Learning outcomes
After this session, you should have a solid understanding of
- different generic strategies as proposed by Ansoff, Porter and Mintzberg;
- the competitive characteristics that define the strategy types and their applicability;
- the significance of locating (and focusing on) the core business;
- the concepts of vertical and horizontal integration, internal and external growth; and
- the importance of trade-offs in strategic management;
You are able to apply the knowledge gained to real-life scenarios to describe and provide explanations for strategic decisions made by firms, particularly to develop initial guidance regarding the selection of an appropriate strategy.
Reflection
Before we start: Any questions or comments regarding the different types of corporate strategies outlined by Galbraith, Craig, and Schendel (1983) and my questions?
Galbraith and Schendel
Overview
Consumer goods:
Harvest, builder, continuity, climber, niche & cashout
Industrial products:
Low commitment, maintenance, growth & niche
Galbraith, Craig, and Schendel (1983) developed a typology of strategy encompassing six generic strategies for consumer goods and four for industrial products based on empirical data. The typology reaffirms that distinct, consistent, and recurring patterns of strategic behavior exist.
Consumer goods
Harvest
Organizations following a harvest strategy often prioritize maximizing short-term financial returns. They may reduce investments in growth and innovation.
- Characteristics: Emphasis on cost reduction, efficiency, and capitalizing on existing assets and market positions.
- Example: Kodak continued to focus on analog photography in the 1990s to maximize short-term profits instead of investing in digital technologies.
Builder
Organizations that actively seek growth opportunities and invest in expanding their market presence within consumer goods.
- Characteristics: Willingness to take risks, invest in R&D and new ventures, and pursue aggressive growth strategies.
- Example: Amazon continuously invests in new markets and technologies to secure long-term growth (e.g., Kindle).
Continuity
Organizations that aim to maintain stability and continuity by avoiding major changes or risks within consumer goods.
- Characteristics: Preference for maintaining existing operations, market positions, and core business practices.
- Example: Coca-Cola focuses on maintaining its market leadership in the beverage sector.
Climber
Organizations that aggressively pursue growth and expansion, often at a rapid pace.
- Characteristics: High-risk tolerance, willingness to enter new markets, and pursue growth opportunities aggressively.
- Example: Tesla aggressively entered the electric vehicle market and quickly gained market share.
Niche
Organizations that specialize in serving a narrow market segment or niche within consumer goods.
- Characteristics: Deep understanding of niche markets, customized products/services, and a focus on meeting specialized customer needs.
- Example: Ferrari specializes in the luxury sports car market.
Cashout
Organizations that generate significant cash flows from established business units but may not actively seek growth.
- Characteristics: Emphasis on cash generation and profitability from mature products or services.
- Example: IBM has long generated significant cash flows from its established mainframe computer business. While the company continues to support and maintain this business, it does not actively seek aggressive growth in this area.
Industrial products
Low commitment
Low commitment organizations maintain a minimal commitment to any particular strategy and may lack a clear strategic direction.
- Characteristics: Limited investment in strategic planning, unclear direction, and a lack of focus on specific strategic goals.
- Example: GE has maintained its lighting business with minimal investment, focusing on generating steady cash flow without significant growth efforts.
Maintenance
Maintenance-focused organizations prioritize preserving their existing market positions and may not actively seek growth.
- Characteristics: Emphasis on stability, efficiency, and maintaining current business operations.
- Example: Caterpillar focuses on maintaining its market position in heavy machinery by continuously improving its existing products and services, ensuring reliability and customer satisfaction without aggressively expanding into new markets.
Growth
Growth organizations prioritize growth and expansion as a central strategic objective.
- Characteristics: Willingness to invest in new markets, product development, and acquisitions to achieve growth targets.
- Example: Siemens consistently invests in expanding its industrial automation and digitalization solutions, aiming for long-term growth and increased market share in the industrial sector.
Niche
Niche organizations operate within specialized market segments, similar to that uncovered for consumer goods.
- Characteristics: Narrow product line, with only marginal emphasis on promotional activities.
- Example: Rockwell Automation specializes in industrial automation and information solutions, targeting specific industries like automotive and manufacturing with tailored products and services.
