StrategicMarket Management—An IntroductionandOverview
Plansarenothing,planningiseverything.
DwightD.Eisenhower
Evenifyouareontherighttrack,you’llgetrunoverifyoujustsitthere. WillRodgers
Ifyoudon’tknowwhereyou’regoing,youmightendupsomewhereelse. CaseyStengel
Allmarketstodayaredynamic.Changeisintheaireverywhere,andchangeaffectsstrategy. Awinningstrategytodaymaynotprevailtomorrow.Itmightnotevenberelevanttomorrow.
Therewasatime,nottoomanydecadesago,whentheworldheldstilllongenoughfor strategiestobeputintoplaceandre fi nedwithpatienceanddiscipline.Theannualstrategicplan guidedthe fi rm.Thatsimplyisnolongerthecase.Newproducts,productmodi fi cations, subcategories,technologies,applications,m arketniches,segments,media,channels,andon andonareemergingfasterthan everinnearlyallindustries fromsnackstofastfoodto automobilesto fi nancialservicestosoftware.Multipleforcesfeedthesechanges,including digitaltechnologies,theriseofChinaandIndia,trendsinhealthyliving,energycrises,political instability,andmore.Theresultismarketsthatarenotonlydynamicbutrisky,complex,and cluttered.
Suchconvolutedmarketsmakestrategycreationandimplementationfarmorechallenging. Strategyhastowinnotonlyintoday’smarketplacebutalsointomorrow’s,whenthecustomer,the competitorset,andthemarketcontextmayallbedifferent.Inenvironmentsshapedbythisnew reality,some firmsaredrivingchange.Othersareadaptingtoit.Stillothersarefadingintheface ofchange.Howdoyoudevelopsuccessfulstrategiesindynamicmarkets?Howdoyoustayahead ofcompetition?Howdoyoustayrelevanttothecustomer?
Thetaskischallenging.Strategistsneednewandrefinedperspectives,tools,andconcepts.In particular,theyneedtodevelopcompetenciesaroundsixmanagementtasks strategicanalysis, innovation,gettingcontrolofmultiplebusinessunits,developingsustainablecompetitiveadvantages (SCAs),anddevelopinggrowthplatforms.
Strategicanalysis. Theneedforinformationaboutcustomers,competitors,andtrends affectingthemarketisnowstrongerthanever.Furthermore,theinformationneedstobe continuousandnottiedtoaplanningcycle,becauseatimelydetectionofthreats,opportunities, strategicproblems,oremergingweaknessescanbecrucialtogettingtheresponseright.Thereis anenhancedpremiumontheabilitytopredicttrends,projecttheirimpact,anddistinguishthem frommerefads.Thatmeansresourcesneedtobeinvestedandcompetenciescreatedintermsof gettinginformation, filteringit,andconvertingitintoactionableanalysis.
Customervalue. Astrategythatfailstocreatecustomervaluehasnofuture.Thisvalue mustresonatewithasegmentofcustomersandoffermorebenefitsand/orlowercoststhan competitors.Creatingthatvalueforcustomersandensuringthatcompanypro fitsfromitover timearecentraltasksinstrategy.
Innovation. Marketsevolveandcompetitorsimitatecustomervalue.Therefore,itis importantthatthecompanycreatesnewsourcesofvalueovertime.Theabilitytoinnovateiskey towinningindynamicmarketsasnumerousresearchstudieshaveshown.Innovation,however, turnsouttohaveahostofchallenges.Thereistheorganizationalchallengeofcreatingacontext thatsupportsinnovation.Thereisthebrandportfoliochallengeofmakingsurethatthe innovation fitsamongcurrentofferings.Thereisthestrategicchallengeofdevelopingtheright mixofinnovationsthatrangesfromincrementaltotransformationaltoensurethecompanycan maintainprofitswhilealsopreparingforthefuture.Thereistheexecutionchallenge;itis necessarytoturninnovationsintoofferingsinthemarketplace.Therearetoomanyexamplesof firmsthatownedaninnovationandletothersbringittomarket.
Multiplebusinesses. Itistherare firmnowthatdoesnotoperatemultiplebusinessunits definedbychannelsandcountriesinadditiontoproductcategoriesandsubcategories,countries, andproductcategories.Decentralizationisacentury-oldorganizationalformthatprovidesfor accountability,adeepunderstandingoftheproductorservice,beingclosetothecustomer,and fastresponse,allofwhicharegoodthings.However,initsextremeform,autonomousbusiness unitscanleadtothemisallocationofresources,redundancies,afailuretocapturecross-business potentialsynergies,andconfusedbrands.Achallenge,exploredinChapter16,istoadaptthe decentralizationmodelsothatitnolongerinhibitsstrategyadaptationindynamicmarkets.
Creatingsustainablecompetitiveadvantages(SCAs). Creatingstrategicadvantages thataretrulysustainableinthecontextofdynamicmarketsanddispersedbusinessunitsis challenging.Competitorsalltooquicklycopyproductandserviceimprovementsthatarevalued bycustomers.WhatleadstoSCAsindynamicmarkets?Onepossiblecornerstoneisthe developmentofassetssuchascustomerrelationships,brands,anddistributionchannels,or competenciessuchasdigitalmarketingskillsormarketinganalyticsexpertise.Anotheris leveragingorganizationalsynergycreatedbymultiplebusinessunits,whichismuchmore difficulttocopythanasinglenewproductorservice.
Developinggrowthplatforms. Growthisimperativeforthevitalityandhealthofany organization.Inadynamicenvironment,stretchingtheorganizationincreativewaysbecomesan
essentialelementofseizingopportunitiesandadaptingtochangingcircumstances.Growthcan comefromrevitalizingcorebusinessestomakethemgrowthplatformsaswellasbycreatingnew businessplatforms.
