Saturday, 26 August 2017

Everybody Lies: The evolution of market research


I've only just started reading "Everybody Lies" by Seth Stephens-Davidowitz (see right), but already I am hooked.

Stephens-Davidowitz documents and evidences in page-turning style a view I have held for some years now:
  1. we can now observe how people actually behave, especially when they don't think anyone is looking, in ways which were previously not possible, and
  2. what we observe it is often very different from 
    1. what they say they do or will do, and
    2. how they behave when they think someone is looking.
I would guess that Stephens-Davidowitz borrowed the title of his book, whether knowingly or not, from the byline of the TV series "House M.D.", whose lead character says "It's a basic truth of the human condition that everybody lies. The only variable is about what."

Reading the book has given me pause to reflect on the evolution of market research. Without having actually done a comprehensive historical study of the subject, my personal experience suggests at least 3 waves of development.

Market Research 1.0

The first wave of market research consists of asking people for the views, preferences, intentions, wants and needs, etc. This can be quantitative, for example, in the form of a survey, or qualitative, for example, in the form of a focus group, etc.

The obvious problem with this is, of course, that people have many reasons to lie, and few reasons not to. Reasons to lie can be very simple, for example, wanting to appear intelligent, or virtuous, wanting to be liked or admired by the questioner. Often, people won't even be aware that they are lying. As humans, we are excellent post-rationalisers. Cognitive Dissonance Theory suggests that when faced with a question we can't or don't want to answer, in a situation where we'd like to, our brains simply fill in the blanks, making up a story, possibly without even being consciously aware of it. (Note, we're using the word 'lie' here throughout, even when subjects are doing it unintentionally and unknowingly.)

Another problem is that people find it difficult to answer questions about subjects outside of their existing frames of reference. For this reason, market research 1.0 is even less helpful when developing novel ideas. As Henry Ford apocryphally said: "If I had asked people what they wanted, they would have said a faster horse."  

Market Research 2.0

Market Research 2.0 attempts to build on Market Research 1.0 by showing customers examples of what future products or services might look like. Often, more than one version is shown, with subjects asked to interact with them, compare them and indicate preferences.

This can go a long way to alleviate subjects inability to imagine a different future, and if all options are attractive and presented positively, this will also reduce some of their incentive to lie.

Market Research 2.0 requires more work than Market Research 1.0 as it usually means that you first need to develop some ideas to test. If you're innovative in the development of those ideas, that helps. But the innovation is likely coming from the development of the ideas, rather than from the market research.

However, a number of examples illustrate the difficulties still inherent in the approach:
  1. Subjects reportedly overwhelmingly rejected the idea of ever withdrawing cash from a hole in the wall, as opposed to from a bank teller, but today, 94% of UK adults use cash machines.
  2. In market research, 68% of US customers said they liked the taste of New Coke, but 6 months after launch it was removed from the shelves, and the old formula relaunched. (Reference)
  3. Research conducted between the announcement and launch of the iPhone found high demand in emerging economies like Mexico and India, but not in developed countries, stating: “There is no real need for a convergent product in the US, Germany and Japan”. (Reference)
As I write, I can think of at least two factors which might contribute to this problem, and I am sure there are countless more:
  1. The Hawthorne Effect (also known as the Observer Effect) is named after experiments conducted from 1924-32 in which it was shown that subjects behaviour is altered by virtue of the fact that they know they are being observed.
  2. Research subjects typically have no 'skin in the game'. For example, it is a lot easier to say you'd be happy to pay, say, £100 for an item than it is to forego the other enjoyments you'd have to give up in order to do so. This is probably exacerbated where they are positively incentivised to take part in the study.


Market Research 3.0

Market Research 3.0 observes how real prospects and customers behave with and use products and services in the normal course of their lives and when they don't think they are being watched.

As technology evolves it is increasingly possible to track how customers move through a store, what items they buy and how they engage with and dispose of those products.

This involves developing and launching a product before market testing it, but with increasing software content in products and services (think the Internet of Things) and advances in technologies such as 3D printing, it is become ever cheaper to develop and pilot smaller batches of products or to mass-customise products and services.

Sample Application

I use these techniques to great effect in the development of StratNavApp.com in three ways. It is important to stress, however, that all three techniques are based on machine statistical analysis and don't involve anyone ever looking at users' data or strategies, or attributing the results to any specific individuals or companies.

