Additional topics on the strategy possibility frontier

This is the sixth and final posting in a series on business-unit strategy. This posting deals with the following topics not covered earlier:

• Stuck in the middle (strategic advantage)
• Stuck in the middle (strategic scope)
• Movement of companies position over time
• Movement of the strategy possibility frontier

Figure 1. Smaller black circles are examples of niche strategies. Larger circles are broad based strategies.

Stuck in the middle (strategic advantage)

Stuck in the middle refers to companies that put a great deal of effort into both low cost as well as uniqueness (e.g. Company 15 in figure 1). There are two factors contributing to a company being stuck in the middle:

• Internal problems with coordination and culture when two objectives with inherent trade-offs are being pursued. This factor is only applicable to companies covering a broad scope of the market.
• External problems with lack of demand due to bifurcation of buyer preferences. This factor is applicable both to companies with a broad and niche scope.

Internal problem. Without effort from management, companies would sell commodity-like products and high costs. Competition forces management to exert effort towards the strategy possibility frontier. It is a difficult task to reach and remain at the frontier. Management has an easier job if they are able to largely focus on one of the two dimensions in figure 1. They can align the culture, organisational structure, and incentive systems so that the desired position is reached. Management could instruct the different functional departments of the company to focus on uniqueness, subject to some cost constraints. Alternatively to focus on low cost, subject to some uniqueness constraints. If management considers both dimensions equally important, employees are confused and incentive systems are often perverted. Manufacturing might focus on low cost, whilst marketing might focus on uniqueness. Even more complicated situations could be created when manufacturing is required to produce certain models at low cost and other models at high uniqueness (e.g. workmanship). The resulting frontier position is inferior as indicated by the concave portion of the strategy possibility frontier. In some cases a less successful company can oscillate between the two strategies, one year focusing on low cost and the next year on uniqueness. Since positions are built up over time such behaviour multiplies the difficulty of being positioned in the middle.

The internal problem is only valid for companies with a broad-based strategy. If the company has a niche strategy, management only has to satisfy one customer target group. Since there is one (and only one) clear buyer group, all employees can relatively easily understand the buyers' requirements. Even if the buyers would require a mix of low cost and uniqueness this will create less problems for the niche-oriented company.

External problem. Many product categories have a bifurcated consumer demand. So in addition to the difficulties in reaching the frontier, only a smaller portion of the potential buyers would value the resulting products of Company 15. The big department stores in major western cities have suffered a long decline because customer has migrated to boutique stores (uniqueness) and lower priced mass-market brands (low cost). Many consumers prefer uniqueness for product categories that are important for them, and revert to low cost for all other product categories.

The external problem is valid both for companies with broad and niche strategies. The bifurcation of buyer preferences is especially prevalent in consumer goods markets, but can sometimes also occur in business-to-business markets.

Stuck in the middle (strategic scope)

There is also a notion of being stuck in the middle between a niche strategy and an industrywide (or at least broad-based) strategy. This problem is not much discussed in any literature. It occurs when a firm which has tailormade its value chain to one specific customer segment, decides to start selling to another customer segment as well. This will create a lot of tension in the organisation which can take time to overcome. If the company decides to remain a single business-unit firm, it have to think more seriously about trade-offs involving serving two (or more) segments of the market. If the company decides to become a two (or more) business-unit firms, it will have created another managerial layer in the organisation for the first time. This also takes time to get used to.

Movement of companies' positions over time

The strategic positions are relatively stable, but companies can change their position trough changes in the allocation of management effort. It is often useful to assess which companies are ascending towards the frontier and which companies are descending away from the frontier.

For product categories in which innovation is important it is for instance quite common for companies not to be able to stay at the frontier. The frontier company could have reduced investment (or invested improperly) resulting in a less unique position. If innovation based competition is dominant, substantial changes can occur yearly. If advertising based competition is dominant, changes normally occur much more gradually (typically three to five years to notice). If price based competition is dominant, changes are also more gradual, but can occur faster (typically one to three years to notice).

All companies at the frontier are on the edge of the possible so there is a clear risk of complacency and feeling of entitlement on the frontier. Leading companies on the frontier often also function as a role model for other companies. It is very tempting for companies to copy each other, because, seemingly, that would be less risky. However, the competitive dynamics always change for the worse when companies begin to copy each other's strategy.

Movement of the strategy possibility frontier

The strategy possibility frontier itself  is normally quite stable, but it can shift due to changes in technology and regulation (typically deregulation). When a new multi-purpose technology (e.g. Internet, smartphones) appear, all companies end up far from the new frontier. During such major technological change it is easier for the old order to be disrupted. The low cost leader of the old generation (e.g. Kmart) might not be able to utilise the new technology as well as an more agile company (e.g. Walmart). Similar changes can occur when industries are deregulated.

Technically it is possible to consider the strategy possibility frontier as shifting slightly every year due to marginal improvements of technology. However, it is better to reserve a discussion of a shift in the frontier to situations where there is a major change in what is possible. Two illustrations, the effects of which probably has not permeated the affected industries:

• The discovery of shale oil in the US, will shift the low cost end of the frontier to the right for product category crude oil.
• The mobile internet and e-readers, will shift the uniqueness end of the frontier upwards for product category magazines.

When an external change occurs that in influencing both dimensions of the curve, it is normally the case that the adjustments happens faster on the low-cost side than on the uniqueness side. It is easier for management to set objectives of lower costs (typically process innovation), than to set objectives of uniqueness. Uniqueness often requires product innovation, new service offerings or new branding. This is a slower process.