1. Some reading materials attached.
Michelle_Michy
20200627004611chapter_2.pdf
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Chapter 2
Strategy formulation: Generic strategic options and choices
“A strategy delineates a territory in which a company seeks to be unique.” – Michael Porter1
“The two most fundamental strategic choices are deciding where to play and how to win.” – Roger Martin2
LEARNING OBJECTIVES We indicated in chapter 1 that one of the key activities in strategy-making is the development of a heightened consciousness around the core strategic choices of an organisation. The focus of this chapter is on the broad strategic choices leaders and strategists can make as part of the strategy formulation process to position an organisation in a competitive business landscape. The main areas that we explore are:
• Choices related to the identity of the organisation. These include organisational aspirational descriptions as reflected in the vision, mission and organisational values.
• Choices related to generic high-level strategic positioning options for an organisation. • Choices related to grand strategy options for an organisation, given the fact-based SWOT information of an
organisation derived from a thorough external and internal strategy analysis. • You will be able to use the following perspectives and tools as a basis to develop your own strategic leadership
capacity. • Develop and motivate a descriptive identity write-up for an organisation which includes a vision, mission and
values statements. • Critically examine the current identity and aspirational descriptions of an organisation to suggest improvements
and changes to these statements. • Describe and motivate appropriate high-level strategic choices for an organisation by using the following
generic strategic frameworks to facilitate informed decision-making: o Porter’s five generic competitive strategic options o Treacy and Wiersema’s three value disciplines o digital and physical orientation options o industry-based strategy styles o strategic posture options o foreign market entry options
• Understand and use the relevant grand strategy alternatives for an organisation based on the following options: o competence-based growth strategies o external-orientated growth strategies o strategic space growth strategies o rationalisation strategies
C o p y r i g h t 2 0 1 6 . K R P u b l i s h i n g .
A l l r i g h t s r e s e r v e d . M a y n o t b e r e p r o d u c e d i n a n y f o r m w i t h o u t p e r m i s s i o n f r o m t h e p u b l i s h e r , e x c e p t f a i r u s e s p e r m i t t e d u n d e r U . S . o r a p p l i c a b l e c o p y r i g h t l a w .
EBSCO Publishing : eBook Collection (EBSCOhost) - printed on 6/26/2020 8:43 PM via COLORADO STATE UNIVERSITY - GLOBAL CAMPUS AN: 1427028 ; Ungerer, Marius, Ungerer, Gerard, Herholdt, Johan.; Navigating Strategic Possibilities : Strategy Formulation and Execution Practices to Flourish Account: ns125356.main.ehost
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Navigating strategic possibilities
INTRODUCTION In Figure 2.1 we see that the process of strategy formulation is informed and shaped by four strategy practice domains, namely:
• Strategic leadership, which includes the thinking capacity and practices of leaders in an organisation as well as the business ethics practices using a virtuous leadership approach as described in chapter 1. Entrepreneurial thinking and practices are also part of this domain and are described in chapter 9.
• Results and conclusions from the analysis and synthesis based on an extensive external and internal review of the organisation. This aspect is not included in this book but a comprehensive guide and outline of this strategy practice domain is available in a related publication by the authors.3
• Perspectives based on a multiple futures review for the organisation using scenario planning as described in chapter 4.
• Insights flowing from the strategy renewal and innovation efforts of the organisation as described in chapters 6–8.
Chapter 2 • Generic strategic options and choices
organisational identity generic strategies grand strategies
Chapter 3 • Business model
value creation efficiency engines of growth
• Normative assessment of competitive strategies
Strategic leadership
Chapter 1 • Strategic leadership thinking and practices • Business ethics through virtuous leadership practices Chapter 9 • Entrepreneurial thinking and practices
External and internal contexts* • Analysis and synthesis
� global macro context � competitive context � customer context � internal organisational context
Strategy formulation
Chapter 2 • Generic strategic options and choices
� organisational identity � generic strategies � grand strategies
Chapter 3 • Business model
� value creation � efficiency � engines of growth
• Normative assessment of competitive strategies
Chapter 4: Multiple futures
• Scenario planning and foresight development
Chapter 5: Strategy execution
• Change enablement • Strategic gap closing • Making strategy a reality for all
� strategy translation � strategy mobilisation � strategic performance monitoring
*Covered in the book Crystallising the Strategic Business Landscape by
Ungerer, Ungerer and Herholdt, 2016
Strategy renewal and innovation
Chapter 6 • Strategy innovation tools
� exponential organisations
� blue ocean strategy � sources of e-value
• Break-through stall-points and decline
• Portfolio of experiments and prototypes
Chapter 7 • Inorganic growth
(alliances and M&As)
Chapter 8 • Management innovation
Figure 2.1: The strategic architecture landscape
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Chapter 2: Strategy Formulation: Generic Strategic Options and Choices
When we start with a cycle of strategy formulation and development for an organisation, this process should be informed at least by a thorough fact-based external and internal analysis. As the strategy practices of an organisation mature over time, multiple strategy practice domains as described above will inform and form a strategy development process cycle.
We indicated in chapter 1 that strategy is the collective and emerging pattern, based on strategic choices, that an organisation consciously exhibits and executes over time to ensure its sustainable endurance by differentiating itself in unique ways to create and add value for stakeholders. Strategy is about explaining how an organisation wants to move forward and how it wants to advance the interest of stakeholders. From this description we see that central to strategy development is our ability to make sound and well-founded strategic choices. The nature and variety of strategic choices to position an organisation for differentiating and competitive benefits are described in this chapter. This should be read in conjunction with chapter 3, where the aspects related to the development of an integrated business model for the organisation based on the core strategic choices made, and the normative assessment of competitive strategies are described. The broader strategic choice domains related to strategy formulation and competitive positioning as described in this chapter and chapter 3 are reflected in Figure 2.2.
Identity Choices: Choices related to
identity and aspirational
descriptions of an organisation
Strategic Choices Related to Strategy Formulation
Choices related to functional strategy
options
Choices related to grand strategy
options
Choices related to high level generic strategy options
Business Model Choices:
Choices related to the business model of an
organisation
Strategic Competitive Choices
Figure 2.2: Strategy formulation strategic choice domains
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Navigating strategic possibilities
In the next part of this chapter we discuss three different competitive strategic choice domains for an organisation. These are aspirational choices related to the identity of the organisation, the high-level strategy choices for an organisation and the evaluation of the appropriateness of a variety of grand strategy options.
STRATEGIC CHOICES RELATED TO ORGANISATION IDENTITY AND ASPIRATIONS The concept “organisational identity” is used here as a general reference regarding how stakeholders perceive an organisation. It is about the perceptions and associations, positive and/or negative, that stakeholders have about an organisation. The identity of an organisation is formed by many inter-related factors that are influenced and created by organisational members. Some of the aspects that can shape the identity of an organisation are the leadership, the brand personality or product brands, the corporate image, the reputation, the history and track-record. Based on this identity an organisation is associated with certain attributes. Woolworths is associated with quality, Johnson & Johnson with safe products and Audi with technology. Gallup, the global research-based performance-management consulting firm, states that an organisation’s identity is made up of three distinctively different, yet interrelated elements: purpose, brand and culture.4
From a strategic management perspective we will address the following aspects that contribute to the identity and aspiration agenda of an organisation: vision, mission and values. These descriptions relate to the basic reason for being and also represent future ideal and guiding aspirations for an organisation – its core business philosophies. For instance, Nedbank defines its core aspirations as “deep green”, which include statements like the following: “Great place to work; Great place to bank; Great place to invest; World-class at managing risks; Community of leaders; Most respected and aspirational brand; and Living our values.” The main questions we want to explore around organisational identity are: Who are we as an organisation? And who do we want to be? The strategic choices associated with these decisions have a direct impact on the chosen strategic landscape or playing field of an organisation and the values that are emphasised, representing lead indicators on how the game of business will be played.
An organisation’s aspirational descriptions can also have a constraining effect when not enough stretch is built into them. For example, Xerox’s positioning as the “the document company” constrained its competitiveness in the digital era. Xerox invented the PC at Xerox Parc, but it was never developed further. Serendipity however assisted 3M to not ignore post-its as a new invention, although they were nearly disregarded. Amazon’s aspiration to be an information aggregator assisted it to be more than just a leading virtual bookstore and stimulated the creation of a diversified portfolio of e-businesses. Formulating the aspirational statements for an organisation will not on its own position an institution for competitive benefits, but it can certainly have a constraining effect or lead one up the wrong paths – to unprofitable businesses and lost opportunities. Let us however remember that aspirational descriptions of an organisation are a necessary, but not sufficient, cause of competitive success on their own. In other words, just having challenging aspirations (and communicating them extremely well and often) is not enough.
Vision description and analysis
Vision (from the Latin videre – to see) is an expression of what an organisation or group of people wants to create or achieve. It is a simple and artful expression of the broadest business aspiration of a preferred future state. A vision statement is indicative of where an organisation wants to be in the years to come. A vision therefore represents an ideal end state that serves as an attractor to stimulate innovation towards realising the vision.
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Chapter 2: Strategy Formulation: Generic Strategic Options and Choices
Vision A future desired
aspiration we want to achieve
Current reality �e current results we
now achieve
Tension Seeks resolution
Figure 2.3: Tension between vision and current reality
A vision creates the basis for people to believe in a future because they can identify with it, and it also helps them to believe that their individual efforts make a difference in creating that better future and world. The nature of a visioning process creates the future as a neutral arena, an open space onto which people can project their future aspirations and fears. A vision clarifies the organisation’s future priorities, and highlights where trade-offs might
occur. The function of a well-formulated vision is to create tension between the current and future realities of an organisation. This tension seeks resolution, and the only way it can be achieved is by reaching, or trying to reach, the desired vision – to make it a reality – even if it is enduring and seemingly unachievable in the short term. This dynamic of a vision as a tension creation attract or that seeks resolution by taking actions towards achieving the vision is displayed in Figure 2.3.
Visions only have a mobilising effect towards a shared future if they are widely spread, shared and acknowledged in an organisation. The creation and spreading of a mutually created vision is the task of both leaders and strategy collaborators. Visions spread because of a reinforcing process of increasing clarity, enthusiasm and commitment. As people talk about it and integrate the vision with their capacity to own it and to make it part of their own life purpose and goals, the vision is shared and more people commit their support. As people talk, the vision becomes clearer and more granular aspects of it may emerge.