Thisbookisconcernedwithhelpingmanagersidentify,select,implement,andadaptmarketdrivenbusinessstrategiesthatwillenjoyasustainableadvantageindynamicmarkets,aswellas createsynergyandsetprioritiesamongbusinessunits.Theintentistoprovideconcepts,methods, procedures,andbestpracticecasestudiesthatwillleadtocompetenciesinthesesixcrucial managementtasks and,ultimately,tohigh-qualitystrategicdecisionmakingandprofitable growth.
Thebookemphasizesthecustomerbecauseinadynamicmarket,acustomerorientationis criticaltocompanysuccess.Thecurrent,emerging,andlatentmotivationsandunmetneedsof customersneedtoinfluencestrategies.Becauseofthis,everystrategyneedstohaveavalue propositionthatismeaningfulandrelevanttocustomers.
Thischapterstartswithaverybasicbutcentralconcept,thatofabusinessstrategy.Thegoalis tolendstructureandclaritytoatermthatiswidelyemployedbutseldomdefined.Itcontinues withanoverviewofthebalanceofthebook,introducingandpositioningmanyofthesubjects, concepts,andtoolstobecovered.Finally,theroleofmarketinginbusinessstrategyisdiscussed. Thereisasignificanttrendformarketingtohaveaseatatthestrategytableandtoseethechief marketingof ficer(CMO)asempoweredtocreategrowthinitiatives.
WHATISABUSINESSSTRATEGY?
Beforediscussingtheprocessofdevelopingsoundbusinessstrategies,itisfairtoaddress twoquestions.Whatisabusiness?Whatisabusinessstrategy?Clarifyingtheseconceptsisa necessarystarttowardawinning,adaptablestrategy.
ABusiness
Abusinessisanorganizationalunitwithadefinedstrategyandamanagerwithsalesandprofit responsibility.Theorganizationalunitcanbedefinedbyavarietyofdimensions,includingproduct line,country,channels,orsegments.Anorganizationwillthushavemanybusinessunitsthatrelate toeachotherhorizontallyandvertically.
Thereisanorganizationalandstrategictrade-offindecidinghowmanybusinessesshouldbe operated.Ononehand,itcanbecompellingtohavemanyunitsbecausetheneachbusinesswill beclosetoitsmarketandpotentiallycapableofdevelopinganoptimalstrategy.Thus,astrategy foreachcountryoreachregionoreachmajorsegmentmayhavesomebene fits.Toomany businessunitsbecomeinefficient,however,andresultinprogramsthatlackscaleeconomiesand failtoleveragethestrategicskillsofthebestmanagers.Asaresult,thereispressuretoaggregate businessesintolargerentities.
Businessunitscanbeaggregatedtocreateacriticalmass,torecognizesimilaritiesinmarkets andstrategies,andtogainsynergies.Businessesthathavesimilarmarketcontextsandbusiness strategieswillbecandidatesforaggregationtoleveragesharedknowledge.Anotheraggregation motivationistoencouragesynergiesamongbusinessunitswhenthecombinationismorelikelyto realizesavingsincostorinvestmentorcreateasuperiorvalueproposition.
Therewasatimewhen firmsdevelopedbusinessstrategiesfordecentralizedbusinessunits definedbyproduct,countries,orsegments.Thesebusinessstrategieswerethenpackagedor
aggregatedtocreatea firmstrategy.Thattimehaspassed.Therealsonowneedstobea firmstrategy thatidentifiesmacrotrendsandstrategyresponsestothesetrendsasa firm,allocatesresources amongbusinessunits,andrecognizessynergypotentials.Sothereneedstobeastrategyforthe FordcompanyandperhapstheSUVgroupaswellastheFordExplorer,amajorSUVbrand.
TheBusinessStrategy
Fourdimensionsdefineaneffectivebusinessstrategy:theproduct-marketinvestmentstrategy, thecustomervalueproposition,theassetsandcompetencies,andthefunctionalstrategiesand programs.ThesefourdimensionsaredepictedinFigure1.1.Tobeeffective,allfourelements shouldbebasedontheideaofcustomervalue.Thisfoundationdrivessubsequentdecisionsabout whereandhowtocompetetowin.
TheFoundationofCustomerValue
Acriticalfoundationofanystrategyistoensurethatthecompany’sactionsoffervaluetocustomers. Withoutofferingvalue,decisionsaboutwhereandhowtocompeteareunlikelytosucceed. Unfortunately “value” maybeoneofthemostoverusedandmisusedtermsinbusiness.Thusa “value” priceisoftenwronglyusedtomeanalowpriceorabundledprice.Low-pricedproductscan offercustomersexcellentvalue.However,equatingcustomervaluewithlowpriceobscuresthe morefundamentalrolevalueplaysinhowmarketsoperateandhow firmsmustcompete. Ultimately, customervalue isaboutthedifferencebetweenthebenefitscustomersperceive theyaregettingfromanofferingminustheperceivedcostofobtainingthesebenefits adjusted
fortheriskinessoftheoffering.Thinkaboutcustomervalueusingthefollowingapproach: CustomerValue [1 PerceivedRisk] [PerceivedBenefits PerceivedCosts].Thegreater theperceivedbenefitsand/orthelowertheperceivedtotalcostsand/orrisksofaproduct,the greaterthecustomervalueandthehigherthelikelihoodthecustomerwillchoosethatproduct. Eachcomponentwillnowbeexaminedindetail.
TheodoreLevitt,famouslyobserved “Peopledon’twanttobuyaquarter-inchdrill.Theywant aquarter-inchhole!” Perceivedbenefits aretheseoutcomesthatcustomersassociatewitha product,service,orrelationshipfromacompany.Whatpeoplewantfromacopieraremachine up-time,speedofthrough-putandprintquality,butcustomersalsomakechoicesbasedonthe qualityandspeedofcustomerservice.Whatpeoplewantfromavideogameisfun,excitement, andescape.
