Strategic Positioning:

Organizational Strategy for Turbulent Markets

Research Conducted by: Dana Serb
May 21, 2002

Traditional Strategy “Operational Effectiveness”	Today’s Strategy “Strategic Processes”
Create a defendable position	Enable dynamic strategic repositioning
Acquire or build valuable assets	Facilitate employee detection & reaction to change
Widely allocate resources to assets	Enable managers to mobilize & reconfigure resources
Perform activities faster or with fewer defects	Perform different activities or activities in different ways
RESULTS	RESULTS
Sustained competitive advantage	Organizational agility
Long-term performance	Capturing market resources faster than the competition

Traditional models of strategy can be problematic as managers often pay too much for acquisitions, business strategies are quickly outdated, and competitive advantage is rarely sustained for more than a few years. Particularly in today’s volatile markets, it is difficult to create a defendable position and organizations must instead strive toward strategic positioning, a sustainable competitive advantage that makes an organization distinct by performing different activities from rivals or performing similar activities in different ways. Strategic positioning can be realized by focusing on a few key strategic processes and supporting those underlying processes with simple rules and strategic principles.

I. Strategic Positioning

A. Underlying Strategic Processes

Strategic positioning is the creation of a unique and valuable position involving a unique set of activities. It involves three principles: underlying strategic processes, trade-offs, and fit among an organization’s activities. Underlying strategic processes that identify how strategic positioning will be accomplished include:

· Variety-Based Positioning- Focusing on a single product or service that is a mainstay of the organization

For over 90 years the Wrigley Corporation has focused solely on the production of chewing gum. As a result, they control almost ½ of the $2.5 Billion retail chewing gum market in the United States. Jiffy Lube provides only auto lubricants, meeting the needs of many customers but focusing only on one product. Likewise, the Vanguard Group, a leader in the mutual fund industry, focuses on providing an array of common stock, bond, and money market funds that offer predictable performance and rock-bottom expenses.

· Needs-Based Positioning- Serving most or all of the needs of a particular group of customers

Ikea, the global furniture retailer based in Sweden, seeks to meet all the home furnishing needs of its target customer, young furniture buyers who want style at low cost. In contrast, some organizations focus on serving the needs of a particular customer. For example, assigning one sophisticated account officer for every 14 families, Bessemer Trust Company (a private banking organization) targets families with a minimum of $5 million in investable assets who want capital preservation combined with wealth accumulation. Citibank’s private bank, on the other hand, serves clients with minimum assets of about $250,000 who want convenient access to loans and refer customers to Citibank specialists for other services.

· Access-Based Positioning- Configuring activities to reach customers who are accessible in different ways (i.e., Rural vs. urban, small vs. large, or densely rather than sparsely situated customers)

Carmike Cinemas operates movie theaters exclusively in cities and towns with a population under 200,000. Through a set of activities including standardized low-cost theater complexes, fewer screens, lower rent, and lower pay costs Carmike operates in rock-bottom corporate overhead (2%) and reaches a unique set of customers.

· Patching- Increasing flexibility and accelerating change by remapping (i.e., adding, splitting,

transferring, exiting, or combining) chunks of business to changing market opportunities

As managers make similar moves again and again, they develop routines that allow them to patch more efficiently and are able to exploit niche opportunities by focusing on the specific demands of key customer segments. For instance, Dell Computer regularly uses patching to focus more closely on target markets. In 1994, Dell split into two segments, one catering to customers buying one or two pieces of equipment, the other to bulk buyers. By 1996, Dell was splitting quarterly into numerous units including corporate and small business segments as well as federal, state, and local units. Since then, Dell has announced a new split almost quarterly. Cisco Systems frequently patches their organization by adding new businesses through small acquisitions, more than 20 between 1995-1999. Microsoft uses patching to keep their applications business units at or below 200 people so that managers can develop an in-depth understanding of their business and motivate people effectively.

· Time Pacing- Scheduling change at predictable intervals by creating new products or services,

launching new businesses, or entering new markets according to rhythms (i.e., seasons, suppliers’ product development cycles, or swings in customer spending) in the marketplace

Intel adds a new fabrication facility to its operations about every nine months. By expanding its capacity in this predicable way, Intel deters rivals from entering the business and blocks them from gaining market footing should Intel be unable to meet demand. British Airlines refreshes its service class every five years. Gillette smoothly executes about 20 new product transitions per year, never releasing a product prototype into volume production until a mock-up of the next product to follow is available. This hastens the company’s revenue flow and prevents competitors from copying Gillette’s product in one market and introducing them into another before Gillette does. A large cold-beverage business paces based on seasons and the organization market tests three or four new flavors every spring, selecting one or two of the most promising prototypes in time for a June product launch. Accompanying each product launch with a promotional game, the organization is best able to utilize summer months, the peak season of demand. For its application development Microsoft designs product features as modules and then prioritizes them. This allows Microsoft to meet release deadlines for products that incorporate the most critical features and roll over those features that are a lower priority to the next time-paced interval. TRW (a large defense contractor) was able to bid on and win more contracts simply by changing its planning calendar to match the government’s calendar.