Charles Kiefer5 states: “Despite the excitement a vision generates, the process of building shared vision is not always glamorous. Managers who are skilled in building shared visions talk about the process in ordinary terms – talking about our vision just gets woven into everyday life.” If visions are co-created with and through others in a constant dialogue, the eventual spreading is done by participants. Involving key stakeholders in the development and refinement of the aspirational descriptions of an organisation is a best practice and requires innovative processes to facilitate maximum participation. Mobilising people around a compelling vision will sometimes allow it to root itself – especially when there is a charismatic leader as a sponsor. This enhances the inspirational angles of a vision. This process of “rooting” may continue and increase in value, clarity and scope, until the actual vision is more than just a single statement – it has meaning within a specific context and stakeholders interpret the strategic implications to empower themselves strategically. A key aspect about a vision is how it mobilises stakeholders’ energy so they make a concerted and informed effort to make the vision a reality.
In contrast with strategic goals (see chapter 5 on strategy execution), a vision is long-lasting and does not change in the short term. Imagination, intuition and an ability to synthesise disparate information are key ingredients for the development of an impactful vision.6 A good starting point for developing a vision is to answer the question: “What is our ultimate ambition?”7
Visions should however not be seen as a general panacea for all organisational dilemmas and woes. For example, a vision cannot guarantee success and is dependent on many collaborators making a meaningful contribution to
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shaping and executing it. To create and execute a vision, leaders as sponsors, champions and collaborator mobilisers are critical in making the vision come alive in an organisation’s influence domain. It is sad to see organisations that spent a great deal of time and energy formulating elaborate visions that are displayed in boardrooms and on factory floors, but left it at that. As can be expected, very little comes from this.
#
&
Application tool
Use the requirements for a vision and the related questions and criteria as summarised in Table 2.1 to critically evaluate the vision statement of an organisation.
Table 2.1: Guidelines on development and evaluation of a vision
General requirements for a vision statement8
Visions must be: • shared, and generate commitment; • about a preferred or desired future; • a contrast with current reality to create the desired structural tension; • fluid and enduring; • sustained and nurtured in a constant process as part of the strategic conversation
Visions should not be • about vague concepts; • solutions to current problems; • eloquent words and statements only; • only on boardroom walls, but must be in the hearts and minds of people
Visions can • be unemotional; • be emotional and inspirational; • emerge in the course of ordinary organisational life; • emerge from inspirational leadership; • be detailed and granular; • have few details, but constitute provocative and magic thoughts
Evaluation of a vision
Questions to consider:9
• Would it motivate you to join this organisation and continue to motivate you once you are there? • Does it provide a beacon for guiding the kind of adaption and change required for continual growth? • Will it challenge you? • Can it serve as a basis for strategy that can be acted on? • Will it serve as a framework to keep all strategic decision-making in context?
Criteria for a vision statement:10
• Is it directional? • Does it give focus? • Is it desirable? • Is it feasible? • Is it easy to communicate and easy to remember?
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Chapter 2: Strategy Formulation: Generic Strategic Options and Choices
Practical guideline
An alternative way to stimulate creating inspiring and stretch visions is to ask: “What is the BIG IDEAL?” Complete the following sentence to describe the end-state and contribution of your organisation’s differentiated position choice:
The world would be a better place if: …
Ogilvy, the media and brand consultancy, indicates that their South African operation’s big ideal is: “Liberating the inner greatness of companies and people”. A big idea for the University of Stellenbosch Business school in 2011 was: The world would be a better place “when USB stakeholders contribute as leaders to achieve the Millennium Development Goals (MDGs)”.
Tom Boardman, the legendary CEO of Nedbank, said in 2006:11 “I truly believe that great companies achieve and maintain greatness by being vision-led and values-driven. You need a clear and compelling vision to take people along with you towards new goals and objectives. It requires passionate, committed and ethical people to move together towards a clearer vision.”
Mission or purpose description and analysis
Purpose (mission) (from the Latin word proponere – to declare) represents the fundamental reason for a company’s existence. It declares what this company is here to do, which means it spells out in which business domain a company operates and seeks success. In other words, the mission specifies the business or businesses in which the organisation wants to compete and the customers it intends to serve.12 In this chapter “mission” and “purpose” are used as inter- related concepts. A purpose or mission is associated with a longer-term orientation and can change as the context and competitive aspirations of an organisation develop over time. The word “mission” should not be confused with the military application of it, as in “Our mission (objective) is to take this hill.” Mission and purpose descriptions are longer-term strategic business domain explanations.13
Purpose often connects on a deeper level as a company’s reason for being, and may have as much of a pulling effect as a vision, but in addition it also creates clear boundaries that spell out where the company operates. Mission or purpose statements therefore spell out what business domain an organisation operates in and seeks success in. The clearer this business domain, the more certain it is what will spell success for that organisation and the better and more focused the company will be in positioning itself in its industry and marketplace. The mission or purpose statement also gives guidance on boundaries and “what we don’t do”. In all cases this is extremely important in order to create focused behaviour. Strong company purposes also seem to connect strongly with that industry’s reason for existence.
A well-defined mission/purpose statement gives clear guidance on the key question: “What business are we in?” Examples of this are:14
• Volkswagen SA is not in the motorcar business, but in the transportation business. • BP is not in the petrol business, but in the energy business. • Rhodes University is not in the business of education and research, but in the business of equipping people for life. • Steinhoff International sees itself more of a supply chain than just a furniture maker and distributor.
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Montblanc, part of the Richemont group, evolved carefully over time from a brand associated with writing instruments to a luxury goods brand.15 Today they sell, beside pens, premium goods including watches, jewellery, fragrances, leather goods and eyewear.
The mission/purpose statement should also give strategic direction on the question: “What business are you not in?” Howard Schultz of Starbucks is very clear on the four things Starbucks will “never” do:16 They will not franchise, put chemicals in their coffee beans, sell beans in plastic bins in supermarkets, and “never, never stop pursuing the perfect cup of coffee by buying the best beans and roasting them to perfection”.
#
&
Application tool
Use the questions related to a mission/purpose statement and the Lift Test in Table 2.2 to develop or evaluate the robustness of an organisation’s description.
Table 2.2: Guidelines on developing and evaluating a mission/purpose
Answer the following questions: • Why do we exist? Why is our existence important to others and the world in general? Why do we matter? • What are we here to do? • What business are we in? • What business are we not in? • What is our ultimate ambition?
From the answers to these questions, formulate the mission/purpose of the organisation.
The Lift Test to test the robustness of the mission/purpose description:
Imagine you get into a lift with a customer. He or she asks: “What does your organisation do?” You have until the lift reaches its destination to answer the question (in other words, no more than two minutes). Go for it!
Winning players develop a purpose for their organisation beyond the aim of “making money”. They develop a purpose that sets the organisation on a route to contributing to making the world and the societies they operate in better places. Of course they are also successful in making money, but that is the result of their strategic efforts, not their direct focus. According to research by Moss Kanter, great companies work to make money, but in their choice of how to do so they consider whether they are creating enduring institutions. As a result they both invest in the future and are very aware of the needs of people and the society.17 Google’s purpose is to “Organize the world’s information and make it universally accessible and useful”. TED is a non-profit organisation that is devoted to “Ideas worth spreading” and does so in the form of short, powerful talks (18 minutes or less). Facebook’s mission is to “to give people the power to share and make the world more open and connected”. It therefore provides people with the tools to stay connected with friends and family, to discover what’s going on in the world, and to share and express what matters to them. These mission statements are broad and grandiose, yet focused and compelling, serving as excellent motivators for employees to change the world.
From a stakeholder-centric view it is important to remember that stakeholders can affect an organisation’s vision and mission and are also the recipients of the strategic and operational outcome achievements. Stakeholders tend
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Chapter 2: Strategy Formulation: Generic Strategic Options and Choices
to continue to support an organisation when its performance outputs meet or exceed their expectations. Research indicates that organisations that manage stakeholders well effectively outperform those that do not.18 The major stakeholder groupings an organisation should engage with are shown in Figure 2.4.
• Employees • Managers • Non-managers
• Global, regional and local regulators
• Customers • Suppliers • Host
communities
• Shareholders • Major suppliers
of capital eg Banks
Capital market stakeholders
Product market stakeholders
Organisational stakeholders
Regulatory stakeholders
Figure 2.4: Major stakeholder groupings19
Organisational values description and analysis
Where much of the identity choice focuses around “what” an organisation wants to be, organisational value give us guidance on “how” these aspirational choices should be made. Organisational values describe in broad behavioural terms “how” things are done (or intended to be done) around here. More specifically, organisation values represent the beliefs, traits and behavioural norms the personnel of the organisation are expected to display in conducting business and executing strategies and operations.20 Organisational values shape the moral landscape and boundaries of the firm and give guidance on the behavioural aspirations of an organisation. The values descriptions give direction on the “best” behavioural aspirations of how business activities and people interactions should happen.
#
&
Application tool
Use the questions that follow to develop your view on status of organisational values.
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Navigating strategic possibilities
Table 2.3: Guidelines on evaluation of a values statement
It is essential to comment on how “alive” these values are. • What processes and practices are in place in the organisation to promote and enhance the use of organisation values in
the operations and strategies of the organisation?
Other questions: • What are the gaps between intent and reality? • How is the use of values enforced?
We need to remember: Values without actions are meaningless.
Organisation values and culture are related concepts. Malone states that a great corporate culture is a fabric of rules, experiences, myths and legends, relationships and rituals as complex as any real family – and just as difficult to describe to any outsider.21 Organisation values form an integral part of the culture of an organisation and are a strategic choice that guides organisation stakeholders on how to execute the broader aspirations in the form of vision and mission statements.
Google’s innovation focus seems to be based on the following values-related principles:22
• In the long run, the interests of shareholders and society at large are convergent. o Making the planet a “better” place serves the interests of business, and making businesses “better” serves
the interests of every human being. • A company’s social legitimacy can never be taken for granted – it can and will be challenged, so live with it. • Citizens and consumers expect companies to be not only socially accountable, but socially entrepreneurial. • Systemic problems can’t be solved by a single institution or by people sitting around conference tables.
o Businesses are uniquely equipped to help mobilise the relevant parties and get “boots on the ground.” They need to be energetic partners of public institutions and NGOs.
• “Don’t be evil” (Google’s famous mantra) is a de minimis standard.
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Chapter 2: Strategy Formulation: Generic Strategic Options and Choices
Case study of SABMiller
The core strategic aspirational descriptions of SABMiller and an evaluation of it are reflected in Figure 2.5 as an example.