Customers’ perceivedcosts alsohavemanydimensions.Pricepaidisthemoststraightforward cost.However,examiningthefullrangeofcostscustomersincurintheirsearchfor,acquisition, anddisposalofproductsrepresenttotallife-cyclecosts.Inthepersonalcomputermarket,for example,thetotallife-cyclecostsincludeacquisitioncosts(comprisedofsearching,ordering, pricepaid,processing,receiving,andinstallingcosts),operatingcosts(notablyenergyconsumption),psychologicalcostsoflearninganewsystem,andmaintenanceanddisposalcosts(including thecostofsoftwareupgrades,technicalassistance,andrepairs).
Customerchoicesarealsoswayedbydifferencesin perceivedrisks betweenofferingsandthe companiesthatsellthem.Thedegreeofriskdependsonthebuyer’suncertaintyaboutthe answerstoquestionssuchas, “CanItrustthesupplier ’spromises?Willtheofferingperformas expected?Willthevendorstayaroundtosupporttheproductinthefuture?” Smallandnew companieswithunknownbrandnames,norecommendations,andlimitedtrackrecordsareata realdisadvantagebecauseperceivedriskssharplyoffsetthegainsfromanysuperiorperceived bene fits.
Leadersshouldbewaryofthesecommonstrategypitfallsinmanagingforcustomervalue:
First,attributesdonotreplacebenefits.Attributesaretheproductorservicefeaturesthat thecompanyofferstothecustomer thequarter-inchdrill.Thebenefitiswhatthe customergets thequarter-inchhole andanyotherneedsthataremetbythehole. EventhoughmanagersseemtoendorseLevitt’spowerfulinsight,mostproceedtoignore themessage.Insteadtheysegmenttheirmarketsbyproductattributes(typeofdrill, power,pricepoint,etc.)orcustomerdemographics,ratherthanfocusingonhowtheyare meetingcustomerneeds.
Second,withinmarkets,customersvaryintheiremphasisoncertaincostsandbenefits. Somesegmentsofvideogamecustomerswanthigh-techperformancefeaturesinagame thatmakeitmorerealisticorfuturistic,suchasRiseofTombRaider,GrandTheftAuto, orMetro:LastLight;othersegmentswanttopersonalizecharactersandtheexperience suchasinWorldofWarcraftandMinecraft.Thenatureofthecostsdependsonthe customersegmentandtheparticularoffering.Notallcustomerswillrecognizethesecosts andincorporatethemintotheirbuyingdecisions.Furthermore,coststhatareincurredfar inthefuturemaybediscountedbacktotheirpresentvalue(consciouslyornot)atsucha highdiscountratethattheyvirtuallyvanish.
Third,customervalueisdynamic.Atanypointintime,customershaveapreferenceand knowwhattheyvalue.However,ascustomersbecomemoreexperiencedandcompetitors shiftpriorities,customervalueevolves.
TheProduct-MarketInvestmentStrategy:WheretoCompete
Thescopeofthebusinessandthedynamicswithinthatscoperepresentaverybasicstrategy dimension.Whichsectorsshouldreceiveinvestmentsinresourcesandmanagementattention? Whichshouldhaveresourceswithdrawnorwithheld?Evenforasmallorganization,theallocation decisioniskeytostrategy.
Thescopeofabusinessisdefinedbytheproductsitoffersandchoosesnottooffer,bythe marketsitseekstoserveandnotserve,bythecompetitorsitchoosestocompetewithandtoavoid, andbyitslevelofverticalintegration.Sometimesthemostimportantbusinessscopedecisionis whatproductsorsegmentstoavoidbecausesuchadecision,iffollowedbydiscipline,canconserve resourcesneededtocompetesuccessfullyelsewhere.PeterDrucker,themanagementguru, challengedexecutivestospecify—“Whatisourbusinessandwhatshoulditbe?Whatisnotour business,andwhatshoulditnotbe?” Suchajudgmentcansometimesinvolvepainfulchoicesto divestorliquidateabusinessoravoidanapparentlyattractiveopportunity.Chapter15discusses disinvestmentjudgmentsandwhytheyarehardtomakeandeasytoavoid.
Manyorganizationshavedemonstratedtheadvantagesofhavingawell-definedbusiness scope.Williams-Sonomaoffersproductsforthehomeandkitchen.IBMturnedaroundits firm underthedirectionofLouGerstnerinpartbydialingupitsservicecomponentandmorerecently byexpandingitssoftwareanddataanalyticsfootprint.P&Gfocusesonabroadspectrumof nonfoodconsumergoodswithanemphasisoncurrentorpotentialbilliondollarbrandssuchas Tide/Arial,Always/Whisper,Crest,Iams,Pampers,Charmin,Bounty,Pantene,Downy/Lenor, andGillette.WalmartandAmazonhaveawidescopethatgeneratesbothscaleeconomiesanda one-stopshoppingvalueproposition.
Moreimportantthanthescopeisthescopedynamics.Whatproductmarketswillbeentered orexitedinthecomingyears?AsFigure1.2suggests,growthcanbegeneratedbybringing existingproductstonewmarkets(marketexpansion),bringingnewproductstoexistingmarkets (productexpansion),orenteringnewproductmarkets(diversi fication).
Expandingorchangingtheproduct-marketmixcanhelptheorganizationachievegrowthand vitalityandcanbealevertocopewiththechangingmarketplacebyseizingopportunitiesasthey emerge.Duringthe first fiveyearsoftheJeffImmeltera,GEchangeditsfocusandcharacterby investinginhealthcare,energy,watertreatment,homemortgages,andentertainment(bybuying Universal)whileexitingmarketsforinsurance,industrialdiamonds,businessoutsourcingbasedin India,andamotordivision.Inaddition,thepercentageofrevenuesourcesoutsidetheUnited Statesgrewfrom40percenttonearly50percent.