Here are some common ways we measure and
  1. Web-site analytics: using even a simple (and free) tool like Google Analytics, it is possible to understand how users find the service, which parts of it they visit most frequently and in what order, how long they engage, and from where they leave. Using this insight, we can prioritise our development efforts to those areas and features users find most valuable. So, for example, we know that our SWOT analysis tool has been 24% more popular than our Strategy Canvas tool and 33% more popular than our Business Model Canvas tool (confirming our views on the continuing popularity of the SWOT).  
  2. AB Testing: almost all new features are first introduced to a randomly selected subset of users (the "A" group") while the remaining users (the "B" group) continue to see the site unaltered. We can then measure whether the A group engages more positively (against our own defined Critical Success Factors) than the B group or not. If they do, then the feature is released to the remaining users, and if they do not, then the new feature is rolled back or adjusted and retested. Either way, the results are analysed to enhance our picture of how users use the service, and how we can further improve it. By way of a very simple example, StratNavApp.com's byline "Collaborative strategy development and execution" was the winner from among a number of AB Tested alternatives considered.
  3. Content Analysis: StratNavApp.com provides a unique insight into how users develop and execute strategies. By way of a very simple example, we know that the word 'Market' is used almost twice as frequently as the word 'Customer' when describing strategic insights. We may not know why that is, and we may not know if it is a good thing or not, but we can certainly use it to enhance our product. We can analyse word counts, numbers and lengths, etc. of all elements used in StratNavApp.com with a view to optimising users' experiences of the tool.

Privacy and Ethics

This is not intended to be a post on privacy and ethics. However, it goes without saying that privacy and ethics have always been a key consideration in market research and it is right that there is ongoing debate and development of this subject as it evolves.

Conclusion

We've always known that market research is both invaluable and limited. As new technologies evolve we are able to increase the value it adds whilst simultaneously reducing its limitations. Those organisations that explore and utilise these new approaches will be at a distinct advantage over those that do not.

Tuesday, 4 July 2017

Understanding the 3 Horizons model

The 3 Horizons model is one of my favourite tools for helping people to think more strategically.

The 3 Horizons model suggests that a sustainable business plan should include a combination of 3 types of initiatives or projects:
  1. Horizon 1 includes all the initiatives that you need to do in order to maintain and fix your existing business - initiatives required to comply with changes to legislation, to maintain existing systems and to fix problems in your existing processes.
  2. Horizon 2 includes all the initiatives that you need in order to improve and grow your business and includes internal improvements, such as efficiency, effectiveness and quality improvements, as well as developing new products and entering new markets.
  3. Horizon 3 includes initiatives that will evolve and transform your business. These could take your business into new markets, new places in the value chain or new business models. It should include at least one initiative that could transform your industry - the so-called category killer.
You can easily see all 3 Horizons at play in a company like Uber. In Horizon 1 it is grappling with challenges to its employment practices and from traditional taxi firms and licensing authorities. In Horizon 2 it continues to expand into new cities and to develop new services. In Horizon 3 it is investing heavily in the development of autonomous vehicles which will undoubtedly change the very nature of car ownership and personal transportation. To succeed as a business, it must succeed in all 3 horizons at the same time. Its strategy must operate across all 3 Horizons.

I find the 3 Horizons model helpful in countering two problems I frequently encounter.

  1. Businesses that use strategy development as a precursor to the annual budget cycle tend to omit or significantly under-weight Horizon 3 initiatives. Restricted budgets keep people focused on the immediate issues of the day whilst demanding only incremental growth from existing business. Real change quickly becomes an unaffordable luxury.
  2. Businesses that approach strategy from a 'blue sky visioning' perspective tend to underplay Horizon 1 and 2 initiatives. As a result, the strategy is distant from most stakeholders' experiences of the organisation, and removed from its day-to-day operations. In some cases, businesses go as far as developing separate skunk-works to progress the strategy. Whilst this has some advantages, it can make progress difficult to integrate back into the business.

An organisation which is too focused on visionary transformation may not survive long enough to see it bear fruit. An organisation which is too focused on the here and now may be overtaken by events and rendered redundant by the competition.

Applying the 3 Horizons model to your strategy has three advantages:

  1. It quickly highlights whether your strategy is biased towards either the near term priorities or longer term transformation.
  2. It can help you rebalance your strategy by filling in any evident gaps.
  3. It helps stakeholders to understand the need to balance all 3 Horizons and pay attention to all of them on an ongoing basis.

