Week 2.2 Organizational Strategies

When setting strategic direction, organizations answer two questions. 

1. Where are we now? 

2. Where do we want to go?

Where Are We Now?

There are multiple tools to utilize when deciding where we are now. It involves identifying competencies, customers, and competitors (3 Cs). Other tools include SWOT analysis and environmental scanning.  

Let us start with the 3 Cs.

The 3Cs extend from the question "Where are we now?" are listed in the caption.
3 Cs. The three Cs include competencies, customers, and competitors.

 competency-icon Competencies

Competencies are special capabilities, including the skills, technologies, and resources that distinguish an organization from other organizations and that provide value to customers. Competencies answer the question, “What do we do the best?” 

Competencies can be used strategically if other organizations cannot copy them. Competencies that are distinctive enough provide competitive advantage to the organizations. 

Competitive advantage is a unique strength relative to competitors that is often based on quality, cost, innovation, or customer experience management.

Tesla car.

Example: Tesla is known for their innovative products. They have a competency in research and development (R&D). 

Competencies are special capabilities. Producing high-quality products could be a competency. Firms often try to improve quality through benchmarking.  

Benchmarking refers to discovering how others do better than you so that you can imitate or leapfrog the competition. 

Many companies such as Tesla are using innovation as a competitive advantage to win in the marketplace. 

 customer-icon Customers

Customers play a big role in setting a sound strategic direction. Every organization should know who their customers are and the type of products and services (value) they are seeking. Strategic direction depends on the degree to which we are able to satisfy customers’ needs and wants. The strategic direction would not be right unless it is aligned with the customers' expectations. 

 

 competitors-icon Competitors

In competitive markets, organizations continuously assess their competitors’ actions in order to respond to changing market conditions. Competitors’ products, competencies, and pricing play an important role in the success of any organization. Successful organizations know how to differentiate themselves from their close competitors, which allows them to maintain and even expand their market share.

Where Do We Want to Go?


After discovering where we are now, we move onto setting the direction on where we want to go next.

There are two methods in setting where we want to go: 

  1. Business Portfolio Analysis 
  2. Market-Product Analysis

Business Portfolio Analysis

We examine The Boston Consulting Group's (BCG) business portfolio analysis. It uses market growth rate and relative market share of a firm's strategic business units (SBUs) in order to identify a future direction. It is simple to interpret and helps determine the appeal of each SBU and the amount of cash (investment) each should receive.

Boston Consulting Group Business Portfolio Analysis (~ 4 min.)

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In the video above, there are ten strategic business units (SBUs) represented by circles. The area of each circle is proportional to the corresponding SBU's dollar sales. There are four types of SBUs on the matrix, which are cash cows, stars, question marks, and dogs. 

  • Cash cows are the business units with high market share in low-growth markets. They are the most desired SBUs since they do not require much investment to maintain their market share and they generate large amounts of cash. 
  • Stars are the business units with high market share in high-growth markets. They require heavy investment to finance their rapid growth due to the high growth rate in the market. When the growth rate slows, they are likely to become cash cows.
  • Question marks are the business units with low market share in high-growth markets. They require major investments due to the high growth rate in the market. Also it requires a lot of investment to build their market share. Some of the question marks grow into stars while some are eliminated. Management needs to decide which question marks to build into stars and which ones to eliminate.
  • Dogs are the business units with low market share in low-growth markets. They might generate enough cash to maintain themselves but do not hold promise to become real winners for the organization.

Companies can employ one of four strategies for each SBU:

  • invest more in the SBU to build its market share; 
  • invest enough to hold its market share; 
  • harvest the SBU, milking it for short-term revenue; or 
  • divest the SBU.

Companies' strategic decisions in terms of future growth depend on what they want to pursue with each SBU. We can classify strategic direction decisions into five types:

  • invest in some question marks to make them stars; 
  • invest in the current stars in the hope they will become cash cows; 
  • simply milk the cash cows and make little or no investment in the question marks or stars; 
  • eliminate some dogs; and
  • use revenue from the cash cows to fuel the growth of the stars or question marks.

Example: Apple products on the business portfolio analysis matrix.  The figure shows four Apple products on the business portfolio analysis matrix. Apple watch is shown as a question mark, iPhone 6 is a star, iPad is a cash cow, while iPod is a dog. There is a counterclockwise direction of movement on the figure. The movement on the figure points to the life cycle of SBUs. Products starting as question marks have the potential of becoming stars, then cash cows and eventually becoming dogs. There is no guarantee that every question mark will be successfully converted to a star.

Apple business portfolio analysis matrix.

 

Stop and Think Question: Given the Apple products on the business portfolio analysis shown on the example above, which strategic decisions would you select for each SBU? As you notice, these are the decisions that are vital for the future success of the company. Can you guess what Apple is going to do?

Plot of Apple business analysis simplified, as explained previously.

