Market Driven Strategy: Processes for Creating Value

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Today, countless new niche and specialty market opportunities are emerging as the era of mass marketing comes to an end. George S. Day argues persuasively that old ways of competing and much of the conventional wisdom about organizations are being overturned by a convergence of forces: mass markets are fragmenting into narrow segments that are themselves becoming global markets; information technologies are blurring the boundaries between markets and organizations while accelerating the pace of decisions; ...

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Overview


Today, countless new niche and specialty market opportunities are emerging as the era of mass marketing comes to an end. George S. Day argues persuasively that old ways of competing and much of the conventional wisdom about organizations are being overturned by a convergence of forces: mass markets are fragmenting into narrow segments that are themselves becoming global markets; information technologies are blurring the boundaries between markets and organizations while accelerating the pace of decisions; technological change continues to shrink product life cycles while customers are demanding ever higher levels of responsiveness and quality. These forces are also spawning new types of retailers, distributors, and linkages with customers.


Contending that the rate of change in the market has clearly outstripped the speed at which a conventionally managed company can respond, Day makes a compelling case for first creating customer value, without which there can be no shareholder value. He presents a proven market-driven approach to formulating and implementing competitive strategy at the business-unit level -- "in the trenches" -- based upon materials that have been empirically tested and critiqued in more than 200 internal executive programs and strategic planning sessions at such companies as U.S. West, General Motors, Marriott, Kodak, and General Electric, where he is director of the Product Planning Program.


Day introduces the five critical, interdependent choices that managers must make to create a market-driven organization in the 1990s. With dozens of examples from companies such as Otis Elevator, GE, H.J. Heinz, IKEA, Nestlé, Acuson, and 3M, he shows how forward-thinking companies select their markets, differentiate their products, choose their communication and distribution channels, decide on the scale and scope of their support activities, and select future areas for growth.


Finally, Day persuasively documents that at these winning companies there is a commitment to thinking and planning processes that harness the power of bottom-up understanding of customers and competitive realities with top-down vision and leadership. A powerful vision is a shared intention that creates a winning atmosphere throughout the organization. By focusing attention on a desired leadership position, measuring progress against that achievement, and continually seeking new ways to gain competitive advantage by serving customers better, the actions and aspiration of the organization are given meaning.

Author Day provides a proven market-driven approach to formulating and implementing competitive strategy at the business unit level--"in the trenches." He introduces the five critical strategic choices that managers must make.

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Editorial Reviews

From the Publisher
Charles M. Lillis Chairman and CEO, Mediaone Group The book is content-rich and should be invaluable to executives striving to become "market-driven." The guidance offered on how to externalize, so that true superiority in producing customer value results, is extraordinarily well packaged. I'll strongly recommend the book to my fellow practitioners.

Dave Davis Manager, Business Research, Dow Chemical U.S.A. George Day provides very important insights into what steps are necessary for a company to be truly market-driven. This book is obligatory reading for anyone involved in developing competitive strategies.

Philip Kotler S.C. Johnson & Son Distinguished Professor of International Marketing, Northwestern University, author of Kotler on Marketing George Day has produced a wonderful synthesis of the best thoughts we have on building and implementing a market-driven strategy. I predict that managers will keep this book on their nearest bookshelf and reach for it many times during the year for inspiration and guidance.

Vincent P. Barabba General Manager, Corporate Strategy and Knowledge Development, General Motors Corporation For those who wish to base their decision making on what customers really need, the concepts found in Market Driven Strategy have the right level of customer focus, attention to external environmental factors, and the right mix of theory and practical experience.

David K. Hurst Executive Vice President, Fedmet, Inc. By integrating the latest conceptual frameworks with helpful practical examples, Professor Day has created a most useful bridge between theory and practice. An excellent guide to a comprehensive overhaul of an organization's marketing strategy

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Product Details

  • ISBN-13: 9780029072110
  • Publisher: Free Press
  • Publication date: 9/28/1990
  • Pages: 405
  • Product dimensions: 6.52 (w) x 9.57 (h) x 1.28 (d)

Meet the Author

George S. Day holds the Geoffrey T. Boisi Professorship in the Department of Marketing and is Director of the Huntsman Center for Global Competition and Innovation at the Wharton School of the University of Pennsylvania. Professor Day has written more than 125 articles for leading marketing and management journals and fourteen books including The Market Driven Organization, the companion volume to this book. A consultant to leading corporations worldwide. Day is the recipient of the Charles Coolidge Parlin Award for his leadership in the field of marketing and the Paul D. Converse Award for outstanding contributions to the development of the science of marketing. He lives in Bryn Mawr, Pennsylvania.

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Read an Excerpt

Introduction

This book was written a decade ago in the belief that sound business strategies had to be based on a deep understanding of customer requirements and their anticipated behavior, and the capabilities and intentions of competitors. My approach was also guided by the premise that the process of making strategy mattered more than the plan that eventually emerged. Today, there are many more companies acting on these premises and devising new ways to gain advantage with superior customer value.