You can now do your own 3 Horizons analysis using the innovative StratNavApp.com online tool for collaborative business strategy development and execution. Simple click on StratNavApp.com, register or log in, and add the 3 Horizons tool in the "Planning" quadrant.

The chart below, illustrating the 3 Horizons, was produced using StratNavApp.com.

See also:

Friday, 23 June 2017

Are we losing focus on strategy?

I recently had a look at the keyword 'strategy' in Google Trends and noticed a worrying trend. Have a look at the chart below, which tracks Google Trends for the search term 'strategy' since records began in 2014:


It seems that interest in 'strategy' as a subject has declined over the last decade or so by over 50%.

I gave some thought as to why that might be and came up with five possible reasons.

1. The anti-strategy movement could be gaining ground


Perhaps people are being taken in by mantras such as 'execution trumps strategy', 'culture eats strategy for lunch', and 'agility is more important than strategy' leading them to mistakenly believe that strategy somehow matters less than previously thought.

I have written on previous occasions explaining why I think this is misguided. See, for example: False dichotomies and the noise before defeat, and Agility needs a strategy.

2. People could be shifting focus to more specific aspects of strategy


Business strategy is a relatively young discipline. It only really rose to prominence in the 1960s. As it has evolved it has developed into several subdisciplines. Where these don't specifically use the word 'strategy' in their labels, and increasing interest in those might appear as a decreasing interest in 'strategy' as an overarching topic. Some example of this might include:
  • Target Operating Model (TOM) development
    The first candidate I looked at was Target Operating Model Development. See for example: How to design a Target Operating Model (TOM). Google Trends analysis suggests that interest in Target Operating Models has increased significantly (albeit from a zero base) over the same period, as shown in the chart below:

  • It also revealed something I had not appreciated before: all of this interest is coming exclusively from within the United Kingdom.


  • Business Model Canvas, Strategy Map, Strategy Canvas and Digital Disruption
    I then added some other strategic concepts I thought might have gained popularity into the mix. The chart below shows the relative popularity of the Business Model Canvas, Strategy Map, Strategy Canvas and Digital Disruption into the mix along-side Target Operating Model Development, over the same time period - see the chart below:

    • Blue | Target Operating Model: The chart highlights the fact that, whilst popular in the United Kingdom, Target Operating Model development barely features in the rest of the world.

    • Green | Strategy Canvas: I was also surprised to see that, the Strategy Canvas popularised in the book Blue Ocean Strategy, languishes at the bottom of the chart with the Target Operating Model. Further analysis shows that, in contrast to the Target Operating Model, interest in the Strategy Canvas originates almost entirely in the USA.

      See also: How to draw a Strategy Canvas in 4 steps.

    • Purple | Strategy Map: Popularised in the book, The Balanced Scorecard, and its sequel, The Strategy-Focused Organisation, seems to be suffering a similar fate to the word Strategy itself, slowly losing popularity.

    • Yellow | Business Model Canvas: Introduced in the book Business Model Generation seems to be the big winner. I am a great fan of the model, and given the ever increasing popularity of startups and startup culture, the popularity of this model is unsurprising.

      See also: How to use a Business Model Canvas.

    • Red | Digital Transformation: Whilst not a model or specific concept in the same way that the others are, I included this one off the back of some research claiming that Digital Transformation now accounts for ~25% of all strategy projects. The Google Trends analysis certainly bears this out, and one can easily imagine Digital Transformation eclipsing the Business Model Canvas in the very near future.

      See also: The digital spiral towards innovation at the core

3. Attention spans could be reducing


In a world where even world leaders struggle with more than 140 characters, it could be that disciplines like strategy simply require too much attention for people to bother.

I'd like to believe that we're not living through the early scenes of the film Idiocracy. However, as the art of strategy evolves, strategists need to work with ever greater care and discipline in order to identify and extract value from increasingly competitive markets.

Perhaps that is simply something that fewer and fewer people are willing to do.

4. People could think strategy is really easy


In direct contrast to the previous points, perhaps everyone thinks they are now a strategist.

In the last 4 hours, I've read two blog posts in which the author picked holes in well-known business and claimed to have the fix for them. Both analyses were based on precious little data or other evidence, were over-simplistic and completely missed the mark. One basically criticised Linkedin for not being more like Facebook, whilst the other thought Uber was doomed because after 4 rides they'd not asked him for an NPS score. (I'd only read them because the headlines had seemed promising.) 