From the figure displaying Apple’s SBUs, it is apparent that there is a direction of movement. Try to identify how the movement would apply to a question mark SBU. The movement on the figure points out the life cycle of SBUs. Each SBU has its own life cycle. Question marks often move counterclockwise around the growth-share matrix to become stars, then cash cows, and finally dogs. Of course it is not guaranteed that every question mark will be successfully converted to a star.

 

Boston Consulting Group’s business portfolio analysis is a fairly simple, yet effective tool that helps to set strategic direction. Organizations can take a broad look at how their current business units are classified currently and proceed to make future decisions utilizing this tool. It does not mean that this tool is perfect. There are weaknesses with the business portfolio analysis:

  • It is often difficult to get accurate information especially on the market growth rate. Market share can also change fairly fast due to the strategies of competitors. 
  • There is no information included on the matrix regarding competitive products. When you solely look at your own products, it is easy to miss the critical role of competition in setting your strategic direction.  
  • It can be time consuming to develop the matrix. Given the fast pace of markets, market conditions might have already changed by the time decisions are made. 

Market-Product Analysis

You have seen Boston Consulting Group’s business portfolio analysis. There is another useful tool in setting strategic direction, which is called market-product analysis. With this approach, firms consider growth opportunities in terms of markets and products.

For any product, there is both a current market (existing customers) and a new market (potential customers). It is important to point out that when we say a new market, we are not necessarily referring to a new geographic location. Customers,who are not currently being served are potential customers and they are considered as the new market. 

For example, a firm which is selling to only females would come up with a different version of their product and target males at the exact same geographic locations as before. In this case males are considered as the new market.


dove-men

Example: Dove created Men+Care products specifically to reach out to males in addition to their female-dominated products. A new geographic location that a firm wants to serve would also be considered a new market.

For any market, there is both a current product and a new product. For any product, there is both a current market and a new market. We can develop a two-dimensional chart based on market and product dimensions: new market, new product, current market, current product. Such a chart allows us to identify four market-product strategies: market penetration, market development, product development, and diversification.

 

 Products
 CurrentNew
MarketsCurrent Market Penetration

Selling more products in existing markets

Product Development

Selling new products in existing market

New Market Development

Selling existing products in new markets
(either geographic or new segments)

 
Diversification

Selling a new product in a new market

 
You need to carefully consider internal and external conditions surrounding your company before selecting a market-product strategy. You must present strong arguments supporting the fact that the strategy you have chosen is the best for the company.

Let us examine how these four strategies work in detail.  

Market Penetration

Market penetration is when a company continues to sell its current products in the current markets that they are serving. This strategy could be considered the safest of all four strategies since it does not involve producing new products or moving onto new market segments. 

milk

Example: milk producers in Québec decided to apply the market penetration strategy. They used a promotional campaign to encourage the consumption of two glasses of milk daily. Their goal was to increase their market penetration in the beverage market.

Market Development

Market development is when a company starts to sell its current products in new markets. This strategy carries some risk as the company starts to target new consumer segments. Remember the fact that a new market is not necessarily a new geographic location. 

overweight-man

Example: a firm that sells mainly to women, such as Weight Watchers, decides to sell to the overweight male market. They are serving in the same geographic locations as before, but it is still considered a market development strategy since they are serving a new customer segment that they have not served before.

Product Development

Product development is when a company develops a new product and sells it in its current markets. This strategy carries some risk as new product development is involved. Remember from Boston Consulting Group’s business portfolio analysis that the new product is a question mark until the product builds its market share. 

smoothie

Example: Second Cup develops a line of fruit smoothies and sells the new beverages in its existing stores to its existing customers in addition to its traditional coffee and tea. 

Diversification

Diversification is when a company develops a new product and sells it in new markets.

Stop and Think Question: What do you think about the risk level of the diversification strategy? Write your answer down before you click on reveal.

This strategy is the riskiest of the four strategies since not only is there new product development but there is also new customer segments involved. The organization cannot use its expertise with current products in existing markets.

 

There are two types of diversification: related and unrelated. 

Related Diversification

Firms might introduce new products in new markets that are related to their current business. There could be some expertise that the firm already has in these products/markets, which will help the firm to reduce the level of risk. 

red-lobster

Example: Think about McDonald's buying out Red Lobster. It is a diversification strategy since the company’s current operations are in the fast food business. However, it is related diversification since the company remains in the restaurant industry, just moving into a different sector of it.

Unrelated Diversification

Firms might introduce new products in new markets that have nothing in common with their current business. There is no expertise that the firm has in these products/markets, which makes the strategy the most risky. 


mcdonalds

Example: Think about McDonald's diversifying into completely new business areas, such as financial services. They open their own bank and start serving in the finance sector. It has nothing to do with their current fast food business. That is why it is very risky and considered as unrelated diversification. 

Concept Check Questions: 

1. Which of these is NOT one of the four market-product strategies?

 

2. Selling existing products in new markets is known as

 

3. The riskiest market-product strategy is known as