Conclusions
SABMiller vision, mission, values & strategic priorities (2013/2014) Description
V is
io n
Be the most admired company in the South African beer industry –- as an employer of choice, partner of choice and investment of choice.
The best example of its ingrained vision is SAB’s acquisition of Miller in 2002. This made it the second-largest brewer in the world.
M is
si on
Own and nurture local and international brands which are the first choice of the consumer.
The mission is well entrenched and is very much part of the DNA of the firm. This is evident in its historic drive to enter new markets, either through acquisition or a green fields strategy , and once there to grow the brands.
V al
u es
We are a market-facing, brand-led and self-refreshing organisation, committed to recognising, retaining and advancing our top talent. Our company personifies “South African” pride and diversity with an all- embracing culture built on great brands, great people and rock-solid values. • Our people are our enduring advantage • Accountability is clear and personal. • We work and win in teams. • We understand and respect our customers and consumers. • Our reputation is indivisible.
The values of the firm reiterate its drive to be a global leader in its industry by ensuring that its staff are working towards the common goals of the firm , in such a way that the customer is looked after and the brands of the various products are valued .
St ra
te gi
c pr
io ri
ti es
• Drive superior top-line growth through strengthening our brand portfolios and expanding the beer category.
• Build a globally integrated organisation to optimise resources, win in market and reduce costs.
• Actively shape our global mix to drive a superior growth profile
SABMiller's strategic priorities are highly aligned to its business strategy. It is in the words of the strategy priorities that each employee can see exactly where SABMiller intends to go and what steps are needed to get there. The vision, mission, values and the strategic priorities are all aligned with the direction SABMiller has been heading in the last 10 years and are very much part of the reason that the firm has been so successful.
Figure 2.5: SABMiller’s strategic aspirational descriptions in 201323
Case study of Woolworths24
Vision, mission & values
woolworths’ vision is to be a leader in retail brands that appeal to people who care about quality, innovation and sustainability. The group depicts its accompanying strategy as seven strategic objectives, as shown in Figure 2.6. Of note are the realistic and achievable strategic objectives that support an ambitious and expansive vision statement. Woolworths’ strategic objectives provide realistic clarity, which links to strategic and operational plans in a practical manner.
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Navigating strategic possibilities
TO BE A WORLD LEADER IN RETAIL BRANDS THAT APPEAL TO PEOPLE WHO CARE ABOUT QUALITY,
INNOVAITON AND SUSTAINABILITY.
Build stronger, more profitable customer
relations
Be a leading fashion retailer in the southern
hemisphere
Become a big foods business
Become an omni- channel business Continue to build the
business in the rest of Africa
Offer our customers simple, convenient and
rewarding financial services
Embed the Good Business Journey throughout our
business
Figure 2.6: WHL’s vision & strategic objectives
Woolworths lists seven values that underpin its ethos and company culture, namely: quality and style, value, service, innovation, integrity, energy and sustainability. The group’s values are regularly reinforced throughout the business, with measurable behavioural objectives forming part of all employees’ integrated performance management plan.
The group’s values are qualified by practical descriptions of how behaviours should be reinforcing their intent, as shown in Figure 2.7.
Of specific note is that several of the group’s values are directly quoted in the vision statement as well, indicating a well-integrated system of vision, strategic objectives and values system to support and enable the execution thereof.
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Chapter 2: Strategy Formulation: Generic Strategic Options and Choices
QUALITY AND STYLE
VALUE
INTEGRITY
ENERGY
“When we deliver the best we stay focused, adopt a professional approach and demonstrate awareness of market trends.”
“When we o�er value to the business, we encourage collaboration, show e�ective decision-making and in�uence others.”
“Service means we demonstrate commitment and build e�ective relationships.”
“When we embrace innovation, we improve processes and seek creative solutions.”
“When we demonstrate integrity we operate with integrity, develop ourselves and others and communicate e�ectively.”
“When we act with energy, we inspire and engage, and we recognise and value others.”
“When we contribute to the sustainability of Woolworths, we share the vision and plan for success, support and initiate change and embrace diversity.”
SERVICE
INNOVATION
SUSTAINABILITY
Figure 2.7: WHL’s values
Woolworths’ vision, strategy and values subscribe to best practices and are adopted at all levels of the organisation, which ensures aspirational and behavioural alignment in execution.
Conclusions on identity and aspirational descriptions
The aspirational and identity descriptions of an organisation set the boundaries of the strategic (vision and mission) and moral (values) landscape it wants to operate in. The vision and mission descriptions are central to the strategy formulation processes of an organisation (see Figures 2.1 and 2.2). The embedding of organisational values as part of the individual and team performance enhancement system of an organisation is a best practice. The revitalisation and ongoing socialising of these aspirational descriptions with newcomers, new stakeholders and new partners through various interaction mechanisms is an ongoing quest of strategic leadership.
HIGH-LEVEL GENERIC STRATEGIC CHOICES After the aspirational descriptions of an organisation have been developed, these must be translated into holistic views of the strategic orientation of the firm before other strategy execution processes kick in (see chapter 5 on strategy execution and translation practices). This implies that the longer-term strategic goals of an organisation should be based on a set of core strategic choices about how the firm plans to best compete in a chosen marketplace.
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A menu of strategic competitive choices for an organisation that strategists and leaders should ponder as part of a strategy formulation and development process is reflected in Figure 2.8. The strategic competitive choice options of an organisation can be classified into four levels: identity and aspirational strategic choices (as described above); generic strategy choices; grand strategy choices; and functional strategy choices. The details of generic and grand strategy options are described in the rest of this chapter. The aspects related to functional strategies are beyond the scope of this book, but are shown below to indicate the link to the competitive strategy choices of an organisation.
Identity and aspirational descriptions for organisations – Level 1 Strategic choices
• Vision • Mission • Values
Generic strategies for organisations – Level 2 Strategic choices
Generic competitive strategy
options
• Overall cost leadership strategy
• Focused cost leadership strategy
• Broad differentiation strategy
• Focused differentiation strategy
• Integrated cost and differentiation strategy
The value disciplines
• Operational excellence • Customer intimacy • Product leadership
Digital/Physical orientation
• Digital pure play • Digital pure play selling
physical products • Hybrid • Physical pure play
Industry-based strategic styles
• A classical strategy • An adaptive strategy • A shaping strategy • A visionary strategy
Strategic posture options
• Conservative posture • Aggressive posture • Defensive posture • Competitive posture
Foreign market entry options
• Exporting • Licencing and contract
manufacturing • Franchising • Joint ventures, and
strategic alliances • Acquisitions • Foreign branches • Wholly owned
subsidiary/Greenfield venture
Grand strategies for organisations – Level 3 Strategic choices
Competence- based growth strategies
• Concentrated growth • Market development • Product development • Innovation
External orientated growth
strategies
• Horizontal integration • Concentric
diversification • Joint ventures • Strategic alliances • Consortia
Strategic space growth strategies
• Vertical integration • Conglomerate
diversification
Rationalisation strategies
• Turnaround • Divestiture • Liquidation • Bankruptcy
Functional strategies to support Generic and Grand strategies – Level 4 Strategic choices
• R&D/Engineering strategy • IT strategy • Human capital strategy • Marketing and sales strategy • Finance strategy
Figure 2.8: A menu of strategic competitive choices
The strategic choices described in this chapter are presented to stimulate dialogue as part of an ongoing strategy conversation to deepen our understanding of the competitiveness of an organisation’s strategy. However we do not imply that the strategic options and choices described in this chapter represent all the strategic decisions related to competitive strategy positioning. It is important to remember that in chapter 3 the aspects related to the business model choices of an organisation are described as an integral part of a strategy formulation and development process (see Figure 2.1). In fact each of the strategy practice domains in Figure 2.1 represent strategic choice arenas which reinforce the importance of a higher level of awareness by internal and external stakeholders of the key decisions that influence the future competitiveness of an organisation.
In this section we introduce six different frameworks that we can use to think about the generic competitive positioning of an organisation. The following high-level generic strategic frameworks to facilitate informed decision- making, in the contextual reality of an organisation, are addressed:
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73
Chapter 2: Strategy Formulation: Generic Strategic Options and Choices
• Porter’s generic competitive strategic options • Treacy and Wiersema’s three value disciplines • digital and physical orientation options • industry-based strategic styles • strategic posture options • foreign market entry options
Porter’s generic competitive strategic options
Competitive advantages are, according to Porter,25 derived from the activities that are involved in creating, manufacturing, selling and supplying products and services, and winning the competitive race can only be achieved by establishing and preserving a company’s distinctiveness. There are two ways in which companies can achieve this distinctiveness. The first is by performing different activities to their rivals, and the second is by performing similar activities, but performing them in different ways. Analogously, companies can either supply differentiated offerings that create unique value and enable a premium price to be charged; or they can supply similar products and services, but perform the activities more efficiently and economically than competitors, leading to a cost advantage.
Low cost Differentiation
Competitive advantage
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ar ro
w ta
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Br
oa d
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et
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iv e
sc op
e
Porter’s generic strategy choices
Cost leadership
Broad differentiation
Cost focus
Differentiation focus
Figure 2.9: Porter’s generic strategies adapted28
Within the strategic positioning paradigm, strategy is about the creation of a unique and valuable position, involving a different set of activities.26 Porter27 strongly emphasises (1) differentiation of activities, but also highlights that (2) costs can play a significant role in creating competitive advantages. Both of these strategic approaches, however, can only be realised when a company has (3) a clear focus. Focus describes how it aims to penetrate the market and which customers to target. These three factors led to the creation of Porter’s four generic strategies, as depicted in Figure 2.9.
