short-term financial objectives dominate.

The surest path to protecting and sustaining a

company’s profitability quarter after quarter and year after year is to pursue strate- jons that Basic Concept
strengthen its competitiveness and business position. A company exhibits
strategic intent when it
relentlessly pursues a
'The Concept of Strategic Intent A company’s strategic objectives are important for certain long-term strategic
another reason—they indicate strategic intent to stake out a particular business position.6 objective and concentrates
its strategic actions on
The strategic intent of a large company may be industry leadership on a national or global
achieving that objective.
scale. The strategic intent of a small company may be to dominate a market niche. The
strategic intent of an up-and-coming enterprise may be to overtake the market leaders.
The strategic intent of a technologically innovative company may be to pioneer a promising
discovery and open a whole new vista of products and market opportunities—as did Xerox,
Apple Computer, Microsoft, Merck, and Sony.
The time horizon underlying a company’s strategic intent is long-term. Companies that
rise to prominence in their markets almost invariably begin with strategic intents that are
out of proportion to their immediate capabilities and market positions. But they set
ambitious long-term strategic objectives and then pursue them relentlessly, sometimes
even obsessively, over a 10 - to 20-year period. In the 1960s, Komatsu, Japan’s leading
earth-moving equipment company, was less than one-third the size of Caterpillar, had little
market presence outside Japan, and depended on its small bulldozers for most of its
revenue. Komatsu’s strategic intent was to “encircle Caterpillar” with a broader product line
and then compete globally against Caterpillar. By the late 1980s, Komatsu was the
industry’s second-ranking company, with a strong sales presence in North America,
Europe, and Asia plus a product line that included industrial robots and semiconductors as
well as a broad array of earth-moving equipment.
Often, a company’s strategic intent takes on a heroic character, serving as a rallying cry
for managers and employees alike to go all out and do their very best. Canon’s strategic
intent in copying equipment was to “Beat Xerox.” Komatsu’s motivating battle cry was
“Beat Caterpillar.” The strategic intent of the U.S. government’s Apollo space program was
to land a person on the moon ahead of the Soviet Union. Throughout the 1980s, Wal-Mart’s
strategic intent was to “overtake Sears” as the largest U.S. retailer (a feat accomplished in
1991). In such instances, strategic intent signals a deep-seated commitment to winning—
unseating the industry leader, remaining the industry leader (and becoming more
dominant in the process), or otherwise beating long odds to gain a significantly stronger
business position. A capably managed enterprise whose strategic objectives exceed its
present reach and resources can be a more formidable competitor than a company with
modest strategic intent.

Long-Range versus Short-Range Objectives An organization needs both long-range and

short-range objectives. Long-range objectives serve two purposes. First, setting per-
formance targets five or more years ahead pushes managers to take actions now in order
to achieve the targeted long-range performance later (a company that has an objective of
doubling its sales within five years can’t wait until the third or fourth year of its five-year
strategic plan to begin growing its sales and customer base!). Second, having explicit long-
range objectives prompts managers to weigh the impact

6The concept of strategic intent is described in more detail in Gary Hamel and C. K. Pralahad, Strategic Intent,”
Harvard Business Review 89, no. 3 (May—June 1989), pp. 63—76. This section draws upon their pioneering
discussion.
1. Stay-on-the-offensive strategy—This strategy rests on the principle that the best defense
is a good offense. Offensive-minded leaders stress being first- movers to sustain their
competitive advantage (lower cost or differentiation) and to reinforce their reputation as
the leader. A low-cost provider aggressively pursues cost reduction, and a differentiator
constantly tries new ways to set its product apart from rivals’ brands. The theme of a
stay-on-the-offensive strategy is relentless pursuit of continuous improvement and
innovation. Striving to be first with new products, better performance features, quality
enhancements, improved customer services, or ways to cut production costs not only
helps a leader avoid complacency but it also keeps rivals on the defensive scrambling to
keep up. The array of offensive options can also include initiatives to expand overall
industry demand—discovering new uses for the product, attracting new users of the
product, and promoting more frequent use. In addition, a clever offensive leader stays
alert for ways to mak it easier and less costly for potential customers to switch their
purchases from runner-up firms to its own products. Unless a leader’s market share is
already so dominant that it presents a threat of antitrust action (a market share under 6
percent is usually “safe”), a stay-on-the-offensive strategy means trying to grow faster
than the industry as a whole and wrest market share from rivals. / leader whose growth
does not equal or outpace the industry average is losing ground to competitors.
Fortify-and-defend strategy—The essence of “fortify and defend” is to mak it harder
for new firms to enter and for challengers to gain ground. The goals a strong defense
are to hold onto the present market share, strengthen current market position, and
protect whatever competitive advantage the firm has. Specific defensive actions can
include
• Attempting to raise the competitive ante for challengers and new entrants via
increased spending for advertising, higher levels of customer service, and bigger
R&D outlays.
• Introducing more of the company’s own brands to match the product
attributes that challenger brands have or could employ.
• Adding personalized services and other “extras” that boost customer loyalt and
make it harder or more costly for customers to switch to rival products
• Broadening the product line to close off possible vacant niches for
competitors to slip into.
• Keeping prices reasonable and quality attractive.
• Building new capacity ahead of market demand to try to block the market
expansion potential of smaller competitors.
• Investing enough to remain cost competitive and technologically
progressive. *
• Patenting the feasible alternative technologies.
• Signing exclusive contracts with the best suppliers and dealer distributors.
A fortify-and-defend strategy best suits firms that have already achieved industry
dominance and don’t wish to risk antitrust action. It is also to situations where a firm
wishes to milk its present position for profits and cash flow because the industry’s
prospects for growth are low or because further gains in market share do not appear
profitable enough to go after. But the fortify-and-defend strategy always entails trying
to grow as fast as the
 market as a whole (to stave off market share slippage) and requires reinvesting rh
enoii capital in the business to protect the leader’s ability to compete, fllow-the-leader
3 strategy—Here the leader’s strategic posture involves its competitive muscle
. /using i (ethically and fairly!) to encourage runner-up firms to be content followers
rather than aggressive challengers. The leader plays competitive hardball when smaller
rivals rock the boat with price cuts or mount new market offensives that directly
threaten its position. Specific responses can include quickly matching and perhaps
exceeding challengers’ price cuts, using large promotional campaigns to counter
challengers’ moves to gain market share, and offering better deals to the major
customers of maverick firms. Leaders can also court distributors assiduously to
dissuade them from carrying rivals’ products, provide salespersons with documented
information about the weaknesses of an aggressor’s products, or try to fill any vacant
positions in their own firms by making attractive offers to the better executives of rivals
that “get out of line.” When a leader consistently meets any moves to cut into its
business with strong retaliatory tactics, it sends clear signals that offensive attacks on
the leader’s position will be met head-on and probably won’t pay off. However, leaders
pursuing this strategic approach should choose theirbattles. It may be more
strategically productive to assume a hands-off posture and not respond in hardball
fashion when smaller rivals attack each /other’s customer base in ways that don’t affect
its own.