When you think strategy is that easy, why would you need to Google it or take any other steps to learn how to do it?

5. Google Trends could be too blunt an instrument


Search terms trends are a blunt instrument for measuring the popularity of something. In the first instance, who really knows how Google collects and presents this data. Certainly not I. There could be many other technical reasons for the trends we think we're seeing.

In the second instance, we don't really know why people are searching for strategy. They could be searching for strategy games, military strategy or any of a range of topics with little to do with business strategy at all. So the decrease in popularity of strategy could have little to do with business strategy at all. A quick Google Trends check on 'business strategy' reveals, however, a similar trend as for 'strategy' in general. However, I am not sure if that distinction is viable as I suspect few business strategists distinguish when searching.

Conclusions:


Having completed the above analysis, my conclusions are that:
  • The specific terms 'Strategy' and 'Business Strategy'do appear to be losing popularity.
  • However, specific sub-disciplines, particularly those labelled without including the word 'strategy' are thriving. (Tip: If you're developing a new strategy concept, leave the word out of its name.)
  • The popularity of some strategy approaches is much more regional than I had realised.
Over to you: Do you think we are losing focus on strategy? If so, why do you think that might be? Should we be concerned? What, if anything, should we do about it? Please drop your answers in the comments below.

Thursday, 15 June 2017

How to evaluate and prioritise strategic options

Once you've developed a comprehensive list of strategic options, it's time to evaluate, prioritise and select the ones you want to pursue.

Evaluation is typically based on four criteria:
  1. feasibility,
  2. strategic fit,
  3. interdependencies, and
  4. financial risk and reward.

Feasibility


It doesn't matter how compelling your strategy is, if it requires you to build a time travel machine and teleport into a parallel universe, you're probably going to fail.

Feasibility is a measure of how easy it will be to execute an option.

One way to establish this is to cross-check the option against the strengths and weaknesses in your SWOT analysis. Does the option capitalise on your strengths? Do your strengths provide you with a unique opportunity to succeed with this initiative where others might find it more difficult? Does the option require strengths you don't have or where you are weak? Would the option protect you from exposure to your weaknesses?

Of course, you may find the option requires capabilities which you simply did not evaluate when you originally did your SWOT, in which case, you may want to consider updating it.

Just because an option will be difficult for you to execute does not mean you should give up on it. When America decided to put a man on the moon, no-one thought it would be easy. But it is certainly an important consideration when weighing an option up against alternatives.

Strategic Fit


There is little point in starting to build a commanding position offering a product or service for which demand is in free fall.

Strategic fit is a measure of the future attractiveness of an option.

You can establish this by cross-checking the option against the threats and weaknesses in your SWOT analysis, PESTEL analysis and/or Porter's 5 Forces analysis. Do industry trends suggest that demand for a product, service feature or attribute is likely to increase or decrease? Does the option capitalise on recent or anticipated changes in order to operate more effectively or efficiently? Do other external factors mitigate in favour of or against this option? Is it a unique fit to your specific relative strengths and weaknesses, or is it a me-to undifferentiated move?

Typically, lower strategic fit is less of an issue for very short-term options (think, for example, Horizon 1) which play strongly relative to strengths and weaknesses. However, they mitigate much more strongly for or against longer term investments (think, especially, Horizon 3).

Looked at together, a rigorous assessment of feasibility and strategic fit should also stop organisations from meandering aimlessly in pursuit of the next shiny idea, and instead help to develop a portfolio of strategic options which is holistic and based on sound analysis.

Interdependencies


It is important to remember that not all strategic options are independent of each other. There may be trade-offs and mutual exclusions (going in one direction may make it harder, or even counterproductive, to go in another), or dependencies (executing one option first may make it easier to implement another one second).

It is important to identify these before proceeding to look at financial risk and reward, as these interdependencies can have a significant impact on financial costs, benefits and risks.

The matrix below illustrates a simple approach to bulleting out the potential interdependencies between options (additional supporting documentation may be required):

Financial Risk and Reward


Financial risk and reward is probably the most widely written about of the 4 criteria. It is also the least strategic in that it can be applied to any project on a standalone basis. However, having worked through the other three criteria have a significant impact in understanding the costs and risks of implementation (feasibility & interdependencies) and the size and risk of the prize at stake (strategic fit and, again, interdependencies).