The cost leadership generic strategy refers to when a company is able to achieve lower overall costs, while offering products that appeal to a wide range of customers, mainly through underpricing
competitors. This type of positioning is closely associated with economies of scale, a large market share and aggressive cost-cutting techniques. In return, low-cost strategies provide very good defences against both buyer and competitor bargaining power, as profit margins can still be maintained even in the face of strong competitive threats.29 Examples of cost leadership companies include Wal-Mart, Shoprite, Dell Computers, AirBnB and Amazon. A cost focus generic strategy also achieves lower overall cost benefits and low pricing, but provides its offering to a smaller niche of customers. Examples of cost-focus companies are Capitec, Southwest Airlines, Priceline, Expedia and Agoda.30
A broad differentiation generic strategy focuses on providing a differentiated offering, while appealing to a wide array of customers. The advantage of differentiation strategies is that differentiated offerings are often perceived as exclusive, warranting a premium price, brand loyalty and customer lock-in.31 Examples of companies that employ
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Navigating strategic possibilities
broad differentiation strategies are Facebook, Microsoft, Symantec Norton and Dropbox. Lastly, differentiation focus generic strategies provide differentiated offerings aimed at a niche customer segment that meets their tastes and requirements better than the competitors’ offerings. Examples of such companies are DStv, Porche, Zynga, Prezi, 9gag and various niche online communities.32
Low cost Differentiation
Competitive advantage
N
ar ro
w ta
rg et
Br
oa d
ta rg
et
C om
pe tit
iv e
s co
pe
Generic strategy choices
Cost leadership
Broad differentiation
Cost focus
Differentiation focus
Best cost Provider Strategy
Figure 2.10: Extended generic strategies34
There is a fifth generic strategy type that emerged not specifically from Porter’s design, but by retrospective reflection.33 This generic strategy type is known as the best-cost provider strategy. Customers get more value for money by combining both good-to-excellent offering attributes with a lower cost than rivals. This creates a competitive space of lower (best) costs and prices than competitors with comparable offering features. A best-cost provider strategy simultaneously pursues both differentiation and low-cost advantages. Porter’s extended generic strategies are depicted in Figure 2.10.
Each of the above generic strategies represents a particular competitive advantage with a particular competitive scope for an organisation. A competitive
advantage is based on a choice between low cost or differentiation. The choice of a competitive advantage is informed by the nature and quality of internal resource strengths, capabilities and core competences, e.g. a low-cost strategy is dependent on a lean value chain and a differentiation strategy is linked to value-creating activities that customers appreciate and admire. The competitive scope consists of a broad market or narrow target market. Firms serving a broad market seek to utilise their competitive advantage on an industry-wide scale, whilst a narrow target market serves the needs of a specific group of customers. The best-cost strategy offers customers competitive prices with comparable product/service features.
In order for competitive advantages to be sustainable, explicit trade-offs in choosing how to compete are required35 to create a tight “fit” between activities. Fit creates an interrelated web of activities (often termed an “activity system” – see chapter 3) that cannot easily be untangled, creating barriers to entry and imitation. Two types of imitator that need to be guarded against are “repositioners” and “straddlers”. Repositioners copy valuable strategic positions of competitors, whereas straddlers keep their own strategic position, but copy additional activities, features or services of a superior competitor.36
Trade-offs protect against imitation for three reasons. Firstly, different products and services require different activities, equipment, configurations, employee behaviour, skills and management systems. It is impossible for an organisation to compete on all fronts, because competing in some areas directly prohibits the ability to compete in another area due to incompatibility. Activity incompatibility therefore prevents imitation. Secondly, even if activities are not completely incompatible, value is destroyed if activities are overdesigned or underdesigned for a specific use. Therefore, though activities may be copied, the value of the activity may be diminished for the imitator. Thirdly, trade-offs help with focusing a company to avoid internal or external confusion. Inconsistencies in a business’s image
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75
Chapter 2: Strategy Formulation: Generic Strategic Options and Choices
and reputation create external confusion, which leads to distrust of a product or service. Internal confusion, on the other hand, may arise from a too diverse set of products and services offered, blurring organisational priorities, coordination and control. This leads to employees who are confused about company goals, which values to exhibit, or how to approach customers. These all result in suboptimal daily operations. Trade-offs therefore ensure that a company remains focused and prevents imitation.37
Fit also introduces the idea of designing a business holistically, whereby the system is more than its constituent parts. Three different tiers of fit exist. First-tier fit is when there is a consistency between activities and the overall vision, strategy and goals of the organisation. Consistency allows competitive advantages to be compounded and focuses the internal co-ordination of the business. Second-tier fit is created when activities are reinforcing, meaning that activities support and improve the functioning of the other activities. Lastly, third-tier fit is created when second-tier fit is optimised, leading to near-ideal execution of activities.38
1. Start With the Right Goal:
Superior Long- Term Return on
Investment
2. Strategy Must Enable a
Differentiated Value Proposition
3. Strategy Needs to be Reflected in a Distinctive Value
Chain
4. Robust Strategies Involve
Trade-Offs
5. Strategy Defines How All Elements of a Company Fit
Together
6. Strategy Involves
Continuity of Direction
Figure 2.11: Six principles of strategic positioning41
Fit prevents imitation in the following way: if an activity is linked to two others and a competitor has a 90 per cent chance to copy an activity, then the likelihood of copying that part of the system is (0.9)3, equalling 72.9 per cent. With more activities entangled by a tight fit, imitation of activities becomes increasingly difficult.39 Organisations should therefore seek to deepen their strategic positioning (rather than broadening and compromising it) by offering products and services which are aligned with their existing activity system, and which would
be too expensive and difficult for competitors to supply on a standalone basis.40 Porter summarised strategic positioning as consisting of six basic principles, as shown in Figure 2.11.
The first principle states that businesses should pursue superior long term return on investments. Only by being profitable can a business survive. The focus should be on economic value creation and sustained profitability of strategies. Economic value is created when customers are willing to pay a higher price for a product or service than what it costs to produce it. The second principle states that it is necessary to provide a differentiated value proposition. A set of benefits must be provided that differs from those provided by competitors. Businesses do not need to find the universally best way of competing and neither do they have to be all things to every customer. The business only needs to deliver unique value to a specific customer segment.
The third principle is that businesses need to develop a distinctive value chain. Businesses must reflect their distinctiveness by performing differentiated activities, or similar activities in different ways. Best-practices benchmarking erodes distinctiveness and makes it difficult to establish a competitive advantage. Fourthly, a robust strategy requires a business to make trade-offs in how it decides to compete. A company cannot be all things to all customers. Trade-offs are required and the business has to explicitly decide which products, services and activities it will perform.
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Navigating strategic possibilities
The fifth principle states that a strategy must define how all elements of a company fit together in a mutually reinforcing way. Not only does the fit between activities increase competitive advantage, but it also makes a strategy harder to imitate. Activities that are locked in a tight, reinforcing web are much more difficult to imitate than stand-alone activities. Lastly, the sixth principle focuses on continuity of direction and consistency of purpose. A business needs to maintain its strategic direction, even if it means foregoing certain opportunities. Without this consistency, businesses will find it difficult to focus, develop skills, develop assets and forge long-term relationships with customers.
Research42 shows that none of the generic competitive strategies shown in Figure 2.9 is inherently or universally superior to the others. The effectiveness of each strategy is dependent on both opportunities and threats in the external environment of the organisation and the strengths and weaknesses of the organisation based on the available resource portfolio. This implies that it is important to select a generic strategy that fits with the market opportunities and threats as well as the resource strengths and weaknesses of the organisation.
Once a generic strategic position has been chosen, it is essential that other strategic actions are aligned to this competitive choice. Porter43 is very clear in his guidance for competitive success:
“Broadly, the prescription is to concentrate on deepening a strategic position rather than broadening and compromising it. One approach is to look for extensions of the strategy that leverage the existing activity system by offering features or services that rivals would find impossible or costly to match on a stand-alone basis. Deepening a position involves making the company’s activities more distinctive, strengthening fit, and communicating the strategy better to those customers who should value it. But many companies succumb to the temptation to chase “easy” growth by adding hot features, products, or services without screening them or adapting them to their strategy. Or they target new customers or markets in which the company has little special to offer.”
Next we explore guidelines for low-cost strategies, broad differentiation strategies, and best-cost strategies.44
Practical guideline for creating low-cost strategies
Use the guidelines in Table 2.4 to develop insights about developing low-cost strategies.
Table 2.4: Guidelines for developing low-cost strategies
Approaches to support low-cost strategies:
• Sell standardised goods or services. • Invest in process innovations to create lower cost of production and distribution. • Perform value chain activities more cost-effectively than rivals:
o Capture all available economies of scale. o Take full advantage of the learning/experience curve. o Operate facilities at full capacity. o Leverage sale volume to invest in R&D, advertising and to improve sales and administrative efficiencies.
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Chapter 2: Strategy Formulation: Generic Strategic Options and Choices
o Improve supply chain efficiencies. o Use digital technology to improve operating efficiencies. o Leverage buying power to gain concessions. o Use outsourcing and vertical integration to improve efficiencies. o Evaluate specifications for high-cost items and substitute materials and parts. o Use labour-saving practices.
• Eliminate or bypass cost-producing activities in overall value chain: o Sell directly to end-users. o Use e-solutions for processes. o Shift low-value activities to suppliers. o Offer frills-free products.
Required resources and capabilities: • sustained capital investment and access to capital • process engineering capabilities • controlled labour practices • products that are designed for easy manufacturing • low-cost distribution capacity
General advice: The target market for low-cost providers is budget-conscious customers. Low-cost providers must still keep an acceptable level of value for customers to prevent the offerings becoming unattractive to buyers. A product offering that is too frills-free erodes the attractiveness and can turn customers off. Keep the ratios – a low-cost strategy is sustainably profitable only when prices are cut by less than the cost advantage or the added gains in unit sales are large enough to bring in a bigger total profit despite the lower margins per unit sold. Seek cost efficiency improvements that are difficult for competitors to imitate (see above importance of trade-offs and fit).
Examples: Competitive scope broad: Walmart, Shoprite Competitive scope niche: Southwest Airlines, Kulula
Practical guideline for creating differentiation strategies
Use the guidelines in Table 2.5 to develop insights about developing differentiation strategies.
Table 2.5: Guidelines for developing differentiation strategies
Approaches to support a differentiation strategy:
• Develop a deep and intimate understanding of customers’ needs and behaviours. • Invest in innovations to bring new products and services to markets that benefit both the customer and the sponsoring
company. • Sources of differentiation: a unique taste (Coke); multiple features (Microsoft Office); wide selection and one-stop
shopping (Amazon); superior service (Rovos Rail); spare parts availability (Caterpillar guarantee of 48-hour world- wide spare parts availability); engineering design and performance (Mercedes, BMW); prestige and distinction (Rolex); product safety and reliability (Johnson & Johnson’s baby products); quality manufacturing (Toyota, Honda); technological leadership (3M); full range of services (universal banks – Standard Bank; Barclays); top-of-the line image and reputation (Starbucks; Ralph Lauren).
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Navigating strategic possibilities
• The value-adding features in an offering should be at competitive cost point to ensure customers are willing to pay the price.
