Ansoff Matrix

The product/market grid of Ansoff is a model that has proven to be very useful in business unit strategy processes to determine business growth opportunities. The product/market grid has two dimensions: products and markets.

Over these 2 dimensions, four growth strategies can be formed:

- market penetration,

- market development,

- product development, and

- diversification.

Market Penetration:

Company strategies based on market penetration normally focus on changing incidental clients to regular clients, and regular client into heavy clients. Typical systems are volume discounts, bonus cards and customer relationship management.

Market Development:

Company strategies based on market development often try to lure clients away from competitors or introduce existing products in foreign markets or introduce new brand names in a market.

Product Development:

Company strategies based on product development often try to sell other products to (regular) clients. This can be accessories, add-ons, or completely new products. Often existing communication channels are leveraged.

Diversification:

Company strategies based on diversification are the most risky type of strategies. Often there is a credibility focus in the communication to explain why the company enters new markets with new products. This 4th quadrant (diversification) of the product/market grid can be further split up in four types:

- horizontal diversification (new product, current market)

- vertical diversification (move into firms supplier's or customer's business)

- concentric diversification (new product closely related to current product in new market)

- conglomerate diversification (new product in new market).

3C's model - Ohmae

The 3C's Model is a strategical look at the factors needed for success. It was developed by Kenichi Ohmae, a business and corporate strategist.

The 3C’s model points out that a strategist should focus on three key factors for success. In the construction of a business strategy, three main players must be taken into account:

A. The Corporation

B. The Customer

C. The Competitors

Only by integrating these three C’s (Corporation, Customer, Competitors) in a strategic triangle, a sustained competitive advantage can exist. Ohmae refers to these key factors as the three C’s or strategic triangle.

The Corporation

The Corporation needs strategies aiming to maximize the corporation’s strengths relative to the competition in the functional areas that are critical to achieve success in the industry.

Selectivity and sequencing

The corporation does not have to lead in every function to win. If it can gain decisive edge in one key function, it will eventually be able to improve its other functions which are now average.

Make or buy

In case of rapidly rising wage costs, it becomes a critical decision for a company to subcontract a major share of its assembly operations. If its competitors are unable to shift production so rapidly to subcontractors and vendors, the resulting difference in cost structure and/ or in the companies ability to cope with demand fluctuations may have significant strategic implications.

Cost-effectiveness

Improving the cost-effectiveness can be done in three ways. First by reducing basic costs, second by exercising greater selectivity (orders accepted, products offered, functions performed) and third by sharing certain key functions with a corporation’s other businesses or even other companies.

The Customer

Clients are the base of any strategy according to Ohmae. Therefore, the primary goal supposed to be the interest of the customer and not those of the shareholders for example. In the long run, a company that is genuinely interested in its customers will be interesting for its investors and take care of their interests automatically. Segmentation is helping to understand the customer.

Segmenting by objectives

The differentiation is done in terms of the different ways that various customers use a product.

Segmenting by customer coverage

This segmentation normally emerges from a trade-off study of marketing costs versus market coverage. There appears always to be a point of diminishing returns in the cost versus coverage relationship. The corporation’s task is to optimize its range of market coverage, geographically and/ or channel wise.

Segmenting the market once more

In fierce competition, competitors are likely to be dissecting the market in similar ways. Over an extended period of time, the effectiveness of a given initial strategic segmentation will tend to decline. In such situations it is useful to pick a small group of customers and reexamine what it is that they are really looking for.

A market segment change occurs where the market forces are altering the distribution of the user-mix over time by influencing demography, distribution channels, customer size, etc. This kind of change means that the allocation of corporate resources must be shifted and/ or the absolute level of resources committed in the business must be changed.

The Competitors

Competitor based strategies can be constructed by looking at possible sources of differentiation in functions such as: purchasing, design, engineering, sales and servicing. The following aspects show ways in order to achieve this differentiation:

Power of image

When product performance and mode of distribution are very difficult to distinguish, image may be the only source of positive differentiation.

Capitalizing on profit- and cost structure differences

Firstly, the difference in source of profit might be exploited, from new products sales etc. Secondly, a difference in the ratio of fixed costs and variable costs might also be exploited strategically. A company with lower fixed cost ratio can lower prices in a sluggish market and hence gain market share.