STRATEGIES FOR RUNNER-UP FIRMS ___________________________________

Runner-up firms occupy weaker market positions than the industry leader(s). Some
runner-up firms are up-and-coming market challengers, employing offensive strategies to
gain market share and a stronger market position. Others behave as content followers,
willing to coast along in their current positions because profits are adequate. Follower
firms have no urgent strategic issue to confront beyond “What kinds of strategic changes
are the leaders initiating and what do we need to do to follow along?”
A challenger firm interested in improving its market standing needs a strategy aimed at building a competitive advantage of its
own. Rarely can a runner-up firm improve its competitive position by imitating the strategies of leading firms. A cardinal rule in offensive strategy
is to avoid attacking a leader head-on with an imitative strategy, regardless of the resources and staying power an underdog may have .23 Moreover,
if a challenger has a 5 percent market share and needs a 20 percent share ~To”eam attractive returns, it needs a more creative approach to competing
than just
“try harder.”
In industries where large size yields significantly lower unit costs and gives large- share
competitors an important cost advantage, small-share firms have only two viable strategic
options: try to increase their market share (and achieve cost parity with larger rivals) or
withdraw from the business (gradually or quickly). The competitive strategies most
underdogs use to build market share are based on (1) becoming a lower-cost producer and
using lower price to win customers from weak, higher-cost rivals and (2) using
differentiation strategies based on quality, technological superiority, better customer
service, best cost, or innovation. Achieving low-cost leadership is

' Porter, Competitive Advantage, p. 514.

 I / THE CONCEPTS AND TECHNIQUES OF STRATEGIC MANAGEMENT

usually open to an underdog only when one of the market leaders is not already solidly
positioned as the industry’s low-cost producer. But a small-share firm may still be able to
reduce its cost disadvantage by merging with or acquiring smaller firms; the combined
market shares may provide the needed access to size-related economies. Other options
include revamping its value chain to produce the needed cost savings and finding ways to
better manage executional cost drivers.
In situations where scale economies or experience curve effects are small and a large
market share produces no cost advantage, runner-up companies have more strategic
flexibility and can consider any of the following six approaches:2
1. Vacant-niche strategy—This version of a focused strategy involves concentrating on
customer or end-use applications that market leaders have bypassed or neglected.
An ideal vacant niche is of sufficient size and scope to be profitable, has some growth
potential, is well-suited to a firm’s own capabilities and skills, and for one reason or
another is not interesting to leading firms. Two examples where vacant-niche
strategies worked successfully are regional commuter airlines serving cities with too
few passengers to attract the interest of major airlines and health foods producers
(like Health Valley, Hain, and Tree of Life) that cater to local health food stores—a
market segment traditionally ignored by Pillsbury, Kraft General Foods, Heinz,
Nabisco, Campbell’s Soup, and other leading food products firms.
2. Specialist strategy—A specialist firm trains its competitive effort on one market
segment: a single product, a particular end use, or buyers with special needs. The
aim is to build competitive advantage through product uniqueness, expertise in
special-purpose products, or specialized customer services.
Smaller companies that successfully use a specialist focused strategy include
Formby’s (a specialist in stains and finishes for wood furniture, especially
refinishing), Liquid Paper Co. (a leader in correction fluid for writers and
./typists), Canada Dry (known for its ginger ale, tonic water, and carbonated soda
water), and American Tobacco (a leader in chewing tobacco and snuff).
3. Ours-is-better-than-theirs strategy—The approach here is to use a differentiation-
based focused strategy keyed to superior product quality or unique attributes. Sales
and marketing efforts are aimed directly at qualityconscious and performance-
oriented buyers. Fine craftsmanship, prestige quality, frequent product innovations,
and/or close contact with customers to solicit their input in developing a better
product usually undergird this “superior product” approach. Some examples include
Beefeater and Tanqueray in gin, Tiffany in diamonds and jewelry, Chicago Cutlery in
premium-quality kitchen knives, Baccarat in fine crystal, Cannondale in mountain
bikes. Bally in shoes, and Patagonia in apparel for outdoor recreation enthusiasts, a
4. Content-follower strategy—Follower firms deliberately refrain from initiating
trendsetting strategic moves and from aggressive attempts to" steal customers away
from the leaders. Followers prefer approaches that will not provoke competitive
retaliation, often opting for focus and differentiation strategies that keep them out of
the leaders’ paths. They react and respond

