Entrepreneur Success Series
Resource Note # 9
An entrepreneur needs appropriate business strategy to convert innovation into a successful venture. In this edition of SATTVA we introduce the concept of business strategy.
1. Meaning of Strategy
Professor Pankaj Ghemawat, in his much acclaimed article titled ‘Competition and Business Strategy in Historical Perspective’ observes that strategy is a term that can be traced back to the ancient Greeks, for whom it meant a chief magistrate or a military commander in chief. According to Professor Ghemawat the organisational challenges involved in World War II were a vital stimulus to strategic thinking. During this period, American military leaders had to make the arrangements that would best protect legitimate competition between military services while maintaining the needed integration of strategic and tactical planning. Many argued that the Army, Navy, Marines, and Air Force would be more efficient if they were unified into a single organisation. According to one school of thought Army was seen as a ‘manpower’ organisation and the Navy as a finely adjusted system of technical, engineering skills—a ‘machine-centered’ organisation. In a way this was the beginning of the concept of “distinctive competence” that later became a key part of strategic management.
One of the early contributors to the discipline of strategy, Alfred D. Chandler, Jr., defines strategy as “the determination of the basic long-term goals and objectives of anenterprise, and the adoption of courses of action and the allocation of resources for carrying out these goals.” According to Kenneth Andrews “strategy is the pattern of decisions in a company that determines and reveals its objectives, purposes or goals, produces the principal policies and plans for achieving those goals, and defines the range of businesses the company is to pursue, the kind of economic and human organisation it is or intends to be, and the nature of the economic and non-economic contribution it intends to make to its shareholders, employees, customers, and communities.”
Renowned management scholar, Henry Mintzberg classifies various ways of looking at strategy into five categories.
1.1 Strategy as Plan
According to most popular view, strategy is some sort of consciously intended course of action, or set of guidelines to deal with a situation. As per this view strategies are made in advance of the actions to which they apply, and they are developed consciously and purposefully. As plan, strategy deals with how leaders try to establish direction for organisations, to set them on predetermined courses of action.
1.2 Strategy as a Ploy
As plan, a strategy can be a specific “manoeuvre” intended to outwit an opponent or competitor. For instance, a corporation may threaten to expand plant capacity to discourage a competitor from building a new plant. Here the real strategy is the threat, not the expansion itself, and as such is a ploy. As ploy, strategy deals with direct competition, where various moves & counter moves including threats are employed to gain advantage.
1.3 Strategy as a Pattern
Many a times people infer consistency in behaviour of companies or managers, and label it as strategy. Such consistency may or may not be intentional. When the consistency is viewed as intentional, it is interpreted that there exists a plan behind the pattern. Mintzberg points out that a strategy may have two parts: the ‘intended’ part and the ‘realized’ part as shown in exhibit 1. That part of strategy which was intentional and realized can be termed as ‘deliberate’ strategy. The other part is the ‘emergent’ strategy where patterns developed in the absence of intentions or despite them, which went unrealized.
Exhibit 1: Intended versus Realized Strategy
(Source: Mintzberg, H. (Fall, 1997). ‘The Strategy Concept I: The 5Ps of Strategy.’ California Management Review, p. 14)
1.4 Strategy as Position
Strategy has also been thought as a means of developing a “match,” between organisation and environment. In that sense strategy aims at creating a unique place in the market which generates higher profits for the company. A position can be preselected and achieved through a plan or a ploy or pattern or may unintentionally get evolved. As position, strategy emphasizes consideration related to competitive environments. In that sense, strategy answers the question: how an organisation finds its positions and protects it in order to meet competition, avoid it, or subvert it.
1.5 Strategy as Perspective
Like human beings view the world based on their personality, organisations have relatively fixed patterns of perceiving the world. For example, some organisations, are aggressive pacesetters, creating new technologies and exploiting new markets; others perceive the world as set and stable, and so sit back in long established markets and rely more on political influence than economic efficiency. A perspective may become so deeply ingrained in the behavior of an organisation that the associated beliefs can become subconscious in the minds of its members. Mintzberg cites examples of IBM, Hewlett Packard and McDonalds as having different perspectives. While IBM favours marketing and builds a whole ideology around that, HP relies more on engineering and McDonalds concentrates on productive efficiency.