Exercise
Take five minutes to chat with your neighbor and think about how the strategy types identified by Galbraith, Craig, and Schendel (1983) relate to configurational thinking.
The configurational school of strategy, as described by Henry Mintzberg and others, views strategy formation as a process of transformation, where organizations move through different configurations or states over time. For instance:
- Low Commitment: This strategy type aligns with the configurational school’s emphasis on flexibility and adaptability. Organizations using a low commitment strategy can quickly shift configurations in response to changing environmental conditions, maintaining minimal investment in any single area to stay agile.
- Maintenance: This strategy type fits well with the idea of maintaining a stable configuration. Organizations focusing on maintenance aim to preserve their current state, ensuring consistent performance and reliability without seeking significant transformation.
- Growth: The growth strategy type is about transitioning to a more advanced configuration. Organizations pursuing growth are actively transforming their structures and processes to achieve higher performance levels and expand their market presence.
- Niche: This strategy type involves creating a specialized configuration tailored to a specific market segment. Organizations adopting a niche strategy develop unique capabilities and structures that cater to the particular needs of their target market, differentiating themselves from broader competitors.
Ansoff
Overview
The Ansoff-matrix (Ansoff 1965) is a strategic planning framework that helps businesses figure out how to grow by looking at their current and potential markets and products. The matrix groups growth strategies based on two main factors: products (what they offer) and markets (who they serve), leading to four growth strategies, each with its own focus.
Strategies
Market penetration
Organisations with a market penetration strategy aim to increase market share and sales within existing markets with existing products. They focus on selling more of their current products or services to their current customer base. This often involves tactics like price adjustments, marketing campaigns, or enhancing customer loyalty.
Example: Coca-Cola frequently uses market penetration strategies by increasing its marketing efforts and promotional activities to boost sales of existing products in existing markets. For instance, they often launch new advertising campaigns and seasonal promotions to increase consumption of their beverages.
Market development
Organizations pursuing market development strategy expand into new markets or customer segments with existing products. They seek to identify and enter new geographic regions or customer groups that haven’t been previously served. This could involve entering new countries, regions, or demographic segments.
Example: Starbucks has been expanding into new geographic markets, particularly in Asia. By opening new stores in countries like China and India, Starbucks is applying a market development strategy to grow its customer base.
Product development
Organizations with a product development strategy create and introduce new products or services into existing markets.They focus aim to leverage their existing market knowledge and customer base to introduce new products or services. This may involve research and development efforts or acquisitions of technologies or innovations.
Example: Apple consistently introduces new products to its existing markets. The launch of new versions of the iPhone, iPad, and MacBook are examples of product development strategies aimed at maintaining and growing its market share.
Diversification
Organizations with a diversification strategy enter entirely new markets with new products or services. Diversification strategies are the most ambitious and risky. Organizations seek growth by both creating new offerings and entering new markets that are unrelated to their current business. Diversification can be either related (limited connection to current products or markets) or unrelated (no connection).
Example: Amazon has diversified significantly over the years. Beyond its core e-commerce business, Amazon has expanded into cloud computing with AWS, entertainment with Amazon Prime Video, and even grocery retail with the acquisition of Whole Foods.
Guidelines (David and David 2016)
Consider market penetration when:
- Markets are not saturated
- Customer usage rates can increase
- Competitors’ market shares are declining
- High correlation between sales and marketing spend
- Economies of scale offer advantages
Consider market development when:
- New, reliable distribution channels are available
- The organization is highly successful
- Untapped or unsaturated markets exist
- Capital and resources are available for expansion
- There is excess production capacity
Consider product development when:
- Products are in the maturity stage
- The industry has rapid technological developments
- Competitors offer better-quality products
- The industry is high-growth
- Strong R&D capabilities exist
Consider related diversification when:
- Competing in a no-growth or slow-growth industry
- Adding related products enhances current sales
- Related products can be competitively priced
- Related products balance seasonal sales
- Products are in the declining stage
- Strong management team is in place
Consider unrelated diversification when:
- Competing in a highly competitive or no-growth industry
- Adding unrelated products significantly increases revenue
- Existing distribution channels can market new products
- New products have countercyclical sales patterns
- The industry is experiencing declining sales and profits
- Capital and managerial talent are available
- Financial synergy exists
- Existing markets are saturated
- Potential antitrust action in a concentrated industry
Discussion
What school of strategy does the Ansoff-matrix reflect?
