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

Food retailing in Singapore revisited

This is the fifth posting in a series on business-unit strategy.

The objective of this posting is to show how the strategy possibility frontier can be applied to the Singapore food retailing industry. I am not an expert on the industry so this is work in progress. The posting is mostly relevant to students of strategy that would like to perform similar analyses for other product categories. I have previously written about the model (start reading here) and the industry (here). It is helpful to revisit those postings before continuing.

Niche strategy

This is the fourth posting in a series on business-unit strategy.

We have so far assumed that the the competition occurs on a fairly broad level of the market. In addition to the previous two strategies, a third strategy focuses on one particular market niche. This strategy has some interesting implications illustrated in the figure 1.

Uniqueness strategy

This is the third posting in a series on business-unit strategy.

Uniqueness competition. The area labelled [b] is the realm of uniqueness competition (or differentiation). In contrast to the low-cost competition, there is generally more than one way to be unique. Companies 5, 6, 7 and 8 all have unique positions as indicated by them all being on the strategy possibility frontier. Think about companies with different advertising image, product development focus and/or customer service. (The diagram should ideally be represented in (n+1) dimensions. There are n dimensions of uniqueness and one dimension of low cost.)

Figure 1.

Low-cost strategy

This is the second posting in a series on business-unit strategy.

Low-cost competition. The area labelled [a] is the realm of price-oriented competition. Since the companies do not offer much uniqueness the only remaining way to compete is to offer the buyers lower prices. Company 1 has been the most successful in achieving a low-cost position. Company 2 and 3 both have a higher cost position (and slightly lower in terms of uniqueness). A higher cost position is often the result of lower economies of scale, but can also be due to other factors (e.g. capacity utilisation, economies of learning, location, better designed value chain).

Figure 1.

The strategy possibility frontier

This is the first posting in a series on business-unit strategy.

Product-category. A good level to understand a company's strategy is to consider the product-category level. A product category includes the individual products that fulfil a similar need for the buyers. The definition of a product category is often straightforward, but not always. Here are a few examples of product categories:

• Carbonated sweet softdrinks. In the US market this is a distinct product category, even though the definition has become somewhat blurred due to the popularity of non-carbonated softdrinks as well as bottled water. In the Asian context the definition also needs to deal with tea-based drinks.
• Packaging containers for beverages. This would include aluminium, glass, plastic and waxed paper. However, it could be argued that each raw-material should be a separate product-category. 
• Commuter transportation. This would include metropolitan rail as well as bus services in large cities. 
• Smartphones. Since a smartphone is able to function like a computer it should be seen as a different product category compared to the traditional mobile phone.

When in doubt regarding the exact definition of a product category it is necessary to explore the different options available. The considerations are similar to the ones made when analysing substitutes for an industry analysis.

The product category often corresponds to a business-unit inside a company. However, there is no guarantee that there will be a direct correspondence. If a company has more than one business-unit for a particular product-category we should consider the different business-units separately. And if a business-unit includes several product-categories we should consider the different product-categories separately.

Example of a low cost strategy in ecommerce

In my strategy class we have talked about there only being room for one successful low-cost strategy company in each industry. Boxed could be an example. They only sell around 600 necessities (e.g. diapers, toilet paper), but in larger packs compared to Amazon. The company claims that if customers buy in larger quantity, prices can be up to 20% lower than Amazon. To accomplish such low prices the company needs to be very cost focused. For instance: they only have an iphone/android application, no website, they only deliver to a few US states that are densely populated.

HTC shifted from a unique strategy to a copy-cat strategy, guess what happened?

There are strong forces towards conformity in society; for instance individuals dress in similar fashion and eat similar food. Human beings are social animals and it is easier for us to belong if we conform. I am not denying the existence of non-conformity, just stating that there are forces towards conformity in society.

A similar force towards conformity can be found among companies strategies. Academics use the fancy word isomorphism to describe the situation. Isomorphism can be created by CEOs having similar background, CEOs copying seemingly successful companies, CEOs' compensation contract, government regulation, and a number of other factors. This note will illustrate the disastrous effect of isomorphism on HTC, a company producing mobile phones.

Book review: "The Circle"

David Eggers have written a fascinating book about the future of work and social life. The book is a futuristic novel, but it could equally well be considered a business book. I will not be surprised if The Financial Times will short-list this book for its annual business book award.

Strategy assessment - initial perspective

Strategy is about a consistent set of policies that has a good fit with the external environment. It could take several years to perfect a strategy. Unfortunately, every time a company changes its strategy it risks getting a misfitting new strategy. Despite the difficulties it is sometimes necessary to change a strategy. This note will look at successful and unsuccessful changes to a company's strategy, and how the stock market tends to evaluate these changes.

Economies of scale and economies of scope

This note is primarily directed to students. It is the third in a series on strategic cost analysis. Economies of scope is a term related to economies of scale. I will argue that economies of scope is not a very helpful concept in strategic management.

Apologies, but this note is not very structured :)

Economies of scale and capacity utilisation (economies of capacity)

This note is primarily directed to students. It is the second in a series on strategic cost analysis. Economies of scale is defined as a company's cost per unit being lower when the it produces at a larger volume. This note explains the difference between economies of scale and a related concept called capacity utilisation. Capacity utilisation refers to how much of the existing capacity is used for production.