The confusion arising out of contradictory and ill-defined uses of the term strategy can be reduced by understanding these five viewpoints of strategy. To explain the relationship between various views of strategy, Mintzbergcites example of Honda’s forays in motorcycle market in USA. He says some consultancy firms described Honda’s strategy as result of a particular perspective. According to these consultants, Honda’s perspectiveof being a low cost producer, seeking to attack new markets in aggressive ways, was translated into a plan, in the form of an intended positionto capture the traditional motorcycle market in the US and create a new one for small family motorcycles, which was in turn realized through an integrated set of patternslike lining up distributorships, developing the appropriate advertising campaign of “You meet the nicest people on a Honda,” etc. However, Mintzberg argues that Honda did not go to America with the main intention of selling small, family motorcycles at all; rather, the company seemed to fall into that market almost inadvertently. However, once it was clear to the Honda executives that by chance they got a lucrative strategic position, that presumably became their plan. Honda’s strategy emerged, step by step (pattern), but once recognized, was made deliberate. In its formative years the organisation tried various things and gradually consolidated a perspective around what worked. This means organisations develop character, much as people develop personality by interacting with the world as they find it through the use of their innate skills & natural propensities.
2. Contents of Strategy
Just as there are multiple ways of looking at the concept of strategy, there exists whole lot of confusion about its content. According to Mintzberg, contents of strategies can be divided into following five groupings.
2.1 Locating the core business
A business can be thought to exist at a junction in network of industries that take raw material and through selling to and buying from each other produce variety of finished products or services. One of the tasks of strategies is to locate the core business. For instance, while core business of mobile handset makes like Samsung is manufacturing and marketing consumer electronics products, core business of Flipkart is to provide an electronic platform for consumers to buy products from several manufacturers like Samsung.
2.2 Distinguishing the core business
An organisation needs strategies to distinguish its core business so as to gain competitive advantage. Michael Porter provides a ‘generic strategies’ framework for this purpose. According to Porter there are two basic types of competitive advantages: Low Cost and Differentiation.
Low Cost –A generic approach based on competence to design, produce & market a product more efficiently than competitors.
Differentiation –A generic approach based on competence to provide unique and superior value to customers in terms of quality, features or service.
This combined with the scope of a business gives three generic strategies: Cost Leadership, Differentiation and Focus. Competitive scope means breadth of an organisation’s target within an industry in terms of customer segments, geographies, product range, channels etc. As shown in Exhibit 2, Focus Strategy has two further options.
Exhibit 2: Porter’s Generic Strategies
|Competitive Scope||Competitive Advantage|
|Low Cost||Product Uniqueness|
|Cost Leadership Strategy||Differentiation Strategy|
|Focus Strategy (low cost)||Focus Strategy (differentiation)|
(Source: Porter, M. E. (1980). Competitive Strategy. New York: The Free Press)
The generic strategies are discussed in greater detail subsequently.
2.3 Elaborating the core business
Organisations need strategies to elaborate their core business. Two most commonly used levers for elaboration are products/services and markets. As shown in exhibit 3, Igor Ansoff proposed a product – market growth matrix which provides four strategic options depending on the newness of products and markets.
Exhibit 3: Product – Market Growth Matrix
|Markets àProducts ↓||Existing Market (EM)||New Market (NM)|
|Existing Product (EP)||Market PenetrationCan we sell more of EP to EM?||Market Development: Can we target NM for EP?|
|New Product Variant / Form / Category (NP)||New Product Development:Can we develop NP for EM?||Integration &DiversificationRelated: Forward or Backward IntegrationUnrelated: New products & markets|
(Source: Adapted from Ansoff, H. I. (1965).Corporate Strategy. New York : McGraw Hill)
2.4 Extending the core business
Organisations at times grapple with the issue of how to extend beyond their core business. According to Mintzberg following strategic options are available for this purpose.
(i) Chain Integration Strategies:Herein an organisation extents its business backwards by getting into the business of its suppliers or forwards by getting into the business of it customers.
(ii) Diversification Strategies:These strategies involve getting into businesses that are not in the same chain of original business. The diversification may be related or unrelated.