• Successful differentiation enables an organisation to: o Ask a premium price for its product. o Increase unit sales due to additional customers who value differentiating features. o Grow loyalty to its brand due to customers’ strong attachment to the differentiating features and bond with the
offering. • Use any (or a combination) of the value chain elements (supply chain, R&D, manufacturing, distribution and marketing
& sales) as a source for differentiation.
Required resources and capabilities • strong marketing capabilities • product engineering capabilities • creative flair • strong R&D capacity • corporate reputation for quality or technological leadership
General advice: Differentiation yields a longer return and profitability if it is based on product innovation, technical superiority, product quality and reliability, comprehensive customer service, and unique competitive capabilities. Seek differentiation features that are difficult for competitors to imitate (see above importance of trade-offs and fit). Make both the actual and perceived value of a differentiating offering visible to customers to prevent a situation where price is the only decision factor.
Examples: Competitive scope broad: McDonalds, Woolworths Competitive scope niche: Apple, Moët & Chandon, W L Gore (Gore-Tex)
Practical guideline for creating best-cost strategies
Use the guidelines in Table 2.6 to develop insights about developing best-cost provider strategies.
Table 2.6: Guidelines for developing best-cost provider strategies
Approaches to support a best-cost provider strategy:
• The focus is on capturing a middle ground between pursuing a low-cost and a differentiation advantage and appealing to customers between broad and narrow markets. This represents a hybrid approach.
• It is all about a low-cost provider of an upscale product – increase attractive attributes through appealing features, good- to-excellent product performance or quality or attractive customer service and price offering at a lower level than rivals.
• The organisation should have resources and competences that create the basis for upscale features at a lower cost than competitors.
General advice:
Give customers more value for their money by incorporating in the offering attractive or upscale attributes and features at a lower price than competitors.
The target market for a best-cost provider is value-conscious buyers or value-hunting customers.
Organisations evolve to this strategic position: they seldom start here.
Examples:
Toyota’s Lexus, Zara
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79
Chapter 2: Strategy Formulation: Generic Strategic Options and Choices
We use the case study of Zara to illustrate the dynamics involved in a best-cost strategy option.
Case study of Zara’s generic strategic choice45
ZARA’s competitive strategic positioning is that of a best-cost provider, as they pioneered “cheap chic”.
ZARA is classified within this positioning due to:
• focus on “fast fashion” based on trends that turn over faster than seasonal wear • unique position in owning the full value chain and therefore the ability to be priced comparatively cheaper
than competing quality brands • ability to design/produce to customers’ demands • ability to appeal to a balance of broad and niche markets, and still create their own differentiation through
affordable and trendy apparel, which changes every two to four weeks
Differentiating features are:
• product quality • fashion design – at affordable pricing • speed of innovation/fashion trends to shelf
Low cost Differentiation
Competitive advantage
N ar
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ta rg
et
Br oa
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sc op
e
Generic strategy choices
Cost leadership
Broad differentiation
Cost focus
Differentiation focus
Figure 2.12: Zara’s generic competitive choice
Zara occupies the sweet spot of combining low production cost, good quality, and fashionability while offering the customer value for money. There is a limit on the lines offered but the quick design cycle time makes up for this.
The Zara brand does not compete in the focused differentiation space but does appeal to the shopper who aspires to the nicer thing but still wants value for money at the same time.
The Zara brand’s strongest rivals are from broad differentiation brands such as H&M, Nordstrom, and Ralph Lauren and Nordstrom; focused differentiation brands such as Kering, Benetton, Calvin Klein, GIII and Prada; and from the low-cost and niche market sections the Next group is growing in market share
and number of stores over Europe to encroach on Zara’a space. The generic competitive choice of Zara is reflected in Figure 2.12.
To conclude this part on generic strategic positioning choices, the different advantages and challenges associated with each of the generic strategic options are summarised in Figure 2.13.
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Navigating strategic possibilities
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Figure 2.13: Summary of generic competitive positioning options46
In an organisation with distinctive different business lines with different product/service offerings aimed at different end-users and markets, it is most likely that these different businesses will have different generic strategic positions and choices. This means that in a diversified conglomerate business, different product lines and brands can have different generic strategic positions. This point is illustrated in the case study of the Shoprite group.
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Chapter 2: Strategy Formulation: Generic Strategic Options and Choices
Case study of Shoprite Group
The Shoprite Group of Companies, Africa’s largest food retailer, operates 1 751 corporate and 360 franchise outlets in 15 countries across Africa and the Indian Ocean Islands.47 The general strategic positioning statement for the group indicates:
“The Group’s primary business is food retailing to consumers of all income levels, and there are outlets from Cape Town to Accra and on some islands of the Indian Ocean. Management’s goal is to provide all communities in Africa with food and household items in a first-world shopping environment, at the Group’s lowest prices. At the same time the Group, inextricably linked to Africa, contributes to the nurturing of stable economies and the social upliftment of its people.”
The different brands of the group each service a target market with a set of products. In Figure 2.14 some of the brands in the group are described, with an interpretation of the associated generic strategic choice.
Shoprite is the original business of the group and remains the flagship brand, serving the mass middle market. It’s the brand with the most stores in RSA as well as the brand used to spearhead growth into Africa. The brand’s core focus is to provide the masses with the lowest possible prices on a range of groceries and some durable items. Specific emphasis is placed on basic commodities, which is critical to the core target market. LSM 4-7 Checkers focuses on time-pressed, higher income consumers and differentiates on its speciality ranges of meats, cheeses and wines. Its full range of groceries and household general merchandise are all promised at the consistently good value for which the Group is famous. The stores across South Africa and Namibia are located in shopping malls and other premises conveniently accessible to more affluent residential areas. LSM 8-10 Checkers Hyper offers the same specialty food selections and great value as Checkers, but within large-format stores that encourage bulk rather than convenience shopping. The general merchandise ranges are far wider in Hyper stores, focusing on categories like small appliances, pet accessories, garden and pool care, outdoor gear, home improvement, homeware, baby products, toys and stationery. Checkers Hyper stores operate in South Africa only and are found in areas with high population densities. LSM 8-10 Usave is a no-frills discounter focussing on lower income consumers. This smaller format, limited range store is an ideal vehicle for the Group’s expansion into Africa and allows far greater penetration into underserved areas within South Africa. LSM: 1-5 Hungry Lion operates in seven countries and with its current growth trajectory it is rapidly extending its footprint throughout Southern Arica. Hungry Lion’s goal is to provide all communities in Africa with fried chicken in a first-world Quick Service Restaurant (QSR) environment at competitive prices. Hungry Lion aims to be the leading brand in consumers’ minds when considering an option for fried chicken. LSM 4-7
Brand Target Market and Competitive Advantage Generic Strategy
Cost Leadership
Differentiation Focus
Broad Differentiation
Cost Focus
Best Cost Provider
Figure 2.14: Generic strategic position of selected brands in the Shoprite Group
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Navigating strategic possibilities
#
&
Application tool
Choose and motivate a generic competitive strategic position for an organisation. Also indicate the implications for operational aspects and business model features.
Treacy and Wiersema’s three value disciplines
International management consultants Michael Treacy and Fred Wiersema developed an alternative approach to generic strategy which they call value disciplines.48 The value-discipline approach is a strategic tool that assists organisations to establish what they want their customers to value them for.
The value disciplines that an organisation can excel in are operational excellence, customer intimacy and product leadership.49 Each area results in customers valuing the organisation in a different way. The departure point is that an organisation needs to choose one of these value disciplines to develop strategies that would deliver superior customer value and at the same time develop the other two disciplines to meet industry standards.
“best product” Product leadership
Operational competence
Customer responsive
Operational excellence Customer intimacy “best total cost” “best total solution”
Product differentiation
Figure 2.15: Value disciplines
When an organisation specialises in one of these disciplines, it gains competitive advantage. A focus on one of the disciplines assists an organisation to align all operational processes in support of the chosen value discipline and build a clearer understanding of what must be done to attain the desired results in the business model elements (see chapter 3 on Business models). For example, operationally excellent organisations in general have a limited range of products and configurations as this is more cost-effective to build and deliver than a vast range of products and configurations typical of a customer-intimate organisation.50 The assumption is clear: to succeed in the marketplace, organisations must embrace a specific value discipline as part of their competitive strategy. The three value disciplines are depicted in Figure 2.15.
Operational excellence
Operational excellence represents a specific strategic orientation towards the production and delivery of products and services. An operational excellence strategy aims to accomplish cost leadership. Here the main focus centres on automating manufacturing processes and work procedures in order to streamline operations and reduce cost. The strategy lends itself to high-volume, transaction-oriented and standardised production.
The organisation that follows this strategy aims to lead its industry through price and availability by focusing on a lean and efficient operations capability. The following practices are used to foster operational excellence:51 minimise cost by reducing overheads; eliminate intermediate production steps; reduce transaction cost; and optimise business processes. Operational excellence is characterised by offering customers competitive (low or lowest price) and hassle-free service with minimum inconvenience. A strategy of operational excellence is ideal for markets where
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Chapter 2: Strategy Formulation: Generic Strategic Options and Choices
customers value cost and availability over variety, which is often the case for mature, commoditised markets where cost leadership provides a vehicle for continued growth.
Examples of operational excellence-aligned enterprises are: BHP Billiton, Fed Ex and GE’s large appliance business.
Customer intimacy
Organisations that excel at making customer intimacy their strategic focus continually shape and fit their products and services to match the needs of a specific target group. Deep customer insights are combined with operational flexibility to offer customers a quick response to a spectrum of needs raging from customised products to meeting special requests to increase customer loyalty.
Customer-intimate organisations focus on the lifetime value of customers and are prepared to invest now to create long-term customer loyalty. The focus here is not on initial cost or profit per transaction, but on creating customer satisfaction that builds loyalty to sustain lifetime relationships with a customer. Organisations with a customer intimacy orientation invest in systems that differentiate quickly and accurately the degree of service customers require and match that with the potential revenue patronage is likely to generate over time. Careful customer segmentation assists organisations to engage and service customers according to their needs, based on their flexible and responsive capacity.
Examples of customer intimacy-aligned enterprises are Virgin Atlantic, Casinos (for high rollers), the hair salon and Amazon.com.
Product leadership
Organisations that pursue the discipline of product leadership aim to deliver a constant flow of state-of-the-art products and services that delight customers. This focus on product leadership requires capabilities in the area of creativity from organisational actors to create these new offerings, to industrialise and commercialise these new ideas quickly and to continually upgrade offerings to stay in front of the competition.