Economies of scale

This note is primarily directed to students. It is the first in a series on strategic cost analysis. One of the most important cost drivers is economies of scale . A key point to note is that diseconomies of scale, which textbook authors like to describe, hardly exist in the real world.

How to pick a good management book

A Business Week article last year mentioned that 11,000 management books are published each year (here). I can't believe this number, but even 1,100 books per year would be a lot. Thinking about it, even 110 books are too many too read. Actually, 11 business books are probably also too many to read in a year. So should you even bother reading management books? Nassim Taleb (on his third book, see below) concludes "I don't read business books and I almost never talk to anyone who reads them". In fact, this sentiment is common even among many managers. Personally, I think a good target for most of us is to read one to three business books per year. With such a limited target you need to do quite a bit of research before you decide what to read. Your time is valuable.

Naive shareholders taken for a ride?

A few recent corporate governance transactions are worrying. Is this evidence of a new variant of the old principal/agent conflict? This conflict occurs when the CEO (agent) and the owners (principal) of the company have different interests? Here are two recent examples:

• Dell. Michael Dell CEO of Dell drives the share price of Dell down by poor management. Then he makes a bid for the whole company together with a private equity consortium. Michael Dell will remain as CEO and now he will be able to turn around the company that he was not able to turn around in the preceding years. Comment: If Mr Dell will be so good at fixing Dell, why couldn't he fix the company when he was CEO? His claim that the stock market would not allow him to take the necessary actions is just not credible
• Nokia. Stephen Elop CEO of Nokia and a former high level executive at Microsoft stops development of Nokia's Symbian operating system and focuses on the Windows Phone. Before Nokia has staged a turnaround, he negotiates a sale of Nokia's mobile phone division to Microsoft. Microsoft gets the mobile phone division cheaply and Elop moves back to Microsoft. Comment: Nokia and Microsoft are in the same boat and both need the Windows smartphone to be a success. Why would Mr Elop sell the mobile phone business to Microsoft before the Nokia turnaround is complete? It is true that Nokia is dependent on Microsoft, but the reverse is equally true. Why is it good for Nokia's shareholders that Mr Elop completes the turnaround after being hired by Microsoft?

Book review: "Ten types of innovation"

The consulting group Doblin in Chicago has published a book on the innovation process in companies. Their main point is that each real life innovation should utilise three to five out of a total of ten ideal types of innovation. This will maximise the chances of commercial success. Here are the ten types:

Microsoft's future

In an earlier positing (here), I described how Microsoft's now outgoing CEO Steve Ballmer talked about Microsoft being a consumer company, despite having only around 15% of sales to consumers. Windows is mostly bought by OEMs (original equipment manufacturers) and Office by corporations. Since Microsoft is invoicing corporations and not consumers, it is a business-to-business company whatever the CEO is saying. Very few consumers make an active choice to buy Windows or Office. Consumers actively buy Playstation and Skype services but those products are a small portion of Microsoft's revenues.

Are there too many retail shops in Singapore?

During the last couple of years it has been harder for lower skilled foreigners to get work permits in Singapore. A lot of small and medium sized firms are complaining about the difficulty of finding staff. The government is not changing the new policy. Is it doing the right thing?

Does the stock market put pressure on companies to reduce R&D?

The field of finance used to be very dogmatic regarding the efficiency of financial markets. Kuhn (The Structure of Scientific Revolutions) said that new paradigms only surface when the older generation of researchers die. The generation of arrogant, efficient-market fundamentalists in finance is now largely gone. Younger researchers document many interesting phenomena. There is not yet a new paradigm, though. This post looks at how companies' R&D effort change when they are subject to stock market pressure.

What is an entry barrier?

New entry into an industry will increase the number of competitors, which in turn will increase rivalry in subsequent time periods. It is possible to estimate the likelihood that new entry will happen by assessing the size of the barriers to entry.

This is post nine in a series on industry analysis.

JC Penney share price back on 1986 levels

JC Penney just fired Ron Johnson, its less than competent CEO (good article here). His tenure is a classic example of how to destroy a company by bad strategy and bad management. None of this analysis is based on hindsight, but on a student report from March 2012. Since the student report, the company has underperformed index with 74%.

Will Facebook Home increase Facebook's revenue?

Facebook has just introduced the Facebook Home application for a selected set of Android smartphones from Samsung and HTC. Is this a good idea?

Book review: "Good strategy bad strategy"

Dick Rumelt was my prof in Strategy when I did my MBA at INSEAD. I was quite impressed by him, but always wondered why he did not write a book. Now he has written that book. It is a good, but only for a niche audience.

Corporate government advice from Singapore

Can the government of Singapore have something to teach the world of corporate governance in large listed companies? I think so. It used to be the case that the retiring Prime Minister became Senior Minister.

In defense of "Built to Last"

Jim Collins and Jerry Porras wrote Built to last: successful habits of visionary companies back in 1994. The book has sold millions of copies. It identified 18 great companies and compared them to 18 merely good companies. Based on this research, the authors identified a number of management principles. I would not recommend reading the book today, but I want to defend the book in this posting.