Hito-Kane-Mono

A favorite phrase of Japanese business planners is hito-kane-mono, standing for people, money and things. They believe that streamlined corporate management is achieved when these three critical resources are in balance without surplus or waste. For example: Cash over and beyond what competent people can intelligently expend is wasted. Of the three critical resources, funds should be allocated last. The corporation should firstly allocate management talent, based on the available mono (things): plant, machinery, technology, process know-how and functional strength. Once these hito (people) have developed creative and imaginative ideas to capture the business’s upward potential, the kane (money) should be given to the specific ideas and programs generated by the individual managers.

The 7S McKinsey model

Most of us grew up learning about 'the 4Ps' of the marketing mix: product, price, place, promotion. And this model still works when the focus is on product marketing. However most developed economies have moved on, with an ever-increasing focus on service businesses, and therefore service marketing. To better represent the challenges of service marketing, McKinsey developed a new framework for analyzing and improving organizational effectiveness, the 7S model:

The 3Ss across the top of the model are described as 'Hard Ss':

• Strategy: The direction and scope of the company over the long term. • Structure: The basic organization of the company, its departments, reporting lines, areas of expertise, and responsibility (and how they inter-relate). • Systems: Formal and informal procedures that govern everyday activity, covering everything from management information systems, through to the systems at the point of contact with the customer (retail systems, call centre systems, online systems, etc).

The 4Ss across the bottom of the model are less tangible, more cultural in nature, and were termed 'Soft Ss' by McKinsey:

• Skills: The capabilities and competencies that exist within the company. What it does best. • Shared values: The values and beliefs of the company. Ultimately they guide employees towards 'valued' behavior. • Staff: The company's people resources and how they are developed, trained, and motivated. • Style: The leadership approach of top management and the company's overall operating approach.

In combination they provide another effective framework for analyzing the organization and its activities. In a marketing-led company they can be used to explore the extent to which the company is working coherently towards a distinctive and motivating place in the mind of consumer.

BCG matrix

The BCG matrix method is based on the product life cycle theory that can be used to determine what priorities should be given in the product portfolio of a business unit. To ensure long-term value creation, a company should have a portfolio of products that contains both high-growth products in need of cash inputs and low-growth products that generate a lot of cash. It has 2 dimensions: market share and market growth. The basic idea behind it is that the bigger the market share a product has or the faster the product's market grows the better it is for the company.

Placing products in the BCG matrix results in 4 categories in a portfolio of a company:

1. Stars (=high growth, high market share)
- use large amounts of cash and are leaders in the business so they should also generate large amounts of cash.
- frequently roughly in balance on net cash flow. However if needed any attempt should be made to hold share, because the rewards will be a cash cow if market share is kept.
2. Cash Cows (=low growth, high market share)
- profits and cash generation should be high , and because of the low growth, investments needed should be low. Keep profits high
- Foundation of a company
3. Dogs (=low growth, low market share)
- avoid and minimize the number of dogs in a company.
- beware of expensive ‘turn around plans’.
- deliver cash, otherwise liquidate
4. Question Marks (= high growth, low market share)
- have the worst cash characteristics of all, because high demands and low returns due to low market share
- if nothing is done to change the market share, question marks will simply absorb great amounts of cash and later, as the growth stops, a dog.
- either invest heavily or sell off or invest nothing and generate whatever cash it can. Increase market share or deliver cash

The BCG Matrix method can help understand a frequently made strategy mistake: having a one-size-fits-all-approach to strategy, such as a generic growth target (9 percent per year) or a generic return on capital of say 9,5% for an entire corporation.

In such a scenario:

A. Cash Cows Business Units will beat their profit target easily; their management have an easy job and are often praised anyhow. Even worse, they are often allowed to reinvest substantial cash amounts in their businesses which are mature and not growing anymore.

B. Dogs Business Units fight an impossible battle and, even worse, investments are made now and then in hopeless attempts to 'turn the business around'.

C. As a result (all) Question Marks and Stars Business Units get mediocre size investment funds. In this way they are unable to ever become cash cows. These inadequate invested sums of money are a waste of money. Either these SBUs should receive enough investment funds to enable them to achieve a real market dominance and become a cash cow (or star), or otherwise companies are advised to disinvest and try to get whatever possible cash out of the question marks that were not selected.

Some limitations of the Boston Consulting Group Matrix include:

• High market share is not the only success factor

• Market growth is not the only indicator for attractiveness of a market

• Sometimes Dogs can earn even more cash as Cash Cows

Porter's Five Forces Model

The Porter’s 5 Forces tool is a simple but powerful tool for understanding where power lies in a business situation. This is useful, because it helps you understand both the strength of your current competitive position, and the strength of a position you’re looking to move into.