Product leadership organisations invest in R&D and environmental scanning to create new offerings and foster a culture of ongoing innovation. The strength of product leaders is based on their ability to react fast to opportunities when they arise. The big aim here is to maintain the creation of a stream of new products over time to sustain product leadership, momentum and a competitive edge.
The consumer electronics, fund management, automotive and pharmaceutical industries include many companies pursuing a strategy of product leadership. Examples of product leadership-aligned enterprises are Ferrari, Pfizer, Apple and Nike.
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Navigating strategic possibilities
Conclusions on the three value disciplines
The value-discipline approach is an alternative way to create a general competitive position for an organisation. It relates in some way to the generic competitive positions of Porter, where operational excellence aligns with a cost leadership strategy, and customer intimacy and product leadership support a differentiation focus strategy choice.
#
&
Application tool
Use the descriptions of the three value disciplines to choose ONE as the cornerstone for an organisation’s generic competitive positioning choice. Motivate why the chosen value discipline is appropriate and how it will impact operational aspects and business model features.
Digital and physical orientation options
The next strategic choice on level 2 (see Figure 2.8) is between the different digital and physical orientations available. An organisation’s digital-physical orientation refers to its relative position on the digital-physical continuum.52 This choice is usually implicitly made based on the products that a business sells, the way that it decides to do business, or the way that it makes its offering available to customers. An explicit and conscious consideration of the different options is useful however, as the different orientations fundamentally impact the business and present different challenges and benefits.
The four broad options are shown on the digital-physical continuum in Figure 2.16:
Digital Digital pure Plays selling
Digital offerings
Digital pure Plays selling
Physical offerings
Hybrid E-businesses
Physical pure Plays (“Brick and
Mortar”) Physical
Figure 2.16: Digital-physical continuum53
Digital pure plays selling digital offerings largely or exclusively compete online and provide digital products or services to customers. These businesses are entirely digital. Examples are Facebook, YouTube, Dropbox, PayPal, WhatsApp, LinkedIn and Spotify.
Digital pure plays selling physical offerings also compete largely or exclusively online, but provide physical products or services to customers. The interactions of these businesses are strictly digital however. Digital pure plays sell physical offerings, but do not take ownership of physical products or services and do not engage in physical order fulfilment themselves. These businesses act as intermediaries that connect buyers and sellers. They generate sales through their website (for which they get commission, for instance) and make use of partnerships and extensive outsourcing to deliver the physical offerings to customers (or a similar business model). Examples of such businesses are eBay, Alibaba, Gumtree, OLX, AirBnB, Uber, Groupon and Kickstarter.
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Chapter 2: Strategy Formulation: Generic Strategic Options and Choices
Hybrid e-businesses compete online, but partake in physical activities and order fulfilment in addition to their digital activities. Typical hybrid businesses are e-retailers such as Amazon, Takealot, Rubybox, Geekfuel and Zappos. These businesses make use of the Internet as a customer interface and sell physical products (that they own) through their website. Hybrids do not have physical stores, but require warehouses, inventory, order fulfilment systems and so forth to do business.
Lastly, physical pure plays are “brick-and-mortar” businesses that sell physical products and services. These businesses have physical stores and make use of traditional physical supply chains. Examples are Woolworths, Checkers, Exclusive Books and McDonald.
Yet the line that distinguishes hybrid e-businesses from physical pure plays is becoming increasingly blurred. Typical hybrid e-businesses only possess an online customer interface. The newer tech-enabled brick-and-mortar businesses, on the other hand, are providing customers a multi-channel choice of either a physical shopping experience (through their physical outlets) or a digital shopping experience (through their e-commerce websites). By their very nature, these businesses remain brick-and-mortar businesses however, as they would still be able to function via their physical channels even if the Internet did not to exist. Important in this discussion is the realisation that these orientations exist along a relative digital–physical continuum. What this continuum implies is that though a broad definition for each orientation exists, the boundaries separating them are somewhat malleable. Stated differently, businesses of the same basic digital–physical classification can be more digital or more physical relative to one another.54
The power of a business’s digital–physical orientation lies not in the classification, but in the purposeful consideration and explicit choice of the type of offering that will be delivered to customers and how these offerings will be made available. Considering the business from this perspective could entirely reframe the business and highlight new possibilities for how the business could function. Some of the characteristics that distinguish between the orientations are outlined in Table 2.7.
Important questions to consider when choosing an orientation are:
• Which type of offering do our customers require? • Which of these orientations is the most efficient at delivering offerings that our customers require? • Which of these orientations will give our business the most traction? • Given our available resources, skills and partner network, which of these orientations do we have the highest
chance of successfully executing?
Finally, a business’s digital–physical orientation is not necessarily a fixed choice and it is possible that a business’s orientation may shift in order to meet customer demands over time.
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Navigating strategic possibilities
Table 2.7: Digital–physical orientation choices fundamental characteristics55
Digital pure play selling digital offerings
Digital pure play selling physical offerings
Hybrid e-business Physical pure play
Orientation definition
Sells digital products online, usually by employing an e-commerce interface.
Sells physical products online, but interactions remain digital. Digital pure plays selling physical products do not take ownership of products and do not partake in physical order fulfilment.
Sells physical products online and partakes in physical order fulfilment.
Sells physical products offline via brick-and- mortar stores.
Ease of business development
Typically less difficult. Website development and programming can prove challenging, but automated services reduce operating complexity.
Typically less difficult. Website development and programming can prove challenging, but business difficulty is reduced by outsourcing physical functions.
Typically more difficult. Hybrids need to manage large, integrated physical value chains and these physical value-chain elements add complexity to the business.
Product, scale and formality-dependent. Informal trading on sidewalks is very easy. Building and managing an expansive network of physical stores is more difficult.
Cost of business development
Typically less expensive. Costs contingent on: • complexity of
e-business website/ platform developed
• inherent programming capabilities of start-up team
• web development tools and partnership opportunities available
Typically less expensive.56 Unlike hybrids, physical pure plays do not require inventory, warehouses, physical order fulfilment systems or labourers.
Typically more expensive. • Hybrids require
inventory, warehouses, physical order fulfilment systems and labourers.
• This translates into requiring higher start-up capital and leads to higher operating costs than pure plays of similar scale.57
• “Lean” (inexpensive) hybrids can be created; however they sacrifice many benefits (e.g. customer service) that customers may actually require.
Typically more expensive. • Physical pure
plays require physical outlets, warehouses, inventory, physical order fulfilment systems and labourers.
• This translates into requiring higher start- up capital and leads to higher operating costs than pure plays of similar scale.58
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Chapter 2: Strategy Formulation: Generic Strategic Options and Choices
Digital pure play selling digital offerings
Digital pure play selling physical offerings
Hybrid e-business Physical pure play
Distinguishing advantages
• Can capitalise on any and all of the benefits that the online medium provides: o Can provide
digital content instantly.59
o Can allow users to experience and test trial versions before purchasing the full offering.60
o Inherently global o Can reproduce
and distribute digital products at a near zero cost. 61 62 63
• Opportunity for.64
o Information as a source of value;
o Mass customisation;
o Economic principle of abundance.
• A cheaper version of hybrid e-businesses, however a lot of advantages are foregone by not taking ownership of products.65
• Reach as widespread as partnership network.
• Can provide a combination of online and offline products and services.66 This enhances choice and convenience and can possibly provide a better overall experience.
• Taking control of order fulfilment grants the opportunity to better control and affect customer interactions. In comparison to physical pure plays, hybrids can provide:67 o more enticing physical
product presentations; o more reliable
and standardised information about product characteristics and availability;
o quicker and more reliable delivery;
o a more favourable return policy.
• These latter three reduce uncertainty and instil greater trust.
• Hybrids can also better capitalise on: o economies of scale
(through bulk purchases);
o synergy effects (through bundling); and
o pricing flexibility.68
• Physical stores: o Provide
convenience to shoppers who enjoy a physical shopping experience.
o Are excellent sales channels.
o Provide products instantaneously without having to wait for delivery.
o Provide the opportunity for better customer service.
• Tech-enabled physical pure plays can provide a combination of online and offline products and services.69 This enhances choice and convenience and can possibly provide a better overall experience.
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Navigating strategic possibilities
Digital pure play selling digital offerings
Digital pure play selling physical offerings
Hybrid e-business Physical pure play
Typically suited to
Innovative entrepreneurs with good programming skills and deep IT knowledge.
Entrepreneurs with good programming skills and sales experience.70
• Incumbent retailers with a strong brand, installed customer base, established infrastructure, experience and scale in logistics.71
• Entrepreneurs with experience in retail and logistics.
• Incumbent retailers with a strong brand, installed customer base, established infrastructure, experience and scale in logistics.72
• Entrepreneurs with experience in retail and logistics.
Largest challenges
• Creating innovative offerings that customers will pay for.73 74
• Staying ahead of competitors in the innovation game.
• Combating piracy. 75
• Building strong partnership networks and negotiating with partners.
• Reducing buyer apprehensiveness.76
• Reducing and off-loading logistical costs. Customers are not willing to pay significantly more for an online offering than an offline one,77 and odd product geometries are difficult to assemble, pack and ship, which incurs extra costs.78
• Increasing “basket” value.79
• Reducing buyer apprehensiveness.80
• Staying relevant in an increasingly digital world. o Customers
increasingly demand online sales channels and delivery, forcing offline retailers into new areas of business. This requires additional capital expenditure.
o Competing against digital products and services that are simply cheaper or superior online.
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Chapter 2: Strategy Formulation: Generic Strategic Options and Choices
Digital pure play selling digital offerings
Digital pure play selling physical offerings
Hybrid e-business Physical pure play
Core strategies • Seek trade-offs between the Internet and traditional approaches, where only an Internet model offers real advantages.81 This occurs when: o Customer’s
needs are best met online;
o Product or service can be best delivered through an online channel and does not require physical assets.
• Resellers o Focus on
particular product categories, enabling the provision of expertise and enhanced choice to customers. Also target popular or unique brands that are in high demand.
o Build strong partnership networks.
o Cultivate secondary revenue streams.82
• Other intermediaries: o Identify niches
in which to be a category killer.
o Devise ways to collaborate, co-create and capitalise on the sharing economy in the physical world.
• Build huge scale to sufficiently “dissipate” high operating costs.83 84 Building a large physical value chain is enormously expensive, however.
