Assignment 2: Discussion—Crafting a Strategy to fit the Business
This assignment examines the connection between and relevance of a solid and appropriate business model and an effective business strategy. You will explore the independent and interdependent nature of business models and strategies.
Review the following statement:
Respond to the following:
Write your initial response in approximately 300 words. Apply APA standards to citation of sources.
Assignment 3: Discussion—Better Ways to Get to Market: Formulating a Strategy that Works
There can be a good strategy with a bad product and a good product with a bad strategy, and this can impact product or service success in the marketplace. There are many cases of good products taking much longer to achieve their rightful success because of poor strategy. This assignment helps you explore why such issues occur and how to prevent them.
Using the module readings and the Argosy University online library resources, research various marketing strategies.
Identify a good product that had a bad “get to market” strategy and as a result took longer than it should have to be successful.
Respond to the following:
Write your initial response in approximately 300 words. Apply APA standards to citation of sources.
By Thursday, May 8, 2013
, post your response to the appropriate
Discussion Area
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FALL 2011
VOL.53 NO.1
)Christopher B. Bingham, Kathleen M. Eisenhardt
and Nathan R. Furr
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Which Strategy When?
STRATEGY
Which Strategy When?
Just when you think you have settled on the right strategy, you may need to change. By understanding the particular circumstances and forces shaping your company’s competitive environment, you can choose the most appropriate strategic framework.
BY CHRISTOPHER B. BINGHAM, KATHLEEN M. EISENHARDT AND NATHAN R. FURR
MARKETS ARE CHANGING, competition is shifting and your business may be suffering or perhaps thriving, at least for now. Whatever the immediate circumstances, managers are forever asking the same questions: Where do we go from here, and which strategy will get us there? Should we fortify our strategic position, move into nearby markets or branch out into radically new territory? To help guide our decisions, most of us have a smorgasbord of strategic frameworks to draw on. But which one is the right one, and when? The strategic plans, market analyses and hefty binders that strategy consulting firms leave behind often jumble strategic lenses: Five-Forces analysis, portfolio review, assessment of core competencies; examination of profit pools, competitive land-scape and so on. But which analyses are most helpful right now?
Most managers recognize that not all strategies work equally well in every setting. So to understand how to choose the right strategy at the right time, we analyzed the logic of the leading strategic frame-works used in business and engineering schools around the world. Then we matched those frameworks with the key strategic choices faced by dozens of industry leaders at different times, during periods of stability as well as change. (See “About the Research, p. 72.) Two surprising insights emerged.
First, we discovered that the logics of the different strategic frameworks break into three archetypes: strategies of position, strategies of leverage and strategies of opportunity. What’s right for a company depends on its circumstances, its available resources and how management combines those resources together. (See “Choosing the Right Strategy,” p. 73.)
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Pixar Animation Studios, whose worldwide megahits include the
Toy Story
movies and
Finding Nemo
, uses rules such as “great story first, then animation” to guide its strategy.
)Second, by observing market leaders employing archetypal strategies, we found that many assumptions about competitive advantage simply don’t hold. For example, although strategy gurus talk about strategically valuable resources, sometimes
THE LEADING QUESTION
How can managers know which strategic framework is the most ap-propriate one?
FINDINGS
What’s right for a company depends on its circumstances, its available resources and how it puts the resources together.
Sometimes ordinary resources assem-bled well can be used to create competitive advantage.
To identify the most appropriate strategic framework, start by assessing whether your industry is stable, dynamic or somewhere in between.
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STRATEGY
very ordinary resources assembled well are all that’s required for competitive advantage. Sometimes it makes good sense to bypass the largest markets and focus instead on where resources fit best. In other circumstances, it may be preferable to ignore existing resources and attack an emergent market. In some situations, basic rules of thumb work better than detailed plans. Surprisingly, these simple strat-egies can be harder to imitate than complex ones.
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ABOUT THE RESEARCH
To understand how compa-nies create competitive advantage in different indus-tries and settings, we conducted in-depth inter-views with more than 90 corporate leaders. The lead-ers included both senior executives (CEOs, chair
men, executive vice presidents
and business-unit heads) and managers who are charged with strat-egy implementation. We also surveyed all top man-agement team members at 12 U.S., Finnish and Singa
porean companies about the strategies they used for key strategic processes such as allian
ces, acquisitions, prod-uct development and internationalization as well as the performance results that followed from using those strategies. In addition, we reviewed relevant re
search articles in the field of strategic management pub
lished in leading a
cademic and practitioner journals from 1980 to 2010. From the data collected in our own research and through the review of the extant lit
erature, we were able to zero in on three archetypal strategic frameworks used by industry exemplars at different time
s and under different conditions of envi-ronmental dynamism.
)How to Choose the Right Strategy
To figure out when it makes sense to pursue strategies of position, leverage or opportunity, the key is to look first at the immediate circumstances, current resources and the relationships among the various resources. Understanding these factors will help you get started with the right strategic framework.
Understand Your Circumstances The first step for managers is a thoughtful review of their industry. Specifically, assess whether your industry is stable, dynamic or somewhere in between. How do you gauge this dynamism? Begin by asking yourself: Can I map the five industry structure forces in my industry? If you can identify buyers, suppliers, customers and substitutes by name and tick off barriers to entry, and if these five factors tend to stay largely the same, then you are probably operating within a stable industry. If the industry is too unsettled to map (think mobile Internet applications) or the basic rules are in flux (think clean or nano technology), then you most likely inhabit a dynamic industry.
Next ask: Where do my products fit in terms of product life cycle? In stable industries, standards are well-defined, product expectations are clear, product life cycles are known and often long and a limited number of competitors may slowly push the development envelope with anticipated innovations. However, in dynamic industries it’s different. Standards may not yet exist, product life cycles are short, products are diverse and no clear dominant technology or product has emerged. Some industries are in between. The auto industry is historically a stable industry. But new technologies (for example, hybrid and electric-powered engines), compressed product development times, volatile oil prices and regulatory pressure have increased dynamism. Also, don’t forget that your own company’s circumstances (for
example, whether you’re a startup with a promising business model or an established player with global reach) will also affect where you fit.
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)Take Stock of Your Resources Once you understand your industry circumstances, take a look at your company. Assessing your resources and the links among them is essential. Why? Resources lie at the heart of strategy. They enable companies to set themselves apart from competitors. Tangible resources (such as Intel’s fabrication facilities or Starbucks’ locations) are relatively straightforward to assess. But intangible resources (for instance, Amazon’s patents or Procter & Gamble’s brands) are trickier. Beyond these, organizational processes (for example, the acquisition process of India’s Tata Group or General Dynamics’ divestment process) can provide a critical basis for advantage.
Once you know your resources, determine how advantageous they really are. The most strategically important resources are valuable (i.e., useful in your industry), rare (i.e., possessed by only a few), inimitable (i.e., difficult to copy) and nonsubstitutable (i.e., lacking in functional equivalents). These resources are a potential source of competitive advantage. Yet even if they can provide advantage, they aren’t absolutely necessary for competitive advantage. Indeed, even common resources can be a source of advantage depending on how they are linked with other resources.
Determine the
Relationships
Among Resources A secret to picking the right strategic framework is assessing how your resources relate to one another. Some resources are tightly linked. For example, Wal-Mart’s low-cost strategy in the United States depends heavily on its physical resources (often rural locations), so-phisticated information technology (like maximizing selling space in stores and quickly replenishing inventories), efficient logistics (like cross-docking) and cost-conscious culture, all of which reinforce each other. By contrast, Google’s resources are more loosely linked. Executives can recombine human capital and technical resources as needed to tackle different markets and products. Of course, there are trade offs: Tightly linked resources create more defensible strate-gic positions, but they resist change; loosely linked resources are easier to change, but they can be ineffi-ciently deployed and redundant.
CHOOSING THE RIGHT STRATEGY
We found that the logics of different strategic frameworks break into three archetypes: position strategies, leverage strategies and opportunity strategies. What’s right for a company depends on its circumstances, available resources and how management links those resources.
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STRATEGY
)POSITION STRATEGY
Build mutually reinforcing resource systems with many resources in an attractive strategic position. Deepen their links.
LEVERAGE STRATEGY
Build strategically important resources for current markets. Leverage them into attractive new products and new markets.
OPPORTUNITY STRATEGY
Pick a few strategic processes with deep and swift flows of opportunities. Learn simple rules to capture opportunities.
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Circumstances Best for
Resources
)Stable environments
Often mundane
Moderately dynamic environments
|
Strategically important (i.e., valuable, rare, inimitable and nonsubstitutable) |
Dynamic environments
|
Opportunity-rich strategic processes guided by simple rules |
Relationships
Basis of Competitive Advantage
Tightly interlocked resources
A cost leadership or differentiated strategic position that is defensible
Moderately linked resources
Ownership of specific strategically important resources that can be leveraged
Loosely linked resources
Capture of attractive opportunities before rivals
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Sustainability of Advantage
Inimit
ability of Advantage
Challenges
)Long term
Through causal ambiguity of tightly linked resources plus time to develop the resource system and path dependence
Adjusting system of tightly linked resources quickly enough and with-out producing negative synergy
Medium term
Through property rights, path
dependence and time needed
to develop the same resources
Adjusting resource portfolio without being blocked by cognitive and political rigidities
Unpredictable
Through first-mover advantage and the challenge of inferring rules from partially improvised outcomes
Maintaining “edge of chaos” with the right number and types of rules. Timely pivoting to better strategic processes
Choosing a Strategy When does it make sense to choose one strategy over another? How do execu-tives decide whether to build their strategies around position, leverage or opportunity? We will examine each framework separately.
The Position Strategy
When industries are stable, a strong case can often be made for a position strategy. Position strategies involve selecting a valuable and unoccupied indus-try position and then building up its defenses. This is the strategy that is commonly associated with Five Forces analysis,1 where competitive advantage comes from constructing a fortress around an attractive market. Industry stability ensures that the position of the fortress provides a long-term competitive advantage, thereby justifying repeated investments to reinforce and preserve the position. The strategy remains valuable until the terrain shifts and the strategic position is eroded.
With a position strategy, competitive advantage depends first on choosing a valuable and unoccupied strategic position in a given industry, and second on creating and linking company resources
to defend that position. A valuable strategic position drives superior profitability through the ability to either boost prices (e.g., Porsche in the automotive industry) or reduce costs (e.g., Casio in the watch industry). Companies often defend their positions by assembling resource combinations that their competitors cannot easily imitate. In the U.S. mutual fund industry, for example, The Vanguard Group has built its strategy around conservative investment management and low costs. Vanguard, which claims that the average expense ratio of its mutual funds is a fraction of its main competitors, defends its position with mutually reinforcing resource choices, including low commissions, modest management perks and an absence of retail branches. Thus, the key to advantage with a position strategy is not just having a valuable strategic posi-tion, but also linking resources to defend successfully against challengers.
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)Position strategies seem straightforward, but it is often assumed their success requires strategically important resources. Although such resources can be helpful, they aren’t necessary. Competitive advantage can come from defending a strategic position
STRATEGY
through a system of tightly linked resources, not necessarily from the superiority of the resources per se. Consider JetBlue, the low-cost U.S. airline. On the surface, its strategy is based on common, even mundane, resources: Airbus A320 and Embraer 190 aircraft, comfortable passenger seats, DIRECTV access and SIRIUS XM satellite radio, e-mail and instant messaging services and fast turnaround capability at airport gates. None of these resources is particularly special. But as a package, they are mutu-ally reinforcing and produce a differentiated offering that gives JetBlue a competitive advantage that other airlines would have difficulty imitating.
When resources are tightly linked, they are hard to copy. Interdependent resources create complexity, and so copying them and their linkages is challenging and time-consuming. Thus, even if imitators understand which resources are being used, they probably don’t understand exactly how they fit together because there are often many resources with unexpected combinatorial effects. Successful imitation, therefore, requires not only knowing which resources comprise another company’s strategy (i.e., ingredients), but also deciphering the proper sequence of their assembly (i.e., recipe).
Over time, since even fortresses need maintenance, managers with position strategies can’t just rest on their laurels. To maintain competitive advantage, they may need to refresh their resources and strengthen the links among them. For example, the Spanish clothing company Zara has updated several resources to bolster its strategic position, including more and better small-batch production that seamlessly links to air shipment logistics. Zara can now send new designs to any store in the world in less than two days.
Like any strategy, position strategy has an Achil-les heel: change. When industries change, moving a fortress locked into a strategic position is tough. Changing a tightly linked system means dismantling the very synergies that management worked so hard to build and putting the organization at risk during the transition to a new strategy. For this reason, many managers either ignore change or make changes at the margin. But neither approach works. Once stable markets change, entrenched strategic positions tend to falter. Change forces managers to dismantle their existing resource systems and reas
semble them in new strategic positions. This is difficult and time-consuming — a combination that can potentially be lethal because performance may not improve until the pieces are reassembled and linked. For example, Liz Claiborne, an apparel company, relied on a positioning strategy in which production, distribution, marketing, design, pre-sentation and sales resources were all tightly linked. But when the industry changed, the company’s re-lationships with department stores were disrupted.2 In an effort to adapt, Claiborne executives changed resources such as their “no reordering” process that had antagonized department stores. But since this process was synergistically entwined with other resources like overseas logistics and distant manufacturing locations, the “no reordering” process could not be undone without damaging system coherence. Financial performance sank precipitously. Only after Claiborne executives dismantled their existing resources and started reconnecting new ones did positive performance begin to return.
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)The Leverage Strategy
In markets where change is moderate, leverage strategies often beat position strategies. Since change is incremental and predictable, it makes sense for managers to coevolve their strategically important resources with the industry. So while position strategies are based on the fortress analogy, leverage strategies are more like chess, where competitive advantage comes from both having valuable pieces and making smart moves with them. Take Pepsi. The company has several strategically important resources (including its brand, product formulas and distribution system). But what really matters is that the company has smartly leveraged them to support new products that fit with increasingly health-conscious consumers. Alongside its carbonated drinks, Pepsi now offers an array of alternative beverages, including waters (Aquafina, SoBe Lifewater), juices (Tropicana, Dole), teas (Lipton) and sports drinks (Gatorade), all of which take advantage of the company’s stra-tegically important resources.
Companies that pursue leverage strategies achieve competitive advantage by using their strategically important resources in existing and new industries at a pace that is consistent with market
change. This strategy, commonly associated with the resource-based view of the company,3 focuses on building or acquiring resources that are valuable, rare, difficult to imitate and nonsubstitutable, and leveraging them into new products and markets. But while resources in position strategies are often tightly interlocked, resources in leverage strategies are often only moderately interconnected.
Leverage strategies can focus on refreshing and consistently deploying core resources in current markets. For example, although Intel’s short-term success depends on extracting value from its current generation ofmicroprocessors, its long-term growth depends on using its well-known design capabilities, branding and manufacturing resources in future generations of microprocessors. Similarly, Pizza Hut’s continued suc-cess depends on updating its highly important service resources in its existing markets. The company expanded into India in the late 1990s and soon distinguished itself from competitors based on its ability to provide customers with pizza and friendly table service in a relaxed atmosphere. Yet, by 2005, India’s casual dining sector was crowded. Pressured by rivals, including Domino’s, Pizza Hut refreshed its service resources and leveraged them to create a more upscale dining experience. As a result, Pizza Hut is still the most trusted food brand in India.
While leveraging resources in existing markets is important, leveraging resources into new markets is important, too. Under Armour, a Baltimore, Maryland, sports apparel company founded in 1995, offers a good example. CEO Kevin Plank originally planned to make breathable garments for football players. But he and his team soon realized that they could leverage their moisture-wicking synthetic fabrications into other markets. After screening markets to see where this resource could be introduced most effectively, Under Armour executives developed their first line of moisture-wicking running shoes. Similarly, Home Depot is currently attempting to leverage its core resources by selling automotive replacement parts. By exploiting both its extensive expertise in “do-it-yourself” and its 2,200 store locations, it hopes to propel growth.