There are a number of ways of assessing financial risk and reward, including NPV, Profitability Index, IRR, Payback Period, Discounted Payback Period, etc. each with its pros and cons. Discussion of these is beyond the scope of this post. (If there is demand, I may consider a future post - please let me know in the comments.) All of these methods are based on future expected cash flows. Again, there are numerous ways of calculating these, and again, they are beyond the scope of the post (but could be the subject of a future post if there is demand).

It is self-evident but never-the-less worth stating that all of these methods of assessment are only as good as the forecasts on which you base them. Garbage in - garbage out. Furthermore, forecasts are notoriously unreliable, and probably more so as the options you're evaluating get more innovative and strategic. 

It is important to undertake financial risk and reward forecasts as they force you to confront difficult to answer questions. However, it is equally important not to then believe that your forecasts are somehow factual or accurate.

Bringing it all together


Once you've evaluated all of your options against each of the 4 criteria, you're in a position to review your portfolio and to start making choices.

Start by assigning a simply High, Medium and Low score to each option for each of Feasibility, Strategic Fit and Financial Risk and Reward. The result can easily be translated into a total score from 3 to 9 by giving one point for a Low and 3 points for a High, and the options can then be sorted based on that score. Then, where there are dependencies, firstly remove any lower scoring options which are mutually exclusive with higher scoring options, and if any preceding options score less well than their succeeding options, move the preceding options to just before the succeeding options.

The strategic portfolio analysis matrix provides a useful way to visualise the solution.

This basic approach will yield a prioritised list of options from which you can build a roadmap for delivering your strategy. There will inevitably arise situations where you disagree with the result. Any system for prioritisation will give you an indication but not a definitive solution. So if you really think you should charge what the formula spits out, then do so - but do it consciously and make sure you document and agree your reasons so that you're not left second guessing yourself.

Once you've evaluated and prioritised your strategic options, you're ready to move on to build your implementation roadmap. But that will have to wait for another post. Do be sure to signup to receive email updates to make sure you don't miss it if you've not already done so - just enter your email address in the panel to the right at the top of the page.

Friday, 26 May 2017

6 techniques and 5 tips for developing strategic options

So, you’ve completed your analysis. You now understand everything there is to know about your firm, the market in which it competes, and how you anticipate the future might unfold. Well, maybe not everything, but as much as you reasonably can.

Now what?

The next step is to develop strategic options for taking the firm forward. Options are simply things you could choose to do or not do.

But how exactly do you do that?

Contrary to popular belief, you don't have to rely on vague notions like 'blue-sky thinking'. Nor must you simply hope that inspiration strikes like a bolt from the blue (although a little inspiration never hurt anyone!) In contrast, there are specific processes you can undertake in order to develop strategic options.

6 techniques for generating strategy options


There are a number of ways to generate options, for example:
  1. Use Ansoff’s matrix to consider all the possibilities of selling existing products to new customers (new geographies, customer segments, etc), new products to existing customers, or even new products to new customers (learn more).
  2. Use the innovation templates for a systematic approach to developing new products and services (learn more).
  3. Use Porter’s generic strategies as a framework for choosing between and developing options based on either Cost Leadership, Differentiation or Focus (learn more).
  4. Add, change or remove a competitive factor on your Strategy Canvas (learn more). This best done using the Voice of the Customer (VOC) off the back of customer research.
  5. Develop options which flow directly from the insights in your SWOT analysis (see below).
  6. Ask people for ideas (see below).

Developing options from the insights in your SWOT analysis


Weaknesses:
  1. Strengthen your capability or acquire the resources
  2. Partner with some who is strong at it
  3. Avoid it by focusing on customer segments who value it less highly
  4. Discount opportunities which rely on it
Strengths:
  1. Find other products or services which rely on it
  2. Promote it to your customers
  3. Target customers who prize it most highly
Opportunities:
  1. Invest in building and using related strengths
  2. Position and promote yourself as a leader in the field
  3. Conceal your intentions so that competitors are less aware of the opportunities
Threats:
  1. Exit or de-emphasis directly affected markets
  2. Capitalise on a competitor's weaknesses in this area
  3. Seek to neutralise it
Look especially for examples where your strengths play into opportunities, and take evasive action where your weaknesses most expose you to threats.

Don't forget to just ask people


In addition to using the other techniques, don't forget the simplest one of all: just ask people what they think you could or should do. You could ask colleagues, customers, distributors, suppliers, and, of course, professional consultants. When doing so, it is best to follow the brainstorming guidelines of suspending judgement of those ideas until later.