2F8Mijore details, see Kotler, Marketing Management, gfp. 397—412; R. G. Hamermesh, M. J. Anderson, Jr., and J.
ETjfaqis, “Strategies for Low Market Share Businesses^Harvard Business Review 56, no. 3 (May-June 1978), pp. 95-
T02t-and_Porter, Competitive Advantage, chapter lSv
 6 / MATCHING STRATEGY TO A COMPANY’S SITUATION

rather than initiate and challenge. They prefer defense to offense. And they rarely get out
of line with the leaders on price. Union Camp (in paper products) has been a successful
market follower by consciously concentrating on selected product uses and applications
for specific customer groups, focused R&D, profits rather than market share, and
cautious but efficient management.
Growth-via-acquisition strategy—One way to strengthen a company’s position is to merge
with or acquire weaker rivals to form an enterprise that has more competitive strength
m- 5.
and a larger share of the market. Commercial airline companies such as Northwest,
USAir, and Delta owe their market share growth during the past decade to acquisition of
smaller, regional airlines. Likewise, the Big Six public accounting firms enhanced their
national and international coverage by merging or forming alliances with smaller CPA
firms at home and abroad.
Distinctive-image strategy—Some runner-up companies build their strategies around
ways to make themselves stand out from competitors. A variety of strategic approaches
I
can be used: creating a reputation for charging the lowest prices, providing prestige
quality at a good price, going all out to give superior customer service, designing unique
product attributes, being a leader in new product introduction, or devising unusually
creative advertising. Examples include Dr Pepper’s strategy in calling attention to its
distinctive taste, Apple Computer’s making it easier and more interesting for people to
use a personal computer, and Mary Kay Cosmetics’ distinctive use of the color pink.
industries where big size is definitely a key success factor, firms with low mar- S|ket shares have some
obstacles to overcome: (1) less access to economies of scale in ^manufacturing, distribution, or sales
promotion; (2) difficulty in gaining customer Hpecognition; (3) an inability to afford mass media
advertising on a grand scale; and (p) difficulty in funding capital requirements.25 But it is erroneous to
view runner-up wmfirms as inherently less profitable or unable to hold their own against the biggest
Wjfirms. Many firms with small market shares earn healthy profits and enjoy good repu- Ktations with
customers. Often, the handicaps of smaller size can be surmounted and a ^profitable competitive position
established by (1) focusing on a few market segments where the company’s strengths can yield a
competitive edge; (2) developing technical expertise that will be highly valued by customers; (3)
aggressively pursuing the Svelopment of new products for customers in the target market segments; and
(4) ig innovative/“dare to be different”/“beat the odds” entrepreneurial approaches to manage stodgy,
slow-to-change market leaders. Runner-up companies have a g~|||ien opportunity to gain market share if
they make a leapfrog technological break- through, if the leaders stumble or become complacent, or if they
have the patience to iaaa8”B|gnibble away at the leaders and build up their customer base over a long period
of

-
 176 I / THE CONCEPTS AND TfciCH NICJU '-'f- sinrtic.vji'- iviru^vji_iMu.i ■* i

egy keyed either to low-cost or “new” differentiation themes, pouring enough money and talent into
the effort to move up a notch or two in the industry rankings and become a respectable market contender within five years or so. It can employ a
fortify-and-defend strategy, using variations of its present strategy and fighting hard to keep sales, market share, profitability, and competitive
position at current levels. It can opt for an immediate abandonment strategy and get out of the business, either by selling out to another firm or by
closing down operations if a buyer cannot be found. Or it can employ a harvest strategy, keeping reinvestment to a bare-bones minimum and taking
actions to maximize short-term cash flows in preparation for an orderly market exit. The gist of the first three options is self-explanatory. The fourth
merits more discussion.
A harvest strategy steers a middle course between preserving the status quo and exiting
as soon as possible. Harvesting is a phasing down or endgame strategy that involves
sacrificing market position in return for improved cash flows or short-term profitability.
The overriding financial objective is to reap the greatest possible harvest of cash to deploy
to other business endeavors.
The measures taken in a harvest strategy are fairly clear-cut. The operating budget is
chopped to a rock-bottom level; reinvestment in the business is held to a bare minimum.
Capital expenditures for new equipment are put on hold or given low financial priority
(unless replacement needs are unusually urgent); instead, efforts are made to stretch the
life of existing equipment and make do with present facilities as long as possible. Price may
be raised gradually, promotional expenses slowly cut, quality reduced in not-so-visible
ways, nonessential customer services curtailed, and the like. Although harvesting results in
shrinking sales and market share, if cash expenses can be cut even faster, then after-tax
cash flows may rise (at least temporarily) and the company’s profits will erode slowly rather
than rapidly.
Harvesting is a reasonable strategic option for a weak business in the following
circumstances:26
1. When the industry’s long-term prospects are unattractive.
2. When rejuvenating the business would be too costly or at best marginally
profitable.
3. When the firm’s market share is becoming increasingly costly to maintain or
defend.
4. When reduced levels of competitive effort will not trigger an immediate or rapid
falloff in sales.
5. When the enterprise can redeploy the freed resources in higher opportunity
areas.
6. When the business is not a'crucial or core component of a diversified
company’s portfolio of business interests (harvesting a noncore business is
strategically preferable to harvesting a core business). -%
7. When the business does not contribute other desired features (sales stability,
prestige, a well-rounded product line) to a company’s overall business portfolio.
The more of these seven conditions present, the more ideal the business is for harvesting.