A common mistake with leverage strategies is forgetting to reassess the strategic importance of resources (especially value, rarity and nonsubsti-tutability) in potential new markets. For example,
when
Amazon.com
first tried to leverage its online ordering and inventory fulfillment capabilities beyond books and music to include other product categories such as toys, it hit a wall. As it turned out, the inventory systems that were tailored for books and music were not well suited for the extreme seasonality of toys, and the company’s warehouse logistics were not designed to handle toys, which come in all sorts of shapes and sizes.
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Under Armour CEO Kevin Plank and his team realized that they could leverage their moisture-wicking synthetic fabrications into new markets.
)Leverage strategy is not only about expansion. Sometimes, it makes sense to pull back and redeploy resources. For years, California-based Advanced Micro Devices used its superior engineering design resources to develop semiconductors. Recently, however, the company has redeployed some of its resources away from the hotly competitive semiconductor industry and into design services. Although products and ser-vices may rely on particular strategically important resources, these resources need not be wedded to specific products or services. Rather, they can be used to create competitive advantage in other contexts. In other words, a deep knowledge base of resources and capabilities is often fungible across multiple products and markets.
A primary challenge of creating competitive advantage with a leverage strategy is updating the resource portfolio as industries change. This can mean choosing whether to acquire, partner or develop key resources in-house. Toyota’s Prius is an example of leveraging some existing resources, including brand and electronics technology, even as the company developed and acquired new resources for hybrid technology, engine control software and regenerative braking. But, even when managers see the need for adding, upgrading or eliminating resources, entrenched beliefs and internal power struggles can interfere. Immediate performance from existing resources takes precedence over later performance from new resources that may be several years away. To support this point, one needs to look no further than Chrysler. In 1984, Chrysler introduced the first minivan. Over the next 20 years, it sold more than 10 million minivans, revitalized its popular Jeep line and introduced successful Ram and Dakota pickups and Dodge Durango SUVs. But the auto industry changed. While General Motors and Ford adapted their engine technologies to emphasize fuel efficiency
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and retooled their manufacturing plants for small cars, Chrysler failed to update its resource portfolio. As a result, the company, now controlled by Fiat, has yet to prove that it can gain the resources necessary to compete well in the new reality.
The Opportunity Strategy
In contrast to stable industries, dynamic industries are characterized by superabundant flows of fast-moving but often unpredictable opportunities. Industry struc-ture is characteristically shifting as competitors come and go, customers modify their preferences and business models are in flux. How long will competitive advantage last? It’s impossible to know, but probably not very long. As the CEO of a security software company told us half-jokingly, “You need a degree in astrology to compete in our industry.” Even though managers seek a long-term competitive advantage, they do business as if it doesn’t exist. The famous Intel axiom that “only the paranoid survive” reflects senior management’s belief that at any point in time their competitive advantage will vanish. As a result, strategy focuses on capturing opportunities that create a series of temporary competitive advantages.
In contrast to the fortress and chess views of strategy, pursuing an opportunity strategy is like surfing: Performance comes from catching a great wave at the right time, even though the duration of that wave is likely to be short and the ride a precarious “edge of chaos” experience where falling off is always a possibility.4 Timing and capturing succes-sive waves are what matters. The video game console industry provides a useful case in point. In the space of only a few years, different companies (including Sega, Nintendo, Sony and Microsoft) have “caught the wave” and for a time led the industry.
For companies pursuing opportunity strategies, competitive advantage comes from capturing at-tractive but fleeting opportunities sooner, faster and better than competitors. This strategy, which is commonly associated with “simple rules” heuris-tics,5 requires combining two elements: choosing a focal strategic process and developing simple rules to guide that process. Together, they enable companies to be flexible enough to capture unanticipated opportunities while still being broadly coherent and efficient. In choosing a focal strategic process, the key is to choose one where the flow of attractive op
portunities is steady and deep. Tata Group, whose diversified operations range from steel and autos to communications and beverages, provides a good example. Because of its high market capitalization and ready access to corporate debt, Tata has relied heavily on acquisitions as its focal strategic process. Its managers have pursued a series of acquisition opportunities quickly and effectively. For example, in 2007, the company paid $12 billion for Corus, a European steel company. Several months later, it paid $2.3 billion to buy Jaguar and Land Rover from Ford. In contrast, Apple focuses on a different stra-tegic process — product development — to churn out coveted new designs. Yet in contrast to position strategy, which depends on tightly connected processes, opportunity strategy is built on processes that are only loosely connected to one another.
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)Once managers have identified their focal strategic process, they need to learn some simple rules. The easiest to learn are rules of thumb for picking and processing opportunities; rules for pacing and priority rules are more difficult to learn. The idea is to provide enough structure for action while also allowing flexibility to capture unanticipated opportunities. At Pixar Animation Studio, whose animated films (including the Toy Story movies, A Bug’s Life, and Finding Nemo) have become worldwide megahits, the rules are clear. One rule is “no studio executives.” Pixar is run by cre-ative artists, or as Andrew Stanton (director of WALL-E and Pixar’s ninth employee) called it, “film school without the teachers.” This gives company artists maximum leeway to create without having to fight their way through middle management. A second rule is “great story first, then animation.” That not only ensures a steady stream of prestigious awards (Ratatouille holds the record for the most Oscar nominations for a feature-length animated film), but also makes it easier to attract talent. Another rule stipulates “in-house original ideas only.” And while ideas must come from within, they don’t come just from creative types: Every-one from janitors to auditors is encouraged to submit ideas, and all ideas are considered. Finally, as the surf-ing analogy would suggest, the rules affecting pacing are particularly important. A key one at Pixar is “one new movie per year.” But while there are rules, there is plenty of space at Pixar to create unique movies.
On the surface, opportunity strategies relying on simple rules seem easy to copy. But since the op-
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)portunities and outcomes are so varied, it is actually difficult to decode the rules from the outside. Of course, competitors can try to mimic processes (say, for acquisitions or product development), but rules are often the results of idiosyncratic trial and error, making them difficult for rivals to duplicate. More-over, even if competitors understand the underlying logic and copy a company’s rules, it’s often too late: The most attractive opportunities will have already been captured. For example, although Cisco Sys-tem’s networking rivals eventually copied the rules of its acquisition process, they could not replicate the opportunities that Cisco had already acquired.
Managers often tinker with their rules by making them better or more suited to their changing industries. In doing so, managers not only alter the number and content of rules, but also their abstraction. For example, CRF Health, an international company that expedites drug discovery in the pharmaceutical industry, frequently adjusted the rules that guided its internationalization process. When the company entered the United States, it relied on a rule that had been highly effective in Sweden: “Hire strong locals using online resources.” But this rule proved ill-suited to the new market because there were few individuals with both clinical development and technical skills willing to work in a startup. Indeed, the rule led to several early hires who were not well-qualified. Based on this experience, CRF’s team decided that the existing rule needed to change to one emphasizing local hiring without regard to source. Thus, leaders raised the abstraction from “Hire strong locals using online resources” to the more general “Hire strong locals.” This new rule focused attention on the overarching aim of hiring, but did not prescribe whether to rely on online resources, headhunters or other sources. Although intuition suggests that rules begin as abstract and become detailed, opportunity strategy stresses the opposite. Rather than becoming routine to ensure efficiency, rules often become more abstract and remain few in number to ensure flexibility to address unanticipated opportunities.
When an opportunity flow becomes less attractive (e.g., greater competition for the opportunities or lower payoff from the opportunities) or when more attractive opportunity flows emerge, it’s time to pivot to the superior flow and its related strategic process.
STRATEGY
The key point is that shifts in where to compete are driven more by the attractiveness of opportunity flows than by fit with the company’s strategically important resources. For example, as product development opportunities slowed down at Google, management placed more emphasis on internationalization opportunities. The company ramped up to enter more than 55 countries with more than 35 languages by support-ing localized search, and it now generates more than half its revenue from outside the United States. Similarly, once its user network had grown to a sufficient scale, LinkedIn switched from emphasizing its strate-gic process for user acquisition to one for developing new revenue-producing services.
Just as positioning and leverage strategies have their pitfalls, so does opportunity strategy. For entrepreneurial startups, it is often critical to add more strategic processes and rules than is comfortable. Too little structure is riskier than too much. But for large companies, the greater risk is having too much structure. Most managers intuitively worry about bureaucracy and red tape. But what they don’t know is that pursuing an opportunity strategy requires holding the line on the number of rules, not just their content. In other words, the number of rules matters. Managers should also be alert to signs of consolidation, standardization, longer product life cycles and other such indications that the industry is maturing and becoming less dynamic.
SO WHICH STRATEGY SHOULD YOU USE? The reality is that no single strategy works in every industry always. Although the essence of strategy is being different, establishing that “difference” — whether it’s through different positions, different resources or different rules — depends on the circumstances. Each approach works best in particular settings and has its own implications for strategic actions, pitfalls, competitive advantage and performance. And just when you think you have it right, you may well need to change again. But by understanding the archetypal strategic frameworks and the factors underlying each choice, you’ll be better prepared to craft your next strategy.
Christopher Bingham is assistant professor and Phillip Hettleman Fellow of strategy and entrepreneurship at the University of North Carolina at Chapel Hill’s Kenan-Flagler Business School. Kathleen Eisenhardt
is the Stanford W. Ascherman M.D. Professor of Strat-egy and Organization at Stanford University. Nathan Furr is assistant professor of entrepreneurship and strategy at Brigham Young University. Comment on this article at
http://sloanreview.mit.edu/x/53110/,
or contact the authors at
smrfeedback@mit.edu
.
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)ACKNOWLEDGMENTS
The authors thank Kenan-Flagler Business School at UNC, Stanford Technology Ventures Program, Marriott School of Management at BYU and the National Science Foundation (grant #0323176) for their support.
REFERENCES
1. M.E. Porter, “Competitive Strategy” (New York: Free Press, 1980); M.E. Porter, “What Is Strategy?,” Harvard Business Review 74, no. 6 (1996); J.W. Rivkin, “Imitation of Complex Strategies,” Management Science 46, no. 6 (2000): 824-844; N. Siggelkow, “Evolution Toward Fit,” Administrative Science Quarterly 47, no. 1 (2002): 125-159 C.B. Bingham and K.M. Eisenhardt, “Position, Leverage and Opportunity: A Typology of Strategic Logics Linking Resources with Competitive Advantage,” Managerial and Decision Economics 29, no. 2-3 (2008): 241-256.
2. N. Siggelkow, “Change in the Presence of Fit: The Rise, the Fall, and the Renaissance of Liz Claiborne,” Academy of Management Journal 44, no. 4 (2001): 838-857.
3. C.K. Pralahad and G. Hamel, “The Core Competence of the Corporation,” Harvard Business Review 68, no. 3 (1990); D.J. Collis and C.A. Montgomery, “Competing on Resources,” Harvard Business Review 73, no. 4 (1995): 118-128 J. Barney, “Firm Resources and Sustained Competitive Advantage,” Journal of Management 17, no. 1 (1991): 99-120; M.A. Peteraf, “The Cornerstones of Com-petitive Advantage: A Resource-Based View,” Strategic Management Journal 14, no. 3 (1993): 179-191.
4. J.P. Davis, K.M. Eisenhardt and C. B. Bingham, “Optimal Structure, Market Dynamism and the Strategy of Simple Rules,” Administrative Science Quarterly 54 (2009): 413-452.
5. S.L. Brown and K.M. Eisenhardt, “Competing on the Edge: Strategy as Structured Chaos” (Boston: Harvard Business School Press, 1998); K.M. Eisenhardt and D.N. Sull, “Strategy as Simple Rules,” Harvard Business Review 79, no. 1 (2001): 107-116; C.B. Bingham, K.M. Eisenhardt and N.R. Furr, “What Makes a Process a Capability? Heuristics, Strategy and Effective Capture of Opportunities,” Strategic Entrepreneurship Journal 1, no. 1-2 (2007): 27-47; C.B. Bingham and K.M. Eisenhardt, “Rational Heuristics: The ‘Simple Rules’ That Strategists Learn from Their Process Experiences,” Strategic Man-agement Journal (in press); C.B. Bingham and J. Haleblian, “How Entrepreneurial Firms Learn Heuristics: Similarities and Differences Between Individual and Organizational Learning,” Strategic Entrepreneurship Journal (in press).
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AAPEX 2011 Exclusive – Executive Summary
)Agile Execution:
Driving Strategic Results
In a Changing Aftermarket
Written by Brent D. Peterson, The Work Itself Group Inc.; Ron Cox, Tailwind Consulting; Chuck Udell, Essential Action Design Group; and Tom Easton, Essential Action Design Group For the Automotive Aftermarket Suppliers Association October 2011
AASA Editor’s Note:
The following AASA Special Report was prepared exclusively for the association by the authors. It is not intended as an endorsement of any product or service by AASA. The opinions, beliefs and viewpoints expressed by the authors do not necessarily reflect the opinions, beliefs and viewpoints of AASA, MEMA, affiliated associations or boards of directors. Furthermore, all content is provided on an “AS IS” basis and AASA makes no warranties or representations regarding its accuracy.
Introduction
Agile Execution: Driving Strategic Results in a Changing Aftermarket analyzes the gap between formulating strategic plans and carrying them out successfully. It also lays out the solution to enable your company to become strategically literate and effectively achieve your strategic objectives.
As noted in AASA’s “Automotive Aftermarket Outlook 2020” study, automotive aftermarket manufacturers are going to face significant strategic shifts over the next decade. Relationships along the aftermarket value chain will change dramatically, and each company will need to create compelling new sources of competitive advantage. The winning manufacturers will build differentiated capabilities that are valuable to their channel partners.
To survive and thrive in this changing environment, manufacturers need to be able to effectively translate their strategies into execution. A recent study1 of employees found that 70 percent of workers do not know what to do to support their company’s strategy. Work aligned with the
strategy is “Real Work”; work not aligned with the strategy is “Fake Work.” According to the study, half of all the work people did had nothing to do with their company’s strategy – it was Fake Work!
70% of workers don’t know what to do to support their company’s strategy.
Success will require improving the strategic thinking skills of executives and managers at all levels within your company, resulting in an improvement in strategy translation and execution at the individual level. Translating strategy to the individual level is the key to engagement and
alignment. The same research also presented the discomforting and embarrassing truth that 81 percent of employees responded “no” when asked, “Do you feel committed to your company’s strategy?”
Team members within many manufacturers are not strategically literate. Research and experience demonstrate that most workers are not literate in their view of, or their place within, the “big picture” strategy. To improve financial results, companies must critically examine disconnects between the effort employees currently expend and the real contribution of their results in achieving the company’s most important goals.
This report provides new thinking and approaches that have been successfully tested and implemented at real companies. These approaches have enabled Fortune 500 companies – and smaller competitors – to achieve their strategic objectives and realize their vision of the future.
1 Fake Work, Brent D. Peterson & Gaylan Nielson, Simon Schuster, N.Y., 2009
About the Authors
Brent D. Peterson, Ph.D., has authored or co-authored 20 books; he was the founder of the Center for Entrepreneurship, Marriott School of Management at Brigham Young University. He also founded The Work Itself Group to help companies reduce their “Fake Work.” Ron Cox, MBA, is the former CEO of four well-known consulting and training companies. He formed Tailwind
Consulting to work with clients on building their employees’ literacy in their own strategy. Cox pioneered the idea of Strategic Literacy for business. Chuck Udell earned his MBA in marketing and finance from Simon Graduate School of Business at the University of Rochester. He is the former president of the University of the Aftermarket at Northwood University. Tom Easton completed his undergraduate work in business administration at Murray State University. He is a former adjunct professor at Northwood University. (See Author’s Biographies at the conclusion of this report.)