Therearerisksasthescopeexpansionventuresfurtherfromthecorebusiness the firm ’ s offeringmaynotbedistinctive,problemsinoperationsmayarise,orthe firm ’sbrandsmaybe
inadequatetosupporttheexpansion.Despitesimilaritiesinmanufacturinganddistribution, Bausch&Lomb ’sattempttomovefromeyecaretomouthwashwasaproductandbrandfailure. Aneffortbyamanufacturingequipmentcompanytogointorobotsfailedwhenitcouldnotcreate oracquiretheneededtechnology.Attentionandresourcesmayalsobedivertedfromthecore business,causingittoweaken.
Theinvestmentpatternwilldeterminethefuturedirectionofthe firm.Althoughthereare obviousvariationsandre finements,itisusefultoconceptualizetheinvestmentalternativesfor eachproduct-marketasfollows:
Investtogrow(orentertheproductmarket)
Investonlytomaintaintheexistingposition
Milkthebusinessbyminimizinginvestment
Recoverasmanyoftheassetsaspossiblebyliquidatingordivestingthebusiness
TheCustomerValuePropositionandCustomerValueLeadership
The customervalueproposition isaclearstatementaboutwhatsourcesofdistinctivevaluethe businesswantstoofferthecustomer.Tobesuccessful,thetargetmarketselectedmust findthe valuerelevantandmeaningful.Itmustalsobesupportedbyallaspectsofthecompany’sstrategy. Forexample,ifJessicaAlba’sHonestCompanypromisesconsumers “effective,unquestionably safe,andeco-friendly” bodyandhomeproducts,allingredientsmustre flectthisstatus apoint questionedinrecentlawsuitsbroughtagainstthecompany.Tobecredible,allotheraspectsofthe company ’scommunicationandinteractionsmustalsosupportthisposition,includingwherethe productissold,thetransparencyofthesalespeople,andallonlineinteractions.Tosupporta successfulstrategy,thevaluepropositionshouldbesustainableovertimeandbedifferentiated fromcompetitors.
HomeDepotandLowe ’sarehomeimprovementretailerswithverydifferentvalue propositions.HomeDepothasveryaustere,functionalstoresthataredesignedtoappealto contractorsandhomeownersonthebasisofgoodpriceandbasicfunctionality.Lowe ’sstrategy since1994hasbeentohaveasofterside,alookthatwouldbecomfortabletowomen.Thus,their storesarewelllit,thesignscolorfulandclear,the floorsspotless,andthepeoplefriendlyand helpful.Yearslater,theLowe’sstrategyhastraction,andHomeDepot,withserviceproblems causedbyacostreductionprogram,isattemptingtoadjustitsownvalueproposition.
Avaluepropositionisjusttablestakesforcompeting,however.Themosteffective strategiespavethewaythe fi rmtobeacustomervalueleader,whichmeansthatitperforms verywellononetypeofvalueandatleastmeetsbasiclevelsonothertypes.Forexample,while IKEAcompetesonprice,itsno-frillsproductsm easureuptobasicstandardsoffunctionality anditsstoreenvironments,whilesimple,arec lean,well-lit,andorganized.Customervalue leadersmakedecisivechoicesaboutwhichcustomerstheywilltargetwithinamarketandwith whattypesofvalue.
AssetsandCompetencies
Thestrategicassetsandcompetenciesthatunderliethestrategyarethecriticalresourcesthat producesustainablecompetitiveadvantage(SCA)fora firm.Accordingtoresource-basedtheories ofthe firm,theseresourcesproducecompetitiveadvantagebecausetheycanbeconvertedinto sourcesofvalueforcustomers;theyarerare,noteasilyimitated;andgoodsubstitutesforthe
resourcedonotexist,whichkeepscompetitorsfromofferingthesamevalue;andthe firmcan leveragethemtoitsadvantage.1
Astrategic asset isaresourcethatthe fi rmownsorcontrolsthatcanbeleveragedin thedesignorimplementationofa fi rm ’ sstrategy.Assetsincludegeneralresourcessuchas fi nancialassets,humanassets(leadersandemployees),physicalassets(plantandequipment), legalassets(patentsandtrademarks)aswell asmarketingassetsintheformofstrongbrand reputations,customerrelationships,andpowerfulknowledgeofmarkets.
Competencies leveragetheseassetstoperformactivitiesimportanttothe firm ’sstrategy.They dosothroughorganizationalprocesses,whichactasrecipesforactions.Withouttherightassets, theseprocessesarenotlikelytohavemuchimpact.Atthesametime,theassets,whethertheyare smartemployees,patents,orstrongbrands,willnothelpthecompanyunlesstheyareleveraged repeatedlythroughstrongprocesses.Theseprocesseshelpcompaniesoutpacecompetitorsand alsomakeitdifficultforthemtoeasilyimitatethe firm ’sstrengthsbecauseitishardtoobserve allofthecomplexactivitiesinvolvedinacompetency.Therefore,companiesmustensurethat theyhaveboththestrongassetsandprocessesforleveragingthoseresourcesformarketing excellence.Ifexercisedwell,thesecompetenciescan,overtime,addtothestrengthofa company ’sassetbasebyimprovingcustomerrelationshipsandbrands.