With a clear understanding of where power lies, you can take fair advantage of a situation of strength, improve a situation of weakness, and avoid taking wrong steps. This makes it an important part of your planning toolkit. Conventionally, the tool is used to identify whether new products, services or businesses have the potential to be profitable. However it can be very illuminating when used to understand the balance of power in other situations too.

Porter’s Diamond Model & Clusters

A. The Diamond as a System

• The points on the diamond constitute a system and are self-reinforcing.
• Domestic rivalry for final goods stimulates the emergence of an industry that provides specialized intermediate goods. Keen domestic competition leads to more sophisticated consumers who come to expect upgrading and innovation. The diamond promotes clustering.
• Porter provides a somewhat detailed example to illustrate the system. The example is the ceramic tile industry in Italy.
• Porter emphasizes the role of chance in the model. Random events can either benefit or harm a firm’s competitive position. These can be anything like major technological breakthroughs or inventions, acts of war and destruction, or dramatic shifts in exchange rates.

1. When there is a large industry presence in an area, it will increase the supply of specific factors (ie: workers with industry-specific training) since they will tend to get higher returns and less risk of losing employment.
2. At the same time, upstream firms (ie: those who supply intermediate inputs) will invest in the area. They will also wish to save on transport costs, tariffs, inter-firm communication costs, inventories, etc.
3. At the same time, downstream firms (ie: those use our industry’s product as an input) will also invest in the area. This causes additional savings of the type listed before.
4. Finally, attracted by the good set of specific factors, upstream and downstream firms, producers in related industries (ie: those who use similar inputs or whose goods are purchased by the same set of customers) will also invest. This will trigger subsequent rounds of investment.

B. The Diamond - Four Determinants of National Competitive Advantage

1. Factor Conditions

• Factor conditions refers to inputs used as factors of production - such as labour, land, natural resources, capital and infrastructure. This sounds similar to standard economic theory, but Porter argues that the "key" factors of production (or specialized factors) are created, not inherited. Specialized factors of production are skilled labour, capital and infrastructure.
• "Non-key" factors or general use factors, such as unskilled labour and raw materials, can be obtained by any company and, hence, do not generate sustained competitive advantage. However, specialized factors involve heavy, sustained investment. They are more difficult to duplicate. This leads to a competitive advantage, because if other firms cannot easily duplicate these factors, they are valuable.
• Porter argues that a lack of resources often actually helps countries to become competitive (call it selected factor disadvantage). Abundance generates waste and scarcity generates an innovative mindset. Such countries are forced to innovate to overcome their problem of scarce resources. How true is this?

1. Switzerland was the first country to experience labour shortages. They abandoned labour-intensive watches and concentrated on innovative/high-end watches.
2. Japan has high priced land and so its factory space is at a premium. This lead to just-in-time inventory techniques (Japanese firms can’t have a lot of stock taking up space, so to cope with the potential of not have goods around when they need it, they innovated traditional inventory techniques).
3. Sweden has a short building season and high construction costs. These two things combined created a need for pre-fabricated houses.

b. Demand Conditions

• Porter argues that a sophisticated domestic market is an important element to producing competitiveness. Firms that face a sophisticated domestic market are likely to sell superior products because the market demands high quality and a close proximity to such consumers enables the firm to better understand the needs and desires of the customers
  
• If the nation’s discriminating values spread to other countries, then the local firms will be competitive in the global market.
• One example is the French wine industry. The French are sophisticated wine consumers. These consumers force and help French wineries to produce high quality wines.
  

c. Related and Supporting Industries

• Porter also argues that a set of strong related and supporting industries is important to the competitiveness of firms. This includes suppliers and related industries. This usually occurs at a regional level as opposed to a national level. Examples include Silicon valley in the U.S., Detroit (for the auto industry) and Italy (leather-shoes-other leather goods industry).
• The phenomenon of competitors (and upstream and/or downstream industries) locating in the same area is known as clustering or agglomeration. What are the advantages and disadvantages of locating within a cluster? Some advantages to locating close to your rivals may be

1. potential technology knowledge spillovers,
2. an association of a region on the part of consumers with a product and high quality and therefore some market power, or
3. an association of a region on the part of applicable labour force.