While technology and the business environment have changed, Market Driven Strategy continues to offer a comprehensive and productive framework for developing a deeper market perspective. The continued popularity of this book is an indication that it still has much to offer managers. I have been pleased to see that after a decade the senior executives I work with at Wharton and around the world still find the tools and frameworks are useful for guiding their strategy development process.

As managers seek to gain the benefits of market-driven strategies, they soon encounter limitations imposed by their organizations. They find they have to rethink the culture, capabilities, and configurations of their firms. The companion volume to this work published this year, The Market Driven Organization: Understanding Attracting, and Keeping Valuable Customers, addresses the challenges of creating organizations that support market-driven strategies and fully utilize new information technology and emerging organizational structures. This is the next important step in the process of becoming market-driven, building on the foundation established by this earlier work.

The publication of this companion volume is an opportune time to reflect on the distinctive features of this first book in strategy.

Each component of the title — Market Driven Strategy — and the subtitle — Processes for Creating Value — describes an element of the overall approach. In combination they articulate what it takes for a business to successfully steer through market turbulence and shape the competitive game to its advantage.

MARKET-DRIVEN

Being market-driven is the theme that did most to set this book apart. It had long been an article of faith that successful businesses were driven to be responsive to market requirements and anticipate changing market conditions. They were not product-driven or sales-driven — instead their beliefs, values, and behaviors emphasized getting close to their customers and staying ahead of competitors. What was lacking was practical guidance on how to implement this theory, which was the gap this book began to fill.

Curiously, there is still some misunderstanding about what it means to be market-driven. One school of thought argues it is better to be market-driving than market-driven. Rather than giving customers what they say they want, firms should be creating markets — even ones that were never envisaged by customers. This is a distinction without a difference. The real gains from being market-driven come from anticipating opportunities and getting to them ahead of rivals. Another point of confusion equates being market-driven with a customer focus. While a customer focus is an essential condition, it is not a sufficient guide to action. The only way a business can succeed is to deliver superior customer value, and that requires an intense emphasis on the competitors who set the performance standard. Being customer-focused sometimes metastasizes into a compulsion, where customers are given everything they want. Then firms complain that, when they tried to be responsive to their customers, their profits suffered and resources were deflected from developing the next generation of technology. But every customer is not equally valuable, nor does every need demand equal attention. Instead, market-driven firms achieve superior profits by selectively nurturing the customers with the highest profit potential.

STRATEGY

This is the foundation of the book. A sound strategy is a directional statement — not a fixed location — that describes the array of choices a firm makes to deliver a particular value proposition to a target group of customers. It includes the distinctive configuration of activities, processes, and investments that the firm deploys to gain a competitive advantage. Everyone in the organization contributes to the strategy, which makes it difficult to condense a strategy into a few snappy shorthand phrases.

There are a myriad of choices for any business to make. This book dealt with the four that collectively determine the market strategy. These became known as the "4A's," which is a tribute to their alliterative appeal. They are: arena, the choice of markets to serve and segments to target; advantage, which uses superior customer value as the litmus test; access via distribution and communication channels; and activities that determine the scale and scope. There was a fifth "A" that tended to get overlooked, but signaled the need to adapt the other four A's to impending threats and emerging opportunities.

Most of the attention was given to how advantage was gained. Clarity of thinking demanded distinguishing between sources (how were the advantages gained), the positions (based on superior customer value or lowest delivered cost), and performance (the rewards of superior customer satisfaction, loyalty, profit, and share). This proved to be a rich framework for understanding strategies because it captured the difference between the sources of advantage that could be influenced by managerial action — assets, capabilities, and controls — and the consequences in the market. It also nearly disposed of the lingering controversy over gaining market share as a strategy. It isn't! Instead, market share is something that has to be earned, and is simply one outcome of a successful strategy.

In my mind, strategy was and still is a holistic concept. Nonetheless, the last decade has seen persistent efforts within the strategy field to decompose strategy into the external factors which comprise the positional advantage and internal factors such as core competencies, distinctive capabilities, or critical resources. Those who make these distinctions do so in order to support an argument that what really defines a firm is its superior capabilities, and go on to proclaim the value of reengineering, total quality management, time-based competition, and other worthy initiatives. In practice it is hazardous to concentrate only on internal resources while ignoring the competitive position, for the resources of the firm only gain value if they distinguish a firm favorably in a served market. They have no intrinsic value in and of themselves.

PROCESSES

Here we enter the domain of the subtitle: Processes for Creating Value. Perhaps because this part of the book was subordinated in the title, it did not get the recognition I had hoped. The role of planning processes in the book is a case in point.