26Phillip Kotler, “Harvesting Strategies for Weak Products,” Business Horizons 21, no. 5 (August 1978), pp. 17-18.
 MATCHING STRATEGY TO A COMPANY’S SITUATION

177
Harvesting strategies make the most sense for diversified companies that have (^sideline or n0nc0re
business units in weak competitive positions or in unattractive lljtindustries. Such companies can
take the cash flows from harvesting unattractive, WPnoncore business units and reallocate them
to business units with greater profit poten- ™M'al or to the acquisition of new businesses.

Turnaround STRATEGIES FOR BUSINESSES IN CRISIS

turnaround strategies are needed when a business worth rescuing goes into crisis; the
Subjective is to arrest and reverse the sources of competitive and financial weakness as
luickly as possible. Management’s first task in formulating a suitable turnaround Itrategy is
to diagnose what lies at the root of poor performance. Is it an unexpected lowntum in sales
brought on by a weak economy? An ill-chosen competitive strat- y? Poor execution of an
otherwise workable strategy? An overload of debt? Can ; the business be saved, or is the
situation hopeless? Understanding what is wrong with Se business and how serious its
strategic problems are is essential because different liagnoses lead to different turnaround
strategies.
;iSome of the most common causes of business trouble are taking on too much debt,

loverestimating the potential for sales growth, ignoring the profit-depressing effects of an
overly aggressive effort to “buy” market share with deep price-cuts, being burdened fith
heavy fixed costs because of an inability to utilize plant capacity, betting on R&D {■ efforts
to boost competitive position and profitability and failing to come up with ifffective
innovations, betting on technological long shots, being too optimistic about the ability to
penetrate new markets, making frequent changes in strategy (because the Irevious strategy
didn’t work out), and being overpowered by the competitive advan- ages enjoyed by more
successful rivals. Curing these kinds of problems and achieving {'successful business
turnaround can involve any of the following actions:
Revising the existing strategy.
Launching efforts to boost revenues.
Pursuing cost reduction.
Selling off assets to raise cash to save the remaining part of the business.
Using a combination of these efforts.

ategy Revision When weak performance is caused by bad strategy, the task of iftrategy
overhaul can proceed along any of several paths: (1) shifting to a new competitive approach to
rebuild the firm’s market position; (2) overhauling internal oper- Igations and functional area
strategies to better support the same overall business strat- Uly; (3) merging with another firm
in the industry and forging a new strategy keyed io the newly merged firm’s strengths; and (4)
retrenching into a reduced core of prod- Bpis and customers more closely matched to the firm’s
strengths. The most appealing path depends on prevailing industry conditions, the firm’s
particular strengths and fairnesses, its competitive capabilities vis-a-vis rival firms, and the
severity of the crisis. Situation analysis of the industry, major competitors, and the firm’s own
com- ffiitive position and its skills and resources are prerequisites for action. As a rule,
successful strategy revision must be tied to the ailing firm’s strengths and near-term npetitive
capabilities and directed at its best market opportunities.

Revenues Revenue-increasing turnaround efforts aim at generating

preased sales volume. There are a number of revenue-building options: price cuts,
178 I / THE CONCEPTS AND TECHNIQUES OF STRATEGIC MANAGEMENT

increased promotion, a bigger sales force, added customer services, and quickly achieved
product improvements. Attempts to increase revenues and sales volumes are necessary (1)
when there is little or no room in the operating budget to cut expenses and still break even
and (2) when the key to restoring profitability is increased utilization of existing capacity. If
buyer demand is not especially price sensitive because of differentiating features, the
quickest way to boost short-term revenues may be to raise prices rather than opt for
volume-building price cuts.

Cutting Costs Cost-reducing turnaround strategies work best when an ailing firm’s value
chain and cost structure are flexible enough to permit radical surgery, when operating
inefficiencies are identifiable" and readily correctable, when the firm’s costs are obviously
bloated and there are many places where savings can be quickly achieved, and when the
firm is relatively close to its break-even point. Accompanying a general belt-tightening can
be an increased emphasis on paring administrative overheads, elimination of nonessential
and low value-added activities in the firm’s value chain, modernization of existing plant
and equipment to gain greater productivity, delay of nonessential capital expenditures, and
debt restructuring to reduce interest costs and stretch out repayments.

