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Strategic Choices & Strategy Models

Strategic Choices & Strategy Models

Mihai Ionescu - Senior Strategy Consultant, Owner Balanced Scorecard Romania, author.

Strategic Choices & Strategy Models

Before we start building any Strategic Plan, we have to clearly identify the Strategic Gaps (both Positioning and Coherence gaps) that have to be closed by executing the plan. Or, in other words, to Formulate our Strategy in a detailed manner, in order to get all the input data required for the Strategy Execution and develop an accurate plan for achieving the corporate goals of our Strategy.

Strategy Formulation

I always say that Strategy Management is part Art and part Science. On the Science side, three things are essential for adequately Formulating our Strategy:

(A) Good knowledge of our industry, or of the industry where we want to play

(B) A carefully chosen Strategy Model, or combination of Strategy Models

(C) A clear methodological path, with all correlations in place, allowing us to correctly Formulate the Strategy and generate the input for the Strategic Planning

I don't think that (A) requires much discussion, but without it, chances are slim that we'll be able to build a well-informed Strategy. I'll discuss (B) in the end and I'll focus on (C) in the following paragraphs. In fact, I'm only picking one component of the methodology, the Strategic Choices.

Excellently defined by Prof. Roger Martin, the co-author of 'Playing to Win' (2013), the Strategic Choices are grouped into two categories: Competitive Factors, or 'how-to-win' choices and Market Boundaries, or 'where-to-play' choices. OK, great, but what choices do we have to choose from? In other words, which are our generic choices that we should consider, for evaluation and selection?

One way of doing this would be to look at the Strategic Choices that are embedded into various Strategy Models that we may consider. But which of them to include and which to ignore in our analysis? Is there any integrative framework available that can help us select one Strategy Model or another, one Strategic Choice or another?

The Delta Model

Yes, there is. In 2009, the MIT Sloan Business School Professor Arnoldo C. Hax has published 'The Delta Model', a book that excels through the clarity of comparing and positioning several Strategy Models. In fact, he goes beyond the Strategy Models and identifies eight Strategic Choices (or options), grouped in three Strategic Positions: Best Product, Total Customer Solution and System Lock-In, placed in the three corners of the Delta Model triangle.

I was delighted to read the book, soon after it was published. The eight choices are well selected and are reciprocally disjunctive, allowing a good analysis about which are your alternative options for the Competitive Factors ('how-to-win' choices). For instance, the Generic/Competitive Strategies are well positioned in the Best Product corner, with the two main choices: Low Cost and Product Differentiation.

It is true that Prof. Arnoldo C. Hax builds a good argumentation about why the second positioning (Total Customer Solution) and the third (System Lock-In) provide a better value for the customer and superior economic results than the Best Product positioning, but the true value of the framework is that it provides an integrative, graphical placeholder for various Strategy Models and Strategic Choices, under the same umbrella.

However, not all major Strategy Models are illustrated in the Delta Model. For instance, the Resource-Based View of the Firm (RBV), although discussed in the book, is not placed anywhere in the Delta Model triangle choices. But there are more. Not positioned in the Delta Model are also the Blue Ocean Strategy, the Disruptive Innovation, or the Capabilities-Driven Strategy. So, how can we evolve the Delta Model, in order to be a true Strategy Positioning integrative framework?

The Penta Model (α)

Passed through an intermediary stage, called the Quadra Model (making room, in a fourth corner, for the Strategic Choices derived from the Blue Ocean Strategy and the Disruptive Innovation) the Delta Model evolved to a framework that is just released from the creative lab, called The Penta Model, a pentagon, instead of a triangle or a square, with five Strategic Positioning alternatives and 11 Strategic Choices.

For a higher resolution version of the Penta Model diagrams, go to:

SlideShare: http://www.slideshare.net/mihaione/penta-model

ISSUU: http://issuu.com/mihaiionescu7/docs/penta_model

The Strategic Positions A-C and their eight Strategic Choices are the same as in the Delta Model, except that the last choice (D1) has been moved to the fourth corner of the Penta Model. Which are the new Strategic Positions and their Strategic Choices?