(iii) Strategies of Entry & Control:There are different ways in which an organisation can practice integration or diversification strategies. It may go for internal development, acquisition, joint ventures, licensing, franchising routes etc.
(iv) Combined integration – diversification strategies:Various possible combinations can be thought of. By- product diversificationinvolves selling of by – products of operations chain into different markets. For instance, when an Airlines offers its maintenance services to other carriers. Linked diversificationtakes place when one business simply leads to another vertically, horizontally or sideways. Crystalline diversificationis the end result of many integration & diversification efforts in which it becomes difficult to distinguish between related and unrelated businesses.
(v) Withdrawal Strategies:This is opposite of integration or diversification. Impartation(which leads to outsourcing) is the label used for an organisations decision to buy what it used to make at one point of time. Some of the commonly used options are exit, liquidation, divestment, shrinking etc.
2.5 Reconceiving the core business
As a business develops through expansion, integration, and diversification sometimes need is felt to reconceive the core of business. Mintzberg talks about three options as follows:
(i) Business Redefinition Strategy:As shown in following exhibit 4, a business can be defined along three dimensions: the consumer need, the market segment and the products/technology. A business can be redefined using any of these levers.
Exhibit 4: Abell’s Framework for Business Definition (Ex. a wrist watch manufacturing company)
(Source:Adaptedfrom Abell, D. F. (1980). Defining the Business: The Starting Point of Strategic Planning. Prentice Hall)
(ii) Business Recombination Strategy:Business recombination can be done by looking at shared activities in the value chain. Some of the recombination strategies include bundling (Ex. automobile service with a new car) and unbundling (Ex. selling a car without any obligation to buy accessories of the same brand).
(iii) Core Relocation Strategy:Sometimes organisations change their core, the centre of gravity, proactively or reactively. First, the change may be along operating chain. For instance, Amazon started as an online book seller but now has become complete e-commerce platform for variety of products. Second, there can be shift in the dominant function from production to marketing. For instance, India’s largest mobile telephone operator, Airtel has outsourced most of the technology functions and concentrates on marketing. Third can be a shift to a new business. For instance, IBM has transformed from being a computer hardware company into a software & service dominant business.
3. Levels of Strategy
One can have more clarity about the contents of strategy by understanding the organisational level at which different strategies are formulated and implemented.
3.1 Corporate Strategy
This is like an overarching plan of action covering different functions performed by different strategic business units (SBUs). It deals with the objectives of the company, allocation of resources and coordination of the SBUs.Corporate level strategy deals with decisions related to allocation of resources among different SBUs and transfer of resources from one SBU to another. Various strategic options at the corporate level strategy are as shown in exhibit 5.
3.1.1 Expansion:Aiming at high growth by broadening the scope of business in terms of customer groups or customer functions or technology or a combination. For example, ‘Facebook’ trying to attract customers other than youth.
Expansion can be brought about by concentrating on existing businesses, &/or integrating with adjacent businesses&/or diversifying into new businesses. Internationalisation involves geographical expansion beyond organisation’s native country. At times organisations realize limitations of growing on one’s own and enter into some sort of cooperation with other organisations in the form of mergers, acquisition, joint ventures, licensing etc.
3.1.2 Stability:Aiming at incremental improvement in performance by marginally changing the scope of business in terms of customer groups or customer functions or technology or a combination. For example, a pharmaceutical company tries to offer special services to hospitals or amachinery manufacturer offers better after-sales services.
3.1.3 Retrenchment:Aiming at contraction of business through a substantial reduction or elimination of business scope in terms of customer groups or customer functions or technology or a combination. For example, areadymade garment company moves out of retail selling & concentrates only on institutional sales.
Exhibit 5: Corporate Strategies
(Source:Adapted from Kazmi, A. (2008). Strategic Management and Business Policy. New Delhi: Tata McGraw Hill.)
In reality a combination of these strategies are often used by companies.
3.2 Business Unit Level Strategies
Business unit level strategy is a comprehensive plan providing objectives for the respective SBU. It deals with allocation of resources and coordination among various functional areas of the SBUs for optimal contribution to corporate objectives. Primary focus of business strategy is creation of competitive advantage for the business unit through what Porter calls as generic strategies of cost leadership, differentiation, or focus. Business strategies are discussed in detail in next section.