· Clustering- Opening several stores in close proximity to one another

In important market areas, such as DuPont Circle in DC and a fashionable area of downtown Vancouver, Starbucks clustered its stores to lock up market share and to deter other similar retailers from entering the market. Through clustering Starbucks increased sales and consumer awareness of the brand.

· Product Development- Creating new but related products that can be sold to existing markets

MCI and Sprint (in competition with AT&T) offer slightly improved long-distance phone service at a slightly better price and have grown tremendously since their founding.

· Innovation- Creating products that are so new or superior that existing products become obsolete

At 3M, 25% of all its products are less than 5 years old and development is a major focus.

· Horizontal Integration- Acquiring or merging with a similar organization to reduce competition

Chrysler acquires American Motors.

· Vertical Integration- Develop an internal supply network, or internal distribution system that puts

the organization closer to its end users

Amoco acquired Dome Petroleum in order to develop an internal supply network. To create an internal distribution system that puts it closer to its end users, PepsiCo assured itself of an enormous number of retail outlets for its soft drinks.

· Joint Venture- Teaming up with another organization to develop a new product or market

Apple and IBM joined in a joint venture intended to develop a new generation of operating system that will drive both IBM and Apple PCs allowing them to be part of the same network in an organization. Starbucks teamed up with Dreyer’s Grand ice Cream Company in 1995 to create a coffee flavored ice cream and in the process leveraged its strong reputation across a related product and upheld its commitment to the innovation of new products.

· Concentric Diversification- Acquiring or merging with organizations that are compatible with the

organization’s technology, markets, or products
Sony acquires Columbia Motion Pictures and Records.

· Diversification- Acquiring or merging with organizations that counter balances its own strengths and

weaknesses
The acquisition of Time by a pulp and paper company.

· Divestiture- Selling off or closing down a segment of the organization

Due to differences in values between the two organizations, American Express decided to divestiture Fireman’s Fund Insurance Co.

· Liquidation- Selling off the organization for its tangible assets and closing it down

Eastern Airlines

· Utilizing the Competitor’s Weaknesses- Identifying and building on the competitor’s weak areas

Wal-Mart knew there was high customer dissatisfaction in K-Mart’s services so it high lighted its superior service to customers and made customer service a premier priority.

B. Strategy and Trade-offs

Profitable strategic processes often lead to imitation by competitors and many times organizations will “straddle” underlying strategic processes by mimicking successful processes while maintaining existing ones. This often proves problematic as the organization engages in conflicting activities that negate the effectiveness of the new processes. For instance:

· Impressed with Southwest’s success, Continental Airlines (a full service airline) decided to straddle processes by creating a new service called Continental Lite. However, because Continental remained a full service airline, and was not able to reduce costs though the types of activities conducted by Southwest, the airline lost hundreds of millions of dollars and Continental Lite ultimately failed.

The failure of Continental Lite and other similar ventures suggest strategic positioning requires organizations to make trade-offs in competing. Furthermore, as volatile markets create many decision making opportunities organizations must choose what not to do for several reasons.

· First, trade-offs must be made when there is an inconsistency in image or reputation. For example, Ivory soap, an inexpensive everyday soap, would have a difficult time reshaping its image to match Neutrogena Soap’s premium “medical” reputation.

· Second, trade-offs arise from the activities themselves. As Ikea focuses on meeting all the home furnishing needs of young furniture buyers who want style at low cost it is less able to satisfy customers who require higher levels of service.

· Third, companies that try to be all things to all customers will confuse employees who will be forced to make day-to-day operating decisions without a clear framework.

C. Strategy and Fit

In addition to processes and trade-offs, strategic positioning involves creating “fit” among an organization’s activities. In other words, activities must interact and reinforce one another in various ways.

· First, fit can occur between each activity and the overall strategy. For example, Southwest Airlines tailors all of its activities to deliver low-cost, convenient service. This includes fast turnarounds at the gate (15 minutes or less) and not offering meals, assigned seats, interline baggage checking, or premium classes of service. Additionally, automated ticketing at the gate allows travelers to by-pass ticket agents (reducing ticket cost) and Southwest uses a standardized fleet of 737 aircrafts to boost the efficiency of maintenance. Likewise, Ikea targets all of their activities around young furniture buyers who want style at low cost. Their strategy includes selling low-cost ready to assemble furniture, displaying every product in room-like settings, and expecting customers will want to handle their own parcel pick up and delivery.

· Second, fit can occur between reinforcing activities. As a high end medicinal soap maker, Neutrogena markets to upscale hotels using their own labeling. Once guests have tried the soap in these luxury establishments they are more likely to purchase it at the drugstore or ask their doctor about it. Thus, Neutrogena’s medicinal and hotel marketing activities reinforce one another, lowering total marketing costs and increasing customer sales.