At the time this book was written, few companies felt they were getting much value from their planning processes. Some would argue that not much has changed even now. Too often planning was a bureaucratic exercise, following a fixed schedule and devoid of creativity. Managers had good reason to believe that their five-year plan was only a thinly disguised prelude to the annual budget.

Accepted practice implied a linear progression of activities, from mission or vision to objectives, and then to the strategy for achieving the objectives, concluding with the tactics to implement the strategy. This sequence clashed with the reality I found as a facilitator of planning sessions in several dozen companies. The actual process of strategy making was messy, iterative, independent of the calendar, and driven as much from the bottom-up as the top-down. The healthiest processes were team-based with a robust dialogue about the fundamentals of the business, with top-down intentions and resources meshing with bottom-up insights about market opportunities. From this experience, and my observations of best practice companies, I evolved the concept of adaptive planning, with the following features:

* The integrating theme is the creation of competitive advantage. The objectives of growth, market share, and shareholder value creation were treated as constraints to be satisfied.

* Issues are the main currency of the strategy dialogue. They are a useful device for concentrating the plethora of forces, problems, opportunities, and uncertainties into manageable chunks. In this form they are focal points for decision making.

* Strategy making requires the creative development and evaluation of multiple alternatives. If the job of management is to make the best choices possible, then to choose we must have choices; so the planning team must generate two to three viable alternatives. The job of top management is to challenge the planning team to stretch their efforts beyond what can be easily reached and then give them the resources they need.

* The planning cycle starts whenever there is a need, perhaps because the strategy lacks clarity, performance is unsatisfactory, or key assumptions have been proven wrong.

Firms that plan adaptively have an uncanny ability to learn from experience and to seize opportunities ahead of rivals. They apply clear-eyed insights into the market and their own capabilities when they make strategic choices. This is a planning approach that is well suited to market-driven organizations.

After another decade of experience with adaptive planning, I remain comfortable with the base principles and premises. My discomfort is with two persistent problems that bedevil all efforts to use the planning process to guide the allocation of resources. One is the tendency of managers to overstate the rewards from the strategy they are advocating — perhaps because of optimism, games-playing, or an inability to anticipate competitive actions and counteractions. A partial antidote is a vigorous strategy review that challenges the underlying assumptions in the forecasts. The second problem is an inability to cope with high levels of uncertainty. Sometimes there are so many complex interactions among multiple dimensions of uncertainty that the environment is almost impossible to comprehend. This is what companies face when coming to grips with emerging technologies like gene therapy or intelligent sensors. Managers are pushed to understate the level of uncertainty to make a persuasive case for their strategy. New approaches to strategy making that recognize the need to retain flexibility in the face of uncertainty are needed.

CREATING VALUE

This was a play on words that was intended to signal two arguments. First, that without superior customer value, a firm could not deliver superior shareholder returns. Second, that despite profound differences in approach, variables, and measures, strategy analysis and shareholder value analysis were complementary. Ten years later the two approaches to strategy making are still not reconciled, and if anything there is a growing tension.

Shareholder value analysis (SVA) is widely accepted as the best way for firms to keep score. By holding managers accountable for the cost of the capital consumed by their strategy proposal, the shareholders' interests are kept front and center. As a methodology it is best suited to squeezing returns out of established businesses. The critics argue that it doesn't help managers create strategic breakthroughs that exploit new opportunities. Worse, it is argued, SVA encourages short-teem strategic fixes such as cutting costs or shedding assets. The proponents of SVA reply that short-termism is not an intrinsic flaw, but there has to be a realignment of the incentives toward long-run returns to avoid the problem. No doubt the marriage of modern financial theory and strategic planning will continue because both represent valid approaches, to managing for the future. As always it will take judgment and recognition of the pitfalls to ensure sound choices are made.

A RETROSPECTIVE-APPRAISAL

This opportunity to reissue the book prompted two questions: What are the reasons for the book's continued acceptance, and what would I change if I were writing the book now? With a caveat that these are difficult for an author to address objectively, let me offer some opinions.

The main reason for the book's acceptance is surely that the issues have not changed. The frameworks and concepts presented in the book remain valuable handrails for managers trying to chart a strategic direction and build their organizational capabilities. Managers still struggle to keep their organizations aligned with volatile markets. If anything, it has become more difficult to be market-driven because competitors keep raising the standards of performance. New technologies, especially the Internet, are reshaping the landscape of most markets — by reducing friction, expanding buyer power, and introducing new competitors and strategies that were only dreamed about a decade ago. Yet the underlying rules of competition haven't changed, and firms will only prevail over rivals by delivering superior customer value. While markets-fragment and mass-customization offers the promise of offerings tailored to segments of one or a few, the platform concepts of market segmentation, channel functions, and choice of value proposition remain valid but in need of significant adaptation. Shareholder value is still the best metric for comparing strategies, but the tough questions to be used to probe the assumptions underlying the financial forecast are even more important to assure the inputs are valid.

