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Business Strategy Tools

The Management Pocketbooks Pocket Correspondence Course

This is part of an extended management course. You can dip into it, or follow the course from the start. If you do that, you may want a course notebook, for the exercises and any notes you want to make.


Over the years, Pocketblog has covered some important business strategy thinkers, so we will start by reviewing what we have.

Good Strategy/Bad Strategy

This is the name of Richard Rumelt’s book and it neatly frames any discussion of business strategy by defining what your outcome needs to look like. Take a look at ‘What makes good business strategy?

The Balanced Scorecard

In one of the all-time classic Harvard Business Review articles, Robert Kaplan and David Norton set out to ensure that our business strategies are balanced across a range of different areas of the business. The tool they introduced is nearly ubiquitous in the upper reaches of the management world, and no manager can get away without at least a passing familiarity with the Balanced Scorecard. Take a look at ’Balance is Everything’.

The McKinsey 7S Model

One of my own favourite tools is also about balance, but this time about ensuring all the elements of your business strategy and planning are all aligned. It was developed by consultants at top US firm, McKinsey: Tom Peters and Robert Waterman. The seven S model reminds us that shared values, style, skills, staff, structure, systems, and strategy must all be consistent with one another. Take a look at ‘On Competition: Internal Forces and the 7-S Model’.

The Awesome Michael Porter

Over the years, three blogs have featured the thinking of business strategy specialist, Michael Porter.

‘On Competition: Five Forces’ briefly introduced two of his principal ideas: the five forces model and his three generic business strategies that flow from them.

‘On Competition, again: Porter’s Five Forces’ took a deeper look at the five forces model.

‘On Competition – The Far End of the Value Chain’ focused on the three generic business strategies and his concept of the value chain. Here, I speculated that some businesses have found a fourth, very successful business strategy.

By the way, a recent entry in the Pocket Correspondence course returned to the idea of the value chain. Take a look at ‘The Value Chain’.

The Boston Consulting Group Matrix

Having finished reviewing the archives, let’s take a look at one business strategy tool. This is designed to help us answer a very simple question:

‘We have a number of products (or services) but limited resources to invest in their development and marketing. Which products (or services) should we focus our investment on?’

The folk at Boston Consulting Group who developed the tool suggested that two considerations are paramount in making our judgements:

  1. What is our market share?
    Do we have a dominant market position with this product/service, or a modest share. This dictates the base from which investment can grow or maintain our position.
  2. What is the growth potential of the market?
    Is this product in a growing, static or declining market? Clearly static and declining markets offer far less opportunity to recoup investments.

The result was a simple matrix that plots these two conditions against one-another and identifies four generic strategies. You can click on the image to enlarge it.

The Boston Consulting Group (BCG) Business Strategy Matrix

The Matrix gives us four strategies, three compelling labels for our products/services and one label that is, frankly, honest but lame.

Stars

Place your biggest investment bets on the products which dominate markets with high growth potential. If you are Samsung, you will be investing highly in mobile telephone products because the market continues to expand and you already have a dominant position.

Dogs

Do not invest – arguably, disinvest – in products which have a small share of a static or declining market. There is not much to win and you are not placed to take much of it.

Cash Cows

What do you do if you are a dominant player in a static or declining market? BCG suggested it is like having invested in a cow: you should look after it and milk it while it is healthy. This is how I read the men’s razor market. If you are one of the big players in your region (Gillette, Wilkinson Sword, Bic, for example, here in the UK), then you have a lot of investment in products and marketing, and a strong, valuable revenue stream. Over investment can gain little, as the market will never expand until men grow two heads or we need to shave more of ourselves. But if you don’t invest, you will lose the benefit of your position to your rivals. So, what do we see? Incremental investment in new – but hardly innovative – products. When I started shaving, two blades was new. Now we are up to five. By the time I no longer need to shave (about thirty years or so, I guess) I predict an eight bladed razor will be common.