· Third, fit can occur through an optimization of efforts. The Gap, a retailer of casual clothes, focuses on product availability as a major part of its strategy. By restocking its selection of clothing almost daily out of three warehouses, and therefore limiting the need for in-store stock, The Gap optimizes their strategy with more display room and consistently stocked shelves.

II. Supporting Strategic Processes

While selecting a unique set of strategic processes is fundamental to achieving a successful strategic position, the processes should be guided with simple rules and strategic principles. Simple rules are concrete, specific rules that help guide an organization’s strategic processes and provide the flexibility to capture the best market opportunities including product innovation, partnering, spinout creation, or new-market entry. Too many rules are paralyzing; too few, confusing. Organizations should aim for two – seven rules, using more rules in predictable markets to increase efficiency and fewer rules in turbulent markets to increase flexibility. Simple rules may include:

A. Simple Rules

· How-to Rules- define how to distinctively execute an organization’s key processes

Akamai (an Internet technologies company) created three clear rules to guide its customer care process: 1.) staff must consist of technical gurus, 2.) customer service reps must answer questions on the first call or email, and 3.) R&D staff must rotate through customer service. To help Dell determine when to use its patching strategy, the organization set a how-to rule stating a business must be split in two when its revenue hits $1 billion.

· Boundary Rules- help an organization quickly decide which opportunities to pursue

After choosing acquisitions as a key process, Cisco set a boundary rule that allowed it only to acquire companies with no more than 75 employees, 75% of whom are engineers. At a major pharmaceutical company, researchers can work on any of ten molecules (no more than four at once) specified by a senior research committee, and a research project must pass a few continuation hurdles related to its progress in clinical trials. Within those boundaries, researchers are free to pursue whatever looks promising. Miramax Films also uses a set of four boundary rules to determine which movies it will create.

· Priority Rules- help an organization quickly rank opportunities & set priorities for resource allocation

Realizing the need to very carefully allocate manufacturing capacity among its products, during the mid 1980’s Intel implemented a simple rule: allocate manufacturing capacity based on a product’s gross margin. This allowed Intel to seize the opportunity to dominate the highly profitable micro processor niche rather than allocating too much capacity to its traditional core memory business.

· Timing Rules- synchronize the organization with the pace of emerging opportunities, as well as with other parts of the organization

Nortel Networks’ timing rules include: 1.) project teams must always know when a product has to be delivered to win leading customers, and 2.) product development time must be under 18 months. The first rule keeps Nortel in sync with cutting-edge customers and the second forces Nortel to move quickly into new opportunities while synchronizing the various parts of the organization to do so. Together, the rules help Nortel exploit new market openings.

· Exit Rules- discipline the organization to end support of outdated opportunities

Oticon, a Danish hearing aid company, kills projects if a key team member leaves for another project within the company. Similarly, at a high tech multinational organization, senior executives stop new initiatives that do not meet certain sales and profit goals within two years.

B. Strategic Principles

A strategic principle is a memorable and actionable phrase that distills an organization’s process strategy into a real meaning and communicates it throughout the organization. It allows organizations to maintain a strategic focus while providing the necessary flexibility among management and employees that facilitates innovation and a quick response to valuable opportunities. Decentralization, rapid growth, technological change, and institutional turmoil make strategic principles critical to today’s organizational environment. Strategic principles are action oriented, providing explicit guidance to make strategically consistent choices, and possess three defining attributes:

· Strategic principles force trade-offs between competing resource demands

Southwest Airlines used its strategic principle, “Meet customers’ short-haul travel needs at fares competitive with the cost of automobile travel,” to determine if it should continue service to Denver’s Stapleton Airport (a popular destination but an airport known for bad weather and consistent delays). Comparing the action to its strategic principle, Southwest realized it should stop its service to Denver since the airport’s delays would ultimately lead to higher ticket prices. Thus, Southwest was able to use its strategic principle to make the necessary tradeoffs to maintain its strategic position.

· Strategic principles test the strategic soundness of a particular action

AOL’s strategic principle, “consumer connectivity first-any time, anywhere” helped employees identify and move toward attractive opportunities that lead to deeper consumer connectivity and broader distribution. For instance, after noticing high activity around the bulletin-board folders created by two stock analysts and AOL subscribers, one of the managers at AOL gave the analysts the chance to create their own site which became the enormously popular the “do-it-yourself investing” Web site the Motley Fool.

· Strategic principles set clear boundaries within which employees must operate while granting them freedom to experiment within those constraints.

The Vanguard Group, a leader in the mutual fund industry, found that many employees did not clearly understand its strategy of large customer savings by discouraging investors from making frequent trades. Vanguard used its strategic principle, “unmatchable value for the investor-owner,” to communicate its strategy and thus created an environment where employees had the knowledge and freedom to utilize important opportunities on their own.

· Other strategic principles

General Electric: “Be number one or number two in every industry in which we compete, or get out.”

Wal-Mart: “Low prices, every day.”

Bain & Company: “The product of a consultant should be results for clients-not reports.”

Dell: “Be direct”

eBay: “Focus on trading communities.”

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