The Evolution of Strategic Thinking. The book also benefited from good timing. A compressed history of thinking about competitive strategies would show three phases of development, with this book a precursor of the latest phase.

In phase one, the focus was largely on the outcomes of strategy. Much was made of portfolio models that prescribed market share strategies based on market attractiveness and business strength including the infamous BCG share-growth matrix. Toward the end of this phase, industry structure analysis became influential through Michael Porter's explication of the "five forces" of competition. The emphasis of. this framework was on uncovering differences among industries and helping businesses find attractive positions within the industry that minimize direct rivalry.

The second phase shifted attention to creating positional advantages within the industry to achieve lower delivered costs or superior customer value. This phase peaked in the mid-to-late eighties and focused attention on the dimensions of advantage, such as quality, channel relations, and time-to-market.

By the late eighties, a third phase had emerged as the emphasis shifted from outside to inside the firm. In effect, strategic thinkers were working back along the food chain to unravel the sources of the advantages that were achieved. This was a belated recognition that positional superiority was derived from relative superiority in the skills, assets, collective learning, and prevailing values and culture that are embedded in the firm, and the ability of management to mobilize these resources.

Of course, strategic thinking keeps progressing. Early in phase three there was much enthusiasm for the emerging concepts of core competencies, competing on capabilities, and reengineering core processes. This fit nicely with the emphasis of the early nineties on delayering and restructuring since they required reconceiving a business as a collection of linked processes. This phase ran its course as reengineering became synonymous with cost cutting and downsizing. The strategic priorities shifted to achieving growth- and renewal, while delivering superior shareholder value. An important vehicle for achieving these ends was a disciplined focus on delivering superior customer value and not trying to be all things to all customers. Meanwhile, marketing scholars were exploring the antecedents and consequences of a market orientation to uncover the role of culture, structure, incentives, human resource policies, and leadership. This work persuasively validated the long-standing belief that a market orientation was an important source of advantage and also enhanced business performance.

In light of these advances, what would I do differently if I were writing the book now? A number of new insights have emerged since the book's publication, many of which are addressed by The Market Driven Organization. Heading the list would be an expansion of the meaning of process to embrace the concept of a business as a collection of linked processes, with the distinctive capabilities being exercised through these processes. This has profound implications for how organizations are designed and advantage is gained and sustained.

This process perspective has shaped my own thinking about how organizations can better align themselves with their markets. An evolving hybrid firm has Proven. capable of maintaining deep functional specialization within a horizontal structure based on multifunctional teams. These market-driven organizations also excel at market sensing and market relating, which are two capabilities embedded in their processes.

Another area where learning has been pushed further is the respective roles of customer satisfaction versus loyalty or retention. The awkward reality is that 60 to 80 percent of customer defectors said they were "satisfied" or "very satisfied" on the last survey prior to defection. When combined with the superior profitability of loyal customers, there are profound implications for appropriate strategies and objectives. Similarly, recent research has challenged the usefulness of the distinction between the generic strategies of lowest delivered cost or differentiation. The presumed trade-off does not always have to be made, and the two strategies are not talking about the same things. A differentiation strategy is framed in external customer terms, while cost strategies are framed relative to competitors and do not offer a direct inducement to customers. What is needed is a richer palette of customer value strategies that highlights the need to serve different customers with different models (e.g., make-and-sell versus sense-and-respond).

Finally, all markets are being reshaped by the increased pace of value migration between business models, the fragmentation of markets, and the disruptive potential of the Internet and electronic commerce. Nowhere are these changes more evident than in distribution channels where distributors and retailers are being disintermediated — and communication-channels where broadcasting is giving way to one-to-one communications with molecular markets.

Despite these forces for change, the concepts and frameworks for making market-driven strategies continue to offer a solid system for navigating through the turbulence.

Market Driven Strategy was written at a different time but addresses enduring issues. It was built on a body of cumulative knowledge contributed by many practitioners whose trial-and-error experiments-expanded the envelope of feasible practice, and scholars who learned from these experiments and extracted generalizable insights. In this way, knowledge keeps progressing. This book is now part of the basic platform of knowledge about strategy, which is being continually refreshed and expanded.