5 tips for generating strategic options


The purpose of developing options is to allow for choice. As Porter said:
Strategy is about making choices, trade-offs; it's about deliberately choosing to be different.
Here are some tips to ensure your options allow for real choice.
  1. Don't just stop once you've found an option you like.

    If you'll do, you'll never know if the next option would not have been even better. Work through the full range of options.
  2. Look for options which are mutually exclusive and/or involve tradeoffs.

    This will help to ensure you're making the really tough calls to differentiate yourself in the market, and not simply executing as many of the ideas as you can.

    For example: Airline brands must typically choose to position themselves as either 'discount' or 'premium'. For example, by eliminating meal options, discount airlines can reduce flight turnaround times and reduce costs (well beyond the cost of the meals themselves). However, this would deter premium customers.

    Far from being a limitation, such mutually exclusive options are strategically valuable as they allow different competitors to take up different positions without competing head-on.
  3. Beware Hobson's choice.

    Hobson's choice creates the illusion of choice by positioning one option as an alternative to either doing nothing or failing. I've seen people do this when they only really have one option (see tip 1).

    For example: We must replicate a competitor's last move or lost market share. What else could you do to retain and even grow market share?
  4. When faced with a large number of options, group mutually reinforcing options into themes.

    Strategy is a pattern of decision making, rather than a number of decisions made independently of each other. Grouping options into themes can help to highlight those patterns. Some options can be included in more than one theme.

    In extreme case, themes can have their own vision and mission statements. Values, however, should remain consistent across all the options and themes.

    Theming options presents you with two levels of choice: which themes to pursue / not pursue, and which options to pursue / not pursue within them.
  5. Suspend judgement until the end

    Resisting the temptation to judge options as either good or bad too early in the place will cloud your judgement. An option which does not appear very good in isolation might be a vital component of a very powerful theme.
Once you're done, you're ready to move on to the next step: How to evaluate and prioritise strategic options.

Monday, 15 May 2017

Porter's Generic Strategies and how to use them

As far back as 1980, Michael Porter wrote that all firms must choose to compete on the basis of either cost leadership, differentiation or focus. Firms which attempt to compete on more than one of these three risk wasting precious resources with incompatible strategies. Porter described such firms as "stuck in the middle".

Cost Leadership


In cost leadership strategies, firms compete by lowering prices (relative to value) in order to appeal to a broader target market (especially cost-conscious customers who might otherwise not purchase the product) or to sell higher volumes of product to existing customers.

Cost leadership firms retain profitability by keeping costs low through:

  1. increasing asset utilisation: for example, an airline that can turn aircraft around more quickly at the gate, a restaurant that can turn tables more quickly, or a management consultancy can charge more billable hours per member of staff and/or have fewer support staff, a factory can run expensive machinery 24 hours a day, etc.
  2. increasing economies of scale: for example, manufacturers that produce and sell higher volumes of goods can negotiate better deals on raw materials and distribution, and use more specialised equipment and processes.
  3. utilising the experience curve: for example, firms that repeat processes more frequently and over a longer period of time can use statistical and other methods to learn about and improve those processes.
  4. standardisation: offering few options on products and services, like the Model T Ford "any colour as long as it is black" approach. This will help to drive asset utilisation, economies of scale and the experience curve.
  5. process innovation: for example, by finding a substantially cheaper way to produce something.
  6. employing other low-cost strategies, including operating from low-cost locations, outsourcing, etc.
Firms pursuing cost leadership can deter new entrants to their market by threatening to retaliate with reduced prices. They can lock in powerful distributors with attractive deals, and neutralise supplier bargaining power. Given low prices, customers are less likely to consider more expensive substitute products or services. Rivalry can become an issue if two cost leaders enter into a price war, commoditising the market and competing all of the profits away.

Differentiation


In differentiation strategies, firms compete by offering superior products or services to customers, usually at higher prices.

Firms achieve differentiation through:

  1. customer intimacy: having strong relationships with their customers and knowing what they want and value.
  2. product or service innovation: developing new products, services and features to satisfy those wants and needs (learn more).
  3. brand building: to convince customers that a firm's products or services are somehow superior to a greater extent than what they really are, or to convince customers that they want product or service features the firm offers more than they actually need them.
Firms must find ways to protect their differentiators, for example using copyrights, patents, and/or exclusive/monopoly contracts. If their differentiators can be replicated by competitors, they will lose their competitive advantage and may be forced to compete on price against firms which lead on cost.