Question Marks

What to call these pesky products… Does the label attach to the products or the challenge BCG found in labelling them with a cute title? Set aside that curious linguistic conundrum and we face the most difficult challenge of all. Your market is growing, so there is a big prize for the skilled/lucky investor. But your market position is weak, so you have a low chance of success against bigger rival products. Like many good tools, the BCG matrix does not give you all the answers. But it does bring your choices into stark relief.

Further Reading 

From the Management Pocketbooks series:

  1. The Strategy Pocketbook
  2. Business Planning Pocketbook
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On Competition – The Far End of the Value Chain

Back in August, we met Michael Porter – a professor at Harvard Business School, and an authority on competitive strategy.  In a blog called ‘On Competition – Five Forces’ I described his best known ‘Five Forces Model’ and also his model of three sources of competitive advantage:

Porter's Three Generic Business Strategies

The Whole Picture?

At a recent seminar, I challenged participants to identify any additional business strategy that can deliver competitive advantage.  After all, in my August blog, I did assert that this model is showing its age.

Could a business outcompete rivals with a higher cost product, that does pretty much the same as its competing products, and has no niche focus?  The answer takes us into a fascinating debating point, by way of another powerful model with which Porter is closely associated.

Competitive Advantage

Porter’s 1985 book ‘Competitive Advantage’ gives you a pretty thorough précis of his earlier ‘Competitive Strategy’ in Chapter 1 – focusing on the three strategies – and then takes off.  Competitive advantage, Porter says, comes from understanding the ‘value chain’.  This is the full set of activities that company undertakes, to create value.  It is illustrated below.

Porter's Value Chain

Competitive advantage is about understanding the Five Forces model and the sources of cost advantage and product differentiation in terms of these nine activities.

The Far End of the Value Chain

The five primary activities form a chain of value-adding processes, supported by the four secondary processes that provide the necessary resources to make the value chain work.  Each can be a source of competitive advantage, most obviously through cost differentiation.

I want to focus on Marketing & Sales, and Service.  My argument is that a company can differentiate its product – to give it competitive advantage, through these two, without focusing on a niche, delivering a substantively different product, and with no cost leadership.

Marketing, Sales and Service are about Myth-making

Hello Kitty is a trademark of SanrioIf you can create a compelling narrative about your product, people will want it, to associate themselves with the myth you have created around your brand.  My daughter loves ‘Hello Kitty’ – I don’t know why.  As far as I can tell, the Hello Kitty brand started life as nothing more than a motif, appearing on a range of products.  Now, not just children, but adults too, want goods just because they have the face of a little white cat (with no mouth) on them.

The products are no better, no different (unless you include the motif) and certainly no different functionally, and definitely no cheaper.  There is little niche focus beyond, as far as I can tell, females.  Hello Kitty thrives in most cultures and at many age groups from 2 to forty, at least.

I think the source of Sanrio’s competitive advantage is nothing more than marketing.

Would I fall for such a ruse?

Of course not.  Unlike some grown ups, I would never have Hello Kitty nor any other character on my iPhone case…

‘Hold on Mike, did you say iPhone?’

iPhone certainly has no cost advantage and it now has many competing products that offer the same functionality.  And as a niche, iPhone users are pretty hard to define: old and young, across social and cultural spectra…

So how does marketing create competitive advantage?

It seems implausible that three sources of competitive advantage could be all there is.  Yet I have come to the conclusion that I haven’t yet found an exception.  Despite arguing that marketing is that exception, let me explain.

What does marketing do that creates such loyal followings for Hello Kitty and iPhone (and, indeed, for both – I saw someone with a Hello Kitty iPhone cover, which was the nudge for writing this blog)?

I think the great marketing that Sanrio and Apple create, builds a loyal following for their products.  Many people will identify themselves as iPhone users – in a way that others would not identify themselves as Wildfire or Galaxy users.  What great companies can do is use marketing and service to create a ‘tribe’ of people who are loyal to their brand – or to a part of their brand.

What this relatively new form of marketing is doing is building a niche focus that is defined by the products and services of the company.

So, Porter was right after all.  Now we need to look at this concept of ‘tribes’.  More next week.

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