The combination of their research, studies of aftermarket companies, findings and opinions provide extensive insights into the most important strategic execution issues facing senior leaders in Automotive Aftermarket Suppliers Association member companies. The authors of this AASA Special Report present their opinions in the full report, available for free download at the AASA Web site,
www.aftermarketsuppliers.org/Publications/Special-Reports
. Simply click on the Special Report title, Agile Execution: Driving Strategic Results in a Changing Aftermarket, and a printable PDF version will automatically download on your desktop.
I. Executive Overview
“Manufacturers cannot rely on just traditional sources of power (i.e., good product, strong brands, and scale and scope). There will be a survival of the fittest among automotive aftermarket suppliers with greater distinction between the winners and losers in an industry with no real growth and over-capacity. Only those companies that invest in building differentiating capabilities over time and evolve their business models will succeed; others will suffer.” Aftermarket Outlook 2020
Before exploring business models, operational efficiency and strategy, it is helpful to distinguish efficiency from effectiveness. Efficiency is a performance metric that evaluates how well a process converts inputs to outputs. Effectiveness is a measure of the degree to which outputs satisfy requirements.
Efficiency is about “doing things in the right way.” This includes using all resources well, with an internal focus on activities. Effectiveness is about “doing the right things.” Your effectiveness is when Real Work produces the results that contribute to the realization of the strategic intent of your company.
Operational efficiency is an absolute requirement for any manufacturer to compete in the current automotive aftermarket. However, in terms of true competitive advantage, a manufacturer can only surpass its rivals by managing to establish a difference that is distinctive and that it can maintain. To this end, the manufacturer must include in its strategy unique and sustainable ways to deliver value to its customers in a manner that is distinct from traditional manufacturing strengths.
Strategy development is the deliberate search for a plan of action. Strategy is a pattern to follow in a consistent way over time. Collectively we have found that there is a deficiency in the connection between the process of conceiving strategy and the process of implementing it.
73% of workers do not think their company’s goals are translated into
specific work that they can execute.2
The number one issue cited in a survey of CEOs was “Excellence in Execution.”3 Aligning the thinking and activities of your key executives and managers to the overall strategic intent is a differentiator that reduces and improves all deliverables to your channel partners.
We have found it is next to impossible to achieve strategic execution without company-wide Strategic LiteracySM.4 Just because leaders dispatch the strategy to their entire company does not mean they can assume that quality translation has or will occur. If inaccurate translation occurs, employees never really take ownership of the strategy, and their contributions to the execution of the strategy are sub-optimized.
To be successful, it is vital that aftermarket suppliers cascade their strategic intent in a way that builds understanding, commitment and ownership at
every
level. Communicating the strategic intent to each executive and manager transcends a manufacturer’s traditional sources of strength, creating a new competitive strength by building literacy in their own strategy.
Fifty-six percent of workers do not clearly understand their company’s
most important goals.5
Strategic Literacy engages employees, aligns their contributions and is the key to preventing Fake Work. It creates a disposition for action that concentrates the strategic intent of the company and provides a framework for transforming Fake Work into Real Work. It links your company’s strategic intent and its objectives with every unit and every employee.
Strategic Literacy creates a single vision of strategy in the mind of every employee. This improves the strategy’s implementation and facilitates its communication and the translation to channel partners, customers, employees and shareholders. As companies build employees’ literacy in their strategy, there is an optimization of effort. The most basic form of this optimization involves the flow of information and coordination between divisions, units, work groups and teams.
Too often, a generalized focus on operational efficiency explains the lack of strategic vision.
When an aftermarket manufacturer bases its “self-evaluation” solely on its operational performance, the only options for improvement are in traditional disciplines such as purchasing, manufacturing and material handling.
2 Fake Work, Brent D. Peterson & Gaylan Nielson, Simon & Schuster, N.Y., 2009
3 The Conference Board Annual CEO Challenge Survey, 2007-2010
4 Greenwald, Bruce. Competitive Demystified: A Radically Simplified Approach to Business Strategy, 2005.
Of course, operational efficiency is desirable, and increasing it is a necessary part of managing any enterprise. However, the incremental gains realized when manufacturing companies improve their efficiency is not a strategy.4
In fact, since every manufacturer in the aftermarket has adopted the same cost-containment tools and best-of-class practices, these improvements to their operational efficiency are no longer enough to differentiate one supplier from another.
A manufacturer making a commitment to improve their employees’ literacy in their own company’s strategy will generate greater value than its competitors will. Improving strategic thinking skills creates the ability to foresee the risks and returns with sufficient accuracy to justify a new use of resources. Executives, supervisors and managers are able to leverage new insights into their own strategy to predict the effects of their decisions and actions.
“All levels of your company should be engaged in a discussion of the future,
thus becoming strategy activists.”6
The Strategic Literacy of your company will change perspectives, involving the highest levels of your organizational chart (where resources are allocated) as well as in the middle levels (where more imagination exists), and at lower level (where there is more potential for change).
The process of developing literacy in your strategy is work involving all levels of your company to make possible the changes needed for the achievement of your company’s strategic intent.
EDITOR’S NOTE:
This AASA Special Report is available for free download at the AASA Web site,
www.aftermarketsuppliers.org
.
5 Strategic LiteracySM within a business usage is a term service marked by Tailwind Consulting, LLC. From this point on throughout this paper, we will use the term strategic literacy to refer to this usage.
5 Strategic Alignment Process and Decision Support Systems, The Idea Group; IGI Global, EBSCO publishing, 2006
Title:
By: Porter, Michael E., Harvard Business Review, 00178012, Nov/Dec96, Vol. 74, Issue 6
Database:
Business Source Elite
HTML Full Text
What Is Strategy?
1.
Operational Effectiveness: Necessary but Not Sufficient
2.
II. Strategy Rests on Unique Activities
3.
The Origins Strategic Positions
4.
III. A Sustainable Strategic Position Requires Trade-offs
5.
IV. Fit Drives Both Competitive Advantage and Sustainability
6.
Types of Fit
7.
Fit and Sustainability
8.
V. Rediscovering Strategy
9.
The Failure to Choose
10.
The Growth Trap
11.
Profitable Growth
12.
The Role of Leadership
13.
Japanese Companies Rarely Have Strategies
14.
Finding New Positions: The Entrepreneurial Edge
15.
The Connection with Generic Strategies
16.
Alternative Views of Strategy
17.
The Implicit Strategy Model of the Past Decade
18.
Sustainable Competitive Advantage
Listen
Select:
I. Operational Effectiveness Is Not Strategy
For almost two decades, managers have been learning to play by a new set of rules. Companies must be flexible to respond rapidly to competitive and market changes. They must benchmark continuously to achieve best practice. They must outsource aggressively to gain efficiencies. And they must nurture a few core competencies in the race to stay ahead of rivals.
Positioning-once the heart of strategy-is rejected as too static for today’s dynamic markets and changing technologies. According to the new dogma, rivals can quickly copy any market position, and competitive advantage is, at best, temporary.
But those beliefs are dangerous half-truths, and they are leading more and more companies down the path of mutually destructive competition. True, some barriers to competition are falling as regulation eases and markets become global. True, companies have properly invested energy in becoming leaner and more nimble. In many industries, however, what some call hypercompetition is a self-inflicted wound, not the inevitable outcome of a changing paradigm of competition.
The root of the problem is the failure to distinguish between operational effectiveness and strategy. The quest for productivity, quality, and speed has spawned a remarkable number of management tools and techniques: total quality management, `benchmarking, time-based competition, outsourcing, partnering, reengineering, change management. Although the resulting operational improvements have often been dramatic, many companies have been frustrated by their inability to translate those gains into sustainable profitability. And bit by bit, almost imperceptibly, management tools have taken the place of strategy. As managers push to improve on all fronts, they move farther away from viable competitive positions.
Operational Effectiveness: Necessary but Not Sufficient
Operational effectiveness and strategy are both essential to superior performance, which, after all, is the primary goal of any enterprise. But they work in very different ways.
A company can outperform rivals only if it can establish a difference that it can preserve. It must deliver greater value to customers or create comparable value at a lower cost, or do both. The arithmetic of superior profitability then follows: delivering greater value allows a company to charge higher average unit prices; greater efficiency results in lower average unit costs.
Ultimately, all differences between companies in cost or price derive from the hundreds of activities required to create, produce, sell, and deliver their products or services, such as calling on customers, assembling final products, and training employees. Cost is generated by performing activities, and cost advantage arises from performing particular activities more efficiently than competitors. Similarly, differentiation arises from both the choice of activities and how they are performed. Activities, then, are the basic units of competitive advantage. Overall advantage or disadvantage results from all a company’s activities, not only a few.[1]
Operational effectiveness (OE) means performing similar activities better than rivals perform them. Operational effectiveness includes but is not limited to efficiency. It refers to any number of practices that allow a company to better utilize its inputs by, for example, reducing defects in products or developing better products faster. In contrast, strategic positioning means performing different activities from rivals’ or performing similar activities in different ways.
Differences in operational effectiveness among companies are pervasive. Some companies are able to get more out of their inputs than others because they eliminate wasted effort, employ more advanced technology, motivate employees better, or have greater insight into managing particular activities or sets of activities. Such differences in operational effectiveness are an important source of differences in profitability among competitors because they directly affect relative cost positions and levels of differentiation.
Differences in operational effectiveness were at the heart of the Japanese challenge to Western companies in the 1980s. The Japanese were so far ahead of rivals in operational effectiveness that they could offer lower cost and superior quality at the same time. It is worth dwelling on this point, because so much recent thinking about competition depends on it. Imagine for a moment a productivity frontier that constitutes the sum of all existing best practices at any given time. Think of it as the maximum value that a company delivering a particular product or service can create at a given cost, using the best available technologies, skills, management techniques, and purchased inputs. The productivity frontier can apply to individual activities, to groups of linked activities such as order processing and manufacturing, and to an entire company’s activities. When a company improves its operational effectiveness, it moves toward the frontier. Doing so may require capital investment, different personnel, or simply new ways of managing.
The productivity frontier is constantly shifting outward as new technologies and management approaches are developed and as new inputs become available. Laptop computers, mobile communications, the Internet, and software such as Lotus Notes, for example, have redefined the productivity frontier for sales-force operations and created rich possibilities for linking sales with such activities as order processing and after-sales support. Similarly, lean production, which involves a family of activities, has allowed substantial improvements in manufacturing productivity and asset utilization.
For at least the past decade, managers have been preoccupied with improving operational effectiveness. Through programs such as TQM, time-based competition, and benchmarking, they have changed how they perform activities in order to eliminate inefficiencies, improve customer satisfaction, and achieve, best practice. Hoping to keep up with shifts in the productivity ‘frontier, managers have embraced continuous improvement, empowerment, change management, and the so-called learning organization. The popularity of outsourcing and the virtual corporation reflect the growing recognition that it is difficult to perform all activities as productively as specialists.
As companies move to the frontier, they can often improve on multiple dimensions of performance at the same time. For example, manufacturers that adopted the Japanese practice of rapid changeovers in the 1980s were able to lower cost and improve differentiation simultaneously. What were once believed to be real trade-offs- between defects and costs, for example- turned out to be illusions created by poor operational effectiveness. Managers have learned to reject such false trade-offs.
Constant improvement in operational effectiveness is necessary to achieve superior profitability. However, it is not usually sufficient. Few companies have competed successfully on the basis of operational effectiveness over an extended period, and staying ahead of rivals gets harder every day. The most obvious reason for that is the rapid diffusion of best practices. Competitors can quickly imitate management techniques, new technologies, input improvements, and superior ways of meeting customers’ needs. The most generic solutions- those that can be used in multiple settings- diffuse the fastest. Witness the proliferation of OE techniques accelerated by support from consultants.
OE competition shifts the productivity frontier outward, effectively raising the bar for everyone. But although such competition produces absolute improvement in operational effectiveness, it leads to relative improvement for no one. Consider the $5 billion-plus U.S. commercial-printing industry. The major players- R.R. Donnelley & Sons Company, Quebecor, World Color Press, and Big Flower Press-are competing head to head, serving all types of customers, offering the same array of printing technologies (gravure and web offset), investing heavily in the same new equipment, running their presses faster, and reducing crew sizes. But the resulting major productivity gains are being captured by customers and equipment suppliers, not retained in superior profitability. Even industry-leader Donnelley’s profit margin, consistently higher than 7% in the 1980s, fell to less than 4.6% in 1995. This pattern is playing itself out in industry after industry. Even the Japanese, pioneers of the new competition, suffer from persistently low profits. (See the insert “Japanese Companies Rarely Have Strategies.”)
The second reason that improved operational effectiveness is insufficient- competitive convergence- is more subtle and insidious. The more benchmarking companies do, the more they look alike. The more that rivals outsource activities to efficient third parties, often the same ones, the more generic those activities become. As rivals imitate one another’s improvements in quality, cycle times, or supplier partnerships, strategies converge and competition becomes a series of races down identical paths that no one can win. Competition based on operational effectiveness alone is mutually destructive, leading to wars of attrition that can be arrested only by limiting competition.
The recent wave of industry consolidation through mergers makes sense in the context of OE competition. Driven by performance pressures but lacking strategic vision, company after company has had no better idea than to buy up its rivals. The competitors left standing are often those that outlasted others, not companies with real advantage.
After a decade of impressive gains in operational effectiveness, many companies are facing diminishing returns. Continuous improvement has been etched on managers’ brains. But its tools unwittingly draw companies toward imitation and homogeneity. Gradually, managers have let operational effectiveness supplant strategy. The result is zero-sum competition, static or declining prices, and pressures on costs that compromise companies’ ability to invest in the business for the long term.
II. Strategy Rests on Unique Activities
Competitive strategy is about being different. It means deliberately choosing a different set of activities to deliver a unique mix of value.
Southwest Airlines Company, for example, offers short-haul, low-cost, point-to-point service between midsize cities and secondary airports in large cities. Southwest avoids large airports and does not fly great distances. Its customers include business travelers, families, and students. Southwest’s frequent departures and low fares attract price-sensitive customers who otherwise would travel by bus or car, and convenience-oriented travelers who would choose a full-service airline on other routes.
Most managers describe strategic positioning in terms of their customers: “Southwest Airlines serves price- and convenience-sensitive travelers,” for example. But the essence of strategy is in the activities-choosing to perform activities differently or to perform different activities than rivals. Otherwise, a strategy is nothing more than a marketing slogan that will not withstand competition.
A full-service airline is configured to get passengers from almost any point A to any point B. To reach a large number of destinations and serve passengers with connecting flights, full-service airlines employ a hub-and-spoke system centered on major airports. To attract passengers who desire more comfort, they offer first-class or business-class service. To accommodate passengers who must change planes, they coordinate schedules and check and transfer baggage. Because some passengers will be traveling for many hours, full-service airlines serve meals.
Southwest, in contrast, tailors all its activities to deliver low-cost, convenient service on its particular type of route. Through fast turnarounds at the gate of only 15 minutes, Southwest is able to keep planes flying longer hours than rivals and provide frequent departures with fewer aircraft. Southwest does not offer meals, assigned seats, interline baggage checking, or premium classes of service. Automated ticketing at the gate encourages customers to bypass travel agents, allowing Southwest to avoid their commissions. A standardized fleet of 737 aircraft boosts the efficiency of maintenance.
Southwest has staked out a unique and valuable strategic position based on a tailored set of activities. On the routes served by Southwest, a full-service airline could never be as convenient or as low cost.
Ikea, the global furniture retailer based in Sweden, also has a clear strategic positioning. Ikea targets young furniture buyers who want style at low cost. What turns this marketing concept into a strategic positioning is the tailored set of activities that make it work. Like Southwest, Ikea has chosen to perform activities differently from its rivals.