D. Proprietary Enablers

This Strategic Position provides a set of Strategic Choices that represent enablers of the Strategic success of the company and may be associated with other choices, within the Strategic Choices mix that defines the Strategic Positioning.

The option D1 - Proprietary Standard, is allowing the company to exploit the success of a product that can be positioned as a standard (whether based on an Intellectual Property asset, or not) and as a foundation for building an Eco-system of Complementors that create products aligned to the proprietary standard, therefore complementary products that increase the value of our product for the customer (think, for example, of the numerous vendors of accessories for successful mobile phone brands - power chargers, jackets, hands-free car kits, etc.).

The option D2 - Core Resources or Capabilities, is allowing the company to exploit the ownership or exclusive access to rare and non-replicable resources that are used in the manufacturing of a product or in the supply of a service, giving the company a powerful competitive advantage against its competitors. The same type of advantage is based on a set of unique Core Capabilities, which cannot be easily replicated by competitors, used to differentiate company's Value Proposition, with no match in the market.

E. Disruptive Value

The Strategic Choices within the positions A-D, may be considered more or less traditional, in the sense that the competitive advantage is built following the game rules of the respective industry and market. The Disruptive Value choices are representing game-changers.

The option E1 - Conceptual Innovation is based on creating a completely new and innovative product or service that departs from the value curve of the competitive factors shared by all competitors in that industry. It creates a conceptually new value for the customer, leaving the competition behind and addressing marginal customers or non-consumers, which cannot find any other similar product or service in the marketplace.

The option E2 - Disruptive Innovation is using the advantage provided to the company by a new technology or method (not used by its competitors), with a significant reduction of costs, even if the resulting product is inferior to the competing products that are manufactured or supplied with traditional technologies or methods. For the target market, the price difference is worth much more than the quality or performance penalty, therefore they prefer the new product. The same goes for services.

OK, so now we have a complete set of Strategic Choices, disjunctive between each other, which we can analyze and then pick the ones that will provide us more opportunities and less threats, over the strategic horizon considered. But this addresses only half of our strategic positioning. What about the Market Boundaries (choices about 'where-to-play')?

The Penta Model (β)

You have probably noticed that the Penta Model described above is named Penta Model α, as it deals with the Competitive Factors ('how-to-win'). Complementary to it, the Penta Model β is dealing with the Strategic Choices about the Market Boundaries ('where-to-play') and has five Strategic Positions and 11 Strategic Choices, as well.

Very briefly, going through each Strategic Position (F-J):

F. Market Focus

The Strategic Choices that require an increased focus on certain market segments, is represented in the Penta Model by the F1 - Needs Segmentation, which uses the standard criteria for market segmentation into strategic groups (demographics, buying behavior, life style, etc.), by the F2 - High-End Market, which includes customers demanding a premium product and seller-buyer relationships and are able to pay the corresponding premium prices (includes the luxury/vanity market segments), and by the F3- Long Tail Market, which is characterized by a large number of price-sensitive customers of lower value, a segment also called the commodity market.

G. Channel Focus

This Strategic Position is regarding the 'distance' between the vendor and the customer, along the sales channel/chain. The G1 - Proximity Market choice is related to the geographical proximity of the sales channel and locations to the customer (think, for example, of the proximity grocery stores, opened closer to the residential areas, as opposed to the supermarkets opened in central locations or outside the cities), but also to the buying convenience (think of the 'click-and-mortar' retailers that allow customers to order online and have the goods delivered to their desired location).

The G2 - Sales Channel Refocus choice is a two-way option. On one hand, it is used when, for instance, the manufacturers that don't interact significantly with end-users (because their products are sold in retail chains) want to re-position their Value Proposition closer to the end-user needs. An example is McDonald's, which switched their focus during the '90s from the franchisees to the end-users, in order to re-position their restaurants away from the low-quality perception that has developed over the years. McDonald's focuses today on the end-user, not on the franchisees. On the other hand, this option is adopted when a company wants to increase the reach of its successful business beyond their capability to expand, especially geographically. So they choose to franchise their business and build a network of franchisees, that rapidly increase their presence in an entire country or in the entire world. So their focus switches from their local customers to their continuously-developing franchise network.