Selling Off Assets Assets reduction/retrenchment strategies are essential when cash flow
is a critical consideration and when the most practical ways to generate cash are (1)
through sale of some of the firm’s assets (plant and equipment, land, patents, inventories,
or profitable subsidiaries) and (2) through retrenchment (pruning of marginal products
from the product line, closing or selling older plants, reducing the workforce, withdrawing
from outlying markets, cutting back customer service, and the like). Sometimes crisis-
ridden companies sell off assets not so much to unload losing operations and to stem cash
drains as to raise funds to save and strengthen the remaining business activities. In such
cases, the choice is usually to dispose of noncore business assets to support strategy
renewal in the firm’s core business(es).

Combination Efforts Combination turnaround strategies are usually essential in grim

situations that require fast action on a broad front. Likewise, combination actions fre-
quently come into play when new managers are brought in and given a free hand to make
whatever changes they see fit. The tougher the problems, the more likely the solutions will
involve multiple strategic initiatives.
Turnaround efforts tend to be high-risk undertakings, and they often fail. A landmark
study of 64 companies found no successful turnarounds among, the most troubled
companies in eight basic industries.27 Many of the troubled businesses waited too long to
begin a turnaround. Others found themselves short of both; the cash and entrepreneurial
talent needed to compete in a slow-growth industry characterized by a fierce battle for
market share. Better-positioned rivals simply proved too strong to defeat in a long, head-
to-head contest. Even when successful, many troubled companies go through a series of
turnaround attempts and management changes before long-term competitive viability and
profitability are finally restored.
1 What is business strategy?

Business strategy is the plans, choices and decisions used to guide a company to
greater profitability and success.
An inspired and clearly considered strategy provides the impetus for commercial
success, whereas a weak or misunderstood strategy may lead to a company going out of
business. Understanding what constitutes “strategy” is therefore crucial in developing a
successful business, as is avoiding the tendency to label every plan and decision
“strategic” when most are about implementing strategy rather than setting it. Equally
important is for a strategy to be clear and effectively communicated to everyone with a
role in implementing it, and to shareholders and other stakeholders.

A clear view
A focus on strategy will highlight where a unit or group of businesses can be more
successful as well as those areas where it is weak, vulnerable or failing. It will show in
detail where the business is making its money and why. This insight can be used to build
profits, cash flow growth and shareholder value. Strategy indicates where resources
(notably people, effort and finance) should be concentrated.
The process of developing and implementing strategy enables managers to
understand their customers and competitors. Specifically, a sound strategy is grounded
in an understanding of a business’s customers. This understanding is dynamic - the
company is able to develop its products and approach in line with its customers’
changing preferences. Some of the strategies pursued by market-leading firms such as
Microsoft and Apple involve anticipating what their existing and potential customers
will like. Few purchasers of the Apple iPod were demanding a stylish new way to buy,
download and play music before it was launched. Instead, Apple was able to combine
developments in software, design, the internet and computer-chip miniaturisation with
its understanding of what people would value to come up with a surprising product that
caught the popular imagination. Apple has been described by The Economist (October
2007) as: “An orchestrator and integrator of technologies, unafraid to bring in ideas
from outside but always adding its own twists.”
Developing and implementing strategy strengthens a business in
 WHAT IS BUSINESS STRATEGY?

highly competitive and often turbulent market, is Cisco, which supplies networking
equipment and network management for the internet. Its strategy is based on
understanding what it can do to help its client achieve their goals, and then using this
understanding to guide its decisions and focus its work. In short, customer success is the
mantra behind client engagement.

and client engagement

At Cisco, people recognise that each client has different goals. Some are related to financial
performance or market share targets; others are concerned with public- sector targets and
governmental priorities.
Cisco places great emphasis on making sure that its approach focuses on helping the
customer to achieve its goals. Scott Brown, vice-president, sales operations and worldwide sales
enablement, says:

When we think about client engagement, the most important question we can ask is:
What are we doing to deliver our clients' success and help them achieve their goals?

The challenge is to make sure that the focus is consistent globally and from top to bottom
within the company. Cisco's experience shows that several things are essential.

Understanding what constitutes customer success

This requires an understanding throughout the organisation of what constitutes success for each
customer so that everyone shares the same goal and is clear about what it is. For instance, the
Cisco badge that forms part of every employee‘s security pass highlights the most important
elements of the company's culture such as open communication, inclusion, trust and teamwork,
but it also makes clear that all of those attributes serve a single goal - customer success.

Getting the metrics right

If you measure things that are important to the customer and the company, it helps to reinforce
their importance among employees - so it matters that you get what you measure and the way
you measure it right. The old adage "what gets measured gets managed'' holds true and to
determine customer success, Cisco uses a wide range of metrics including customer satisfaction,
customer loyalty and the number of franchises within a business.
BUSINESS STRATEGY

Getting the compensation structure right

The size and nature of their remuneration or compensation package matters greatly to
most people. Getting the compensation structure right helps generate positive behav«iour
and gives people the incentive to do the things that need to be done.
At Cisco, a substantial portion (approximately 20%) of executives' pay is linked to customer
satisfaction.