Consider the typical furniture store. Showrooms display samples of the merchandise. One area might contain 25 sofas; another will display five dining tables. But those items represent only a fraction of the choices available to customers. Dozens of books displaying fabric swatches or wood samples or alternate styles offer customers thousands of product varieties to choose from. Salespeople often escort customers through the store, answering questions and helping them navigate this maze of choices. Once a customer makes a selection, the order is relayed to a third-party manufacturer. With luck, the furniture will be delivered to the customer’s home within six to eight weeks. This is a value chain that maximizes customization and service but does’ so at high cost.
In contrast, Ikea serves customers who are happy to trade off service for cost. Instead of having a sales associate trail customers around the store, Ikea uses a self-service model based on clear, in-store displays. Rather than rely solely on third-party manufacturers, Ikea designs its own low-cost, modular, ready-to-assemble furniture to fit its positioning. In huge stores, Ikea displays every product it sells in room-like settings, so customers don’t need a decorator to help them imagine how to put the pieces together. Adjacent to the furnished showrooms is a warehouse section with the products in boxes on pallets. Customers are expected to do their own pickup and delivery, and Ikea will even sell you a roof rack for your car that you can return for a refund on your next visit.
Although much of its low-cost position comes from having customers “do it themselves,” Ikea offers a number of extra services that its competitors do not. In-store child care is one. Extended hours are another. Those services are uniquely aligned with the needs of its customers, who are young, not wealthy, likely to have children (but no nanny), and, because they work for a living, have a need to shop at odd hours.
The Origins Strategic Positions
Strategic positions emerge from three distinct sources, which are not mutually exclusive and often overlap. First, positioning can be based on producing a subset of an industry’s products or services. I call this variety-based positioning because it is based on the choice of product or service varieties rather than customer segments. Variety-based positioning makes economic sense when a company. can best produce particular products or services using distinctive sets of activities.
Jiffy Lube International, for instance, specializes in automotive lubricants and does not offer other car repair or maintenance services. Its value chain produces faster service at a lower cost than broader line repair shops, a combination so attractive that many customers subdivide their purchases, buying oil changes from the focused competitor, Jiffy Lube, and going to rivals for other services.
The Vanguard Group, a leader in the mutual fund industry, is another example of variety-based positioning. Vanguard provides an array of common stock, bond, and money market funds that offer predictable performance and rock-bottom expenses. The company’s investment approach deliberately sacrifices the possibility of extraordinary performance in any one year for good relative performance in every year. Vanguard is known, for example, for its index funds. It avoids making bets on interest rates and steers clear of narrow stock groups. Fund managers keep trading levels low, which holds expenses down; in addition, the company discourages customers from rapid buying and selling because doing so drives up costs and can force a fund manager to trade in order to deploy new capital and raise cash for redemptions. Vanguard also takes a consistent low-cost approach to managing distribution, customer service, and marketing. Many investors include one or more Vanguard funds in their portfolio, while buying aggressively managed or specialized funds from competitors.
The people who use Vanguard or Jiffy Lube are responding to a superior value chain for a particular type of service. A variety-based positioning can serve a wide array of customers, but for most it will meet only a subset of their needs.
A second basis for positioning is that of serving most or all the needs of a particular group of customers. I call this needs-based positioning, which comes closer to traditional thinking about targeting a segment of customers. It arises when there are groups of customers with differing needs, and when a tailored set of activities can serve those needs best. Some groups of customers are more price sensitive than others, demand different product features, and need varying amounts of information, support, and services. Ikea’s customers are a good example of such a group. Ikea seeks to meet all the home furnishing needs of its target customers, not just a subset of them.
A variant of needs-based positioning arises when the same customer has different needs on different occasions or for different types of transactions. The same person, for example, may have different needs when traveling on business than when traveling for pleasure with the family. Buyers of cans – beverage companies, for example – will likely have different needs from their primary supplier than from their secondary source.
It is intuitive for most managers to conceive of their business in terms of the customers’ needs they are meeting.. But a critical element of needs-based positioning is not at all intuitive and is often overlooked. Differences in needs will not translate into meaningful positions unless the best set of activities to satisfy them also differs. If that were not the case, every competitor could meet those same needs, and there would be nothing unique or valuable about the positioning.
In private banking, for example, Bessemer Trust Company targets families with a minimum of $5 million in investable assets who want capital preservation combined with wealth accumulation. By assigning one sophisticated account officer for every 14 families, Bessemer has configured its activities for personalized service. Meetings, for example, are more likely to be held at a client’s ranch or yacht than in the office. Bessemer offers a wide array of customized services, including investment management and estate administration, oversight of oil and gas investments, and accounting for racehorses and aircraft. Loans, a staple of most private banks, are rarely needed by Bessemer’s clients and make up a tiny fraction of its client balances and income. Despite the most generous compensation of account officers and the highest personnel cost as a percentage of operating expenses, Bessemer’s differentiation with its target families produces a return on equity estimated to be the highest of any private banking competitor.
Citibank’s private bank, on the other hand, serves clients with minimum assets of about $250,000 who, in contrast to Bessemer’s clients, want convenient access to loans-from jumbo mortgages to deal financing. Citibank’s account managers are primarily lenders. When clients need other services, their account manager refers them to other Citibank specialists, each of whom handles prepackaged products. Citibank’s system is less customized than Bessemer’s and allows it to have a lower manager-to-client ratio of 1:125. Biannual office meetings are offered only for the largest clients. Both Bessemer and Citibank have tailored their activities to meet the needs of a different group of private banking customers. The same value chain cannot profitably meet the needs of both groups.
The third basis for positioning is that of segmenting customers who are accessible in different ways. Although their needs are similar to those of other customers, the best configuration of activities to reach them is different. I call this access-based positioning. Access can be a function of customer geography or customer scale-or of anything that requires a different set of activities to reach customers in the best way.
Segmenting by access is less common and less well understood than the other two bases. Carmike Cinemas, for example, operates movie theaters exclusively in cities and towns with populations under 200,000. How does Carmike make money in markets that are not only small but also won’t support big-city ticket prices? It does so through a set of activities that result in a lean cost structure. Carmike’s small-town customers can be served through standardized, low-cost theater complexes requiring fewer screens and less sophisticated projection technology than big-city theaters. The company’s proprietary information system and management process eliminate the need for local administrative staff beyond a single theater manager. Carmike also reaps advantages from centralized purchasing, lower rent and payroll costs (because of its locations), and rock-bottom corporate overhead of 2% (the industry average is 5%). Operating in small communities also allows Carmike to practice a highly personal form of marketing in which the theater manager knows patrons and promotes attendance through personal contacts. By being the dominant if not the only theater in its markets-the main competition is often the high school football team-Carmike is also able to get its pick of films and negotiate better terms with distributors.
Rural versus urban-based customers are one example of access driving differences in activities. ‘Serving small rather than large customers or densely rather than sparsely situated customers are other examples in which the best way to configure marketing, order processing, logistics, and after-sale service activities to meet the similar needs of distinct groups will often differ.
Positioning is not only about carving out a niche. A position emerging from any of the sources can be broad or narrow. A focused competitor, such as Ikea, targets the special needs of a subset of customers and designs its activities accordingly. Focused competitors thrive on groups of customers who are overserved (and hence overpriced) by more broadly targeted competitors, or underserved (and hence underpriced). A broadly targeted competitor – for example, Vanguard or Delta Air Lines – serves a wide array of customers, performing a set of activities designed to meet their common needs. It ignores or meets only partially the more idiosyncratic needs of particular customer groups.
Whatever the basis- variety, needs, access, or some combination of the three- positioning requires a tailored set of activities because it is always a function of differences on the supply side; that is, of differences in activities. However, positioning is not always a function of differences on the demand, or customer, side. Variety and access positionings, in particular, do not rely on any customer differences. In practice, however, variety or access differences often accompany needs differences. The tastes-that is, the needs-of Carmike’s small-town customers, for instance, run more toward comedies, Westerns, action films, and family entertainment. Carmike does not run any films rated NC- 17.
Having defined positioning, we can now begin to answer the question, “What is strategy?” Strategy is the creation of a unique and valuable position, involving a different set of activities. If there were only one ideal position, there would be no need for strategy. Companies would face a simple imperative-win the race to discover and preempt it. The essence of strategic positioning is to choose activities that are different from rivals’. If the same set of activities were best to produce all varieties, meet all needs, and access all customers, companies could easily shift among them and operational effectiveness would determine performance.
III. A Sustainable Strategic Position Requires Trade-offs
Choosing a unique position, however, is not enough to guarantee a sustainable advantage. A valuable position will attract imitation by incumbents, who are likely to copy it in one of two ways.
First, a competitor can reposition itself to match the superior performer. J.C. Penney, for instance, has been repositioning itself from a Sears clone to a more upscale, fashion-oriented, soft-goods retailer. A second and far more common type of imitation is straddling. The straddler seeks to match the benefits of a successful position while maintaining its existing position. It grafts new features, services, or technologies onto the activities it already performs.
For those who argue that competitors can copy any market position, the airline industry is a perfect test case. It would seem that nearly any competitor could imitate any other airline’s activities. Any airline can buy the same planes, lease the gates, and match the menus and ticketing and baggage handling services offered by other airlines.
Continental Airlines saw how well Southwest was doing and decided to straddle. While maintaining its position as a full-service airline, Continental also set out to match Southwest on a number of point-to-point routes. The airline dubbed the new service Continental Lite. It eliminated meals and first-class service, increased departure frequency, lowered fares, and shortened turnaround time at the gate. Because Continental remained a full-service airline on other routes, it continued to use travel agents and its mixed fleet of planes and to provide baggage checking and seat assignments.
But a strategic position is not sustainable unless there are trade-offs with other positions. Trade-offs occur when activities are incompatible. Simply put, a trade-off means that more of one thing necessitates less of another. An airline can choose to serve meals- adding cost and slowing turnaround time at the gate-or it can choose not to, but it cannot do both without bearing major inefficiencies.
Trade-offs create the need for choice and protect against repositioners and straddlers. Consider Neutrogena soap. Neutrogena Corporation’s Variety-based positioning is built on a “kind to the skin,” residue-free soap formulated for pH balance. With a large detail force calling on dermatologists, Neutrogena’s marketing strategy looks more like a drug company’s than a soap maker’s. It advertises in medical journals, sends direct mail to doctors, attends medical conferences, and performs research at its own Skincare Institute. To reinforce its positioning, Neutrogena originally focused its distribution on drugstores and avoided price promotions. Neutrogena uses a slow, more expensive manufacturing process to mold its fragile soap.
In choosing this position, Neutrogena said no to the deodorants and skin softeners that many customers desire in their soap. It gave up the large-volume potential of selling through supermarkets and using price promotions. It sacrificed manufacturing efficiencies to achieve the soap’s desired attributes. In its original positioning, Neutrogena made a whole raft of trade-offs like those, trade-offs that protected the company from imitators.
Trade-offs arise for three reasons. The first is inconsistencies in image or reputation. A company known for delivering one kind of value may lack credibility and confuse customers- or even undermine its reputation- if it delivers another kind of value or attempts to deliver two inconsistent things at the same time. For example, Ivory soap, with its position as a basic, inexpensive everyday soap would have a hard time reshaping its image to match Neutrogena’s premium “medical” reputation. Efforts to create a new image typically cost tens or even hundreds of millions of dollars in a major industry-a powerful barrier to imitation.
Second, and more important, trade-offs arise from activities themselves. Different positions (with their tailored activities) require different product configurations, different equipment, different employee behavior, different skills, and different management systems. Many trade-offs reflect inflexibilities in machinery, people, or systems. The more Ikea has configured its activities to lower costs by having its customers do their own assembly and delivery, the less able it is to satisfy customers who require higher levels of service.
However, trade-offs can be even more basic. In general, value is destroyed if an activity is overdesigned or underdesigned for its use. For example, even if a given salesperson were capable of providing a high level of assistance to one customer and none to another, the salesperson’s talent (and some of his or her cost) would be wasted on the second customer. Moreover, productivity can improve when variation of an activity is limited. By providing a high level of assistance all the time, the salesperson and the entire sales activity can often achieve efficiencies of learning and scale.
Finally, trade-offs arise from limits on internal coordination and control. By clearly choosing to compete in one way and not another, senior management makes organizational priorities clear. Companies that try to be all things to all customers, in contrast, risk confusion in the trenches as employees attempt to make day-to-day operating decisions without a clear framework.
Positioning trade-offs are pervasive in competition and essential to strategy. They create the need for choice and purposefully limit what a company offers. They deter straddling or repositioning, because competitors that engage in those approaches undermine their strategies and degrade the value of their existing activities.
Trade-offs ultimately grounded Continental Lite. The airline lost hundreds of millions of dollars, and the CEO lost his job. Its planes were delayed leaving congested hub cities or slowed at the gate by baggage transfers. Late flights and cancellations generated a thousand complaints a day. Continental Lite could not afford to compete on price and still pay standard travel-agent commissions, but neither could it do without agents for its full-service business. The airline compromised by cutting commissions for all Continental flights across the board. Similarly, it could not afford to offer the same frequent-flier benefits to travelers paying the much lower ticket prices for Lite service. It compromised again by lowering the rewards of Continental’s entire frequent-flier program. The results: angry travel agents and full-service customers.
Continental tried to compete in two ways at once. In trying to be low cost on some routes and full service on others, Continental paid an enormous straddling penalty. If there were no trade-offs between the two positions, Continental could have succeeded. But the absence of trade-offs is a dangerous half-truth that managers must unlearn. Quality is not always free. Southwest’s convenience, one kind of high quality, happens to be consistent with low costs because its frequent departures are facilitated by a number of low-cost practices- fast gate turnarounds and automated ticketing, for example. However, other dimensions of airline quality- an assigned seat, a meal, or baggage transfer-require costs to provide.
In general, false trade-offs between cost and quality occur primarily when there is redundant or wasted effort, poor control or accuracy, or weak coordination. Simultaneous improvement of cost and differentiation is possible only when a company begins far behind the productivity frontier or when the frontier shifts outward. At the frontier, where companies have achieved current best practice, the trade-off between cost and differentiation is very real indeed.
After a decade of enjoying productivity advantages, Honda Motor Company and Toyota Motor Corporation recently bumped up against the frontier. In 1995, faced with increasing customer resistance to higher automobile prices, Honda found that the only way to produce a less-expensive car was to skimp on features. In the United States, it replaced the rear disk brakes on the Civic with lower-cost drum brakes and used cheaper fabric for the back seat, hoping customers would not notice. Toyota tried to sell a version of its best-selling Corolla in Japan with unpainted bumpers and cheaper seats. In Toyota’s case, customers rebelled, and the company quickly dropped the new model.
For the past decade, as managers have improved operational effectiveness greatly, they have internalized the idea that eliminating trade-offs is a good thing. But if there are no trade-offs companies will never achieve a sustainable advantage. They will have to run faster and faster just to stay in place.
As we return to the question, What is strategy? we see that trade-offs add a new dimension to the answer. Strategy is making trade-offs in competing. The essence of strategy is choosing what not to do. Without trade-offs, there would be no need for choice and thus no need for strategy. Any good idea could and would be quickly imitated. Again, performance would once again depend wholly on operational effectiveness.
IV. Fit Drives Both Competitive Advantage and Sustainability
Positioning choices determine not only which activities a company will perform and how it will configure individual activities but also how activities relate to one another. While operational effectiveness is about achieving excellence in individual activities, or functions, strategy is about combining activities.