Theabilityofassetsandcompetenciestosupportastrategywillinpartdependontheir strengthrelativetocompetitors.Towhatextentaretheassetsandcompetenciesuniqueorrarein themarketplace?Ifuniquenow,howeasilycantheybeimitatedbycompetitors?Manyassets requirealong-timetodevelopandsocompetitorstryingtobuildthestrengthofAmazon’sstrong customerrelationshipsmaybehopelesslybehind.Competenciesareoftendif ficulttoimitate becausecompetitorscannoteasilyunderstandtherecipethatcompaniesusetocreatesuch outstandingprocesses.ThisiswhySouthwestAirlinesisknowntooffertoursoftheirofficesand activities theyknowthatthespecialingredientthatmakestheirculturesuchavaluableassetcan neitherbeunderstoodnorimitatedveryeasily.
AssetsandcompetenciesleveragedacrossmultipleproductmarketsofferadditionalsynergiesthatcanbeasourceofSCA.Synergiescancomeinmanyforms.Twobusinessescanreduce costsbysharingadistributionsystem,salesforce,orlogisticssystem,aswhenGilletteacquired Duracell(andlaterwasitselfacquiredbyP&G).Synergycanalsobebasedonsharingthesame asset,aswiththeHPbrandsharedbythedozensofbusinessunitsoracompetencesuchas Toyota’ sabilitytomanagemanufacturingplantsacrossbrandsandcountries.Anothersourceof synergyisthesharingoffunctionalareastrategiesacrossbusinessunits.Forexample,theFord MotorCompanymaybeabletosponsortheWorldCup,whichwouldbenefitallbrandacross divisions.AnothersynergysourceisthesharingofR&D.P&GaggregatesbrandssuchasHead& Shoulders,Aussie,Infusion,andPanteneintoahaircarecategorynotonlytoprovideshelfspace guidancetoretailersandtocreatepromotionsmoreeasily,butalsotomanageitsinnovation processes.Finally,acombinationofproductscanprovideavalueproposition.Somesoftware firmshaveaggregatedproductsinordertoprovideasystemssolutiontocustomers;Microsoft Of ficeisoneexample.
FunctionalStrategiesandPrograms
Acompany’svalueproposition,assets,andcompetenciesrequirethesupportoffunctional activitiestosucceed.Assetsandcompetenciesshouldmandatesomestrategyimperativesin theformofasupportivesetoffunctionalstrategiesorprograms.
Functionalstrategiesorprogramsthatcoul ddrivethebusinessstrategymightinclude:
Informationtechnologystrategy
Distributionstrategy
Globalstrategy
Qualityprogram
Sourcingstrategy
Logisticalstrategy
Manufacturingstrategy
Analyticsprogram
Theneedforcertainfunctionalstrategiesandprogramscanbedeterminedbyaskingafew questions.Whatmusthappenforthe firmtobeabletodeliveronthevalueproposition?Arethe assetsandcompetenciesneededinplace?Dotheyneedtobecreated,strengthened,or supported?How?
PITFALLSINSTRATEGYDEVELOPMENT
RichardRumelt,notedstrategythinker,hasidentifiedsomecommonpitfallsindevelopingabusiness strategy.2 First,acentralproblemorthreatisignored.Theproblemcouldbeaqualityissueora recedingmarketplace.Acompetitor’sinnovationoracustomertrendcouldrepresentathreat.A strategydevelopedasifeitherdidnotexistwillbedoomed.Second,thestrategyisalongto-dolistwith nosenseofwhatisimportant.Thereneedstobeasenseofpriorities.Third,asetofgoalsisassumedto beastrategy.Itisnot.Therecanandshouldbegoals,especiallylong-termgoalsthatgobeyond financialmeasures,butastrategyneedstoaddressthefourkeydimensionsinorderto findapathto success.Finally,astrategyisa fluffydescriptionofsomedesiredstateofaffairs.Wewillbecomethe industryleaderswhileincreasingmarginsandaddressingsustainabilitychallenges.Rather,the strategiesandaccompanyingactionplansneedtobespecific.
CriteriatoSelectBusinessStrategies
Theprincipalcriteriausefulforselectingastrategycanbegroupedaround fivegeneralquestions: IstheROIattractive? Creatingavaluepropositionthatisappealingtocustomersmay notbeworthwhileiftheinvestmentoroperatingcostisexcessive.Starbucksopenedin Japanin1996intheGinzadistrictandgrewtoover400units,manyofwhichwereinthe highestrentareas.Theresultwasatrendybrandbutonethatwasvulnerableto competitors,whomatchedorexceededStarbucks’ productofferingsandwerenot handicappedwithsuchhighoverheadbecausetheydevelopedlesscostlysites. Isthereasustainablecompetitiveadvantage? Unlessthebusinessunithasorcan developarealcompetitiveadvantagethatissustainableovertimeinthefaceof competitorreaction,anattractivelong-termreturnwillbeunlikely.Toachievea
sustainablecompetitiveadvantage,astrategyshouldexploitorganizationalassetsand competenciesandneutralizeweaknesses.
Willthestrategyhavesuccessinthefuture? Astrategyneedstobeabletosurvivethe dynamicsofthemarket,withitsemergingthreatsandopportunities.Eitherthestrategy componentsshouldbeexpectedtohavealonglifeorthestrategyshouldbecapableof adaptingtochangingconditions.Inthatcontext,futurescenarios(describedinChapter5) mightbeusedtotesttherobustnessofthestrategywithrespecttofutureuncertainties.
Isthestrategyfeasible? Thestrategyshouldbewithinboththe financialandhuman resourcesoftheorganization.Italsoshouldbeinternallyconsistentwithother organizationalcharacteristics,suchasthe firm ’sstructure,systems,people,andculture. TheseorganizationalconsiderationsarecoveredinChapter16.
Doesthestrategy fitwiththeotherstrategiesofthe firm? Arethesourcesand usesofcash flowinbalance?Isorganizational flexibilityreducedbyaninvestmentin financialorhumanresources?Ispotentialsynergycapturedbythestrategy?