George S. Day

Bryn Mawr, PA

March 1999

Copyright © 1990 by George S. Day

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Table of Contents

Contents

Introduction

Preface

PART ONE

Strategic Choices in Competitive Markets

1. Managing in Turbulent Markets

* Choices and Challenges in Turbulent Markets

* Successful Market Management

* When Strategy Matters

2. Strategies for Competing

* Business Definition

* Strategic Thrust

* Performance Objectives

* Attributes of a Sound Strategy

* The Payoff from a Sound Strategy

PART TWO

Processes for Developing Market-Driven Strategies

3. Making Strategic Decisions

* Approaches to Strategy Development

* Adaptive Planning: Integrating the Approaches

* Plans That Can Be Implemented

4. Adaptive Planning

* Situation Assessment

* Real-Time Issues Management

* Negotiating Objectives and Resources

* Completing the Planning Process

PART THREE

Assessing the Competitive Position

5. Understanding Competitive Markets: Their Structure and Attractiveness

* Defining the Market

* Finding Attractive Segments

* Market Attractiveness

* Choosing the Market Arena and Target Segment

6. Assessing Advantages

* The Concept of Competitive Advantage

* Customer-Oriented Assessments

* Competitor-Centered Assessments

* Integrated Assessments of Competitive Advantage

PART FOUR

Choosing Arenas and Advantages

7. Deciding How to Compete

* Strategies for Competing

* Strategies for Enhancing Customer Value

* Cost Competitive Strategies

* Changing the Competitive Strategy

8. Deciding Where to Compete: Focusing and Sustaining the Advantage

* Segmentation Focus Strategies

* Choosing the Scope of Market Coverage

* Sustaining the Advantage

* Defending the Advantage

* Lessons for Strategy

9. Gaining Access to Markets

* Channel Design Decisions

* The Turbulent Channel Environment

* Developing a Channel strategy

* Navigating the Turbulent Channel Environment

10. Responding to Global Markets

* Assessing the Extent of Globalization

* Choosing Strategies for Competing Globally

* Deciding How to Participate

* Implementing Global Strategies

* Meeting the Global Challenge

PART FIVE

Renewing the Strategy

11. Charting New Directions: Conditions for Successful Renewal
par

* Staying Close to the Market

* Setting the Strategic Direction

* Sticking to the Knitting

* Innovating under Time Pressure

* Ensuring Organizational Support

* The Conditions for Success

12. Setting the Growth Direction

* Growth Objectives

* Strategic Purpose

* Growth Path

* Method of Participation

* Toward a Strategic Guidance System

PART SIX

Issues in Implementing Market-Driven Strategies

13. Choosing Market Strategies

* The Process of Valuing Market Strategies

* Why Value Analysis Is Not Strategy Analysis

* Misleading Signals from Value Analysis

* Finding a Role for Value Analysis

14. Building a Market-Driven Organization: The Key to Competing Effectively

* Perspectives on Market-Driven Organizations

* Becoming Market-Driven

* Toward Market-Driven Strategies

Notes

Index

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First Chapter

Chapter 1: Managing in Turbulent Markets

There is no resting place for an enterprise in a competitive society.
Alfred Sloan, Jr.

Unless we change our direction we are likely to end up where we are headed.
Ancient Chinese Wisdom

Benetton and Sears, Roebuck both compete for a piece of the retail apparel market. Otherwise there are few similarities. The differences between these two firms are more interesting for they illustrate the richness and complexity of competitive strategies, as well as the adverse consequences for performance when a strategy drifts out of touch with the market. Their stories are also apt metaphors for some of the forces that will be sweeping the markets of the 1990s.

Sears is a classic example of what happens when a firm becomes complacent in its market. Until 1986 Sears was the dominant retailer in the United States, before being challenged by K-Mart and Wal-Mart. By 1989 it was struggling to reverse a decade-long decline in its share of general merchandise sales from 18 percent to 13 percent, overcome bloated selling and administrative costs of 30 percent of sales, and raise pretax margins from 3.7 percent to a level closer to the 7 percent of their competitors.

The problems with apparel were symptomatic of Sears's difficulties. The traditional key success factors in this department were quality of presentation and assortment. Both were major problems to manage because of the number of stores and diversity of product lines in each store. Many suppliers of branded apparel didn't like Sears's sloppy presentation or considered a mass market outlet inappropriate. Changes to overcome these problems proved difficult to make. One proposal was to create "neighborhood stores" that would sell only apparel and home furnishings. However, the executives representing "hard goods" such as appliances, electronics, and automotive products argued they shouldn't be left out of the stores, and killed the proposal.

Despite Sears's problems, its standing with consumers remained strong. Consistently it was picked as a company associated with high quality, and 75 percent of Americans visited a Sears store at least once a year. Unfortunately, this reservoir of goodwill was being dissipated by a ponderous and noncompetitive culture, antiquated systems, and excessive in-fighting. Customers were being siphoned off by trendier specialty retailers, such as The Gap or The Limited, or superdiscounters such as Circuit City or Toys R Us who dominated specific merchandise types.

Benetton was anything but complacent. In just 10 years this Italian-based fashion retailer opened 5,000 shops in 79 countries. Each shop offered brightly colored sportswear with a distinctive flair, presented in basic color and design configurations, with lots of excitement and ever-changing variety.

The contrasts with Sears were telling; Benetton was focused, global. It competed with a distinct strategy that provided a stable platform for managing in a turbulent fashion market where life cycles were often less than a season. Not surprisingly, their net profit margins were also three times those of Sears.