Managing performance effectively

At Cisco people get feedback on the measurement of results and know that their
compensation depends in part on how good those results are. This reinforces the
focus on the customer and benefits everyone involved.
/

Collaborating and sharing expertise

If a new Cisco client has a specific need and the experience or expertise to address this
resides somewhere else in the business, there is an expectation that help will be
forthcoming. Collaboration is fostered and managers communicate the standards of
professionalism and integrity they expect.

Using technology to communicate

Cisco's focus on customer success benefits from a network-based approach in which
communication includes videos from sales leaders, regular information about client
successes, examples of how customers use technology and details of what has worked and
what has not. For a company selling networking equipment none of this is surprising, but
this kind of communicating is standard in many big companies.

Developing skills and insight

Once the principles of client engagement are understood, practical aspects that a manager
can develop include the following:

E Dialogue. The ability to question, empathise and listen is crucial for establishing rapport
with customers and ensuring their success.
E Coaching. Encouraging people who have attained leadership positions because of their
results and technical expertise to share their skills and experience is essential.
E Knowledge. A sufficiently deep knowledge and understanding of a client's industry,
market, customers (and what they want and value), competitors and overall market
position is crucial to being able to make a difference.
I
 WHAT IS BUSINESS STRATEGY?

What strategy is not .... — .........

While it is important to know what strategy is and why it is important, it is also useful
to appreciate what strategy is not. There is much confusion about the nature of strategy.
Strategy is not:

E A vision or mission statement such as “Our strategy is to be a leading-edge

provider/employer”. This.explains neither where th/ firm is going nor how it will
make progress. Consequently, it is not
a strategy.
E A goal, budget or business plan. Strategy is not a goal such as “We aim to be the
best or number one”. This is, at best, an aspiration. Also, strategy is neither a
budget nor a business plan, although elements of these may contribute to how a
strategy is implemented. E Data analysis. Too often, data analysis leads to
strategy, when what should happen is that strategic choices are made first and
then refined and explored further using-data analysis.

The choice of strategy

The development of strategy involves making decisions about:

r Who to target as customers (and who to avoid targeting).

E What products or services to offer. E How to undertake related
activities efficiently.

In every industry there are several viable positions that a company can occupy. The
essence of strategy therefore is to choose the one position that a company will claim as
its own. An example of the difference clear strategic thinking and decision-making can
make is Nestle’s turnaround of Nespresso.
■*

Clear strategic thinking: Nespresso

Nespresso is an espresso coffee-making machine consisting of a coffee capsule and a machine.
The coffee capsule is hermetically sealed in aluminium, and contains 5 f' grams (about one
teaspoon) of roasted, ground coffee. The coffee capsule is placed in the handle, which is then
inserted into the machine. The act of inserting the handle pierces the coffee capsule at the top.
At the press of a button, pressurised hot water is passed through the capsule. The result is a
high-quality cup of espresso coffee.
BUSINESS STRATEGY

Target individuals and households, not restaurants or offices 1

Table 1.1 Nestle's winning decisions Sell coffee, not coffee machines Subcontract the
manufacture of the Nespresso machine to prestigious manufacturers
Who Who should I target as customers?
Take control of coffee side and focus on
the production of high-quality coffee
What What products or services.sbould I offer?
capsules Sell the Nesftresso machine
How How can I best deliver the product to
through prestigious retailers
customers?
Educate
retailers so that they can teach the consumer hoj/y to use the machine
Sell the coffee capsules direct through the Nespresso Club

Nespresso was introduced in 1986 as a joint venture between Nespresso and a

Swiss-based distributor called Sobal. The new venture, Sobal-Nespresso, purchased the
coffee-making machines from another Swiss company, Turmix, and the coffee capsules
from Nestle. Sobal-Nespresso then distributed and sold everything as a system: one
product, one price. J Offices and restaurants were targeted as customers and a
separate unit called Nespresso was set up within Nestle to support the joint
venture's sales and marketing efforts, and to service and maintain the
machines.
By 1988, the business had failed to take offand headquarters was considering freezing
the operation. However, in 1988-89 Jean-Paul Gaillard, Nespresso's commercial director,
changed the strategy and made the business profitable. Gaillard decided that the coffee
side of the operation had to be separated from the machine side. Since Nestle was notin
the machine business, he felt he had to focus on the coffee.
Production of the Nespresso machine was assigned to several carefully selected
manufacturers such as Krups, Turmix and Philips. The machines were then sold to
prestigious retailers including Harrods, Galeries Lafayette and Bloomingdale's. It was the
retailers' responsibility, under the guidance and control of Nespresso, to promote,
demonstrate and sell the machines to consumers. It was the responsibility of the
manufacturers to service and maintain the equipment.
On the coffee side, the Sobal partnership was ended and the operation placed under
Nespresso (later Nestle Coffee Specialties). The target customer was changed
W .. .
'from offices to households and th< through a "club". Once customers Nespresso Club.
Orders for capsult
the club and the capsules were sh currently takes 7,000 orders per d

Avoiding pitfalls
All businesses need a strategy business environment chang understanding or
clarity abo J is that strategy needs to be a; I There are other principles 1
I
 WHAT IS BUSINESS STRATEGY?

from offices to households and the distribution of coffee capsules was organised through a
"club". Once customers boughta machine they became a member of the Nespresso Club. Orders
for capsules were taken over the phone or by fax direct to the club and the capsules were
shipped to the customer within 24 hours. The club currently takes 7,000 orders per day.