EXPANDINGTHEBUSINESSSCOPE
Inhisclassicarticle “MarketingMyopia,” TheodoreLevittexplainedhow firmsthatdefinetheir businessmyopicallyinproducttermscanstagnateeventhoughthebasiccustomerneedtheyserveis enjoyinghealthygrowth.3 Becauseofamyopicproductfocus,othersgainthebenefitsofgrowth.In contrast, firmsthatregardthemselvesasbeinginthetransportationratherthantherailroadbusiness, theenergyinsteadofthepetroleumbusiness,orthecommunicationratherthanthetelephonebusiness aremorelikelytoexploitopportunities.
Theconceptissimple.De fi nethebusinessintermsofthebasiccustomerneedratherthanthe product.Visahasde fi neditselfasbeinginthebusinessofena blingcustomerstoexchangevalue(any asset,includingcashondeposit,thecashvalueoflifeinsurance,ortheequityinahome)forvirtually anythinganywhereintheworld.Asthebusinessisredefi ned,boththesetofcompetitorsandthe rangeofopportunitiesareoftenradicallyexpanded.Afterrede fi ningitsbusiness,Visaestimatedthat ithadreachedonly5percentofitspotentialgiventhenewde fi nition.
Definingabusinessintermsofgenericneedcanbeextremelyusefulforfosteringcreativity, generatingstrategicoptions,andavoidinganinternallyorientedproductfocus.
STRATEGICMARKETMANAGEMENT
Strategicmarketmanagementisaprocessdesignedtohelpmanagementcreate,change,orretain abusinessstrategyandtocreatenewstrategiesforthefuture.Amarketingstrategyisasubsetof businessstrategythatinvolvesthesamefourstrategycomponentsalthoughthescopeisrestricted tomarketing.Itincludesdecisionsandbudgetsrelatedtoproductmarketactivities,customervalue proposition,marketingassetsandcompetencies,anddifferentfunctionalareaswithinmarketing.
TheBookFramework
Figure1.3providesastructureforstrategicmarketmanagementandforthisbook.Abrief overviewofitsprincipalelementsandanintroductiontothekeyconceptsarepresentedinthis chapter.
STRATEGIC ANALYSIS
External Analysis
• Customer analysis
• Competitor analysis
• Market/submarket analysis
• Environmental analysis
Internal Company Analysis
• Size, growth, and financial performance
• Assets and competencies (including brand, customer relationships, innovation)
• Image and positioning
• Current and past strategies
• Organizational culture
• Cost structure
STRATEGIC ANALYSIS OUTPUT
External Assessment
Opportunities, threats, trends, insights, and external uncertainties
Internal Company Assessment
Firm strengths, weaknesses, liabilities, problems, constraints, and uncertainties
CREATING AND ADAPTING STRATEGY
• Identify strategy alternatives
- Product-market investment strategies
- Customer value proposition
- Assets, competencies, and synergies
- Functional strategies and programs
• Select strategy
IMPLEMENTING STRATEGY AND PRODUCING FIRM VALUE
• Implement strategy
• Measure performance
ExternalAnalysis
Externalanalysis,summarizedinFigure1.3,involvesanexaminationoftherelevant elementsexternaltoanorganization customers,competitors,marketsandsubmarkets,and theenvironmentorcontextoutsideofthemarket.Customeranalysis,the fi rststepofexternal
Figure1.3 OverviewofStrategicManagement
analysisandafocusofChapter2,involvesidentifyingtheorganization ’ scustomersegmentsand eachsegment ’ smotivationsandunmetneeds.Competitoranalysis,coveredinChapter3, attemptstoidentifycompetitors(bothcurrentandpotential)anddescribetheirperformance, image,strategy,andstrengthsandweaknesses.Marketanalysis,thesubjectofChapter4,aims todeterminetheattractivenessofthemarketandsubmarketsandtounderstandthedynamics ofthemarketsothatthreatsandopportunitiescanbedetectedandstrategiesadapted. Environmentalanalysis,thesubjectofChapt er5,istheprocessofidentifyingandunderstandingemergingopportunitiesandthreatsc reatedbyforcesinthecontextofthebusiness.
Theexternalanalysisshouldbepurposeful,focusingonkeyoutputs:theidentificationof presentandpotentialopportunities,threats,trends,strategicuncertainties,andstrategicchoices. Thereisadangerinbeingexcessivelydescriptive.Becausethereisliterallynolimittothescopeof adescriptivestudy,theresultcanbeaconsiderableexpenditureofresourceswithlittleimpacton strategy.
Theframeofreferenceforanexternalanalysisistypicallyadefinedstrategicbusinessunit (SBU),butitisusefultoconducttheanalysisatseverallevels.Externalanalysesofsubmarkets sometimesprovidecriticalinsights;forexample,anexternalanalysisofthematurebeerindustry mightcontainanalysesoftheimportandnonalcoholicbeersubmarkets,whicharegrowingand haveimportantdifferences.ItisalsopossibletoconductexternalanalysesforgroupsofSBUs, suchasdivisions,thathavecharacteristicsincommon.Forinstance,afoodproductscompany mightconsideranalysesofthehealthy-livingsegmentandfoodtrendsthatcouldspanoperating unitswithinthe firm.
InternalAnalysis
Internalanalysis,introducedinChapter5(seealsosimilarcompetitorcriteriainChapter2), AppendixA,andassummarizedinFigure1.3,aimstoprovideadetailedunderstandingof strategicallyimportantaspectsofthebusiness.Performanceanalysislooksnotonlyat financial performance,butalsoexaminesthecompany’sassetsandcompetencies(includingbrand, customerrelationships,andinnovation),thecompany’scurrentimageandposition,cultureas wellasitspastandcurrentstrategies.Theidentificationandassessmentoforganizationalstrengths andweaknesseswillguidestrategicpriorities,includingboththedevelopmentofnewstrategies andtheadaptationofexistingones.