The most noticeable difference was their "customer draw" system that electronically tied the 5,000 stores directly to their factories -- so closely that turnaround from order to delivery was only two to six weeks. Store managers didn't have to guess in advance what to order, they could monitor what was selling and reorder the "hot" items. The highly automated factories produced only to order. If a new style or fabric emerged unexpectedly, a sophisticated computer-aided design (CAD) system could compress the time from design to production of a full range of sizes and colors. Not only had they broken the traditional constraints of time with this system, they were also able to avoid being penalized by costs that typically rise with increasing variety. This gave them a distinct competitive advantage.

While it is tempting to dismiss Sears as a dinosaur, ill-equipped to match fleet-footed competitors in fast-changing global markets, and celebrate Benetton as a prototype of innovative winners in the future, that would be terribly misleading. Their respective positions reflect past strategic choices and intentions, but their future performance hinges on how well they adapt to the future environment. If Sears management can shake loose from their bad habits, they have enormous strengths to exploit. Conversely Benetton must keep innovating or be surpassed by eager emulators. Their futures are very much in their hands, depending on the wisdom and commitment their management brings to the critical choices any business must make to successfully manage its markets. This chapter introduces the strategic choices that collectively determine whether the rules of their competitive game are defined to their advantage and not preempted by their rivals. The rest of the book is about how to make these choices.

CHOICES AND CHALLENGES IN TURBULENT MARKETS

A competitive strategy specifies how a business intends to compete in the markets it chooses to serve. This strategy provides a conceptual glue that gives shared meaning to all the separate functional activities and programs. Effective strategies are straightforward in their intent and direction. Too much subtlety and complexity, and the essential ingredients won't be consistently understood or acted upon by the organization. This is damaging to performance in the market because it sends erratic and confusing signals to customers.

Strategies are directional statements, rather than detailed step-by-step plans of action. The direction is set by four choices:

Arena: the markets to serve and customer segments to target
Advantage: the positioning theme that differentiates the business from competitors
Access: the communication and distribution channels used to reach the market
Activities: the appropriate scale and scope of activities to be performed

These choices are highly interdependent -- change one and all the other elements of the strategy have to be changed. The result of these choices is an integrated pattern that collectively specifies the strategy in Figure 1-2.

A fifth and final set of choices deals with the adaptation of the strategy to impending threats and emerging opportunities. Winning strategies don't change every year or at the whim of new management, because if they did the customers and the organization would soon become confused. This doesn't mean a sound strategy can be static, for that would stifle innovation and lead to stagnation. Successful adaptation requires a clear sense of the growth direction to pursue that will best capitalize on the competencies of the business.

The choice of the best direction depends on making sense of a myriad of events, trends, and cross-currents, and placing bets on how the environment will unfold. If the bets are wrong, and the business can't change course quickly, the penalty is below par performance and foreclosure from future opportunities. Each of the critical strategic choices will be more difficult in the future because of the challenges posed by an accelerating rate of change and competition of unprecedented intensity.

ARENA: CHOOSING MARKETS AND TARGET SEGMENTS

As soon as the market arena is chosen management loses many of their degrees of freedom. This single choice largely dictates the customers to be served, the rivals to surpass, and the key success factors (KSFs) they must master. These KSFs are the functions and activities that must be managed well for the business to outperform the rivals. Conversely if these are done badly then failure is almost assured. Each market has a distinctive profile of KSFs, shaped by the attributes of the market. In mature industrial markets, for example, the defining attributes are technology -- whether it is small or large batch or continuous processing -- and transaction complexity, which reflects the frequency of purchase, risk of failure, and size of the decision-making unit.

Despite the importance of choosing target segments, this is often done by default; a failing attributable to the misguided logic that says that since we make hydraulic hoses, semiconductors, or frozen food, we serve all the customers for these products. Serving every segment with a common strategy is seldom the best choice. Alternatively, the business may serve the broad market with distinct, tailored strategies for each segment, or limit coverage to a single segment to the exclusion of the others. The merits of these coverage alternatives will be dealt with further in Chapter 8.

Challenges. Firms are reconsidering their choice of market arena under pressure from three trends that cannot be ignored.

First, there is increasing market fragmentation. New segments with distinct needs and requirements are emerging and being served by specialist competitors with tailored offerings. In markets from soup to cars, sweeping demographic and life-style changes are rendering mass marketing obsolete and eroding brand loyalties. This trend breeds product diversity that encourages further fragmentation. The automobile market, for example, is rapidly becoming a collection of niche markets in which customers can personalize their choice with specific models, designs, and features, rather than take a standard design and add accessories and options.