H. Diversification

The choices of this Strategic Position are used when the company wants to diversify its business and enter other domains/industries, targeting the respective markets. The option H1 - Collateral Market is adopted when a company wants to sell to its existing customers other products or services that are currently sold by other vendors. Think, for example, of a company that is renting office space in its office building, deciding to open a restaurant inside the building, in order to capture a share of its customers who go out every day to the neighboring restaurants during their lunch break.

The H2 - Substitute Market is about companies that decide to enter unrelated domains or industries, targeting customers with its adapted products, which represent substitutes for the equivalent traditional products that are purchased by the customers in that market. Of course, this means that the adapted version of an existing product can bring certain competitive advantages, compared to the substituted products (price, quality, features, simplicity of use, etc.).

I. New Markets

This represents a positioning related to new market entry, either in a different domain/industry, within the existing geography (I.1 - New Domain/Industry) or in the same domain/industry, but in a different geography (e.g. export markets, with or w/o products localization), which is the choice I2 - Internationalization.

J. Market Creation

The choices of this Strategic Positioning are related to markets that don't exist today (non-existent, or below a relevant maturity level) and need to be created or driven/developed by the company. The J1 - Market Redefinition choice is addressing a new conceptual market, typically for selling a conceptually new product or service, by focusing on marginal customers and non-consumers.

The J2 - Future Market choice is usually related to trend markets, where the customer tendencies/evolution towards product characteristics or features that don't exist today are monitored and targeted with future-oriented products that allow the company to gain a so-called 'early-mover-advantage'.

Strategic Choices mapped to Strategy Models

The Strategic Choices are not usually evaluated and selected as independent constructs. They are often related to Strategy Models, which define a highly-specific Strategic Positioning and demand a certain combination of Strategic Choices. However, the business world is flooded by a very large number of Strategy Models, some deserving this title, others not really. How would we map some of the most popular Strategy Models to the Strategic Choices in the Penta Model? Let's see. I'm sure that you can extend this to other Strategy Models that are not mentioned below.

The Generic Strategies (Michael Porter)

The Low Cost Strategy is represented by the Strategic Choice A1 - Low Cost and the Product Differentiation is represented by th

e choice A2 - Differentiation, while the Focus Strategies are represented by a combination of the choices A1, A2 and the choices F1 - Needs Segmentation, F2 - High-End Market and F3 - Long Tail.

The Blue Ocean Strategy (W. Chan Kim and Renee Mauborgne)

This Strategy Model is represented in the Penta Model by the Strategic Choice E1 - Conceptual Innovation and J1 - Market Redefinition.

The Disruptive Innovation (Clayton Christensen)

This Strategic Model is represented in the Penta Model by the Strategic Choice E2 - Disruptive Innovation and typically, by the Strategic Choices F1 - Needs Segmentation, or H2 - Substitute Market, or I1 - New Domain/Industry, or J2 - Future Market.

The Resource-Based View of the Firm (RBV)

This Strategic Model is represented in the Penta Model by the Strategic Choice D2 - Core Resources or Capabilities, and by choices in the Market Boundaries set that include, but are not limited to, F1 - Needs Segmentation, F2 - High-End Market or H1 - Collateral Market, or H2 - Substitute Market, etc.

The Capabilities-Driven Strategy (Strategy&)

Similarly to the RBV, this Strategic Model is represented in the Penta Model by the Strategic Choice D2 - Core Resources or Capabilities, and by choices in the Market Boundaries set that include, but are not limited to, F1 - Needs Segmentation, F2 - High-End Market or H1 - Collateral Market, or H2 - Substitute Market, etc.

So, we now have an integrative reference representation of the Strategic Choices for both the Competitive Factors ('how-to-win') and the Market Boundaries ('where-to-play'), enabled by the mapping with - at least - the most popular Strategy Models. Of course, the analysis and selection of the Strategic Choices or the adoption of a Strategic Model or another is not a mechanical process, as many companies don't use 'pure' Strategy Models, but a combination of Strategic Choices that allow the best strategic positioning, for harvesting the opportunities and mitigating the threats, over the strategic horizon considered.