CreatingandAdaptingStrategy
Afterdescribingstrategicanalysis,thebookturnstothecreationandadaptationofstrategy. Howdoyoudecideonthebusinessscope?Whatarethealternativevaluepropositions,andhow dotheyguidestrategydevelopment?Whatassetsandcompetencieswillprovidepointsof advantage,andwhichwillaimforpointsofparity?Whatfunctionalstrategiesandprogramswill leadtostrategicsuccess?Whatgrowthoptionswillreceiveinvestment?Isthecorebusinessto bethesourceofgrowth,oristhereaneedtomovebeyondthecore?Whatistobetheglobal strategy?Howshouldthebusinessunitsbeprioritized?Shouldtherebedisinvestmentinthe businessportfolio?Howcantheorganizationbeadaptedsothatitsupportsratherthan constrainsstrategy?
Chapter6providesanoverviewofthescopeofstrategicchoicesbydescribingthe firm ’ s choiceofvaluepropositionsasameanstocustomervalueleadershipandsustainablecompetitive advantage.Chapter7examinescustomerrelationshipswithafocusonfacilitatingthedecision
GALLO:ACASESTUDY
Gallo,despiteproducingroughlyoneofeveryfourbottlesofwinesoldintheUnitedStates(primarily intheformofcheapwinessoldundertheGalloname),thoughtithadtoadapttoastrongmarket trendtopremiumvarietals.
OnevehiclewasthelaunchingofthepremiumGalloofSonomabrand,whichenjoyedseveral significantpotentialSCAs.ThegrapesavailabletoGallofromSonomaCountyinnorthernCalifornia (whoseclimate,somesay,issuperiortothefamousNaparegion),coupledwiththecompany’ s willingnessandabilitytomakegreatwine,haveresultedinaproductthathaswonsomemajor internationalwinecompetitions.Inaddition,thebrandgainedsynergiesfromGallo’ssubstantial distributioncloutandoperationalscaleefficiencies.
ThedecisiontoputtheGallonameonthenewlineundoubtedlycreatedahugeliability,butitalso hadsomecompensatingadvantages.First,itpermittedthebusinesstoleveragethecredibilityand personalityofathird-generationfamilywinemaker,GinaGallo.Second,itboostedtheprideofthe organizationanditspartnersinanaspectofthebusiness(winemaking)thatisatthecoreofitsvalues. Finally,theseemingincongruityofGallomakinga finewinecouldappealtothewinetastemakersof theworldbygivingthemachancetoprovethattheyareabovelabels.
ThesuccessofGalloofSonomaemboldenedGallotoradicallychangethebusinessandbrand strategy.GalloofSonomabecametheGalloFamilyVineyardsSonoma,oneoffourGalloFamily brands.TheGallovaluebrandswereretired,andotherbrandsintheportfoliotookonthevaluerole.
journey,creatingvaluethroughstrongexperiences,anddefendingrelationshipsoverthelongterm.Chapter8shiftstoafocuscreatingvaluablecustomersbyexaminingpurchasefunnel managementandcustomerlifetimevalueapproaches.Chapter9showshowbrandequity,akey assetcanbecreatedandused.Chapter10discusseshowtodevelopastrongbrandrelationship withcustomers.Thenextfourchaptersdiscussgrowthoptions:Chapter11coversenergizing thebusiness,Chapter12leveragingthebusiness,Chapter13creatingnewbusinesses,and Chapter14globalstrategies.Chapter15discussesthedisinvestmentoption,animportantand oftenoverlookeddimensionoftheinvestmentdecision.
ImplementingStrategyandProducingFirmValue
Chapter16examinestheorganizationalrealityofimplementingstrategy.Itconsiderstheidea ofcustomer-centricity anapproachthatputsthecustomerattheforefrontofallcompany decisions asaguidingapproachtoensuringthatthecompanyisabletocompeteeffectivelyin themarketplaceovertime.Customercentricityrequiresafocuson fiveorganizationalelements culture,competencies,structure,metricsandincentives,andhumancapital.Finally,Chapter17 considersmoredeeplyhowmarketingcreatesvaluefor firm,includingtheeffectofcustomer relationshipsandbrandsonbothrevenuesandshareholdervalue.Thearrowfeedingbacktothe firm(topbox)denotesthe financialperformanceeffectsandimprovementofassetsand competenciesthatstrengthenthecompany.
ThePlanningCycle
Toooftenanannualplanningexerciseisperceivedasstrategydevelopmentwhentheoutputisnot strategybutanoperatingandresourcebudgetthatspeci fies financialtargets,hiringplans,and
investmentauthorizations.ResearchatMcKinseyinvolvingasurveyofover700executives suggestswaystomakethestrategydevelopmentprocessmoreeffective.4 Inparticular,astrategy processshouldinvolvethefollowingactivities.
Startwiththeissues. CEOssaythatplanningshouldfocusonanticipatingbigchallenges andspottingimportanttrends.Strategychoicewillbewellservedbyidentifyingthekey associatedstrategicissues.OneCEOasksthebusinessleadersinhis firmtoimaginehow asetofspecifictrendswillaffecttheirbusiness.Anothercreatesalistofthreetosix prioritiesforeachbusinesstoformabasisfordiscussion.
Bringtogethertherightpeople. Inparticular,itisnotenoughtohavestaffpeople involvedbutalsothepeoplewhowillimplementthestrategy,thedecisionmakers.Also, inordertofostersynergiesandstrategiesthatspanproductorcountryorganizationalsilos, itisworthwhiletohaverelevantteamsofbusinessesrepresented.