Southwest’s rapid gate turnaround, which allows frequent departures and greater use of aircraft, is essential to its high-convenience, low-cost positioning. But how does Southwest achieve it? Part of the answer lies in the company’s well-paid gate and ground crews, whose productivity in turnarounds is enhanced by flexible union rules. But the bigger part of the answer lies in how Southwest performs other activities. With no meals, no seat assignment, and no interline baggage transfers, Southwest avoids having to perform activities that slow down other airlines. It selects airports and routes to avoid congestion that introduces delays. Southwest’s strict limits on the type and length of routes make standardized aircraft possible: every aircraft Southwest turns is a Boeing 737.
What is Southwest’s core competence? Its key success factors? The correct answer is that everything matters. Southwest’s strategy involves a whole system of activities, not a collection of parts. Its competitive advantage comes from the way its activities fit and reinforce one another.
Fit locks out imitators by creating a chain that is as strong as its strongest link. As in most companies with good strategies, Southwest’s activities complement one another in ways that create real economic value. One activity’s cost, for example, is lowered because of the way other activities are performed. Similarly, one activity’s value to customers can be enhanced by a company’s other activities. That is the way strategic fit creates competitive advantage and superior profitability.
Types of Fit
The importance of fit among functional policies is one of the oldest ideas in strategy. Gradually, however, it has been supplanted on the management agenda. Rather than seeing the company as a whole, managers have turned to “core” competencies, “critical” resources, and “key” success factors. In fact, fit is a far more central component of competitive advantage than most realize.
Fit is important because discrete activities often affect one another. A sophisticated sales force, for example, confers a greater advantage when the company’s product embodies premium technology and its marketing approach emphasizes customer assistance and support. A production line with high levels of model variety is more valuable when combined with an inventory and order processing system that minimizes the need for stocking finished goods, a sales process equipped to explain and encourage customization, and an advertising theme that stresses the benefits of product variations that meet a customer’s special needs. Such complementarities are pervasive in strategy. Although some fit among activities is generic and applies to many companies, the most valuable fit is strategy-specific because it enhances a position’s uniqueness and amplifies trade-offs.[2]
There are three types of fit, although they are not mutually exclusive. First-order fit is simple consistency between each activity (function) and the overall strategy. Vanguard, for example, aligns all activities with its low-cost strategy. It minimizes portfolio turnover and does not need highly compensated money managers. The company distributes its funds directly, avoiding commissions to brokers. It also limits advertising, relying instead on public relations and word-of-mouth recommendations. Vanguard ties its employees’ bonuses to cost savings.
Consistency ensures that the competitive advantages of activities cumulate and do not erode or cancel themselves out. It makes the strategy easier to communicate to customers, employees, and shareholders, and improves implementation through single-mindedness in the corporation.
Second-order fit occurs when activities are reinforcing. Neutrogena, for example, markets to upscale hotels eager to offer their guests a soap recommended by dermatologists. Hotels grant Neutrogena the privilege of using its customary packaging while requiring other soaps to feature the hotel’s name. Once guests have tried Neutrogena in a luxury hotel, they are more likely to purchase it at the drugstore or ask their doctor about it. Thus Neutrogena’s medical and hotel marketing activities reinforce one another, lowering total marketing costs.
In another example, Bic Corporation sells a narrow line of standard, low-priced pens to virtually all major customer markets (retail, commercial, promotional, and giveaway) through virtually all available channels. As with any variety-based positioning serving a broad group of customers, Bic emphasizes a common need (low price for an acceptable pen) and uses marketing approaches with a broad reach (a large sales force and heavy television advertising). Bic gains the benefits of consistency across nearly all activities, including product design that emphasizes ease of manufacturing, plants configured for low cost, aggressive purchasing to minimize material costs, and in-house parts production whenever the economics dictate.
Yet Bic goes beyond simple consistency because its activities are reinforcing. For example, the company uses point-of-sale displays and frequent packaging changes to stimulate impulse buying. To handle point-of-sale tasks, a company needs a large sales force. Bic’s is the largest in its industry, and it handles point-of-sale activities better than its rivals do. Moreover, the combination of point-of-sale activity, heavy television advertising, and packaging changes yields far more impulse buying than any activity in isolation could.
Third-order fit goes beyond activity reinforcement to what I call optimization of effort. The Gap, a retailer of casual clothes, considers product availability in its stores a critical element of its strategy. The Gap could keep products either by holding store inventory or by restocking from warehouses. The Gap has optimized its effort across these activities by restocking its selection of basic clothing almost daily out of three warehouses, thereby minimizing the need to carry large in-store inventories. The emphasis is on restocking because the Gap’s merchandising strategy sticks to basic items in relatively few colors. While comparable retailers achieve turns of three to four times per year, the Gap turns its inventory seven and a half times per year. Rapid restocking, moreover, reduces the cost of implementing the Gap’s short model cycle, which is six to eight weeks long.[3]
Coordination and information exchange across activities to eliminate redundancy and minimize wasted effort are the most basic types of effort optimization. But there are higher levels as well. Product design choices, for example, can eliminate the need for after-sale service or make it possible for customers to perform service activities themselves. Similarly, coordination with suppliers or distribution channels can eliminate the need for some in-house activities, such as end-user training.
In all three types of fit, the whole matters more than any individual part.. Competitive advantage grows out of the entire system of activities. The fit among activities substantially reduces cost or. increases differentiation. Beyond that, the competitive value of individual activities-or the associated skills, competencies, or resources- cannot be decoupled from the system or the strategy. Thus in competitive companies it can be misleading to explain success by specifying individual strengths, core competencies, or critical resources. The list of strengths cuts across many functions, and one strength blends into others. It is more useful to think in terms of themes that pervade many activities, such as low cost, a particular notion of customer service, or a particular conception of the value delivered. These themes are embodied in nests of tightly linked activities.
Fit and Sustainability
Strategic fit among many activities is fundamental not only to competitive advantage but also to the sustainability of that advantage. It is harder for a rival to match an array of interlocked activities than it is merely to imitate a particular sales-force approach, match a process technology, or replicate a set of product features. Positions built on systems of activities are far more sustainable than those built on individual activities.
Consider this simple exercise. The probability that competitors can match any activity is often less than one. The probabilities then quickly compound to make matching the entire system highly unlikely (.9x.9= .81; .9x.9x.9x.9= .66, and so on). Existing companies that try to reposition or straddle will be forced to reconfigure many activities. And even new entrants, though they do not confront the trade-offs facing established rivals, still face formidable barriers to imitation.
The more a company’s positioning rests on activity systems with second- and third-order fit, the more sustainable its advantage will be. Such systems, by their very nature, are usually difficult to untangle from outside the company and therefore hard to imitate. And even if rivals can identify the relevant interconnections, they will have difficulty replicating them. Achieving fit is difficult because it requires the integration of decisions, and actions across many independent subunits.
A competitor seeking to match an activity system gains little by imitating only some activities and not matching the whole. Performance does not improve; it can decline. Recall Continental Lite’s disastrous attempt to imitate Southwest.
Finally, fit among a company’s activities creates pressures and incentives to improve operational effectiveness, which makes imitation even harder. Fit means that poor performance in one activity will degrade the performance in others, so that weaknesses are exposed and more prone to get attention. Conversely, improvements in one activity will pay dividends in others. Companies with strong fit among their activities are rarely inviting targets. Their superiority in strategy and in execution only compounds their advantages and raises the hurdle for imitators.
When activities complement one another, rivals will get little benefit from imitation unless they successfully match the whole system. Such situations tend to promote winner-take-all competition. The company that builds the best activity system – Toys R Us, for instance – wins, while rivals with similar strategies- Child World and Lionel Leisure-fall behind. Thus finding a new strategic position is often preferable to being the second or third imitator of an occupied position.
The most viable positions are those whose activity systems are incompatible because of tradeoffs. Strategic positioning sets the trade-off rules that define how individual activities will be configured and integrated. Seeing strategy in terms of activity systems only makes it clearer why organizational structure, systems, and processes need to be strategy-specific. Tailoring organization to strategy, in turn, makes complementarities more achievable and contributes to sustainability.
One implication is that strategic positions should have a horizon of a decade or more, not of a single planning cycle. Continuity fosters improvements in individual activities and the fit across activities, allowing an organization to build unique capabilities and skills tailored to its strategy. Continuity also reinforces a company’s identity.
Conversely, frequent shifts in positioning are costly. Not only must a company reconfigure individual activities, but it must also realign entire systems. Some activities may never catch up to the vacillating strategy. The inevitable result of frequent shifts in strategy, or of failure to choose a distinct position in the first place, is “me-too” or hedged activity configurations, inconsistencies across functions, and organizational dissonance.
What is strategy? We can now complete the answer to this question. Strategy is creating fit among a company’s activities. The success of a strategy depends on doing many things well – not just a few – and integrating among them. If there is no fit among activities, there is no distinctive strategy and little sustainability. Management reverts to the simpler task of overseeing independent functions, and operational effectiveness determines an organization’s relative performance.
V. Rediscovering Strategy
The Failure to Choose
Why do so many companies fail to have a strategy? Why do managers avoid making strategic choices? Or, having made them in the past, why do managers so often let strategies decay and blur?
Commonly, the threats to strategy are seen to emanate from outside a company because of changes in technology or the behavior of competitors. Although external changes can be the problem, the greater threat to strategy often comes from within. A sound strategy is undermined by a misguided view of competition, by organizational failures, and, especially, by the desire to grow.
Managers have become confused about the necessity of making choices. When many companies operate far from the productivity frontier, trade-offs appear unnecessary. It can seem that a well-run company should be able to beat its ineffective rivals on all dimensions simultaneously. Taught by popular management thinkers that they do not have to make trade-offs, managers have acquired a macho sense that to do so is a sign of weakness.
Unnerved by forecasts of hypercompetition, managers increase its likelihood by imitating everything about their competitors. Exhorted to think in terms of revolution, managers chase every new technology for its own sake.
The pursuit of operational effectiveness is seductive because it is concrete and actionable. Over the past decade, managers have been under increasing pressure to deliver tangible, measurable performance improvements. Programs in operational effectiveness produce reassuring progress, although superior profitability may remain elusive. Business publications and consultants flood the market with information about what other companies are doing, reinforcing the best-practice mentality. Caught up in the race for operational effectiveness, many managers simply do not understand the need to have a strategy.
Companies avoid or blur strategic choices for other reasons as well. Conventional wisdom within an industry is often strong, homogenizing competition. Some managers mistake “customer focus” to mean they must serve all customer needs or respond to every request from distribution channels. Others cite the desire to preserve flexibility.
Organizational realities also work against strategy. Trade-offs are frightening, and making no choice is sometimes preferred to risking blame for a bad choice. Companies imitate one another in a type of herd behavior, each assuming rivals know something, they do not. Newly empowered employees, who are urged to seek every possible source of improvement, often lack a vision of the whole and the perspective to recognize trade-offs. The failure to choose sometimes comes down to the reluctance to disappoint valued managers or employees.
The Growth Trap
Among all other influences, the desire to grow has perhaps the most perverse effect on strategy. Trade-offs and limits appear to constrain growth. Serving one group of customers and excluding others, for instance, places a real or imagined limit on revenue growth. Broadly targeted strategies emphasizing low price result in lost sales with customers sensitive to features or service. Differentiators lose sales to price-sensitive customers.
Managers are constantly tempted to take incremental steps that surpass those limits but blur a company’s strategic position. Eventually, pressures to grow or apparent saturation of the target market lead managers to broaden the position by extending product lines, adding new features, imitating competitors’ popular services, matching processes, and even making acquisitions. For years, Maytag Corporation’s success was based on its focus on reliable, durable washers and dryers, later extended to include dishwashers. However, conventional wisdom emerging within the industry supported the notion of selling a full line of products. Concerned with slow industry growth and competition from broad-line appliance makers, Maytag was pressured by dealers and encouraged by customers to extend its line. Maytag expanded into refrigerators and cooking products under the Maytag brand and acquired other brands – Jenn-Air, Hardwick Stove, Hoover, Admiral, and Magic Chef-with disparate positions. Maytag has grown substantially from $684 million in 1985 to a peak of $3.4 billion in 1994, but return on sales has declined from 8% to 12% in the 1970s and 1980s to an average of less than 1% between 1989 and 1995. Cost cutting will improve this performance, but laundry and dishwasher products still anchor Maytag’s profitability.
Neutrogena may have fallen into the same trap. In the early 1990s, its U.S. distribution broadened to include mass merchandisers such as Wal-Mart Stores. Under the Neutrogena name, the company expanded into a wide variety of products- eye-makeup remover and shampoo, for example- in which it was not unique and which diluted its image, and it began turning to price promotions.
Compromises and inconsistencies in the pursuit of growth will erode the competitive advantage a company had with its original varieties or target customers. Attempts to compete in several ways at once create confusion and undermine organizational motivation and focus. Profits fall, but more revenue is seen as the answer. Managers are unable to make choices, so the company embarks on a new round of broadening and compromises. Often, rivals continue to match each other until desperation breaks the cycle, resulting in a merger or downsizing to the original positioning.
Profitable Growth
Many companies, after a decade of restructuring and cost-cutting, are turning their attention to growth. Too often, efforts to grow blur uniqueness, create compromises, reduce fit, and ultimately undermine competitive advantage. In fact, the growth imperative is hazardous to strategy.
What approaches to growth preserve and reinforce strategy? 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. In other words, managers can ask themselves which activities, features, or forms of competition are feasible or less costly to them because of complementary activities that their company performs.
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. A company can often grow faster-and far more profitably- by better penetrating needs and varieties where it is distinctive than by slugging it out in potentially higher growth arenas in which the company lacks uniqueness. Carmike, now the largest theater chain in the United States, owes its rapid growth to its disciplined concentration on small markets. The company quickly sells any big-city theaters that come to it as part of an acquisition.
Globalization often allows growth that is consistent with strategy, opening up larger markets for a focused strategy. Unlike broadening domestically, expanding globally is likely to leverage and reinforce a company’s unique position and identity.
Companies seeking growth through broadening within their industry can best contain the risks to strategy by creating stand-alone units, each with its own brand name and tailored activities. Maytag has clearly struggled with this issue. On the one hand, it has organized its premium and value brands into separate units with different strategic positions. On the other, it has created an umbrella appliance company for all its brands to gain critical mass. With shared design, manufacturing, distribution, and customer service, it will be hard to avoid homogenization. If a given business unit attempts to compete with different positions for different products or customers, avoiding compromise is nearly impossible.
The Role of Leadership
The challenge of developing or reestablishing a clear strategy is often primarily an organizational one and depends on leadership. With so many forces at work against making choices and tradeoffs in organizations, a clear intellectual framework to guide strategy is a necessary counterweight. Moreover, strong leaders willing to make choices are essential.
In many companies, leadership has degenerated into orchestrating operational improvements and making deals. But the leader’s role is broader and far more important: General management is more than the stewardship of individual functions. Its core is strategy: defining and communicating the company’s unique position, making trade-offs, and forging fit among activities. The leader must provide the discipline to decide which industry changes and customer needs the company will respond to, while avoiding organizational distractions and maintaining the company’s distinctiveness. Managers at lower levels lack the perspective and the confidence to maintain a strategy. There will be constant pressures to compromise, relax trade-offs, and emulate rivals. One of the leader’s jobs is to teach others in the organization about strategy-and to say no.
Strategy renders choices about what not to do as important as choices about what to do. Indeed, setting limits is another function of leadership. Deciding which target group of customers, varieties, and needs the company should serve is fundamental to developing a strategy. But so is deciding not to serve other customers or needs and not to offer certain features or services. Thus strategy requires constant discipline and clear communication. Indeed, one of the most important functions of an explicit, communicated strategy is to guide employees in making choices that arise because of trade-offs in their individual activities and in day-to-day decisions.
