Book 5: Choosing Strategies
_(Originally published on_ _OUBS Blog_ _)_
_The purpose of this book is to “explain the wide choice of strategies available and to identify criteria to aid the strategist’s choice”._
_Formulation and sources of competitive advantage_
_When thinking about strategies keep in mind what the company objectives are (book 2) as well as strategic fit (book 1). To find a feasible strategy, ask three questions:_
Where are we now? (resources and capabilities)
Where do we want to go?
How do we get there?
_Remember that your strategic choices could be limited by different things like legal reasons. To find those limits you can use:_
Mandate analysis by looking at _what must be done_ , _what could be done_ and _what must be not be done_
Stakeholder analyis by looking at what the stakeholder groups think success is.
_Sources of corporate success as of Kay (1993) comes from_
* Relationships matching -> distinctive capabilities and strategic assets based on -> a competitive advantage derived from -> corporate success
_A way to find success is to find “rent” (value added), which only happens when your company works better than another company in the same industry._
_Kay believes that there are three distinctive capabilities:
\- architecture (relationships)
\- reputation (with suppliers and customers, need to be maintained)
\- innovation (compete more efficiently)_
_Strategic assets can also be a source of competitive advantage:
\- natural monopolies
\- sunk costs
\- exclusivity_
_generic strategies_
_Porter has talked about generic strategies being available to a company:_
cost leadership: you set out to be a low cost provider, which gives you additional flexibility in your pricing structures
differentiation: select attributes for your products that are perceived as important to be able to have a price premium. You still need a good cost position
focus: using cost or differentiation you outperform your competition by focusing on a special part of the market
_For a cost based strategies you have several drivers of your cost advantage:
\- economies of scale
\- economies of learning
\- process technology
\- product design
\- process design
\- capacity utilisation
\- input costs
\- residual differences in operating efficiency_
_You need to find out what the cost position of your competition is though as only the difference between you and them provides an advantage._
_Differentiation based strategies is about a balance of unique benefits with the associated additional costs in the case of a broad differentiation and finding a unique segment that is willing to pay extra in terms of focus._
_To put the generic strategies in perspective it should be kept in mind that the industry structure is important and the position needs to fit that market and keep in mind new entrants._
_Bowman and Asch (1996) added that in our complex world, a lot need to be kept in mind. Customers for example do not care about the input side (costs) and not all differentiators lead to a price premium. You need to pay attention that you are not forcing yourself into one box._
_Miller (1986) suggests that you can either use asset intensity (efficiency of asset usage) or asset parsimony (maximum variety out of assets)_
_Innovation as a source of competitive advantage is important as it can lead to creative destruction (Schumpeter, 1934), meaning large shifts in industry structure. Banbury and Mitchell (1995) believe that incremental product innovation are crucial to survival of a business. Your innovation might also depend on complementary innovation (MP3 downloads need high bandwidth). Freeman suggests that techno-economic paradigm changes, changes of innovations, organisational and institutional changes, are very important._
_strategic options_
_He the book talks about Ansoff’s product/market matrix (1965) which puts different strategies into a matrix of present and new in both market and product category._
_present/present
\- market penetration: get existing market share by competitive advantage or changing basis of competition
\- consolidation: firms need to grow in line with market, in mature markets market shares are stable, in declining markts assets change between companies
\- liquidation: if resources are better deployed elsewhere_
_present products in new markets
\- market development: geographically or in terms of customer needs. often in small or emergent markets; high risk strategy_
_new products in present markets
\- product or service development: where existing products do not fully exploit all available opportunities_
_new products in new markets
\- diversification: horizontal integration can lead to value greater than the sum of its parts; biggadike (1979) found that this normally needs 8 years to bear fruit_
_This matrix provides us with a deeper look at selecting generic strategies._
_Testing options and choices_
_Johnson and Scholes (1988) suggest testing for:
\- suitability
\- feasibility
\- acceptability_
_Rumelt (1955) suggest:
\- consistency
\- consonance
\- advantage
\- feasibility_
_There is risk in not looking at the probability of the foreseen outcomes, which does not mean that you need to remove uncertainty. Perceived risk is largely in the eye of the person thinking about it._
_Tapiero suggests looking at all forecasts and then estimating their probabilities_
_The real world is about weighting risk and return. These need to be weighted (could be in a matrix after Day 1990)_