Transcription Strategic Leadership “Business Strategies” Lecture by Dr. Robert Wiseman, PhD
Hello. This is Competitive Strategy and in this segment we’re going to be looking at different business strategies.
As Michael Porter has once said, “Any strategy is better than no strategy.” And yet some firms don’t appear to have a strategy.
The role of strategy is combined with the firm’s competitive advantage to create value. Essentially, strategy is how firms utilize the capabilities and resources that it has to create value in a way that is perceived by consumers and customers.
The two strategies, low cost leadership and differentiation, are the primary strategies and we will discuss them in more detail later. But these two strategies can also be broken down into broad market targets or narrow targeted markets.
Broad markets are you trying to sell the same product to pretty much everyone. In other words, like soft drinks. They’re pretty much targeted to everybody who might enjoy a beverage.
But some products are targeted to a narrower audience. They’re designed specifically to satisfy the needs of a small segment of the market focused on certain needs, and those products obviously are called niche products and they still may be low cost in terms of, for example, the dollar store. Or they may be focused on providing certain types of differentiation, for example, Neiman Marcus.
But some companies try to integrate both low cost and differentiation. An example of that is Southwest Airlines. They’re largely a low priced airline but they do add differentiation to their product in the sense of fun.
If you’ve ridden on a Southwest Airlines flight, you’ll note that the flight attendants and the staff at the desk, and throughout, try to inject a certain amount of levity and fun into this rather terrible process of flying by air.
Anyone who’s been flying in the last 10 years knows that airline travel is not fun. And yet what they do without adding much expense, in fact probably no expense, is try to create some levity while you’re on the plane.
For example, they might say when the plane lands, “Hooray we’ve made it” or something, or they might have, they might engage the plane in singing Happy Birthday to somebody whose birthday is on the plane.
These are fairly inexpensive or no cost ways of trying to add a little bit of differentiation to what is essentially a very low priced service.
But some of the caution against integrating low cost and differentiation. Integrating these two may lead several strategy to involve compromises, trying to do both at the same time. And the risk is that firms may become what is called stuck in the middle, lacking a strong commitment to either the expertise or either, to creating true low cost or low pricing or true differentiation.
An alternative view of hybrid strategies is to look at a dimension in which on one side firms focus mostly on product leadership through innovation and research and development. And on the other extreme, we look at operational excellence. We’re looking at trying to create the most efficient deliverer of value as opposed to the product leadership side which is trying to create new value through research and development.
We can explore this, the effect of these two strategies and firms that try to balance them, by looking at the profit margins that they exhibit. For example, research has suggested that firms that balance the two, product leadership and operational excellence, actually have lower margins than firms who specialize in one side or the other, with operational excellence having a slightly higher profit margin; which is to be expected, since operational excellence leads to greater efficiencies, while product leadership requires a certain amount of investment in research and development, which has certain risks attached to it. Some technologies may or may not achieve market dominance.
We can also look at survival rates of the firms in both who specialize either in product leadership or operational excellence or try to balance the two.
In this case we find the opposite. Firms that are really hybrids of product leadership and operational excellence have much higher survival rates than firms who specialize in either area.
One of the explanations for this is that those firms that are balanced in the middle are able to adjust, moving towards product leadership or operational excellence more easily than firms that are already stuck on one side as environments change.
For example, an industry which is, let’s say, dominated by operational excellence, but new players in the game change the product design, in other words product leadership becomes a more important aspect to winning in this industry, firms that are in that middle position of a hybrid are more easily, can more easily, move towards product leadership than firms that have emphasized operational excellence.
Framing strategy, there’s a variety of questions one should ask in deciding what strategy you want to pursue.
For example, what arenas do you want to play in? This question asks which product categories, which market segments, which geographic areas do you want to offer products in? What kinds of products? What kinds of customers are you looking at? This is an important question to determining the boundaries of your strategy.
Second, how will you win in those markets? How are you distinguishing and differentiating your product from the competitors that may already be in that industry and the new competitors that will later enter that industry?
Are you differentiating on image, on price, on styling, on service? What is it that really distinguishes your product and service from your competitors?
Next, how will you enter the industry? What internal development? Is it through joint ventures, by acquiring other businesses? Is it internally developing new products and services that allow you to enter these other industries? Are you licensing or franchising your products or services into let’s say new geographic or global markets? What vehicle are you using to enter these new markets wherever they might be?
And lastly, staging. What will be the speed at which you enter these markets? Are you expanding quickly or are you taking your time and expanding incrementally over regions? What is the process by which you’re adding new markets or new products or new technologies to your company?
Answers to these questions are combined to create the economic logic of your business, which is how the returns will be generated.
Are we doing this through low cost via scale or low cost via scope? Are we premium pricing via service or are we premium pricing via product design?
This is the thing, the economic logic that drives and coordinates the answers to these fundamental questions for the strategy of your business. A good strategy then should state the strategy's objectives, not just a mission statement, but what must be accomplished.
It should also include the scope of the strategy. What products, markets, regions, customers are really being pursued?
And the value proposition you’re offering in the marketplace. What is the value being created and offered? This reflects the firm’s competitive advantage in the marketplace. What is distinct about your company’s products and why will customers buy them? What commitments allow your company to deliver on this promise?
Distinguishing a good strategy from a bad strategy involves several questions. The first is; is it internally consistent? And, that is if you’re trying to be a low cost provider but yet trying to differentiate on things that add cost, that’s inconsistent.
My Southwest Airlines example was a way in which they found to provide low cost service and yet distinguish themselves on the atmosphere and how they treated passengers.
Is it feasible? Do you have the resources, the capabilities, the skills necessary to carry out the strategy? This is often a question that gets ignored by people who are not familiar fully, and can fully appreciate what the firm can do and what it cannot do, or what is necessary to make the strategy work.
Is it consonant with the environment? Are you in a sense trying to swim upstream, or do you recognize the environmental trends that are occurring within your industry and where it’s going? And are you matching your strategy to recognize those trends, whether they’re technological trends or regulatory trends or even social and consumer trends?
And does your strategy provide advantage? If it does not provide an advantage over your competitors, why are you doing it?
This is critical. Many firms will try to engage a strategy and fail to recognize the importance of whether that strategy is achieving an advantage over their competitors and the products and the services and the value proposition than it offers.
In this chart we look at the perception of strategic alignment among the various parts of a strategy. This is a survey done of executives on various aspects to determine whether the people, the processes, the systems, or the projects of the company were in alignment with the strategy.
What we have here are the percentages of people who said it was very much or to some extent in alignment with the strategy. For example, executives responded that 7% thought it was strongly in alignment and 52% said it was somewhat in alignment.
And for processes, most people said it was in alignment. Systems, 55% said it was at least somewhat in alignment and projects mostly were in alignment.
But what this also meant was there were 41% of the people were not in alignment with the strategy; 25% of projects were, processes were not in alignment with the strategy; 45% of systems and 21% of projects were mostly or completely unaligned with the strategy.
Achieving a competitive advantage then, you must ask questions. Why should customers buy? What is the distinctive nature of your product? What commitments allow you to deliver on that promise?
A good strategy statement then includes the objectives you’re trying to achieve, the scope of your product and services and the value proposition that you’re offering the customer.
Strategies then are important to winning in the game. Battles are dangerous. Better to win by strategy and outmaneuvering your competitors through the value proposition that you offer.