Improving operational effectiveness is a necessary part of management, but it is not strategy. In confusing the two, managers have unintentionally backed into a way of thinking about competition that is driving many industries toward competitive convergence, which is in no one’s best interest and is not inevitable.
Managers must clearly distinguish operational effectiveness from strategy. Both are essential, but the two agendas are different.
The operational agenda involves continual improvement everywhere there are no trade-offs. Failure to do this creates vulnerability even for companies with a good strategy. The operational agenda is the proper place for constant change, flexibility, and relentless efforts to achieve best practice. In contrast, the strategic agenda is the right place for defining a unique position, making clear trade-offs, and tightening fit. It involves the continual search for ways to reinforce and extend the company’s position. The strategic agenda demands discipline and continuity; its enemies are distraction and compromise.
Strategic continuity does not imply a static view of competition. A company must continually improve its operational effectiveness and actively try to shift the productivity frontier; at the same time, there needs to be ongoing effort to extend its uniqueness while strengthening the fit among its activities. Strategic continuity, in fact, make an organization’s continual improvement more effective.
A company may have to change its strategy if there are major structural changes in its industry. In fact, new strategic positions often arise because of industry changes, and new entrants unencumbered by history often can exploit them more easily. However, a company’s choice of a new position must be driven by the ability to find new trade-offs and leverage a new system of complementary activities into a sustainable advantage.
1. I first described the concept of activities and its use in understanding competitive advantage in Competitive Advantage (New York: The Free Press, 19851. The ideas in this article build on and extend that thinking.
2. Paul Milgrom and John Roberts have begun to explore the economics of systems of complementary functions, activities, and functions. Their focus is on the emergence of “modern manufacturing” as a new set of complementary activities, on the tendency of companies to react to external changes with coherent bundles of internal responses, and on the need for central coordination-a strategy-to align functional managers. In the latter case, they model what has long been a bedrock principle of strategy. See Paul Milgrom and John Roberts, “The Economics of Modern Manufacturing: Technology, Strategy, and Organization,” American Economic Review 80 (1990): 511-528; Paul Milgrom, Yingyi Qian, and John Roberts, “Complementarities, Momentum, and Evolution of Modern Manufacturing,” American Economic Review 81 (1991184-88; and Paul Milgrom and John Roberts, “Complementarities and Fit: Strategy, Structure, and Organizational Changes in Manufacturing,” Journal of Accounting and Economics, vol. 19 (March-May 1995): 179-208.
3. Material on retail strategies is drawn in part from Jan Rivkin, “The Rise of Retail Category Killers,” unpublished working paper, January 1995. Nicolaj Siggelkow prepared the case study on the Gap.
Japanese Companies Rarely Have Strategies
The Japanese triggered a global revolution in operational effectiveness in the 1970s and 1980s, pioneering practices such as total quality management and continuous improvement. As a result, Japanese manufacturers enjoyed substantial cost and quality advantages for many years.
But Japanese companies rarely developed distinct strategic positions of the kind discussed in this article. Those that did Sony, Canon, and Sega, for example were the exception rather than the rule. Most Japanese companies imitate and emulate one another. All rivals offer most if not all product varieties, features, and services; they employ all channels and match one anothers’ plant configurations.
The dangers of Japanese-style competition are now becoming easier to recognize. In the 1980s, with rivals operating far from the productivity frontier, it seemed possible to win on both cost and quality indefinitely. Japanese companies were all able to grow in an expanding domestic economy and by penetrating global markets. They appeared unstoppable. But as the gap in operational effectiveness narrows, Japanese companies are increasingly caught in a trap of their own making. If they are to escape the mutually destructive battles now ravaging their performance, Japanese companies will have to learn strategy.
To do so, they may have to overcome strong cultural barriers. Japan is notoriously consensus oriented, and companies have a strong tendency to mediate differences among individuals rather than accentuate them. Strategy, on the other hand, requires hard choices. The Japanese also have a deeply ingrained service tradition that predisposes them to go to great lengths to satisfy any need a customer expresses. Companies that compete in that way end up blurring their distinct positioning, becoming all things to all customers.
This discussion of Japan is drawn from the author’s research with Hirotaka Takeuchi, with help from Mariko Sakakibara.
Finding New Positions: The Entrepreneurial Edge
Strategic competition can be thought of as the process of perceiving new positions that woo customers from established positions or draw new customers into the market. For example, superstores offering depth of merchandise in a single product category take market share from broad-line department stores offering a more limited selection in many categories. Mail-order catalogs pick off customers who crave convenience. In principle, incumbents and entrepreneurs face the same challenges in finding new strategic positions. In practice, new entrants often have the edge.
Strategic positionings are often not obvious, and finding them requires creativity and insight. New entrants often discover unique positions that have been available but simply overlooked by established competitors. Ikea, for example, recognized a customer group that had been ignored or served poorly. Circuit City Stores’ entry into used cars, CarMax, is based on a new way of performing activities – extensive refurbishing of cars, product guarantees, no-haggle pricing, sophisticated use of in-house customer financing that has long been open to incumbents.
New entrants can prosper by occupying a position that a competitor once held but has ceded through years of imitation and straddling. And entrants coming from other industries can create new positions because of distinctive activities drawn from their other businesses. CarMax borrows heavily from Circuit City’s expertise in inventory management, credit, and other activities in consumer electronics retailing.
Most commonly, however, new positions open up because of change. New customer groups or purchase occasions arise; new needs emerge as societies evolve; new distribution channels appear; new technologies are developed; new machinery or information systems become available. When such changes happen, new entrants, unencumbered by a long history in the industry, can often more easily perceive the potential for a new way of competing. Unlike incumbents, newcomers can be more flexible because they face no trade-offs with their existing activities.
The Connection with Generic Strategies
In Competitive Strategy (The Free Press, 1985), I introduced the concept of generic strategies – cost leadership, differentiation, and focus – to represent the alternative strategic positions in an industry. The generic strategies remain useful to characterize strategic positions at the simplest and broadest level. Vanguard, for instance, is an example of a cost leadership strategy, whereas Ikea, with its narrow customer group, is an example of cost-based focus. Neutrogena is a focused differentiator. The bases for positioning – varieties, needs, and access – carry the understanding of those generic strategies to a greater level of specificity. Ikea and Southwest are both cost-based focusers, for example, but Ikea’s focus is based on the needs of a customer group, and Southwest’s is based on offering a particular service variety.
The generic strategies framework introduced the need to choose in order to avoid becoming caught between what I then described as the inherent contradictions of different strategies. Trade-offs between the activities of incompatible positions explain those contradictions. Witness Continental Lite, which tried and failed to compete in two ways at once.
Alternative Views of Strategy
The Implicit Strategy Model of the Past Decade
·
One ideal competitive position in the industry
· Benchmarking of all activities and achieving best practice
· Aggressive outsourcing and partnering to gain efficiencies
· Advantages rest on a few key success factors, critical resources, core competencies
· Flexibility and rapid responses to all competitive and market changes
Sustainable Competitive Advantage
· Unique competitive position for the company
· Activities tailored to strategy
· Clear trade-offs and choices vis-à-vis competitors
· Competitive advantage arises from fit across activities
· Sustainability comes from the activity system, not the parts
· Operational effectiveness a given
Impact of Strategic Planning on Financial Performance of Companies in Turkey
Efendioglu, Alev M
; Karabulut, A Tugba.
International Journal of Business and Management
5. 4
(Apr 2010): 3-12.
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Abstract
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Strategic planning is important for strategic management of companies. The purpose of this study is to explore the impact of strategic planning on financial performance of Major Industrial Enterprises of Turkey. Our findings show that many domestic and foreign firms in our sample have a strategic process in place. It is an annual process and considered a very important organizational activity. This paper is one of the few studies to examine the strategic planning process in a sample of firms from a transitional economy. It can be considered a longitudinal study because it examines a set of institutions to identify changes in their performance over time, as they incorporate the use of strategic tools in a dynamic competitive environment. The findings of this study provide a contribution to our understanding of the nature and practice of strategic planning in Turkish companies and possibilities of correlations between their efforts and performance.
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Abstract
Strategic planning is important for strategic management of companies. The purpose of this study is to explore the impact of strategic planning on financial performance of Major Industrial Enterprises of Turkey. Our findings show that many domestic and foreign firms in our sample have a strategic process in place. It is an annual process and considered a very important organizational activity. This paper is one of the few studies to examine the strategic planning process in a sample of firms from a transitional economy. It can be considered a longitudinal study because it examines a set of institutions to identify changes in their performance over time, as they incorporate the use of strategic tools in a dynamic competitive environment. The findings of this study provide a contribution to our understanding of the nature and practice of strategic planning in Turkish companies and possibilities of correlations between their efforts and performance.
Keywords: Strategic planning, Financial performance, Turkey
1. Introduction
Even though the concept of strategy may have had its original underpinnings in the military and its war efforts, over many decades it has become a mainstay and a major process (organizational activity) in for-profit and not-for-profit organizations. These organizations have refined and used the process to understand issues which they cannot control but have a significant impact on their survival and success, and use their limited resources and competencies to improve their competitive positions. It was hypothesized that by consciously using formal planning, a company could exert some positive control over market forces, create competitive advantages, improve organizational effectiveness, and improve its performance.
As a result, new concepts and tools were developed and added to company repertoires over time, and they were used to bring formality and uniformity to strategy development in organizations. Because one of the objectives of this process is to develop competitive advantages leading to superior organizational performance, the relationship between the firm’s strategic planning efforts and firm performance received considerable attention from academics, researchers, and business executives. However, despite the large number of studies examining this relationship, the findings have been inconclusive and present a mixed picture. Even though the majority of studies have reported a positive relationship between strategic planning and firm performance (Sapp and Seiler, 1981; Wood and LaForge, 1979), several studies found no relationship (Robinson and Pearce, 1983; Kudla, 1980), and a few reported a negative relationship (Fulmer and Rue, 1974). A recent study by Gibson and Cassar (Gibson & Cassar, 2005) cast doubt on the causal relationship between planning and performance, even in small firms.
The purpose of this paper is to extend the previous findings by examining the nature and practice of strategic planning in a different environmental context, that of the developing transitional economy of Turkey and the impact of these practices on the performance of the companies which utilize these practices. This context provides the novelty to the study as most prior studies on the strategic planning process have examined evidence from firms in mature market economies. To achieve this objective, we will briefly discuss why we consider and classify Turkey as a “transitional economy”, review and discuss the few research studies and their findings conducted in similar economies, and present the findings of our research study of top 500 companies in Turkey. This will help to generalize the previous findings and will be instructive in comparing the strategic planning processes of firms in a developed market economy and those located in a transitional economy. By identifying and documenting the levels of strategic process and the types of strategic tools employed by the companies in differing stages of transitory economies and identifying the impacts of these processes on the companies, we can develop a roadmap and incorporate this knowledge to educate and prepare the managerial talents in these economies.
2. Turkey as a Developing Country and an Economy in Transition
Until recently, the primary focus of researchers of strategic planning had been United States and developed economies of Europe. As the economy in United States and Great Britain developed and evolved, various models and methodologies were developed and serious discussions of these methodologies and concepts were conducted on improving competitiveness of businesses in these economies. Very little research was done to examine the understanding and usage of these strategic planning concepts and tools in developing countries and the organizations which form the foundations of these economic systems. One could argue that among the causes of this lack of research were semi-closed state of these economies, the dominant legal ownership (state owned) and the associated governance of majority of medium to large-scale organizations, and the lack of sophistication of the managers of these organizations. Furthermore, the structure of these economies did not present the same competitive issues which dominate open and developed economies and may not have necessitated the use of strategic planning to gain additional competitive advantages.
Last decade and a half has seen major developments in communication technologies and resulting globalization of all types of industries and business processes. The businesses from developed economies have extended their reach to all corners of the globe in search of cheaper costs and new markets, bringing a greater dynamism and heightened level of competitive behaviors to these previously fairly stable economic environments. Furthermore, the increased “foreign direct investments” (FDI) and the associated ownership and governance of new and foreign based competitors have forced the executives of the local enterprises to develop or acquire talent in their managerial ranks and increase their sophistication of the dynamic competitive forces of their business environments. Some countries which were considered undeveloped/developing have been impacted by these changes much more significantly than others. The governments of these countries have taken steps to use these developments as means to accelerating their economies’ transition from an underdeveloped to a developed economy, while opening their local businesses to increased competition and forcing them to adjust their organizational processes to sustain themselves in unfamiliar dynamic environments and increased uncertainties. As evidenced by the World Economic Forum global competitiveness index, Turkey has moved from 71st (out of 131 countries ranked) for 2005-2006 to 59 for 2006-2007, and to 53 for the 2007-2008. The sophistication of company operations and strategy ranking for 2007-2008 is 41 out of 127 countries ranked. (The Global Competitiveness Report 2006-2007; Porter, 2007) The World Economic Forum’s annual Global Competitiveness Report evaluates the potential for sustained economic growth of over 130 developed and emerging economies and ranks them accordingly. It was first released in 1979.
The characteristics of the Turkish economy make it an interesting case to examine the nature and role of the strategic planning process in its largest businesses. Since the early 1980s, government policies in Turkey have focused on developing a free market economy and have encouraged an outward-oriented export-led economic development strategy. Significant progress has been made in the liberalization of trade and investment policies and the pursuit of macroeconomic stability and economic growth. This policy stance has also contributed to a substantial increase in inward foreign direct investment (FDI) to Turkey. Turkey has climbed to 16th place among top FDI attracting countries in 2006, up from 22nd place in 2005, 37th place in 2004 and 53rd place in 2003. It was ranked 5th among the developing countries. The level of FDI inflows to Turkey has increased from an average of 853 million USD during the 1995-2000 period to 9.8 billion USD in 2005 and to 20.1 billion USD in 2006. As of first five months of 2007, FDI inflows reached 11 billion USD, reinforcing the predictions for FDI inflows of 25 billion USD and plus for the year-end. (YASED, 2007) Turkey is ranked as 17th largest economy in the world and 6th largest in EU and has averaged and annual GDP growth of 7.4%/year since 2002. As another outcome of this increased FDI and transition of the Turkish economy, demand for translations into Turkish language has grown 36% over the last year, placing it at number 9 in the world after Chinese and Russian. Top six is composed of former Eastern Block countries which have joined or in the process of joining EU. (Ewing, 2007)
Over a decade ago, due to its high economic growth and rapidly growing population, the US Department of Commerce placed Turkey among the ten big emerging markets (Garten, 1996). As the developments to date have shown, this classification was very much on target. Turkey’s five years’ (prior to global economic downturn) growth rate average of around 7 percent puts it into one of the world’s best-performing economies. Turkey ranked 22nd among the exporting countries and with 16% increase in exports during 2006, is on par with average export growth rates of global economies. Its exports to Europe have grown an average of 24% for the past three years and with 55% of the country’s total exports, EU remains the nation’s leading export market. (McCathie, 2007)
By looking at the stages of the basic needs of a nation’s population, Martinez and Haddock present another approach in identifying transition economies and the nation’s evolution from a developing one to an industrialized one. They identify and argue that a nation’s basic needs evolve through survival (obtaining adequate food, shelter, and clothing) to quality (seek better quality in food, shelter, and clothing) to convenience (time-saving appliances, packaged foods, etc.), and finally to customization (goods and services which satisfy individual tastes and desires). According to these authors, sub-Saharan Africa is in “survival” stage, China and India and Turkey are in “quality” stage, Eastern Europe and Latin America are in “convenience” stage, and finally, North America, Japan, and Western Europe are in the “customization” stage. Their model places Turkey and Brazil clustered around the start of the “convenience” stage. (Martinez and Haddock, 2007)
All these different economic and sociological measures place Turkey at a very unique stage of its economic development and as a country which is rapidly moving from a sheltered static economy to a dynamic and extremely competitive developed economy. Of course with this transition comes the additional competitive pressure for its home-grown privately owned organizations, with responsibilities to their stockholders, and increased turbulence caused by foreign based competitors entering their markets. Furthermore, these Turkish firms’ desires and attempts to enter foreign markets require them to develop sophisticated managers, development and use of tools to understand these new markets, and effective and efficient processes to be able to compete in these developed markets.