The Ansoff-matrix reflects the design school of strategy. This school emphasizes a systematic, analytical approach to strategy formulation, focusing on aligning internal capabilities with external opportunities and threats. By systematically evaluating the growth options, the Ansoff-matrix helps organizations make informed decisions about their growth strategies, aligning with the design school’s emphasis on deliberate, planned strategy formulation
Porter
Overview
Porter (1980) proposed three generic strategies that organizations can pursue to gain a competitive advantage in their respective industries. These strategies are based on the scope of the target market and the competitive advantage sought.
Strategies
Cost leadership strategy
This strategy focuses on becoming the lowest-cost producer in an industry, enabling a company to offer products or services at competitive prices while maintaining profitability. Companies achieve this through economies of scale, efficient operations, and cost-saving measures. The goal is to offer products at a lower price than competitors, attracting price-sensitive customers.
This strategy targets a broad market scope but comes with risks such as intense price competition and the potential need to sacrifice quality or innovation.
Differentiation strategy
This strategy involves offering unique products or services that offer distinct value to customers. Companies achieve differentiation through innovation, quality, branding, and customer service. The aim is to create products that are perceived as superior and can command a premium price.
Companies scope is broad, often they target the entire market. They focus on offerings that are appealing to customers, which are willing to pay more for differentiated products and services. However, sustaining differentiation requires ongoing investment and innovation.
Focus strategy
This strategy targets a specific market segment or niche. Companies using a focus strategy concentrate on serving the unique needs of a particular group of customers better than competitors. This can be achieved through either cost focus (offering lower prices within the niche) or differentiation focus (offering specialized products). Key aspects include market segmentation, specialization, and relationship building within the targeted segment.
While the focus strategy minimizes exposure to broader market risks, it also makes the company vulnerable to changes in the chosen market and potential competition from larger players.
Discussion
What school of strategy does Porter and its three generic strategies reflect?
Porter’s three generic strategies—cost leadership, differentiation, and focus—reflect the competitive positioning school of strategy. This school emphasizes the importance of positioning a company within its industry to achieve a competitive advantage.
Stuck in the middle
Inability to pursue one of the three generic strategies effectively.
When a company is stuck in the middle, it does not offer unique enough features to justify a higher price (differentiation), nor does it have the cost structure to compete on price (cost leadership). As a result, it struggles to attract customers and achieve a competitive advantage
Being stuck in the middle refers to a situation where a company attempts to pursue multiple generic strategies simultaneously without excelling in any one of them. This term is often used to describe a lack of clear strategic focus or a failure to achieve a competitive advantage through cost leadership, differentiation, or focus.
Effective strategic management often involves making deliberate choices about which generic strategy to pursue and aligning the organization’s resources and activities accordingly. When a company tries to pursue multiple strategies without excelling in any of them, it may struggle to compete effectively in its industry.
Trade-offs are necessary in order to secure a strategic position against activities that are incompatible. The essence of strategy is as much about choosing what not to do as choosing what to do (Mintzberg 2014).
Trade-offs arise for three reasons:
- To avoid inconsistencies in image or reputation.
- Different positions require different product configurations, equipment, skills, management systems, etc.
- Due to limits on internal coordination and control.
Positioning trade-offs are essential to strategy – they create the need for choice, and purposefully limit what a company offers. They deter ‘straddling’ and ‘repositioning’ by competitors.
Exercise
Forward, backward and horizontal integration can be used as a way of putting Porter’s three generic strategies into practice.
Split into small groups and spend 15 minutes looking up the three strategic attempts, writing down the definitions and finding examples for each combination.
Prepare to present your findings.
Integration
Porter’s three generic strategies—cost leadership, differentiation, and focus—can be put into practice by forward integration, backward integration, and horizontal integration in the following ways:
Cost Leadership
- Backward integration: Companies aiming for cost leadership might acquire their suppliers to reduce costs and secure a stable supply of raw materials. For example, a car manufacturer might acquire a steel plant to lower the cost of steel.