Adaptplanningcyclestothebusinesses. Itisunrealistictosaythatallbusinessesneed tohaveplanningexerciseseachyear.Somemayneediteveryotheryearorevenevery thirdyear.Also,trends,events,orissuesshouldtriggerastrategyreviewevenifitisnotin theannualcycle.
Implementastrategyperformancesystem. Toomanybusinessesfailtofollowupon strategydevelopment.Asaresult,itbecomesaratheremptyexercise.Majorstrategic initiativesshouldhavemeasurableprogressgoalsaswellasendobjectives.Whatwillbe thebarriertosuccess?Whatneedstohappenforthestrategytobeontrack?
MARKETINGANDITSROLEINSTRATEGY
Marketing’sstrategicrolehasgrownovertheyears.Thequestionforeachorganizationiswhether thechiefmarketingofficer(CMO)andhisorherteamhaveaseatatthestrategytableorare relegatedtobeingtacticalimplementersoftaskssuchasmanagingtheadvertisingprogram.The viewthatmarketingistacticalischanging;itisnowmoreandmorefrequentlybeingacceptedas beingpartofthestrategicmanagementoftheorganization.Giventhedefinitionofabusiness strategyandthestructureofstrategicmarketmanagement,therolesthatmarketingcanand shouldplaybecomeclearer.
Onemarketingroleistobetheprimarydriverofthestrategicanalysis.Themarketinggroupis inthebestpositiontounderstandthecustomers,competitors,marketandsubmarkets,andenvironmentalforcesandtrends.Bymanagingmarketingresearchandmarketdata,itcontrolsmuchof theinformationneededintheexternalanalysis.Marketingshouldalsotaketheleadintheinternal analysiswithrespecttoselectedassets(suchasthebrandportfolioandthedistributionchannel) andcompetencies(suchasnewproductintroductionandcustomerrelationshipmanagement).
Asecondroleistofocusattentiononcustomerinsightandcustomervalue.Byplacinga premiumonmeetingcustomerneedsoverotherorganizationalimperatives,marketinghelps ensurecompanyrelevanceovertime.
Athirdroleistodrivegrowthstrategyforthe firm.Growthoptionsareeitherbasedonor dependentoncustomerandmarketinsights,andmarketingthereforeshouldbeakeydriver. Infact,astudybyBoozAllenandHamiltonofsome2,000executivesfoundthatasmallbut growingnumberof firms(9percent)describetheCMOasagrowthchampioninvolvedinall strategicleversrelatingtogrowth.5
Finally,marketingshouldplayaleadingroleinbuilding,managing,anddefendingstrong customerandbrandassets calledcustomerandbrandequity.Theseassetsdelivervaluebackto the firmandarecriticalto firmstrategynowandinthefuture.
Thus,marketingisapartner,usuallyakeypartner,inthedevelopmentandimplementationof abusinessstrategy.Theconceptualizationofabusinessandmarketingstrategyashavingfour dimensionshelpsilluminatethenatureofthatrelationship.The firmsthatareabletoachieve successovertimearethosethatrealizethatmarketingshouldhaveastrongvoiceinbusiness strategy.
KEYLEARNINGS
Strategyneedstobedevelopedandexecutedinthecontextofadynamicmarket.To cope,itisimportanttodevelopcompetenciesinstrategicanalysis,innovation, managingmultiplebusiness,anddevelopingSCAsandgrowthplatforms.
Abusinessstrategyincludesthedeterminationoftheproduct-marketinvestment strategy,thecustomervalueproposition,assetsandcompetencies,andthefunctional areastrategy.Amarketingstrategyinvolvestheallocationofthemarketingbudget overproductmarkets,thecustomervaluepropositionbysegment,themarketing assetsandcompetencies,andthestrategiesofthefunctionalareasofmarketing. Strategicmarketmanagement,aprocessdesignedtohelpmanagementcreate, change,orretainabusinessstrategyandtocreatenewstrategiesforthefuture.It involvesexternalanalysis,internalanalysis,creatingandadaptingstrategy,and implementingstrategyandproducing firmvalue.
Marketingplaysakeyroleina firm ’sbusinessstrategy.Itdrivescompanystrategic analysis;itfocusesattentiononcustomerinsightandvalue;itdrivescompanygrowth strategies;anditbuilds,manages,anddefendscompanycustomerandbrandassets. TheCMOrolehasgrownovertheyearsandisnowoftenchargedwithbeinga partnerindevelopingstrategiesandavehicletodealwiththedysfunctionsofthe product-marketsilos.
FORDISCUSSION
1. Whatisabusinessstrategy?Doyouagreewiththedefinitionproposed?Illustrate youranswerwithexamples.Consideroneofthefollowing firms.Gotothe firm ’ s websiteandannualreporttogainanunderstandingofitsbusinessstrategy.Lookat elementssuchastheproductsandservicesoffered,thehistoryofthe firm,andits values.Whatisthebusinessstrategy?Whatarethe firm ’sproductmarkets?Whatare itsvaluepropositions?Whatassetsandcompetenciesareimportanttothisstrategy? Whatoutstandingfunctionalprogramsandstrategiesexist?
a. Dell
b. Zappos
c. Visa
d. A firmofyourchoice
2. Inquestion1,identifyanydistinctiveelementsofeach firm ’smarketingstrategy.
3. ConsideringtheGallowinecase,arethereanycurrentwinecompaniesforwhom thisstrategywouldnothaveworked?Why?
4. ApplyTheodoreLevitt’smarketing-myopiaconcepttoprintmedia,magazines,and newspapers.Whatistheimplication?
5. Whichcriteriatopickastrategydoyouconsidermostimportant?Why?Name onecompanythatfailedbecauseitdidnotfollowyourpriority.Whatshouldithave doneinstead?