3. Earlier Studies on Strategy and Performance
As we stated earlier, the relationship between firm strategic planning efforts and firm performance received considerable attention. However, despite the large number of studies examining this relationship, the results have been inconclusive, with findings ranging from positive relationships to no relationships to negative relationships.
Several researchers have attempted to understand these contradictory findings. Armstrong (1982) published one of the first such papers. His analysis of 14 studies generally supported the hypothesis that formal planning was useful but, noted that there were “serious research problems” with the studies. He was very much concerned with the lack of description or definition of the strategic planning process provided to the study subjects. He concluded that “without a description of the planning techniques, it is not possible to assess the value of planning in a scientific manner”. (p. 204).
Pearce, Freeman, and Robinson (1987) also concluded that the evidence that formal strategic planning enhances a firm’s financial performance is “inconsistent and often contradictory.” They had concerns about the methodology’s limiting impact on the researchers’ ability to understand the effect of strategic planning on performance. Their conclusions were based on a review of the results of 18 papers which examined the relationship between formal strategic planning, using a definition similar to Armstrong (1982) for strategic planning, and organizational performance. They were concerned about the “lack of consistent definition” of strategic planning, how the strategic planning construct was “measured”, and the “impact of corporate context” and the factor of business size. Venkatraman and Grant (1986) noted that there is no widely accepted definition of strategy and that the inability to measure the strategic planning construct has hindered research attempting to identify substantive relationships between independent and dependent variables. Boyd (1991), based on the results of his meta-analysis of 21 studies published between 1970 and 1988, including 29 samples and 2,496 organizations, concluded that there were modest positive correlations between strategic planning and financial performance. However, he was concerned with the significant measurement errors in these studies and concluded that this most probably resulted in an underestimate of the true strategic planning-performance relationship. However, one significant work, Miller and Cardinal (1994), seemed to put the issue to rest: they concluded that “Planning was found to be strongly and positively related to growth in studies in which industry effects were controlled, an informant source of performance data was used, planning was defined as not requiring written documentation and the quality of the assessment strategy was high”. (Miller & Cardinal, 1994, 1660)
A study by Sarason and Tegarden (2003) focused on the configuration theory and firm’s resource based view to understand the relationship between strategic planning and the firm’s performance. Their findings also provide partial support for a positive relationship between strategic planning and performance. However, they concluded that this relationship is moderated by organizational stage of development and that it is beneficial to early stage firms. The underlying premise for these conclusions are based on the development competitive advantages provided by the structure and the future thinking incorporated into the strategic process and the nun-sustainability and erosion of these advantages in late stage firms, whose processes are more prone to imitation.
Realizing the complexities of defining the strategic planning construct and the measurement issues identified and discussed by earlier researchers, we decided to identify specific strategy analysis/development tools available to companies, their use by these companies, and compare it to the financial performance of these companies over a 3-year time frame. By focusing on the companies in a transitory economy (companies most likely to be in their early stages in competing in open economies), we tried to identify the frequency of the use of these tools and adaption of other strategic planning mechanisms on the relative performance of these companies.
4. Research Study
Our research sample was drawn from the Turkish Chamber of Industry database which listed the top 500 manufacturing firms in 2006. The survey questionnaire was mailed to the CEO of each company with a letter requesting that the CEO, or his/her senior executive in charge of strategy development within the organization, to complete it. The survey was also made available on the Internet, thus providing the respondents an option to return the paper copies or fill out the questionnaire electronically. The overall response rate was 14.2 percent. Of the 71 returned responses, seven (9.86%) were completed online. There were no duplicates between the paper and electronic returns.
The highest ranked respondent company was ranked as number 2 and the lowest was ranked as number 497.The company rankings were based on their 2006 annual manufacturing revenues (these firms had both manufacturing and non-manufacturing revenues), which ranged from highest TRY 5.606billion (USD 3.742billion) to lowest TRY 83.690million (USD 55.86million), with total revenues of TRY 6.456billion (USD 4.309billion) and TRY 95.294million (USD 63.610million), of the same companies respectively (Note 1). The number of employees ranged from highest 9,780 to lowest 66 with 1,197 as the average.
Over ten industries were represented in the sample and textile industry had the largest representation with nine firms. The respondent companies ranged from 12.68% (9 firms) classified as “single business” (95% or more of their revenues coming from one business segment), 80.28% (57 firms) classified as “dominant/focused business” (70% to 95% of revenues coming from one business segment, to 7.04% (5 firms) classified as “multi-business” (with revenues less than 70% from any segment). All of the seventy-one firms were privately owned (had stockholders), sixty (84.5%) of domestic origin (Turkish) and eleven (15.49%) foreign-owned. The respondent firms ranged from wholly-owned independent companies to subsidiaries of divisions of large organizations.
5. Discussion of Results
Our findings show that a large number of domestic and foreign firms in our sample have a strategic process in place, it is considered a very important organizational activity (by 86.26% of domestic firms and by 100.00% of foreign firms), and it is an annual process. Because of earlier researchers’ concerns about “lack of description or definition of the strategic planning process provided to the study subjects”, we decided to look at the impact of “the use of process” (identified with the use of generally accepted components of a strategic process), “focus/objectives of the process” (what are the companies trying to accomplish), and “the use of strategy development tools and models” (e.g. what-if analysis, SWOT analysis, etc.) on company performance. Following is the presentation and discussion of our findings.
When we looked at the impact of different components/activities in a strategic process and their impact on company performance, the only two that were correlated (positively influenced) and statistically significant were “involvement of top management in the process” and “having a mission statement”. Both of these strategic process components identify and define the importance of the process in the organization and had significant impacts on the profitability of the firms in our study. Even though all of these companies had seen large sales growth rates and growth in exporting their products, two processes (top management participation and mission statement) had resulted in higher average yearly profits over time. These findings are summarized in Table 1. These findings highlight and reinforce the importance of “top management’s active involvement in providing direction” to the organization and “having their and organization’s role and position in the economy and the society” clearly articulated, formalized, and used as a guide for the organization’s activities and processes.
Even though significant number of respondent firms focused on strategic issues, only few of these issues had an impact on the firm’s performance. The performance measures, average sales growth per year, average profit per year, and average export growth rate per year were positively influenced. As can be seen from Table 2, average profit per year was correlated to focus on “organizational capabilities” (a better knowledge of what the firm is capable of) and focus on “similar markets” (expanding capabilities to where the firm has experience in). Interestingly, the only significant correlation between the average export growth rate per year was the firm’s focus on “contingency plans. We did not inquire (the questionnaires were not followed-up with interviews) and cannot speculate why there is such a connection. As can be seen from the table, less than half of the companies in our study focused on contingencies and majority of these firms were subsidiaries of foreign companies.
Companies involved in strategic process use different tools for their analysis of their internal capabilities and external changes and issues. These tools were developed over time and their extensive uses are researched and documented by many. In our study, we selected the tools which we identified as being the ones which are most commonly used and analyzed our data to find out if use of these tools, or lack of use, had any significant impact on performance of the firms in our study.
As can be seen in Table 3, even though there were some differences between the users and non-users of these strategic tools, none of the findings were statistically correlated. Except for profitability, both the average sales growth (which was significantly higher) and the average export growth were higher for the firms which did not use any of the strategic tools or used them very infrequently. This is contrary to what we expected as an outcome and cannot explain it. We could only assume that the significantly higher growth rate for non-users might be a sign of the aggressive market positions these companies might be taking (without considering any consequences and using a scatter-shot approach) or expanding into new products/markets with high entry costs, and might explain their significantly lower average profits. If this is the case and if their profitability increases, as they consolidate their positions in these new markets and slow down their growth, the findings present even a greater lack of usefulness of the strategic tools which organizations routinely use and have come to rely on to improve their competitive positions and effectiveness of their operations. This would be very contrary to the foundation, teaching, and practice of “strategy as a process and as a tool”.
Even though our findings show a much greater attention to the competitive environment and its dynamics, the use of strategic and analytical tools is very limited and significantly lower in the domestic firms as compared to the subsidiaries of foreign firms. For the domestic firms participating in our study, the top three most popular (used frequently or always) strategy analysis and development tools were “critical success factors analysis” (38.60%), “economic forecasting” (36.84%), and “SWOT analysis” (36.21%). Foreign based firms seemed to prefer “SWOT analysis” (81.82%), “critical success factors analysis” (72.73%), and “BCG growth share matrix analysis” (55.56%). The “frequency of use” response means (on a scale of 1 = not used to 5 = always used) for “SWOT analysis” were 2.914 (domestic firms) and 3.909 (foreign firms), and for “critical success factors analysis” were 2.860 (domestic firms) and 3.727 (foreign firms). The mean response for the “Economic Forecasting” was 2.737 for domestic firms and 3.200 for foreign firms. Even though “BCG growth share matrix analysis” was used frequently or always by over half of the foreign firms, its popularity was not uniform among all foreign firm respondents. It was preceded by the mean response for the “value chain analysis”, the third highest with 3.400 and by the mean for the “core capabilities analysis”, the fourth highest with 3.300.
Because of this selective use of strategy analysis tools, we also wanted to see if use of any of these tools were positively correlated with the performance of the firms in our study. The findings are summarized in Table 4. As can be seen, of the most common nine strategy analysis tools used, only three were significantly correlated to firm’s performance. Even though 37.32% of the respondents used “economic forecasting”, average profit per year was directly correlated (p<.10) with the use of this tool. The other two strategy analysis/development tools, "what-if/scenario analysis" (used by 22.39% respondents) and "growth share matrix" (used by 20.90% of respondents) were also positively correlated with the "average sales growth per year" (p<.05 and p<.10, respectively).
Finally, access to sources of funds and the amount of funding available differ between independent companies and subsidiaries of large firms. This in turn may influence performance and ability to attract high quality managers and subsidiary firms may need to ‘deliver’ a performance objective, objectives based on financial criteria, formulated by the holding or parent company. As a result, given the importance of expected quarterly and annual positive results, subsidiary firm managers may be less likely to engage in risky and/or longer-term projects (Dierickx and Cool, 1989; Ghemawat, 1988). Given that our respondent firms included independent domestic (Turkish) firms and foreign based firms (subsidiaries of foreign companies); we wanted to see if there were any differences between the performance measures and the ownership type of the firm. When we look at performance measures and ownership, even though they are not statistically significant, our findings show that subsidiaries of foreign firms have lower returns, supporting the findings of earlier studies. These findings are summarized in Table 5.
6. Conclusions
This paper is one of the few studies to examine the strategic planning process in a sample of firms from a transitional (developing) economy. It can also be considered a longitudinal study because it examines a set of institutions to identify any changes in their performance over time, as they incorporate the use of strategic tools in a dynamic and evolving competitive environment.
Even though the findings show a significant increase in the importance and use of strategic tools and processes in Turkey, a transitional (developing) economy, the basic question about the link/positive correlation between the use of strategic tools and company performance remains somewhat unanswered. Even though, through our findings, we have identified some links between the use of strategic tools and company performance, because of the small number of respondents and lack of follow-up interviews to look at some findings in greater detail, we cannot make any generalized statements or reach definitive conclusions. However, we are encouraged to see that the local firms in our study have increasingly adopted the techniques and tools of strategic planning more commonly employed by foreign firms. They have increasingly involved their top management in the process, allocated more resources to it, and incorporated greater formality into the process. It is quite interesting to see that over time the importance of this organizational process in Turkish firms have come to more closely resemble those of foreign firms. We attribute these changes to increased competitive pressures brought upon these firms as the Turkish economy has opened up and free market forces have come into play as it has begun its transition from an underdeveloped economy to one that is developing. We expect these changes and increased focus on the use of strategic tools and processes to continue as Turkey’s market economy continues to develop and competition from foreign firms increase as globalization proceeds. Unfortunately, we cannot expect and make similar statements about their increased usage of these tools will lead them to stronger and sustainable financial results.
While the findings of this study provide a contribution to our understanding of the nature and practice of strategic planning in Turkish companies and possibilities of positive correlations between their efforts and their performance, there are a number of potential areas for future research. First, it would be a useful contribution to investigate the use of planning techniques and the pervasiveness of the process in service organizations (all the firms in our sample were manufacturing firms) and broaden the study sample by focusing on second-tier companies (our sample was drawn from the top 500 firms list of Chamber of Industry). With a larger study population, we could also try to understand the relationships between strategic process and firm performance in different business sectors. Unfortunately, because of the small sample size and the small number of firms from a given sector, we could not analyze the data to see if there are any differences between and among sectors. By focusing on specific sectors, we might have been better able to determine if there are significant differences between the companies that employ the tools and are using strategic planning process and the ones which do not. Finally, we hope that our study will interest and encourage similar studies not only visit the same unresolved issues but also focus on developing countries and the competitive issues faced by the firms which are the foundations of these countries and their economies.
American Accent
Operational Alignment: Bridging the Gap Between Strategy and Execution
Becher, Jonathan D
Bu
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iness Performance Management Magazine; Mar 2005; 3, 1; ProQuest Central pg. 11
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EXhit
Pathways Show How Priorities Shift Over Time
)Motivation
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RESOURCE USAGE
) (
EXPAND
) (
SCALE
)Corporate leaders often shrug off strategy as “just words” and spend little time articulating their organization’s objectives. However, it is critical to ensure not only that the words accurately convey the company’s intentions, but also that they do so in a way that is meaningful to every stakeholder. Executives who need help communicating corporate goals should consider using two tools: pathways and
LAUNCH strategy plans. These tools can help people at
all levels piece together the puzzle of how an organization seeks to achieve its vision.
To demonstrate their motivational power,
s I’ll describe the alignment effort in a hypo-
-,
s
thetical company that is based on a composite
(
12/2006
3/2009
1/2012
)of all of Pilot Software’s client experiences. Pilot Fashions is a small-town clothing retailer with high expectations. Its vision is to become
one of the United States’ top three specialty chains for women’s clothing and accessories. But
hearing that management has set such a lofty goal, which will take many years to achieve, pro-
vides little motivation for individuals who are busy trying to accomplish day-to-day tasks.
Executives make the vision more accessible by separating movement toward it into three major steps: launching a flagship New York City store that epitomizes style and quality; scaling operations throughout the Northeast, leveraging early experiences; and expanding across the United States by focusing on achieving operational efficiencies. Then they plot the resource-allocation “pathway” that they envision for each step. Exhibit i shows the result, a high-level road map that illustrates how employees’ focus should change over time.
The concept of pathways extends beyond simply naming milestones (launch, scale, and expand) and attaching dates to those goals. Pathways do not have to be strictly sequential or have a discrete beginning and end. They show how the company will prioritize among its complementary goals — and so how it will distribute resources among the milestones it has identified. For example, exhibit i shows that Pilot Fashions expects in December 2006 to expend roughly three times the resources on pathway one (launch) as it does on pathway two (scale). And pathway three will not become the company’s primary focus until early 2010.
In addition to giving employees a more tangible way to visualize corporate goals, pathways can guide the organization’s operational decision-making. Since Pilot Fashions’ first pathway is focused on establishing the brand in New York, the company will limit 2006 advertising and PR efforts to local media outlets. Employees can clearly see that national expansion will not become their top priority for a few more years but that growth throughout the Northeast will be their focus by late 2007. Thus, they might choose a regional PR firm to promote their New York City store in 2006, seeking a compromise between the higher prices commanded by national firms and a local boutique firm which wouldn’t be able to carry them beyond the “launch” pathway’s goals. Well-defined pathways help companies focus their resources and avoid the trap of tackling too many objectives at once.