- Forward integration: Firms might also acquire distribution channels to reduce costs associated with intermediaries. For instance, a manufacturer might open its own retail stores to sell directly to consumers, cutting out the middleman.
- Horizontal integration: By merging with or acquiring competitors, companies can achieve economies of scale, reducing costs per unit. For example, a large supermarket chain might acquire smaller chains to increase its purchasing power and reduce costs.
Differentiation:
- Backward integration: Companies might integrate backward to ensure the quality of their inputs, which supports their differentiation strategy. For example, a luxury car manufacturer might acquire a high-quality leather supplier to ensure the quality of its interiors.
- Forward integration: Firms might integrate forward to control the customer experience and enhance their brand. For instance, a high-end fashion brand might open its own boutiques to provide a unique shopping experience.
- Horizontal integration: By acquiring companies with complementary products, firms can enhance their product offerings and differentiate themselves. For example, a tech company might acquire a software firm to integrate advanced features into its hardware products.
Focus
- Backward integration: Companies with a focus strategy might integrate backward to control specific inputs that are crucial for their niche market. For example, a specialty coffee shop might acquire a coffee plantation to ensure the quality and uniqueness of its beans.
- Forward integration: Firms might integrate forward to directly reach their niche market and provide tailored services. For instance, a gourmet food producer might open specialty stores to sell directly to food enthusiasts.
- Horizontal integration: By acquiring other firms within their niche, companies can strengthen their market position and better serve their focused customer base. For example, a boutique fitness brand might acquire other specialized fitness studios to expand its offerings.
Mintzberg
Overview
According to Mintzberg (1988) families of strategies can be divided into five broad groups:
Locating, distinguishing, elaborating, extending & reconceiving the core business
Locating the core business
Strategies that focus on identifying and concentrating on the core activities which define the organization’s essential business.
A clear focus on upstream business, midstream business or downstream business.
This strategy type involves a clear understanding of the core competencies and core products or services that the organization excels in. Resources are directed toward strengthening and emphasizing these core areas while potentially divesting from non-core activities.
To figure out what the company’s core competencies and products or services are, you can look at the industry network it’s in (Mintzberg 1988):
- In the upstream business the product flows in a number of different directions, from the basic material to a variety of uses. Upstream businesses tend to be tech and capital-intensive, rather than people-intensive. They’re more likely to look for advantage through low-cost than high margins, favoring sales push over market pull (e.g., Wieland producing copper semi-finished products). Essential elements are resource acquisition, technology and innovation, and cost management.
- Midstream businesses are at the heart of the process. The hourglass is a great metaphor for this. It shows how a variety of inputs are drawn into a single production process, which then flows out to a variety of users (e.g., Apple producing iPhones). Essential elements are supply chain coordination.
- In the downstream business lots of different inputs come together in a narrow space (e.g., Mediamarkt selling lots of different electronic products). Essential elements are marketing and distribution.
This framework can help companies better understand where they should focus their efforts and resources to strengthen their core business and achieve competitive advantage.
Distinguishing the core business
Strategies that focus on highlighting and differentiating the core business from competitors.
Creating a unique selling position for core products or services.
Organizations pursuing this strategy type work on creating unique selling propositions (USPs) for their core products or services. They aim to stand out in the market by emphasizing what makes their core offerings distinct and valuable to customers.
- Distinguishing the core business involves creating a clear distinction between what the organization does exceptionally well (its core) and what may be less critical or peripheral to its overall mission. Thus, companies need to identify what its core activities or competencies are. These are the fundamental processes, products, or services that define the essence of the organization and contribute significantly to its success.
- Once the core activities are identified, the organization needs to allocates a significant portion of its resources to support and strengthen these core elements, such as talent, capital, and time. This focus ensures that the company excels in the areas that truly set it apart from competitors.
- By emphasizing and differentiating the core business, the organization strategically positions itself as a leader or specialist in those core activities. This can help it compete more effectively, command premium prices, and build a strong brand reputation.