3.3 Functional Strategies
Every business unit performs several functions such as procurement, operations, sales & marketing, accounting & finance, human resource management, administration etc. Each such function has its own strategy. A Functional Strategy involves setting objectives for a particular function and designing ways of achieving the same. It deals with allocation of resources and coordination among various operations within functional areas for optimal contribution to SBU and corporate objectives. For example, within marketing functional area strategies related to packaging, branding, sales & distribution, promotion etc.
4. Business Strategy
Strategy consultants Ken Favaro and Evan Hirsh along with Harvard Professor Kasturi Rangan describe Business Strategy as a result of choices executives make, on “Where to Play” and “How to Win”, to maximize long-term value. According to them “Where to Play” specifies the target market in terms of the customers and the needs to be served while “How to Win” spells out the value proposition that will distinguish a business in the eyes of its target customers, along with the capabilities that will give it an essential advantage in delivering that value proposition. Accordingly business strategy should provide answer to three questions:
- Who is the target customer?
- What is the value proposition we are going to offer to that customer?
- What are the essential capabilities needed to deliver that value proposition?
Value proposition means all the tangible and intangible benefits accrued to the customers less all the sacrifices a customer is required to make while searching, buying, using & disposing a product/service. The sacrifices can be thought in terms of money, time and even psychological costs of switching from one practice/product/brand to another. Task of business strategy is to choose such options for ‘where to play’ and ‘how to win’ that will meet the need for both long-term growth and short-term profitability.
4.1 Where to play?
This issue is akin to what Mintzberg calls as definition of ‘scope’ of business. As shown in exhibit 6 following strategic options exist for defining business scope.
4.1.1 UnsegmentationStrategy: This involves offering a basic product/service to as many customers as possible. Traditionally this approach has been practised in commodities and low cost services or even in case of some government services. But of late, new variants of this approach (though not strictly unsegmented) have emerged. For instance, some hospitals in eye care & heart care categories are practising this type of strategy in India and there by offering their services at fraction of a cost as compared to other similar hospitals.
4.1.2 CustomisingStrategy:This is exactly opposite of undifferentiated approach wherein a product/service may be customised right from design, manufacturing/operations, to delivery stages. When a product or service is designed right from scratch to suit demands of a customer, it is termed as Pure Customisation. Such type of customisation is seen in business of special purpose machines. When a basic design is modified to suit customer’s requirements, it is the case of Tailored Customisation. Some ultra luxary cars like Rolls Royce fit into this category. Standardised Customisationon the other hand involves only tweaking at the final assembly/delivery stage. For instance, Asian Paints in India offers a very large range of colour shades which can be made by mixing standard colour mixes through a computerised machine at the retail outlets. Mass customisation is a real possibility now with the advent of 3-D Printing Technologies and Artificial Intelligence (AI).
Exhibit 6: Business Scope Definition Strategies
(Source: Mintzberg, H. (1988). ‘Generic Strategies: Toward a Comprehensive Framework.’Advances in Strategic Management, vol. 5, pp. 1-67)
4.1.3 Segmentation Strategy:This involves grouping of customers on the basis of some such features/aspects that are relevant for strategy formulation. Market segmentation provides opportunities to ‘tailor’ the value proposition as per needs, wants and desires of each segment. The company may later decide to target specific market segments.
As a part of business strategy a company needs to decide about the number of segments it wishes to cover. For instance, high end car manufacturers like Rolls Royce follow only a Single Segment Strategy. On the other hand Honda follows a Multi Segment Strategy. Some companies like Hindustan Unilever Ltd, a FMCG major in India, target almost all market segments with variety of offerings. This is termed as Full Market Coverage. Some companies may decide to go for Market Specialisation, where in they focus on a specific market but meet variety of their needs. For instance, a company may specialize in supplying variety of products only to military establishments. At another extreme a company may go for Product Specialisationand cover a large number of segments.