While pathways provide insight into a company’s priorities, they lack detail about how the organization expects to reach its objectives. A strategy plan can enhance a company’s pathways diagram by providing employees with more specific direction. Strategy plans show the relationships between various strategic objectives and demonstrate how the objectives will enable the organization to achieve its overall mission. After completing the pathways diagram, Pilot Fashions managers develop a simple strategy plan that describes how the organization will move toward its vision over the next 48 months. Since that time frame will be dominated by pathways one and two, management omits pathway three objectives, with an expectation that they will be included in an updated strategy plan in the future.
Executives determine that the organization should focus on customer intimacy in order to build relationships and achieve the market momentum necessary to attain the goals of the “launch” and “scale” pathways. This customer-centric orientation gives Pilot Fashions a starting
12 Business Performance Management March 2005
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(
An organization that is appropriately focused on aligning employees with strategy should resist the temptation to attach indicators of success or failure to its pathways and strategy plans.
) (
Exhibit Exhibit 2
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Strategy Plan Clarifies Corporate Objectiv
es
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MISSION: PILOT FASHIONS WILL BE HIGHLY REGARDED SPECIALTY CHAIN OF
WOMEN’S CLOTHING IN THE NORTHEASTERN UNITED STATES BY MARCH 2009.
CUSTOMER
FINANCIAL
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Be a trusted adviser for fashion
Become a destination store for stylish accessories
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Maintain consistent sales growth
Increase “share of wallet” for target audience
) (
PROCESS
) (
Ensure
1
00 percent in-stock merchandise while minimizing overstock
Cross-pollinate best practices from individual stores throughout the chain
) (
EMPLOYEES’ t CAPABILITIES
) (
Foster a culture that encourages and rewards customer intimacy
Elevate employees to valued associates and leverage their experience
)point for its strategy plan. It focuses on two strategic objectives from the customer perspective: to become a destination store for stylish accessories and to be a trusted adviser for fashion.
Because these are external objectives, Pilot Fashions’ customers must believe the company has achieved them for the organization to accomplish its mission. However, to reach the customer objectives, the organization must also consider its goals from the internal perspectives of employees and processes. For example, to ensure that customers view Pilot Fashions as a trusted adviser, senior managers must create a culture that rewards employees for customer intimacy and ensure that stores always have key merchandise in stock.
Exhibit 2 shows Pilot Fashions’ strategy plan. It goes beyond simply listing a mission statement and a few goals; it clearly depicts how employees support the strategy. Unless all workers immerse themselves in customers’ needs and share their experience with others in the company, Pilot Fashions is unlikely to become a highly regarded women’s clothing chain. To ensure it gets this message out, the company takes its strategy plan a step further; it creates a collaborative intranet portal that describes in detail why each objective is crucial to the organization and allows employees to have unfettered discussions about each objective.
Management
An organization that is appropriately focused on aligning employees with strategy should resist the temptation to attach indicators of success or failure to its pathways and strategy plans. Doing so would automatically divert attention away from the strategy itself, so that people would get stuck in the details of the
results
rather than absorbing the overall strategic direction. However, for the organization’s objectives to be tangible to everyone, they need to be translated into
relevant strategic and operational goals for functional depar tments and business units.
Early on, Pilot Fashions recognizes that helping employees understand the strategy and why certain objectives are strategic is not enough to ensure success. The company also needs to answer questions of how. For example, there are many ways it can accomplish the goal of increasing its market share. It can raise prices on individual products, inducing customers to buy items that are more expensive. It can stock stores with a broader range of items, encouraging customers to buy more on each visit. Or it can entice customers to visit its stores more frequently. If corporate management doesn’t specify which approach it wants to take, employees’ efforts could be diluted, or different groups could even work at cross-purposes.
To provide direction, Pilot Fashions’ senior managers set up initiatives to support the objectives in the company’s strategy plan. Each initiative is an operational program that contains the specifics of how the organization plans to achieve its objectives. An initiative’s description, as created by senior management, includes the high-level tasks critical to the project’s success, interdependencies between those tasks, a budget, an owner, and a timeline. At the same time, the company implements a software system, tied in to its strategy plan
portal, that enables it to share information on these initiatives with employees. This empowers them to manage their own role in executing the company’s objectives.
One initiative the company undertakes is a customer survey program that judges its progress toward the goal of becoming a destination for stylish accessories. Exhibit 3, on page 14, illustrates the software’s interface for this initiative. Such a dynamic status-reporting tool helps employees prioritize their time by focusing them on tasks that are high-priority and behind schedule. In addition, the software enables Pilot Fashions managers to quickly see whether the company is likely to reach a particular objective by checking on the status of its related initiatives.
March 2005 Business Performance Management 13
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An intangible goal such as improving employee satisfaction can be quantified using the results of employee surveys or even the percentage of employees who bother to take each survey.
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1
)Every organization has a set of core processes that are fundamental to its operations and provide guidance for the initiatives the company undertakes to achieve its objectives. A marketing department may, for instance, have a detailed product-launch process that outlines the steps it usually takes when releasing new products, such as creating documentation, getting stakeholders involved, and defining key deliverables. But when establishing the initiatives that support its strategy plan, an alignment-focused organization must go beyond simple project management of processes it has already established. It must articulate a clear link between operational processes and the objectives that each initiative impacts. Making this connection empowers employees to work independently yet still make decisions that further corporate objectives.
Monitoring and Measuring
Once an alignment-focused organization has articulated its strategy and defined the initiatives that will lead to that strategy’s execution, it must consider how it will monitor progress on a regular basis. It needs to systematically track its performance and alert stakeholders not only to problems and failures, but also to bright spots and successes. Stakeholders can then react quickly to problems, identify where things are broken, and take corrective action in a timely manner. They can also rapidly recognize what is working particularly well and propagate successful practices to other groups, which contributes to more effective advancement of the organization’s goals.
Before they can monitor progress, organizations must translate strategy into quantifiable terms. Key performance indicators (KPIs) are performance measures explicitly linked to strategic objectives. Even soft, or intangible, objectives can be monitored with KPIs. For example, a seemingly intangible goal such as improving employee satisfaction can be quantified based on changes in involuntary employee turnover, the results of quarterly employee surveys, or even the percentage of employees who bother to take each survey. An alignment-centric organization moves beyond traditional metrics that focus on end results to consider forward-looking measures that are the drivers of future performance. These so-called leading indicators are typically operational in nature; for example, they may include employee morale, brand recognition, and sales-force readiness. They are the gauges by which managers determine whether they are likely to reach their desired goals.
(
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ion of the copyright owner. Further reproduction prohibited without permission.
)
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Exhibit 3 The Right Interface Makes Tracking Initiatives’ Progress Easy AtgfaXEMONNAVANN.AZAIMISCIaVit…..,:.’ |
Schedule |
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Initiative: Customer survey |
Status: • Behind |
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DESCRIPTION: DEVELOP A CUSTOMER |
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SURVEY TO DETERMINE WHETHER PILOT FASHIONS |
Progress: Start ed |
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IS DELIVERING ON ITS PROMISE TO BE THE TOP-OF-MIND PROVIDER OF HIGH-END CLOTHES |
Start: 1/1/05 |
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Target End : 12/30/05 |
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· Roll out customer surveys |
Actual End: |
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Define customer |
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Larry 1/30/05 Hire survey |
Larry 5/15/05 |
Customer |
Budget Status: • Under Budget Budget: $75,000 Actual: $60,000 |
|||
|
Analyze survey |
||||||
|
consultants |
results | |||||
|
Greta 3/21/05 |
Kurt 12/30/05 |
Owner: Sandy Adams |
||||
|
Tasks/ Subtasks |
Team |
Proportion |
Importance |
Start | Target | Actual |
|
(Owner’) |
Complete |
End | ||||
|
gh Define customer F Larry*, 100% Medium Jan 1 Jan 30 Jan 30 |
||||||
|
W survey program Sandy… 2005 2005 2005 |
||||||
|
Determine location Andy*, 60% Medium Feb 1 Mar 15 |
||||||
|
for information Greta… 2005 2005 |
||||||
|
Hire survey ° Greta*, 0% Low Feb 1 Mar 21 |
||||||
|
consultants Chen… 2005 2005 |
||||||
|
Roll out customer Larry*, 10% High Feb 15 May 15 |
||||||
|
surveys Sandy… 2005 2005 |
||||||
|
Analyze survey Kurt*, 0% High Aug 1 Dec 30 |
||||||
|
results Larry… 2005 2005 |
(
14
)Business Performance Management March 2005
(
The biggest impediment to organizations’ success is not that they lack a well-defined strategy or well-honed execution; it’s the fact that these two are usually not in sync.
)After they’ve chosen metrics, organizations need to find an efficient way to monitor them. Scorecards and dashboards are two popular methods. Although the terms are often used interchangeably, there are differences. Scorecards provide a high-level overview of progress toward goals, while dashboards offer a more quantitative look at specific metrics. In an alignment-centric organization, casual users gain a true account of corporate progress toward strategy by looking at scorecards that integrate operational and financial information with resource-allocation data. The interface is simple and easy to use. In contrast, dashboards typically display arbitrary metrics across multiple dimensions of performance. They are built for power users who need to slice and dice the data, drill down into areas of interest, and develop what-if scenarios for use in forecasting. Dashboards’ analyses can benefit the organization as a whole because they allow for testing of the assumptions made in devising the strategy and identification of measures or targets that might contribute to dysfunctional decision-making.
When Pilot Fashions prepares to implement performance monitoring, it decides to give employees a high-level status report of progress toward corporate objectives. Doing so is challenging. Many of its objectives — such as “foster a culture that encourages and rewards customer intimacy” — are difficult to quantify because there aren’t obvious ways to measure success using the data in the company’s financial and operational systems. Yet these soft objectives are crucial. All of the goals in the company’s strategy plan are closely interconnected, so reaching the soft objectives is key to achieving the other goals, including revenue growth.
For example, the personal relationship employees build with customers is a key differentiator for Pilot Fashions. The company expends substantial resources training employees to provide personalized customer service, which fosters customer loyalty. Due to the training investment in each employee and the value the organization derives from ongoing, established employee relationships with customers, minimizing employee turnover is critical. Therefore, employee morale and employee satisfaction are leading indicators that the company must track regularly. By monitoring employee attitudes through surveys, Pilot Fashions can head off problems before they cause significant damage and negatively affect financial perfoimance.
Armed with a deep understanding of its KPIs, Pilot Fashions deploys scorecarding software that indicates the company’s progress toward strategic objectives (see exhibit 4). It selects status indicators that blend leading and lagging metrics, subjective measures of progress, and gauges of action on corporate initiatives. The company allows different departments (such as sales, merchandising, and customer service) to create their own scorecard. Each of these depaitmental scorecards reflects the worldview of the group that creates it, but all explicitly link back to corporate strategy. For the most part, they contain a subset of the company’s strategic objectives, plus a few supporting objectives that apply only to their department.
Because each department’s scorecard represents its own progress toward goals, the status indicators for the same objective may read differently on different groups’ scorecards. For example, the objective “cross-pollinate best practices” requires different behaviors for each function. The merchandisers at Pilot Fashions headquarters routinely collaborate to determine the best assortment of products for each store, but the store managers don’t ever share information about successful layouts or end cap allocation for promotional items. Therefore, the “cross-pollinate” objective shows up green on the merchandisers’ scorecard (effective collaboration), red on the store managers’ scorecard (no sharing), and yellow at the corporate level (blend of merchandising, store management, and other scorecards).
The scorecard software’s green/yellow/red status indicators provide enough information about corporate objectives for most employees, but many operational managers want to be able to drill down into the details of specific areas of performance. Some want quantitative information about trends and deviation from the norm. Others want to be able to benchmark their performance, either internally (e.g., one store vs. a region) or externally (e.g., entire chain vs. similar chains). Over time, Pilot Fashions’ operational managers create a variety of role-specific dashboards that enable them to monitor the KPIs that are most important to them. For example, the director of inventory management creates a dashboard displaying a list of the top Jo out-of-stock items for both the previous week and the previous month, a bar graph of inventory turns by week over the past year, a pie chart showing the relative contribution of each store, and an exceptions list of items whose actual stocking position varied the most from forecast.
Of course, like most companies, Pilot Fashions has a small number of power users who are interested in more sophisticated analysis to help determine the root cause of trends or exceptions.
16 Business Performance Management March 2005
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These employees soon learn that starting with strategic objectives guides them toward the analysis they should be
Exhibit 4
Corporate Scorecard Provides High-Level View of Performance
(
OPERATIONS 1.
FINANCIALS 111
CUSTOMER 111
INTERNAL BUSINESS
COMPETITION
EMPLOYEE
) (
Achieve
profitable
growth
) (
Improve store
operating
efficiency
) (
Improve
customer
satisfaction
•
) (
Provide
customer with
right product
•
) (
Cross-pollinate
best
practices
) (
Improve
inventory
management
) (
Achieve
brand
dominance
) (
Improve
employee
satisfaction
) (
•
Enhance
shopping
experience
Align
employees to corporate
in
strategy
)performing and dramatically reduces the amount of data they have to consider. For example, if the organization finds that sales are lower at specific stores, it might investigate whether customer satisfaction, a leading indicator of sales, is low in those same stores. If satisfaction is also low, Pilot Fashions might then check leading indicators — employee training, product availability, promotional activity, etc. — to identify the culprits of the poor customer satisfaction showings. Once the company understands the root cause of the problem, it can take active steps to turn around customer satisfaction.
Tying the Pieces Together
The biggest impediment to organizations’ success is not that they lack a well-defined strategy or well-honed execution; it’s the fact that these two are usually not in sync. Organizations must bridge the gap between strategy and execution by striving for operational alignment. As they motivate stakeholders toward strategic objectives, manage initiatives that support those objectives, and regularly monitor and measure their progress, companies should formally encourage communication throughout the organization. Information and best practices that come to light through alignment-focused initiatives and dashboard users’ perfounance analyses should be leveraged to improve operations companywide and to influence strategy when appropriate.
At Pilot Fashions, management encourages communication among individual employees by setting up links within the scorecard software that take users to the collaborative portal that was established as part of the strategy plan. Users of the scorecard software can easily ask questions
of one another and share ideas on ways lagging depai talents or stores might transform red sta-
tus indicators to green.
The company also establishes a process for formal sharing of corporate best practices. Once organizational alignment is well under way, executives realize that many of the initiatives under-
taken by different dep./ tments are similar in structure but vary unnecessarily in their details. In
addition, new initiatives have no way of benefiting from knowledge gained through the success or failure of similar previous initiatives. To remedy this situation, Pilot Fashions interviews its operational managers to uncover their best practices. Then executives formalize these into a collection of standard corporate processes in areas such as new-employee training, store location selection, advertising campaign management, and new-product launches.
Now a Pilot Fashions marketing manager launching a new clothing line can use the instituted product-launch process as a foundation for building the launch initiative but tailor it to the parameters of the product at hand. If the new line were to produce disappointing sales figures, a simple analysis of the tasks associated with this and previous launch initiatives could shed light on the root cause of success or failure. Perhaps the low sales would be explained by insufficient research prior to selection of the new line or by a lack of sales-force training on how to sell the new line.
Sharing such information helps a company create scalable, replicable processes that build a strong foundation for future execution. By providing a shared frame of reference for all employees, the alignment-centric organization empowers them to effectively contribute to organizational objectives, encourages functional and individual accountability, and increases transparency across different business units. Only by properly aligning day-to-day operations with its overall strategy and long-telin vision can a company hope to effectively execute on its goals and avoid the role of cautionary case study in the next round of business books. i?ni
March 2005 Business Performance Management 17
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