Strategy in Small Doses II: Generic Strategies

Thomas M. Box

Pittsburg State University

Larry R. Watts

Stephen F. Austin State University

Academics, practitioners and researchers since the middle 1960s have debated the strategy process. Despite massive attention to this important topic, there is remarkably little agreement among the experts as to the exact configuration of the process model. For example, Mintzberg, Ahlstrand and Lampel (1998), note that there are ten different "schools" of the thought that dominate the field of strategic management. These schools are:

• The Design School -- strategy formation as a conceptual process
• The Planning School -- strategy formation as a formal process
• The Positioning School -- strategy formation as an analytical process
• The Entrepreneurial School -- strategy formation as a visionary process
• The Cognitive School -- strategy formation as a mental process
• The Learning School -- strategy formation as an emergent process
• The Power School -- strategy formation as a negotiation process
• The Cultural School -- strategy formation as a collective process
• The Environmental School -- strategy formation s a reactive process
• The Configuration School -- strategy formation as a process of transformation

few detractors. It is well beyond the scope of this brief monograph to argue the merits of

© 2000 by Thomas Box and Larry Watts

each school. The basic thesis of this monograph is that the positioning school of strategy is an effective way of thinking about strategy for the purpose of conceptualization and implementation. The positioning school encompasses the Boston Consulting Group (BCG) Matrix (Perspectives..,1974), the Profit Impact of Market Strategies (PIMS) studies (Buzzell & Gale, 1987) and Porter's Generic Strategies (Porter, 1980).

Basic Models in the Positioning School

The BCG Matrix The BCG Matrix is a useful device for considering the relevant interactions of a portfolio of profit centers (in an individual business) or the interactions of different companies in a corporate portfolio. The BCG Matrix places profit centers or businesses in a 2 x 2 matrix. Generally the rows in the matrix represent high and low industry sales growth and the columns represent high and low relative market share. Industry growth rates are typically "split" at 20% annual growth - high growth rate firms have more than a 20% growth rate and low growth rate firms less than 20%. The relative market share (x-axis of the matrix) for a single firm or profit center is that firm's market share divided by the largest in the industry. The "split" is at 50%. So, a firm that had a relative market share less than half the market share of the largest firm in the industry would be a "low share" firm and one that had a relative share greater than 50% would be a "large share" firm. It should be obvious that relative market share can only range between 1 and 0.

One uses the BCG Matrix to consider the interactions (and cash relationships) between businesses or profit centers. Businesses that are high growth - high share (1,1) are designated "Stars". These businesses represent the overall firm's best long-range opportunities. Stars consume cash and must; therefor, be supported by cash generators. Businesses that are high growth - low share (1,2) are " Question Marks". These businesses, too, are cash consumers and an important strategic question is whether or not to support the growth of these businesses. In many instances, Question Marks wind up being sold off. Businesses that are low growth - high share (2,1) are "Cash Cows". As the name implies, Cash Cows are cash generators. They support the investments required by Stars and Question Marks. Every organization needs adequate Cash Cow supports if it hopes to succeed. Finally, businesses that are low share - low growth (2,2) are designated as "Dogs." Dogs, presumably, offer no benefit to the organization and should most likely be "harvested".

Using the BCG Matrix is a fairly straightforward process. One identifies which category each profit center or business is in and then seeks to ensure that appropriate action is taken as a result of location and that the portfolio is balanced. One benefit of the BCG Matrix is that it focuses attention on cash generation and consumption. Criticisms of the BCG Matrix are that it is a "snap shot" in time, it only considers two variables (growth rate and market share) and that it has no prescriptive recommendation for businesses falling on the "cutting points."

The PIMS Principles The PIMS research program was initiated in 1972 and now includes data from 450 corporations and 3,000 business units. The program is "housed" in the Strategic Planning Institute and, very basically, utilizes regression analysis to examine the effect that a group of actionable variables may have on Return on Investment (ROI). Sidney Schoeffler (founder of PIMS) has argued that, "All businesses are alike in obeying the laws of the market." This suggests that by modeling strategy on the actions of successful companies (or profit centers), one can achieve above normal returns. Although this approach certainly has an intuitive appeal, it has been argued that the direction of the causal arrow is unknown. That is to say that it may well be that firms enjoying a high ROI may cause a high market share rather than vice versa. One other objection to PIMs is that the data has been gathered from large firms that can afford to pay the rather substantial costs and consulting fees.

Porter's Generic Strategies Michael Porter, an industrial organization economist, wrote Competitive Strategy in 1980 and it's no exaggeration to say that the planning school of strategy and practitioner beliefs about effective strategic management have not been the same since. Utilizing extensive empirical research, Porter applied industrial organization economics to the planning school of strategy and this combination was very popular among researchers and practitioners. The fundamental premise as regards generic strategies is that there are fundamentally only two sources of competitive advantage - cost leadership and differentiation. In addition, there are two scale positions that a firm can adopt - wide market and narrow market. The three generic strategies are - cost leadership, differentiation and "focus". Focus means adopting a narrow (small) market approach utilizing either cost leadership or differentiation. The three generic strategies (originally) were believed to be mutually exclusive and exhaustive.