Second, traditional market boundaries are blurring as a result of a barrage of substitutes that result from new technologies. Today there are auto springs from plastic, telephone lines of glass with awesome channel capacity, engines made of ceramics that promise to run efficiently at high temperatures, minerals mined by microbes, and holes being drilled cheaply and accurately by pinpoint, high-pressure jets of water. Worse, these changing market structures usually bring new competitors. To name a few: telecommunication companies have entered the computer industry and vice versa; more management and technical education is done within companies than by universities and some of these companies grant academic degrees; and some churches own television stations.

The third and most compelling market-shaping trend is the transformation of previously self-contained national markets into linked global markets. Many forces underlie this trend: increasing homogenization of buying patterns for products from sweaters to audio-disc players; the challenge from global competitors who gain scale or skill advantages from coordinated country strategies; the emerging economic prowess of the Pacific Rim countries; the upheavals triggered by Europe 1992 and the opening of the Communist block of countries; and technology change that makes it feasible to coordinate far-flung operations and easily communicate with customers across national boundaries.

The challenge for management is to find the right balance of global reach and standardization of activities, versus local adaptation. For example, Nabisco is unlikely to launch their Grey Poupon family of Dijon mustards, which leads the premium segment in the United States, into other markets where tastes may differ or competitors are already solidly entrenched. Their challenge is to use the skills and scale gained in the U.S. market to develop products suited to the unique needs of other markets. This is such an important issue that Chapter 10 will be devoted entirely to managing globally.

ADVANTAGE: POSITIONING FOR COMPETITIVE SUPERIORITY

When a new management team inherits or acquires a business, the market arena has already been chosen for them by the actions and commitments of their predecessors. Initially their emphasis has to be on strengthening their competitive advantages within that arena. This involves achieving demonstrably superior performance on attributes that are important to the target customers at a competitive cost. Points of superiority that cost more than the customer is willing to pay are a profit sink that can't be endured for long.

The essence of competitive advantage is a positioning theme that sets a business apart from its rivals in ways that are meaningful to the target customers. The most successful themes are built on some combination of three thrusts: better (through superior quality or service), faster (by being able to sense and satisfy shifting customer requirements faster than competitors), and closer (with the creation of durable relationships). The task for management is to simultaneously find a compelling theme and ensure continuing superiority in the skills, resources, and controls that will be the source of this advantage over target competitors. This issue is so central that Chapters 5 and 6 are devoted to the process of finding and achieving a position of advantage.

Successful businesses can't afford to stop and celebrate their current advantages. They have to be paranoid about competitors and move aggressively to defend their position. As important as a strong defense might be, it can only delay the inevitable erosion. This means continuously innovating to build new sources of advantage before rivals overtake. Thus Kodak reasserted itself in the film market by introducing its best film ever, Ektar, just two years after introducing another world-class product, Kodacolor Gold film. Kodak management has pledged to keep making these improvements ahead of their arch-rival Fuji.

Challenges. During the eighties it became increasingly difficult for firms to be complacent about the durability of their advantages. By one estimate 70 percent of all product innovations were matched within a year. Process knowledge was easier to protect, but 60 to 90 percent eventually diffused to competitors. Price and advertising moves could be readily matched because they are so visible.

The trends that have quickened the rate of erosion of advantages will continue to intensify. Overshadowing everything is the compression of product life cycles which puts a premium on getting to market first, or imitating quickly to avoid missing a short-lived profit window. This trend can be appreciated only by looking back to markets like refrigerators that took 30 years to fully mature, and comparing them to the market for microwaves that took only 10 years to get to the same place, or compact disc players that matured in three years.

Further pressure on advantages will come from supply gluts. Markets as diverse as commodity petrochemicals, automobiles, and electronics presently suffer chronic global overcapacity of 15 to 40 percent. Why?

* There are too many firms competing. Besides traditionally established firms there are new players from other geographic areas, including the newly industrialized countries, and others that are subsidized by their host government.

* Customers may back integrate by making their requirements rather than buying them. This first reduces the volume of market demand relative to supply. Then these customers may sell their excess capacity in competition with their one-time supplier.

* All firms are increasingly productive as technology improvements diffuse rapidly. The ubiquity of the experience curve is evidence of the extent of productivity improvements.

* Because of significant legal, physical, technological, and financial barriers that block their exit, not enough firms are leaving.

Customer bargaining power also works to narrow the differences between competitors -- or at least, to erase the possibility of capturing superior profits for long periods. This is particularly evident in industrial markets, where large customers are bent on eliminating all but a few of their suppliers by raising the acceptable quality and performance requirements even as they demand price concessions.

ACCESS: SELECTING CHANNELS TO REACH THE ARENA

Until recently, channels were not seen as a matter of strategic choice -- they were a fact of life that came with the market. A propensity for inertia was reinforced by a perceived absence of good alternatives, and the justified fear of the conflicts that would be unleashed by any changes.