Avoiding pitfalls
All businesses need a strategy of some kind and should reconsider it as the business
environment changes. But many get into trouble through lack of understanding or clarity
about their strategy. The first principle, therefore, is that strategy needs to be as clear, simple
and compelling as possible. There are other principles that can help a strategy to be
successful.

Create a unique strategic position for the business

Focus on who your customers are, the attractiveness of your offer to them (known as the
value proposition), and how you can connect the two as efficiently as possible. The benefits
of a unique strategic position are highlighted by the concept of value innovation, developed
by W. Chan Kim and Renee Mauborgne in their book Blue Ocean Strategy: How to Create
Uncontested Market Space and Make Competition Irrelevant.1 This is the concept of
defying conventional logic to either redefine or creatc a market. For example, for many
years American tv networks used the same format for news programmes. They were aired
at the same time and they competed on the popularity and professionalism of their
presenters and their ability to report and analyse events. This changed in 1980, when c N

launched real-time 24-hour news from around the world for only 20% of the cost of the
networks. Viewers, with their increasingly busy lives, valued news and analysis at a time
that suited them, rather than having to fit around a tv channel’s schedule.

Consider the availability or potential availability of resources

Money and other resources are limited even though the balance can be improved through
alliances to bring in other kinds of resources such as knowledge and skills. Realistic
decisions must be made about how to use them to the greatest benefit. For example, if a
firm wants to retain existing customers but expand the customer base, it must widen its
product range and the range of value propositions. Toyota, one of the world’s largest car
companies, has products ranging from small, economical vehicles to
BUSINESS STRATEGY

luxurious marques such as Lexus. This is in contrast to the British car industry during the
1970s and 1980s when one nationalised company, British Leyland, produced many more
models than its competitors but failed to distinguish between any of them. The firm’s
resources were spread too thinly, with product development and marketing weakening
rather than strengthening each other. In time, these issues combined with other problems,
such as poor industrial relations and weak quality assurance, to create a tidal wave of
other troubles that eventually submerged the firm.

Understand the importance of values and incentives

Strategy must be based on reality about both the external and internal environments. The
external forces shaping business strategy include regulatory developments, demographics,
economic growth and political stability (see Chapter 3). Internal factors include skills,
people’s attitudes to their work, their commitment or “engagement”, the way they operate
and the overall culture of the business. If specific aspects of employees’ work in achieving a
company’s strategy are measured and incentives are given, they will respond accordingly
and the strategy will progress. The converse is also true: if a firm ignores the need to get
people working in a way that is consistent with the strategy, progress will be haphazard at
best.

Gain people’s emotional commitment to the strategy

Any strategy, however brilliant, will fail unless people understand it and are emotionally
committed to its success. Therefore it is crucial to explain why the strategy is important to
the organisation and the individual.

Be open to strategic ideas wkerever they originate

Although the top people must decide a company’s strategy, there is a mistaken view that
only they can develop strategic ideas. Ideas can come from anybody, anytime, anywhere.

Keep the strategy flexible

All ideas are good for a limited time, not forever. Continually question the answers to the
“who, what, how” questions. Strategy should not be changed too often, but it will require
adjusting to altered circumstances. Give employees the freedom to respond and to adjust
without waiting for permission or instructions.
Most major businesses recognise the need to empower their employees
and focus on their customers. Understanding how we have arrived at this way of thinking
and the different views of the role of strategy is the focus of the next chapter.

syrauestions
B What are the most profitable parts of your business? In particular:
- What are the prospects in the short, medium and long term?
- How precarious is the business? Does it rely on just a few products,
customers, suppliers, personnel or distribution
channels?
B What are the priorities when expanding? What must be done to achieve the benefits
and avoid the pitfalls? B What do colleagues see as the best options? What are their
views on potential opportunities and difficulties?
B How well do your people management policies reflect changing patterns of
employment? In particular, are you co-ordinating the efforts and talents of all
employees, enabling them to improve their skills and enhance the
organisation’s prospects? B Are your operations unnecessarily bureaucratic?
Could they be more flexible?
B Is there the commitment to act decisively and consistently? How can the culture of
the business or team be enhanced?
B Do you understand how planned changes will affect people? B What are your
success criteria and performance measures? How will they be monitored? B What is
the medium- to long-term plan that will ensure the firm’s success is sustained?
B What are the priorities both within the organisation and externally?
e How will your planned strategy affect other aspects of the business and, in
particular, the principal stakeholders (notably customers and employees)? B How
does your business involve customers? Are efforts made to understand what they
want? Are you certain about what your customers value?
B Is any part of your planning weak or lacking clear direction? Do you lack
confidence in your ability to make the right decisions to meet the strategy? B Do you
always consider multiple options before deciding? Is the quality of your strategic
thinking narrow or uninspired?
3 Forces that shape business strategy

T o succeed, a business’s strategy needs to be relevant to its employees,

shareholders and customers. As well as increasing its profitability and value and
meeting any other goals that may be set, the strategy also needs to take account of
present realities and future trends. The context in which strategy is developed and
implemented will determine its success. This simple point is often overlooked yet it is
an important and recurring theme that may be called the “Goldilocks challenge”: a
firm’s strategy needs to be flexible enough to cope with changing circumstances and
the unforeseen, yet specific, constant and consistent enough to guide people’s
decisions - a carefully-crafted balance.
The problem lies in understanding the complex web of shifting priorities,
aspirations, preferences and fears that people, institutions and societies quickly
develop. They affect the way people work, as well as the wider environment in which
firms strive to achieve their goals.
This chapter assesses the issues shaping business in the early decades of the 21st
century and why they matter. The subsequent two chapters then describe two
methods of linking strategy with these issues: scenarios and systems thinking.