Generic Strategies

Cost Leadership A cost leadership strategy is one in which the firm is able to achieve a lower cost of production than its relevant competitors. The advantage of successfully employing this strategy is that a firm can achieve profit at a selling price below its' competitors breakeven point. WalMart has aggressively employed this advantage (strategy) with notable success.

A cost leadership strategy implies a number of things. It is important to see the difference between low cost leadership and low prices. They are two fundamentally different issues. Low cost leadership means:

• Efficient scale facilities
• Vigorous pursuit of cost reductions in all areas
• Tight cost and overhead control
• Avoidance of marginal customer accounts

• High market share
• Favorable access to supplies and, perhaps, distribution

leadership include Lincoln Electric, Emerson Electric, Black and Decker and Nucor Steel. Nucor is a particularly interesting example. They have aggressively pursued low cost leadership in a highly competitive industry and have not had a financial loss for 35 years running. Their approach to low cost leadership has been the use of advanced technology (electric furnace and continuous casting) and a remarkable incentive and benefits program that has allowed them to operate as a non-union firm in a highly unionized industry. It is likely that Nucor's "flat" organizational structure (only four levels of management) and highly decentralized approach are key elements in their low cost leadership strategy (Iverson, 1998).

No discussion of low cost leadership would be complete without mentioning

Southwest Airlines. They have, for years, been the most profitable airline in an industry that has been drowning in "red ink" since deregulation. Southwest Airlines, under the leadership of Herb Kelleher (Freiberg & Freiberg, 1996), has employed the following techniques to achieve the lowest cost per mile in the industry:

• One type of airplane - the Boeing 737
• Highly motivated work force
• Point to point operations rather than "hub and spoke".
• Very fast gate turnarounds and high utilization rates.
• Quick response to changing conditions and new opportunities.

entry (initially) but those barriers became barriers to repositioning and retaliating for the entrenched incumbents.

Differentiation Differentiation is the strategy of offering features, options, policies, products and services that are unique, premium priced and attractive to buyers. Differentiators earn above average profits because of their ability to engage in premium pricing. Examples of differentiators would be Nieman-Marcus (retailing), BMW and Mercedes Benz (automobiles), Coleman (camping equipment), Jenn-Air (electric ranges0 and Caterpillar (construction equipment). Differentiation tends to insulate a firm against competitive rivalry because of brand loyalty. Differentiation means:

• A very clear understanding of buyer needs, wants and desires.
• The ability to respond to customer needs.
• Creative collaboration between design engineering and marketing
• A cadre of creative problem solvers able to "push the envelope."
• A willingness to accept a smaller market share in some instances
• Generally, a real focus on product/service quality.

offers. If one flies on a regular basis, the dreary sameness of American Airlines, United, Delta, TWA and others is a common complaint. Cabin service is virtually nonexistent, the food is lousy - at best - and seating (in coach) is designed for small people -- four feet tall and weighing about 75 pounds! Along comes Richard Branson and Virgin Atlantic -- friendly cabin service, spotless interiors, good food and seating designed for the average adult. What happened? Virgin Atlantic captured a major share of the Trans-Atlantic market in short order and was able to charge slight price premiums on a regular basis.

American Airlines, to its credit, has apparently considered customer complaints about seating and has begun to remove rows of seating in coach to accommodate passenger comfort. It will be interesting to see if this results in premium pricing. If it does, then this will be an example of effective differentiation.

Focus Low cost leadership and differentiation focus on achieving a competitive advantage on an industry wide basis. A focus strategy, on the other hand, is what the marketing fraternity calls, niche marketing". A focus strategy entails a firm selecting a small, well-defined market segment and serving that specific segment well through either low cost leadership or differentiation within their niche. Focus firms would include Ben & Jerry's Ice Cream, Weatherby (shotguns), Illinois Tool Works (specialty fasteners for the industrial buyer) and Fort Howard Paper Company (industrial grade papers).

Focus firms have to be willing to trade off profitability and market share. Additionally the must be careful to identify a niche that is both sustainable and defensible. If a large firm (wide scope) recognizes an opportunity in a particular niche, they may be able to enter the niche successfully with either low cost or differentiated standard products.

"Stuck in the middle" In the absence of a cohesive, appropriate strategy firms may suffer remarkably low returns. These are firms that are "stuck in the middle". There are what Miles and Snow called "Reactors" -- firms with no clear strategy or a strategy unrelated to the firm's capabilities and markets. They will tend to lose significant market share to the low cost leaders and will be unable to market successfully to the very demanding consumers of differentiated products. Examples of firms that appear to be stuck in the middle are Fiat (automobiles), Clark Equipment (lift trucks) and Franklin (electric motors). For a number of years, these firms have suffered returns well below those earned by both the low cost leaders and the differentiators.