• Focus on niche product categories, hard-to- bring-home products and expensive products as these reduce customers’ sensitivity to fulfilment costs, have higher profit margins and lower customer acquisition costs85 as customers typically seek out these companies instead of vice versa. The paradox, however, is that it is these high basket-value items that customers are especially apprehensive of buying online.86
• Eliminate physical activities to improve profit margins.87
• Seek trade-offs between physical and Internet approaches, where only the physical model offers real advantages. This occurs when: o The nature of
the offering is inherently physical (primary sector).
o Customer’s needs are best met via an offline, physical experience (playing Paintball vs playing Counterstrike; seeing a band live vs watching a YouTube video).
o Product or service can be best delivered through an offline channel.
Industry-based strategic style choices
Organisations are classified into different industries based on the nature and type of activity the business engages in to produce value for customers. Industries differ from each other on numerous dimensions, e.g. the oil industry and the Internet and software industry pose vastly different challenges and opportunities. These divergent patterns lead to the argument that organisations that operate in such dissimilar competitive environments should be planning, developing, and deploying their strategies in markedly different ways.88
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Navigating strategic possibilities
H ow
p re
di ct
ab le
is th
e en
vi ro
nm en
t?
How much power do you or other have to influence the industry?
Can’t change industry Can change industry
Industry is predictable
Industry is unpredictable
ADAPTIVE STRATEGY
If your industry is unpredictable and you can’t
change it
SHAPING STRATEGY
If your industry is unpredictable but you can
change it
VISIONARY STRATEGY
If your industry is predictable and you can
change it
CLASSICAL STRATEGY
If your industry is predictable but you can’t change it
Industry-Based Strategic Style Options
Figure 2.17: Industry-based strategic style options91
Reeves, Love and Tillmans89 developed a framework that divides strategy-making into four styles according to how predictable your environment is and how much power you have to change it. “Using this framework, corporate leaders can match their strategic style to the particular conditions of their industry, business function, or geographic market”.90 The choice of the strategic style an organisation adopts starts with the assessment of the industry it operates in. In assessing an industry two primary factors can be used: predictability (how far into the future and how accurately can you confidently forecast demand,
corporate performance, competitive dynamics, and market expectations?) and malleability (to what extent can you or your competitors influence those factors?). The different strategic styles based on this classification are: classical, adaptive, shaping, and visionary – see Figure 2.17.
A classical strategy style is appropriate when an organisation operates in an industry that is predictable but it is difficult to change the industry. Classical strategies are associated with mature industries such as the oil industry. In the classical strategy approach strategy analysts and planners invest time and effort to develop detailed perspectives on the long-term economic factors relating to demand and the technological factors relating to supply. These analyses inform future possibilities in upstream and downstream value chain activities with a 5–10-year planning horizon. This information is used in multi-year financial forecasts, which informs annual targets that are focused on improving efficiencies required to sustain the organisation’s market position and performance. When extraordinary events like a war, natural disasters or external shocks occur, strategic plans are revised given a changing operating context. A classical strategic approach works for organisations in an industry where the most attractive positions and the most rewarded capabilities today will, in all likelihood, remain the same tomorrow.
An adaptive strategy style is required when an industry is exposed to constant changes and persistent unpredictability in the environment due to global competition, technological innovation, social feedback loops, and economic uncertainty. An adaptive strategy style entails a constant refinement of goals and tactics by shifting, acquiring or divesting resources fast on an ongoing basis. Planning cycles are shorter and may shrink to less than a year or even become continual. Plans are not detailed blueprints but contain rough hypotheses based on the best available data. Continuous feedback is important to validate assumptions. An example of this type of industry is specialty fashion retail, such as Zara who use their flexible supply approach to adapt to new fashion trends and customer taste demands. They focus continuously on changes in the fashion industry to frequently produce, roll out, and test a variety of products as quickly as they can, constantly adapting production in the light of new learning.
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Chapter 2: Strategy Formulation: Generic Strategic Options and Choices
A shaping strategy style is aligned with industries where the barriers to entry are low, innovation rates are high, demand is very hard to predict, and the relative positions of competitors are in flux. A mature industry that’s similarly fragmented and not dominated by a few powerful incumbents, or is stagnant and ripe for disruption, is also likely to be similarly malleable.92 The focus here is to shape the unpredictable environment to your organisation’s own advantage before someone else benefits. Like an adaptive strategy, a shaping strategy embraces short or continual planning cycles.
A visionary strategy style is the arena of entrepreneurs and innovators who see a future landscape and mobilise decisive actions to realise the associated opportunities. A visionary strategist considers the environment not as a given but as something that can be moulded to create a competitive advantage. Visionary strategists must have the courage to stay on track towards a vision and need to ensure that the required resources are mobilised. United Parcel Service (UPS) grasped the opportunity early to become the “the enablers of global e-commerce.”93
Note: In their 2015 book,94 Reeves and his colleagues from BCG added a fifth strategic style to the strategy palette which they called a renewal strategy approach. It is an underlying option to all four styles as described above. A renewal strategy option is appropriate in organisation turnarounds to restore the financial sustainability of a business. A summary of the five strategy styles is shown in Table 2.8.
Table 2.8: Summary of industry-based strategy styles and approaches
Key elements Classical Adaptive Visionary Shaping Renewal
Core idea Be big Be fast Be first Be the orchestrator
Be viable
Indicators of this approach
• Low growth • High
concentration • Mature
industry • Stable
regulation
• Volatile growth • Limited
concentration • Young industry • High
technological changes
• High growth potential
• White spaces, no direct competition
• Limited regulation
• Fragmentation • No dominant
player platform • Shapeable
regulation
• Low growth, decline, crisis
• Restricted financing
• Negative cash flows
How Analyse, plan, execute
Vary, select, upscale
Envisage, build, and persist
Engage, orchestrate, evolve
React, economise, grow
Measure of success
• Scale • Market share
• Cycle time • New product
vitality index
• First to market • New user
customer satisfaction
• Ecosystem growth and profitability
• Cost savings • Cash flow
Key traps Overapplication Planning the un-plannable
Wrong vision Overmanaged ecosystem
No second phase
#
&
Application tool
Use the examples and summary of industry-based strategic styles reflected in Figure 2.18 and Table 2.8 to choose and motivate an appropriate strategy option for an organisation. Also indicate the implications for operational aspects and business model features.
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Navigating strategic possibilities
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Figure 2.18: Examples of industry-based strategic style options95
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Chapter 2: Strategy Formulation: Generic Strategic Options and Choices
Strategic posture options
The SPACE (Strategic Position and Action Evaluation) matrix is an approach to determine the appropriate strategic posture for an organisation.96 The strategic posture options of an organisation are determined by the combination of two internal and two external dimensions. The internal dimensions are financial strength (FS) and competitive advantage (CA) and the external dimensions are environmental stability (ES) and industry strength/attractiveness (IS). By combining ratings on each dimension on one SPACE matrix diagram, the results guide the future strategic agenda of an organisation by indicating four strategic posture options: aggressive, competitive, conservative or defensive. These strategic posture options guide the further strategic thrust of an organisation.
The aggressive posture is typical of an attractive industry with stable economic conditions. Financial strength enables an organisation with this strategic posture to maintain its competitive position. An organisation in this position takes full advantage of industry growth, merger and acquisition opportunities and allocates the required resources to reap potential benefits.97
A competitive posture is associated with an attractive industry in a relatively unstable environment. This position is associated with a competitive advantage for an organisation which enables an increase in investments in marketing and sales as well as an extension of product lines. Productivity improvements and cost-cutting could also be on the agenda of organisations with this posture to improve the financial health of the organisation.98
A conservative posture is distinctive of a low-growth but stable market. Product competitiveness is the key factor to sustain financial stability. Strategic responses for organisations with this strategic posture option are product line rationalisation or new product expansions, cost-efficiency improvements, cash flow improvements or seeking more attractive markets to enter.99
A defensive posture is based on an unattractive industry where competitiveness is the critical factor. An organisation in this position usually lacks a competitive product and financial strength. Organisations in this posture could consider discontinuing marginal product lines, cost-cutting initiatives, divestments and retreat from the market.100 A summary of the four strategic posture options for an organisation is reflected in Table 2.9.
Table 2.9: Characteristics of different strategic postures101
Dimensions Aggressive Competitive Conservative Defensive
Environment Industry Competitiveness Financial strength
Stable Attractive Strong High
Unstable Attractive Strong Weak
Stable Unattractive Weak High
Unstable Unattractive Weak Weak
Potential strategic responses
• Growth, including M&As
• Capitalise on opportunities
• Innovate to sustain competitive advantage
• Cost reduction, productivity improvement, raising more capital to use opportunities and strengthen competitiveness
• Possibly merge with a less competitive rival with cash
• Cost reduction, product/service rationalisation
• Invest in new search for new products, services and competitive opportunities
• Rationalisation • Divestment as
appropriate
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Navigating strategic possibilities
The main position on the SPACE matrix for the four strategic posture options is reflected in Figure 2.19.
SPACE: Strategic position & action evaluation C
om pe
ti ti
ve a
dv an
ta ge
Environment
(High)
(High)
(High)
(Low)
Industry attractiveness
Financial Strength
(Low) (Low)
(Stable)
(Turbulent)
“Conservative” “Aggressive”
“Competitive” “Defensive”
ES
IA CA
FS
ES
IA CA
FS
ES
IA CA
FS
ES
IA CA
FS Conservative Aggressive
Competitive Defensive
Figure 2.19: Strategic posture positions in the SPACE matrix102
Practical guideline
Step 1: For an organisation that you have done a strategy analysis on and that you know well, evaluate the strength of each dimension using the questions and scale in Table 2.10.
Table 2.10: Dimensions and key factors in SPACE matrix
Factors determining Competitive Advantage (CA)
Market share Product quality Brand and image Control over suppliers and distributors
Small Inferior Low Low
-6 -5 -4 -3 -2 -1 -6 -5 -4 -3 -2 -1 -6 -5 -4 -3 -2 -1 -6 -5 -4 -3 -2 -1
Large Superior High High
Factors determining Industry Strength/Attractiveness (IS)
Barriers to entry Technological know-how Capital intensity Profit potential
Easy Simple High Low
1 2 3 4 5 6 1 2 3 4 5 6 1 2 3 4 5 6 1 2 3 4 5 6
Difficult Complex Low High
Factors determining Financial Strength (FS)
Leverage Liquidity Cash flow Return on assets
Imbalance Imbalance Low Low
1 2 3 4 5 6 1 2 3 4 5 6 1 2 3 4 5 6 1 2 3 4 5 6
Balanced Balanced High High
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Chapter 2: Strategy Formulation: Generic Strategic Options and Choices
Factors determining Environmental Stability (ES)
demand variability barriers to entry into market price elasticity of demand price range of competing products
large few elastic wide
-6 -5 -4 -3 -2 -1 -6 -5 -4 -3 -2 -1 -6 -5 -4 -3 -2 -1 -6 -5 -4 -3 -2 -1
small many inelastic narrow
Note: For simplicity only four factors per dimension are used.103
Step 2: Determine the average score per factor. Table 2.11 gives an example of the application of this step in a case study organisation.