Porter’s framework of generic strategies constitute strategies to distinguish the core business. Cost leadership and differentiation align with the idea of distinguishing the core business by focusing on specific strengths, whether in cost efficiency or unique features. Focus strategy aligns with both concepts as it involves concentrating resources and efforts on a specific market segment or niche, which essentially becomes the organization’s core customer base.
Elaborating the core business
Strategies that focus on expanding and deepening the core business to explore related opportunities.
New offerings or new channels but closely aligned with existing core competencies and customer base.
An organization can elaborate a business in a number of ways. It can develop its product offerings within that business, it can develop its market via new segments, new channels or new geographic areas, or it can simply push the same products more vigorously through the same markets. New offerings and channels are well aligned with their existing core competencies and customer base.
The strategy types proposed by Ansoff (1965) indicate how to elaborate the core:
- Market penetration
- Market development (e.g., geographic extension)
- Product development
- Diversification
Extending the core business
Strategies that focus on broadening the core business by exploring new markets or customer segments.
Organic or inorganic growth.
Organizations using this strategy type look for opportunities to leverage their existing core capabilities and enter new markets or customer groups, e.g., by extending operating chains vertically or horizontally:
- Vertical integration means backward or forward integration in the operating chain (downstream or upstream; i.e., chain integration strategies)
- Forward integration: gaining ownership or increased control over distributors or retailers
- Backward integration: seeking ownership or increased control of a firm’s suppliers
- Horizontal integration means seeking ownership or increased control over competitors in the saim value chain
The business can be extended either by internal development or acquisition.
Organic growth refers to the expansion of a business through internal processes, relying on its own resources. This includes increasing sales, improving productivity, and developing new products or services. Inorganic growth involves expanding a business through external means, such as mergers, acquisitions, or strategic alliances. This approach allows for rapid expansion by leveraging the strengths and resources of other entities.
Reconceiving the core business
Strategies that focus on rethinking and transforming the core business to adapt to changing conditions.
Radical change and innovation.
Organizations reassess their core business in response to significant shifts in the industry, technology, or market demands. It may involve redefining the core competencies and adopting a more disruptive approach.
Mintzberg (1988) identifies three basic reconception strategies:
- Business redefinition strategy involves fundamentally redefining the organization’s purpose, identity, and core activities in response to changing market conditions or disruptive forces.
- Business recombination strategy involves reconfiguring existing resources, capabilities, or business units in new and innovative ways to create value.
- Core relocation strategy refers to shifting the primary focus and resources of the organization from one area or aspect of the business to another.
Exercise
Extending the core business by means of integration strategies usually involve merging with or acquiring another firm (i.e., inorganic growth).
Take eight minutes to chat with your neighbour about the pros and cons of inorganic growth.
Benefits:
- To provide improved capacity utilization
- To make better use of the existing sales force
- To reduce managerial staff
- To gain economies of scale
- To smooth out seasonal trends in sales
- To gain access to new suppliers, distributors, customers, products, and creditors
- To gain new technology
- To gain market share
- To enter global markets
- To gain pricing power
- To reduce tax obligations
- To eliminate competitors
Risks:
- Integration difficulties up and down the two value chains
- Taking on too much new debt the target firm owes or to buy the target
- Inability to achieve synergy
- Too much diversification
- Difficult to integrate different organizational cultures
- Reduced employee morale due to layoffs and relocations
Blue Ocean Strategy
Overview
Create and capture value without intense competition by means of
identifying and converting noncustomers, leveraging four actions on six paths
Blue ocean strategy is a business strategy framework that encourages organizations to seek new and uncontested market spaces, where they can create and capture value without intense competition. The “blue ocean” represents uncharted waters, free from the competition seen in the “red ocean,” which symbolizes saturated and highly competitive markets (Kim and Mauborgne 2005).
By applying the principles of blue ocean strategy, organizations can break away from head-to-head competition in overcrowded markets and discover new growth opportunities by creating innovative value propositions and appealing to new customer segments.
Four actions
Organizations are advised to consider four key questions to identify actions towards a blue ocean strategy:
- What factors should be eliminated or reduced well below the industry standard?
- What factors should be raised well above the industry standard?
- What factors should be created that the industry has never offered?
- What factors should be reduced to the industry standard?