The past matters t,

Much of what needs to be known about the future is evident from th^- past, but there
is a dangerous tendency to ^Veremphasise'the significance of broad trends without
understanding their details, which can be crucial. This problem is often complicated
by excessive emphasis pn either the past or the future, when what is required is a
balance between the two.
For example, for the past ten years at least, businesses in the developed world
have been excited by the emergence of China, the world’s most populous country, as
a market for consumer goods. The belief is that a population of 1.3 billion people
largely starved of these goods can be sold anything - and on a scale that will be highly
profitable. In reality, the Chinese require investments in partnership with a Chinese
enterprise, which limits profitability, and in some sectors, such as financial services,
the level of foreign ownership is carefully controlled.
This lack of critical analysis is also apparent in the way senior managers can be
seduced by the next big idea. Business people are competitive

33
BUSINESS STRATEGY

and aspirational, which is fine when it leads to innovation and progress, but the
flipside is a tendency to overlook perennial skills and experience. History and
psychology have much to teach about the future; very little of it is new.
The 1803 Louisiana Purchase exemplifies the point subsequently made by
President Galvin Coolidge that “the business of America is business”. It also
highlights many of the issues surrounding acquisitions. President Thomas Jefferson
believed in reducing America’s national debt, but when France’s cash-strapped
Napoleon Bonaparte offered to sell a massive slice of continental America, Jefferson
believed that this was an opportunity not to be missed. It was a massive strategic
acquisition that highlighted the benefits of boldness, flexibility and a readiness to
spend. Although the problems of integration (and America’s westward expansion)
were significant, the deal laid the foundation for the nation’s future.
So, before considering the implications of how the world is changing, it is helpful
to look at some of the perennial issues that will continue to shape the success of any
business strategy.

Leadership matters
Leadership is crucial. The challenge is to combine management skills and leadership
ability in the right way at the right time. The skills that need to be covered are shown
in the leadership spectrum (see Figure 3.1). This is not simply a scale of desirable
activities and attributes. It shows the range of management skills and roles that every
leader needs to master. This particular example is adapted from a version used by the
British armed forces. New managers generally start their careers by focusing on the
essentials of organisation and control. As they gain experience and develop their
skills and confidence, they display greater reasoning and emotional attributes, and
become more adept at empowering people. The most accomplished leaders display all
the characteristics of the leadership spectrum, notably including the ability to inspire.
The skills and abilities highlighted in the leadership spectrum highlight several
points about strategic decisions.
Emotion, integrity and empathy are crucial: what matters is not simply what
happens but how people perceive events. They need to be involved and heard, and
they need to be encouraged to achieve their potential if a strategy is to work.
Strategists need to be flexible and ready to handle “wild cards” - high-impact, low-
probability events that are potentially dislocating and will shape the future. Because
events such as the SARS epidemic that caused turmoil in Asian markets in 2002 and
2003 often
 FQRCES THAT SHAPE
BUSINESS STRATEGY

on and progress,
The leadership
, and experience, spectrum
future; very little
Inspiration Empowerment Personal
strength and sensitivity Recognition
>sequently made and support Team building Articulate

rica is business”, vision and values

sitions. President
il debt, but when
11 a massive slice
> an opportunity
that highlighted
spend. Although
expansion) were
Future.
orld is changing,
will continue to
move faster than people’s ability to change track, it is crucial to be prepared and
flexible. Businesses need to be guided by more than market research and think
about the future as well as being guided by the past. As the global financial crisis
;ement skills and ; that started in 2007 and erupted in 2008 showed only too clearly, all these factors
skills that need e mean there is a need to build trust and reputation - assets that are vital for future
Figure 3.1). This tes. success.
It shows the needs to
master, id by the Technology: always exciting, invariably hyped There is a fallacy that the
British rs by focusing effects of technology are always immediate, dramatic and far-reachirtg. Usually they
on 1 experience and are evolutionary - from electricity and railways in the 19th century to genetics and
21 reasoning and the internet in the 20th. The significance of technology is often overestimated in the
ering people. The of short term (less than five years) and underestimated over the long term.
the leadership I The costs and risks associated with developing major technologies ar£ often
significant. If they are pitched as “a little bit better, but not much”, they often sink
jectrum highlight j without trace. It is better from the developer’s perspective to make overstated claims
:ters is not simply ed that are later found to be flawed - but only after the development costs have been
to be involved | their recovered.
potential if j In The Shock ,0/ the Old: Technology and Global History Since 1900, 1 David
1 ready to handle | Edgerton says that many advances in such fields as aviation and nuclear weapons
it are potentially] have been costly wastes of resources because of their relatively limited use for
such as the sars mankind as a whole. This contrasts with “smaller” technologies, such as the
2 and 2003 often j development of contraceptives, which have been more widely available and have had
significantly more impact,

35