• Some disadvantages to locating close to your rivals are

1. potential poaching of your employees by rival companies and
2. obvious increase in competition possibly decreasing mark-ups.

d. Firm Strategy, Structure and Rivalry

1. Strategy

(a) Capital Markets

• Domestic capital markets affect the strategy of firms. Some countries’ capital markets have a long-run outlook, while others have a short-run outlook. Industries vary in how long the long-run is. Countries with a short-run outlook (like the U.S.) will tend to be more competitive in industries where investment is short-term (like the computer industry). Countries with a long run outlook (like Switzerland) will tend to be more competitive in industries where investment is long term (like the pharmaceutical industry).

(b) Individuals’ Career Choices

• Individuals base their career decisions on opportunities and prestige. A country will be competitive in an industry whose key personnel hold positions that are considered prestigious.

2. Structure

• Porter argues that the best management styles vary among industries. Some countries may be oriented toward a particular style of management. Those countries will tend to be more competitive in industries for which that style of management is suited.
• For example, Germany tends to have hierarchical management structures composed of managers with strong technical backgrounds and Italy has smaller, family-run firms.

3. Rivalry

• Porter argues that intense competition spurs innovation. Competition is particularly fierce in Japan, where many companies compete vigorously in most industries.
• International competition is not as intense and motivating. With international competition, there are enough differences between companies and their environments to provide handy excuses to managers who were outperformed by their competitors.

C. Implications for Governments

• The government plays an important role in Porter’s diamond model. Like everybody else, Porter argues that there are some things that governments do that they shouldn't, and other things that they do not do but should. He says, "Government’s proper role is as a catalyst and challenger; it is to encourage - or even push - companies to raise their aspirations and move to higher levels of competitive performance …"
• Governments can influence all four of Porter’s determinants through a variety of actions such as

1. Subsidies to firms, either directly (money) or indirectly (through infrastructure).
2. Tax codes applicable to corporation, business or property ownership.
3. Educational policies that affect the skill level of workers.
4. They should focus on specialized factor creation. (How can they do this?)
5. They should enforce tough standards. (This prescription may seem counterintuitive. What is his rationale? Maybe to establish high technical and product standards including environmental regulations.)

• The problem, of course, is through these actions, it becomes clear which industries they are choosing to help innovate. What methods do they use to choose? What happens if they pick the wrong industries?

D. Criticisms

Although Porter theory is renowned, it has a number of critics.

1. Porter developed this paper based on case studies and these tend to only apply to developed economies.
2. Porter argues that only outward-FDI is valuable in creating competitive advantage, and inbound-FDI does not increase domestic competition significantly because the domestic firms lack the capability to defend their own markets and face a process of market-share erosion and decline. However, there seems to be little empirical evidence to support that claim.
3. The Porter model does not adequately address the role of MNCs. There seems to be ample evidence that the diamond is influenced by factors outside the home country.

Reference Groups

A group with which the customer identifies in some way, and whose opinions and experiences influence the customer's behaviour. For example, a sports fan might buy a brand of equipment used by a favourite team.

Reference groups come in several different forms. The aspirational reference group refers to those others against whom one would like to compare oneself. For example, many firms use athletes as spokespeople, and these represent what many people would ideally like to be.

Associative reference groups include people who more realistically represent the individuals’ current equals or near-equals—e.g., coworkers, neighbors, or members of churches, clubs, and organizations.

Finally, the dissociative reference group includes people that the individual would not like to be like. For example, the store literally named The Gap came about because many younger people wanted to actively dissociate from parents and other older and "uncool" people.

Reference groups come with various degrees of influence. Primary reference groups come with a great deal of influence—e.g., members of a fraternity/sorority. Secondary reference groups tend to have somewhat less influence—e.g., members of a boating club that one encounters only during week-ends are likely to have their influence limited to consumption during that time period.

Another typology divides reference groups into the informational kind (influence is based almost entirely on members’ knowledge), normative (members influence what is perceived to be "right," "proper," "responsible," or "cool"), or identification. The difference between the latter two categories involves the individual’s motivation for compliance. In case of the normative reference group, the individual tends to comply largely for utilitarian reasons—dressing according to company standards is likely to help your career, but there is no real motivation to dress that way outside the job. In contrast, people comply with identification groups’ standards for the sake of belonging—for example, a member of a religious group may wear a symbol even outside the house of worship because the religion is a part of the person’s identity.