Table 2.11: Case study average score per dimension
Average score per dimension
Competitive advantage
market share small -6 -5 -4 -3 -2 -1 large product quality inferior -6 -5 -4 -3 -2 -1 superior
brand & image low -6 -5 -4 -3 -2 -1 high control over suppliers & distributors low -6 -5 -4 -3 -2 -1 high
Average -1.75 Industry strength
barriers to entry easy 1 2 3 4 5 6 difficult technological know-how simple 1 2 3 4 5 6 complex capital intensity high 1 2 3 4 5 6 low profit potential low 1 2 3 4 5 6 high Average 4.00
Financial strength leverage imbalance 1 2 3 4 5 6 balanced liquidity imbalance 1 2 3 4 5 6 balanced cash flow low 1 2 3 4 5 6 high return on assets low 1 2 3 4 5 6 high Average 4.25
Environmental stability
demand variability large -6 -5 -4 -3 -2 -1 small barriers to entry into market few -6 -5 -4 -3 -2 -1 many price elasticity of demand elastic -6 -5 -4 -3 -2 -1 inelastic price range of competing products wide -6 -5 -4 -3 -2 -1 narrow Average -2.75
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Navigating strategic possibilities
Step 3: Plot the values from step 2 for each dimension on the SPACE matrix on the appropriate axis and add the average score for competitive advantage (CA) and internal strength (IS) dimensions. This will be your final point on the X axis on the SPACE matrix. Also add the average scores for financial strength (FS) and environmental stability (ES) to find your final point for the Y axis. Find the intersection points for your X and Y axis points. Draw a line from the centre of the SPACE matrix to your point. This line reveals the type of strategic posture the organisation should consider with the associated strategic agenda items.
See the case study example in Table 2.12 for the application of the above steps.
Table 2.12: Case study values for X and Y axis
Values for X and Y axis
Internal strategic position External strategic position
X A
xi s
Competitive advantage Industry strength
market share product quality brand & image control over suppliers & distributors average
-1.00 -2.00 -2.00 -2.00 -1.75
barriers to entry technological know-how capital intensity profit potential average
5.00 5.00 2.00 4.00 4.00
A Total axis X score 2.25
Y A
xi s
Financial strength Environmental stability
leverage liquidity cash flow return on assets average
4.00 4.00 5.00 4.00 4.25
demand variability barriers to entry into market price elasticity of demand price range of competing products average
-2.00 -2.00 -5.00 -2.00 -2.75
Total axis Y score 1.50
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Chapter 2: Strategy Formulation: Generic Strategic Options and Choices
SPACE: Strategic position and action evalution
C om
p et
iti ve
a d
va nt
a g
e
Environment
(High)
(High)
(High)
(Low)
Ind ustry a
ttra ctiveness
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“Conservative” “Aggressive”
“Competitive” “Defensive”
-1
-2
-3
-4
-1 -2 -3 -4
3
2
1
4
2 1 3 4
Figure 2.20: Case study strategic posture position on SPACE matrix
The SPACE matrix is a useful framework to add content to the second-level generic strategic choices of an organisation (see Figure 2.8). By evaluating an organisation’s position on the SPACE matrix, possible future strategic imperatives can be established.
Foreign market entry options
The last generic strategic option combination we explore is foreign market entry alternatives. This is part of the international strategy agenda options of an organisation. In this part we discuss the following market entry modes to assist the footprint expansion strategy: exporting; licensing and contract manufacturing; franchising; joint ventures and strategic alliances; acquisitions; foreign branches; and wholly owned subsidiary/greenfields ventures.
To grow organisations continuously to increase the potential for more financial success is an ongoing challenge for business leaders. There is always a time in the development of an organisation when current local markets become saturated and the need to expand the organisation beyond the local geographical boundaries of the entity becomes a reality. Apart from choosing potential new growth markets through fact-based and data-driven information reviews, there are various options in the key questions about how this market entry should be thought about and what form it should take. The characteristics associated with these different entry modes are shown in Table 2.13.
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Navigating strategic possibilities
Table 2.13: Modes of entry into foreign market and associated features104
Entry mode Key characteristics
Exporting High cost, low control
Licensing, contract manufacturing and franchising
Low cost, low risk, limited control, relatively low returns
Strategic alliances/Joint ventures Shared cost, shared resources, shared risks, challenge of alignment of interest
Acquisitions Relatively fast access to market, high cost, complex negotiations, challenge to merge local operations
New wholly owned subsidiary/Greenfields
Complex, high cost, time-consuming, high risk, maximum control, potential for positive returns
Prof. Jean-Louis Schaan from the Ivey Business School at Western University in Canada developed a typology for new market entrance based on how easy or difficult it is to enter a foreign market and how close or distant the culture in the host country is from that of the country of the entering organisation. This view is reflected in Figure 2.21.
Easy to Enter Difficult to Enter
Cultural Close
Cultural Far
Greenfields
Joint Ventures
Acquisitions
Franchising
Figure 2.21: Options for foreign market entry105
Exporting refers to the international trade of goods and services that are shipped from an exporting company in one country to an importing company in another country.106 The essence of this approach is to maintain a national in-country production base and to export goods to foreign markets using either company-owned or foreign- controlled forward distribution channels. The strategic sweet spot in exporting is to find markets that accept your product standards. This allows exporting of standard products into a new foreign market. Apart from marketing and distribution investments, exporting does not require additional capital and the organisation maintains control over quality. The disadvantages of exporting relate to lower control over the marketing and distribution of products in the host country and the challenges in providing customised products for each international market. Governments also make available export incentive schemes to local organisations to boost foreign currency inflows. Interesting
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Chapter 2: Strategy Formulation: Generic Strategic Options and Choices
to note is that research indicates that cost leadership strategies enhance the performance of exports from developed countries and that differentiated strategies are more successful in emerging economies.107 Exporters usually first target markets close to their home country to learn how the process works and to prevent logistical cost being too high.
Licensing and contract manufacturing represent a formal contractual arrangement between parties where a foreign company purchases the right to manufacture and sell the local firm’s products within a host country or a set of countries. Licensing involves the transfer of some industrial property rights from the licensor to a licensee in exchange for royalties or other income arrangements. The investment in new manufacturing and distribution capacity in foreign territories is made by the licensee. This makes licensing a very low-cost international strategy option. The risk in licensing is the ability of the licensor to gain learning experience benefits to become a competitor after the contract expires, as well as the loss of control over production, marketing and distribution of the product. Many software and pharmaceutical companies use licensing strategies. Franchising represents a special form of licensing. In this case the licensee allows the franchisee through a contractual arrangement to use the brand, products, operating practices and marketing strategies in a defined (foreign) market. In exchange the franchisee pays fees to the parent company based on sales volume. The franchise is operated by local investors who must comply with the franchisor polices. A franchise option is relevant when the host country is culturally far from the country of the franchisor and it is relatively easy to enter the market. McDonald’s is leading the world growth through franchising.
Strategic alliances and joint ventures are formal collaborative arrangements between two or more entities with the intent to achieve mutually beneficial outcomes. These benefits can be to share risks, resources and the creation of new core competences in a host country (see chapter 7 for more detail on inorganic growth strategies). The mutual agreement on pooling of resources can include capital, production, marketing and management expertise, patents and trademarks. Trust between the partners is critical for venture success and the management of expectations needs ongoing attention. Research indicates that trust is also influenced by the different country cultures of the alliances and venture partners.108 Incompatibility and conflict between partners are the major reasons why alliances and joint ventures fail. A joint venture is an appropriate option when the market is difficult to enter and the culture of the foreign target country is far from the entering organisations’ local country culture. Research also indicates that when country risks are high, firms prefer to enter with joint ventures to manage the risks.109
Acquisitions refer here to buying a company in a foreign country. Cross-border acquisitions are a strategic option due to free trade that drives the continued expansion of global markets. Acquisitions are a quick way to get access to new markets. Acquisitions of assets in foreign countries can be expensive and the negotiations can be complex and time- consuming. Governing within the legal and regulatory requirements of the host country and post-acquisition culture and operating practices alignment is part of the challenge110 (also see chapter 7 for more on M&As). Acquisitions are an option when the two country cultures are close and it is difficult to enter the market.
A Greenfields venture involves the creation of a new wholly owned subsidiary, and in the context of foreign market entry options, in a foreign country. The process of creating such a venture is often complex, risky and potentially costly. However, it has benefits like full control of operations and potential for above-average returns. Wholly owned subsidiaries are relevant especially when proprietary technology is involved or when specialised knowledge and customisation are required.111 Greenfield ventures assist firms to maintain control over their proprietary systems. Greenfield ventures are appropriate when it is relatively easy to enter a foreign market and the culture is close to that of the home country.
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Navigating strategic possibilities
Apart from choosing the appropriate foreign market entry option, the choice of which country to enter is a major strategic decision. Guidelines on how to make this decision include many variables. As a first-cut view, the approach of Justin Letschert, CEO of Bio-Oil – a product of Union-Swiss (Pty) Ltd in Cape Town – to identifying top potential foreign target market countries is reflected in Figures 2.22 and 2.23. Please note the figures present 2008 as a baseline. Bio-Oil is a South African product in the specialist skincare oil category. Bio-Oil has won 253 skincare awards and has become the No.1 selling scar and stretch mark product in 20 countries since its global launch in 2002.112
Internationalisation: Taking a local brand to the global arena
Which Country to target?
Figure 2.22: Potential target countries based on GDP per capita113
Source: Justin Letschert, 2008. Taking a local brand to the global arena: Lessons from an SA entrepreneur. USB Leader’s Angle, 27 June.
Internationalisation: Taking a local brand to the global arena
Highest combined GDP/capita and population score
W hi
ch c
ou nt
ry to
ta rg
et ?
Figure 2.23: Potential target countries based on GDP/capita and population114
Source: Justin Letschert, 2008. Taking a local brand to the global arena: Lessons from an SA entrepreneur. USB Leader’s Angle, 27 June.
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