4.1.4 Niche/Focus Strategy: This involves concentrating on a narrow segment and withinthat segment attempting to achieve either a cost advantage or differentiation. This strategy is based on the logic that consumer needs can be better serviced by focusing entirely on a small number of segments and this leads to a high degree of customer loyalty.
Following conditions are necessary to pursue a focus strategy.
- Ability to segment the market & assess the needs of buyers in a particular segment better than others.
- A business model which gives either cost or differentiation advantage in that segment.
4.2 How to play?
In order to answer the question ‘how to play’, companies need to think in terms of their competitive advantage. As discussed earlier, according to Michael Porter there are two basic types of competitive advantages: Low Cost & Differentiation. This leads to following generic strategies.
4.2.1 Cost Leadership Strategy:A company pursuing cost leadership strategy may be interested in increasing the profit margins. On the other hand some other company may pass on the cost benefits to woo the consumers away from competitors thereby increasing its market share. Following conditions are necessary to adopt this strategy.
- Access to the low cost capital required to make a significant investment in production assets.
- Skill in designing products for efficient manufacturing.
- Access to low cost labour.
- High level of expertise in manufacturing.
- Efficient physical distribution.
Entrepreneurs need to assess the possibility of other firms being able to lower their costs as well. Sometimes due to improvement in technology competitors may leapfrog the production capabilities. For instance, with automation of low skill software development jobs, Indian Information Technology (IT) & Information Technology Enabled Services (ITES) sector’s advantage of low labour cost is under threat.
4.2.2 Differentiation Strategy:The organisations pursuing this strategy try to offer higher perceived benefits to the consumers and often charge a premium for these additional benefits. Following conditions are necessary for pursuing a Differentiation Strategy.
- Access to leading scientific research.
- Highly skilled and creative product development team.
- Strong marketing ability to successfully communicate the perceived strengths of the product.
- Strong brand equity.
- Corporate reputation for innovation.
188.8.131.52Bases of differentiation
This can be based on form, features, performance level, durability, reliability, maintainability, style/aesthetics or overall design & technology.
Some products are bought for their image value like high end cars, plush residential apartments, high end consumer electronics etc. Image differentiation is used even otherwise when differentiation on tangible attributes is difficult. For instance, consultancy firms flaunt the list of their big clients or educational background of their key employees.
(C) Support Services
Purchase and usage of products and services involve a chain of activities which can be divided into three parts: pre purchase, usage and post purchase. Each phase provides opportunities for differentiation in terms of ease of searching, ease of ordering, delivery of product/service at the right time & place, customer education on how to get best out of the product/service, timely maintenance & repair, effective & efficient disposal etc.
A company can differentiate itself on the basis of quality of its human resources. Various levers that can be used for this purpose are competence (knowledge & skills), courteous behaviour (friendly, respectful, considerate), credibility (trustworthiness), reliability (consistency & accuracy), responsiveness (speed of working), and communication skills.
Abell, D. F. (1980). Defining the Business: The Starting Point of Strategic Planning. Prentice Hall
Andrews, K.T. (1980). The Concept of Corporate Strategy. New York: Richard Irwin.
Ansoff, H. I. (1965). Corporate Strategy. New York : McGraw Hill
Chandler, A. A., Jr. (1962). Strategy and Structure: Chapters in the History of American Industrial Enterprise. Cambridge, MA: The MIT Press.
Favaro, K.,Rangan, K. and Hirsh, E. (May 29, 2012). ‘Strategy: An Executive’s Definition.’ strategy + business, Issue 67.
Ghemawat, P. (Spring, 2002). ‘Competition and Business Strategy in Historical Perspective.’ Business History Review, 76.
Hamel, G. and C.K. Prahalad. (2002), Competing For The Future. New Delhi: Tata McGraw-Hill.
Kazmi, A. (2008). Strategic Management and Business Policy. New Delhi: Tata McGraw Hill.
Mintzberg, H. (Fall, 1988). ‘Generic Strategies: Towards a Comprehensive Framework’ in Advances in Strategic Management, Vol. 5, Greenwich CT : Jai Press.
Mintzberg, H. (Fall, 1997). ‘The Strategy Concept I: The 5Ps of Strategy.’ California Management Review.
Porter, M. E. (1980). Competitive Strategy. New York: The Free Press