retain a fit with its external markets.12. COMPETENCE AND CAPABILITIESSo far, we have seen that a superior strategy involves a robust positioning, i.e. asound choice of market and a differentiated proposition of value, supported by anetwork of interrelated and distinctive activities capable of carrying the strategyforward over the long term.But there is more. Such a positioning and competitive differentiation should belinked to what a business is ‘good at doing.’ In other words a company’s strategy to betruly superior must grounded in a core or distinctive competence.Let me explain what I mean with a quick example found on the next page.Amongst the other things this simple story illustrates is the point that extending acompany’s markets requires new skills. These skills - capabilities influence the wayproducts are designed, services are offered and markets entered.The important thing is this; while we must not minimise the importance of marketfactors, such as market growth, market trend and customers’ needs and so forth, youmust recognise the importance of building on your key strength and theskills and activities to support your business purpose and – of course - whatyour business will be.
  51. 51. 51COACHING BUSINESS01280 844966 company may then extend this initial distinctive competence by linking it to othercritical market-related competencies that when taken in combination, form a distinctbusiness model.Given such advantages a company may then seek out new market opportunities,using the business model to give themselves a competitive advantage over existingincumbents.But as others seek to emulate success, a company must relentlessly pursue innovationand improvement within the core competence.Now let me ask a question...Ask yourself what it that these companies are exceptionally good at doing; Duracell,Dell, Nike, Nokia, Black and Decker, Google, Coca Cola, M&S and Apple.Well if you had had the time you might have said something like this:Duracell (a reputation for making long life batteries), Dell (assemblingcomputers), Nike (marketing sports shoes), Nokia (customer centric innovation)Black and Decker (producing small electric motors), Google (creating internetYour Moussaka Will Be Ready In 3 months!Weve always said that successful business growth comes from competence andcapability. The issue is to keep building capabilities to do what you do to delightyour customers – even better!Take John, a cafe owner who specialised in cooking fried English breakfasts –his key strength – or competence.He discovered a demand for a more varied menu - including moussaka! Ratherthan cooking a bad meal the following week and damaging his reputation, hefirst took stock of his existing skills - or capabilities.These were chiefly purchasing good raw products and making good, quick‘sausage-and-chip’ and egg-and-chip type breakfasts. He concluded that hecould build on some of his capabilities quite quickly - extending his experiencewith sausages to hamburgers and cheese omelettes - with chips.Moussaka, a totally new dish, however, would need more development.Chopping onions was a skill he already had, but cooking aubergines to aconsistent standard would need to be researched and practiced when he had thetime, and only introduced when ready - a matter of weeks.
  52. 52. 52COACHING BUSINESS01280 844966 solutions), Coca Cola (producing a popular drink with a patent), M&S (greatcustomer service) and Apple (customer centric innovation).Each of these companies’ great success and prominence in their respective markets isin fact grounded in one ample and productive quality - or competence.In bringing these comments into a short summary we may say that a great strategy - aunique strategic position, is one embedded in a complementary and superproductive capability. Any company that possesses such a strategic asset willboast an outstanding strength capable of powering a business model rivals willfind difficult to replicate.Now let’s move on.Types of core competence!I propose that there are two generic sources of distinctive competence each of which Iwant to bring to your notice.The first lies in what a company is reallyThis type of distinctive (or core) competence may be derived from such procedures asaccuracy and cost control, speed and timing, customer oriented innovation,knowledgeable people, appropriate technology and so forth.good at doing. Such an area of expertisemay take the form of a productive process or a special way of doing things.The second source of outstanding strength may be described as a differentiatingcapability. This might include a company’s reputation, relationships within itsentire supply chain, a process that offers value or cost benefits, a form of naturalmonopoly, such as market leadership, sunk costs or some form of exclusivity such asthe sole rights of production. Thus intellectual property rights are powerful sources ofstrength as are license agreements and other exclusivities.But you know, it is a startling fact that most people in business don’t know what theirbusiness strengths are. When you ask them, they look at you with a blank stare, orthey respond in terms of subject knowledge, which is the wrong answer! Yet the issueis of vital importance to the success of any strategy. It offers the muscle in acompany’s business model.For the moment let’s nip over to the Greek islands!