Implementing a Generic Strategy

Just as a painting is comprised of thousands of brush strokes, the implementation of a generic strategy is the combination of hundreds -- perhaps thousands -- of related activities. This entire system of activities leads to a competitive advantage in the market place. In his award-winning HBR article, "What is Strategy?", Michael Porter illustrates the importance of well-organized networks of activities with examples from Southwest Airlines and IKEA (Porter, 1996).

Southwest Airlines has been a very profitable low cost leader for a number of years. Some of their major activities are: short haul, point-to-point routes, low ticket prices, frequent reliable departures and high aircraft utilization. Short haul, point to point routes are supported by aircraft selection (Boeing 737s), lower gate costs at the terminals and no connections with other airlines. Low ticket prices reflect highly efficient, motivated workers, limited passenger services, no meals, no baggage transfers (except within the Southwest system), high utilization and only one type of aircraft. Frequent, reliable departures are contingent upon quick gate turnarounds, skilled motivated workers, one type of aircraft and avoidance (when possible) of major hub airports. Thus we see that the low cost leadership strategy of Southwest Airlines is a function of hundreds of related activities, all of which interrelate and contribute to a significant competitive advantage.

IKEA, a global furniture retailer, based in Sweden also has a clearly defined market strategy and a host of supporting activities. IKEA's target market is young, working people of somewhat limited means who may have children and may prefer to shop after work. To insure low cost, IKEA designs its own furniture and then farms out production around the world to skilled subcontractors. To insure compliance with rigorous quality standards, IKEA takes an ownership position in its supplier firms. Furniture is displayed in very large retail outlets with room-like displays. In many cases the furniture has to be assembled by the purchaser. IKEA rents car-top racks to purchasers (but no delivery services) and provides on-site childcare. Thus IKEA's "bundle" of related activities all contribute to the creation of a unique competitive advantage.

The real challenge in implementing a generic strartegy is in recognizing all of the necessary supportive activities and then "installing", properly, all of the activities. As an aside, Porter argues that many of the management trends of the 80s and 90s -- things like TQM, Reengineering, empowering the workforce, lean production, outsourcing and time based competition were matters of operational effectiveness and not strategy. Operational effectiveness is a necessary, but not sufficient condition for achieving a competitive advantage in the marketplace. Achieving a competitive advantage means adopting the appropriate generic strategy and then implementing that strategy with a network of supportive activities.

Example - Generic Strategies in Higher Education

For the purpose of illustration, consider the example of a new, small distance education university that is privately owned. As you undoubtedly know, this industry (distance education) is currently growing at an exponential rate. Nontraditional, distance education is estimated to be taking an appreciable share of the traditional higher education market. Peter Drucker has said that by 2025 the traditional university will no longer exist. This may be a slight overstatement of the change that is occurring, but it is clear that this is a hypercompetitive industry undergoing dramatic change.

We know that the forces driving success in this industry, as in any industry, are: the threat of new entrants (high), the threat of substitutes (low), the bargaining power of suppliers (low), the bargaining power of buyers (mixed- that is, individual buyers have low power, but institutional buyers have high power) and the threat of existing competition (high). It is also clear that oversight regulation (in the case of accreditation) may play a significant role in the future of the industry and that rapidly developing technology will have an effect.

What, then, should the generic strategy be? This is left as a discussion question for the readers, but it is clear that specifying a single generic strategy is not enough to create a viable strategy for this university. In addition to deciding on an appropriate strategy, planners must also articulate the set of supporting activities that must be accomplished in order to implement the proper strategy. And this might well be an iterative process. Consider the possibility that planners "pick" a low cost leadership strategy. This could well mean that the following supporting activities must be in place:

• Economies of scale
• Standardized offerings
• Very tight cost control
• Limited features, options, bells and whistles
• An ability on the part of the consumer to recognize price differentials

meet the marketplace needs, then it may become necessary to rethink the choice of generic strategy.

Conclusion

This brief monograph has introduced the reader to generic strategies -- an important part of the positioning school of strategic management. There are other "hierarchies" of strategic choice that are relevant and useful, but all attempt to provide answers to the critically important question, "What should our strategy be and what do we need to do to implement?"

References

Buzzell, R.D. & Gale, B. R. (1987) The PIMS principles: Linking strategy to performance. New York: The Free Press

Freiberg, K. & Freiberg, J. (1996), NUTS! Southwest Airlines' crazy recipe for business and personal success, Austin, TX: Bard Press

Hamel, G., & Prahalad, C.K. (1994) Competing for the future, Boston: The

Harvard Business School

Iverson, K (1998) Plain talk: Lessons from a business maverick. New York:

John Wiley & Sons.

Mintzberg, H., Ahlstrand, B., & Lampel, J. (1998), Strategy safari: A guided tour through the worlds of strategic management

.

Perspectives on Experience (Boston, MA: The Boston Consulting Group, 1974)

Porter, M.E. (1980) Competitive strategy: Techniques for analyzing industries and competitors. New York: The Free Press.

Porter, M. E. (1996) What is strategy? Harvard Business Review (Nov-Dec) pp. 61-78.