Firms using differentiation must rely customer loyalty to fend of new entrants. Differentiators can negotiate with distributors on the basis of such customer loyalty and brand pull - that is consumers will want distributors to carry their products. Differentiators have less bargaining power with suppliers but are better able to pass supplier price increases to customers. Differentiators rely on the utility of their value-added features to fend of substitutes. Rivalry is resolved by convincing customers of the superiority of the product or service, which can require clever marketing. 

Focus


Firms achieve focus by targeting one or more specific customer segments or niches. They then pursue a strategy of differentiation with regard to the product and service features with the attributes most highly desired by those segments, and cost leadership with all other attributes.

Whilst focus combines elements of both differentiation and cost leadership, it should not be seen as a hybrid or blend of the two. Strict separation should be made between those product and service attributes where cost leadership is to be applied and where differentiation is to be applied, and this strict separation should be based on the particular wants and needs of clearly identified niches.

How to use the generic strategies


  1. Decide which of the three generic strategies you want to pursue

    It is often, but not universally true that larger firms must choose between cost leadership and differentiation, whilst smaller firms must pursue focus. This is usually because large firms will struggle to find niches of sufficient size, and because small firms lack the resources to compete on cost leadership or differentiation.

    In large businesses, such as conglomerates, it is possible to for different part of the business to compete using different generic strategies. In such cases, the business may pursue different generic strategies under different brands in order to maintain that distinction in the market.

  2. Actively develop strategies and pursue which are aligned to and strengthen that position

    See the three descriptions above for examples of the kinds of strategies you might pursue under each of the three generic strategies.

  3. Identify and phase out any activities you currently undertake which do not support your chosen generic strategy.

  4. When evaluating new opportunities, eliminate those which are not compatible with your chosen generic strategy.

Monday, 8 May 2017

Introducing the Enhanced Business Model Canvas

The Enhanced Business Model Canvas combines the Business Model Canvas with the Operating Model Canvas proposed by Andrew Campbell, Mikel Gutierrez and Mark Lancelott in their recent book by the same name (see to the right).

In suggesting this combination, the authors argue that it provides a more operational perspective to the left-hand side of original Business Model Canvas, directly addressing "important issues such as people, organization structure, location and information systems that are critical to the operating model, but often given too little attention when thinking about the business model."

Here is an example of what an Enhanced Business Model canvas for Uber might look like.


(Please note: I have constructed this canvas by way of example only, using publicly available information without any privileged knowledge of Uber. As such I cannot vouch for its accuracy. If you do disagree with anything in this example, it will only serve to demonstrate the usefulness of the tool in fostering understanding.)

The above example was drawn in StratNavApp.com the collaborative online tool for business strategy development and execution.

In simplistic terms, the  Enhanced Business Model Canvas does provide more context and granularity than the original Business Model Canvas. For starters, it considers 11 elements of the business model, compared to the original. If we consider each of the changes in turn:
  1. Locations and Organisation have been added. These are both welcome additions. If Michael Porter's work on the strategic importance of location is not enough to convince you, just think of the importance of, for example, Silicon Valley to the tech sector. With regards to Organisation, please see my previous blog about why Structure follows Strategy.
  2. Key Partners and Resources have been removed. I would argue that they have, in fact, been replaced with Suppliers and Information respectively. In both cases, the new category appears to be slightly narrower than the original.
    1. In the case of suppliers, I think the greater specificity is probably a good thing. Distributors, for example, may be a Key Partner, but they probably fit more logically on the right side of the model, which focuses on customers, under Channels.
    2. The addition of Information is very welcome in today's data intensive, big data-driven world. And whilst other Resources, such as a preferential Location, now have a home of their own, others, such as patents or exclusive contracts may struggle to find a home in the enhanced model.
  3. Key Activities have been renamed as Processes and placed within a horizontal chevron shape, instead of the non-descript block in which all of the other elements reside. I am neutral regarding the name change. Arguably, the shape and orientation of the category make absolutely no difference to the analytical process. However, I can't help feel that the change highlights the active nature of the Key Processes, and also serves to make the model more distinctive.
Only time will tell whether the Enhanced Business Model Canvas will achieve the popularity of the original. For now, StratNavApp.com offers the ability to use either. Undoubtedly, it does add something to the debate on how best to understand, represent and analyse operating and business models, and I'd certainly be interested to hear your thoughts in the comments below.