Six paths
To identify new market spaces, organizations can explore six paths:
- Look across industries
- Look across strategic groups within industries
- Look across the chain of buyers
- Look across complementary product or service offerings
- Look across functional or emotional appeal to buyers
- Look across time (i.e, identify and leverage trends that will shape the future)
Noncustomers
Identifying and converting noncustomers (those who are not currently served by the industry) into customers is a key aspect of blue ocean strategy.
Kim and Mauborgne (2005) categorize noncustomers into three tiers:
- Soon-to-be noncustomers
- Soon-to-be noncustomers are individuals or entities that are not currently part of your customer base but are likely to become noncustomers in the near future if their needs or preferences are not addressed. These potential noncustomers are dissatisfied or frustrated with the existing offerings in the market. They might be experiencing unmet needs, inconveniences, or issues with current products or services.
- Refusing noncustomers
- Refusing noncustomers are individuals or entities that consciously choose not to engage with your industry or product category despite having alternatives available. These noncustomers have actively decided not to use the products or services within your industry due to reasons such as cost, inconvenience, or dissatisfaction with existing offerings. The goal with refusing noncustomers is to understand their objections or reasons for refusal and to find ways to eliminate those barriers or create offerings that align with their preferences. By doing so, organizations can convert refusing noncustomers into customers.
- Unexplored Noncustomers
- Unexplored noncustomers are individuals or entities who have never been considered as potential customers by your industry because they fall outside the traditional market boundaries. These noncustomers are often overlooked because they do not fit the typical customer profile or have unique needs that have not been addressed by existing products or services in the market. Identifying unexplored noncustomers opens up new market spaces. Organizations can tap into this untapped segment by innovating and creating products or services that cater specifically to the unmet needs and preferences of this group.
By understanding the unique characteristics and motivations of each group, organizations can develop value propositions that resonate with these noncustomers and convert them into loyal customers, thus moving away from crowded “red oceans” and into “blue oceans” of opportunity.
Exercise
The strategy “Flywheel” is a powerful concept that describes how companies can create self-reinforcing cycles of growth.
Research on the concept, provide an illustrative example and analyse the impact of the flywheel on the value-stick.
Review and consolidation
The following questions are designed to review and consolidate what you have learned and are a good starting point for preparing for the exam.
- Define and discuss vertical integration (or another generic strategy)
- Give some guidelines when vertical integration (or another generic strategy) is an excellent strategy to pursue.
- What are advantages and disadvantages of vertical integration (or another generic strategy)?
- Define and give an example of a “blue ocean strategy.”
- Define and explain “first mover advantages.” To which generic strategies does it relate?
- Discuss whether it is best for a small firm to grow internally (organically) or to grow externally using means such as partnerships, joint ventures or mergers and acquisitions.
- Give reasons why so many companies are divesting (spinning off) key segments/divisions of the firm.
- Explain the following statement: Unlike with cost leadership where a firm examines how to reduce costs along its value chain, with differentiation one looks to maximize value along each level of the value chain.
- Called de-integration, there appears to be a growing trend for firms to become less forward integrated. Discuss why.
- What conditions, externally and internally, would be desired/necessary for a firm to diversify?
- What are major benefits of acquiring another firm?
- Why is it not advisable to pursue too many strategies at once?
- There are cooperative and competitive strategies. What is the difference? What are advantages and disadvantages?
Homework
Read Hallegatte (2009) and make notes on following questions:
- Why should climate change be a strategic topic for contemporary firms?
- How does the article describe the uncertainty associated with climate change and its impacts?
- What are the implications of this uncertainty for businesses and organizations?
- What is robust decision-making in light of the climate change as proposed in the article?
- What are insights offered into how individuals, communities, and organizations can efficiently adapt to climate change? How can these insights inform and enhance the strategic management process?
- While only briefly mentioned in the article, economic evaluation is crucial in both climate adaptation and strategic management. How can organizations assess the cost-effectiveness of their strategies and make informed decisions about resource allocation in light of the many uncertainties of climate change?
- What are the five examples of practical strategies discussed in the article? Why are they particularly suited to coping with the high level of uncertainty that climate change is creating?