A great deal of attention has been devoted to managing the channel to keep costs in line, motivating the sales force to improve their productivity, and instituting tighter controls over key channel relationships. But basic choices over the form of the channel have seldom been confronted by most firms; they have elected to go directly to their markets with their own sales force if tight control was essential, or opted for intermediaries such as distributors when they could benefit from their superior efficiency and coverage. Seldom was there any debate, for example, over whether to appoint only an exclusive handful of dealers versus pushing for intensive distribution. These issues were not viewed as important, as they were largely ordained by the characteristics of the product or service.

This view of channels obscures the contribution the choice of a channel makes to the firm's competitive advantage. In most markets, distribution strength (coverage, cost, and closeness of relationships) plays a distinct role in reinforcing superior product performance and maintaining a strong position in end-user markets. Industrial firms in particular cannot maintain market leadership without having a strong distribution system. This applies equally to consumer goods firms, as Procter & Gamble found in the soft drink market. After nine frustrating years in which the U.S. market share of their subsidiary Crush International declined from 1.3 to 0.8 percent in 1989, they finally gave up and sold the brand. They were crippled by not being able to get adequate access to the local bottlers who buy concentrate from the marketers, such as Coke and Pepsi, and then bottle the product and stock the shelves. The overwhelming presence of the two soft drink giants eventually forced P&G to try an alternative store-to-warehouse distribution system. This move not only cut them out of nongrocery store outlets -- such as vending machines -- but so angered their remaining bottlers that they retaliated.

Challenges. Passive acceptance of existing channel arrangements will be increasingly risky for a number of reasons. Companies in all markets are facing greatly increased direct sales costs with little evidence of improved productivity to offset these costs. Meanwhile, customer demands for closer relationships and information technologies that permit direct order-entry links and rapid information flows from buyer to seller and back are forcing companies to reconsider traditional channels.

Companies that use intermediaries are encountering an unwelcome shift in the balance of power. In consumer markets, the retail trade is forcing major concessions on their national brand suppliers. The pressure for trade allowances, deals, and discounts has substantially reduced the funds available for franchise-building advertising. Many industrial markets are seeing rapid concentration among previously fragmented distributors, who bring unprecedented purchasing power, sophistication, and new forms of value-adding services to their dialogue with their suppliers. In response there is an increasing tendency for firms to create hybrid arrangements, and use a variety of channels to reach distinct segments. This escalation in the complexity and scale of channel arrangements has certainly raised the strategic visibility of this area. In recognition of this trend, Chapter 9 is devoted to the choice and management of the appropriate channel.

ACTIVITIES: CHOOSING THE APPROPRIATE SCALE AND SCOPE

The next set of strategic choices is the selection of the strategically central and distinct activities to be performed to convert inputs into outputs that customers will value. Among the potential activities are purchasing, manufacturing or processing, design, sales, distribution, and service. When these activities are assembled together, with the necessary organizational structures, controls, and technology linkages, they establish the value chain for the business.

Few businesses choose to be fully "integrated," that is, to carry out all possible activities starting with raw materials and culminating in a finished product sold and delivered to the end user. Instead, their value chain is limited to only those activities that have to be done very well in order to achieve a competitive advantage -- the key success factors. Surrounding this value chain is a set of value chains that links suppliers at one end to the channels and end-users at the other end.

Challenges. Until recently the choice of appropriate scale and scope was guided by two rules of thumb: bigger is better, and keep as many activities as possible under one roof to maintain control. Adherence to these beliefs led to big companies characterized by sprawling plants, extensive vertical integration, a continuous striving for economies of scale, hierarchical and functional organizations, and mass marketing with a strong volume orientation.

A wrenching era of global competition, resulting in restructuring and cost control to generate cash flow, and market share losses to more agile, entrepreneurial specialists, is changing the rules. Today, large corporations are behaving as though the old organization structures are obsolete. The benefits of specialization, scale, and the control they promised have been nullified by inefficiencies and lack of flexibility. Meanwhile, the imaginative use of information technologies is overcoming the control problem. A company that once might have acquired a key supplier to get more control over component quality may now feel it can do better simply by tracking the supplier's performance by computer. Increasingly, large companies are trying to create autonomous, small, entrepreneurial units to find responsive solutions to customer problems in well-defined market niches. Long-term advantages are sustained by simultaneously investing heavily in core competencies, such as microprocessor controls or digital imaging, that are common to families of business units. Other activities, such as public relations or managing the computer system that are not central to the strategy are increasingly farmed out to independent contractors.

Structures are also changing to accommodate long-term alliances that come in many guises: joint ventures for co-development of technology or entering new markets, supply and service agreements, and sundry licensing agreements. Even IBM, which once felt strong enough to go it alone, had arranged more than 40 active alliances by 1990, including several major partnerships with Japanese firms. They created links with Ricoh in the distribution of low-end computers, with Nippon Steel in systems integration, and NTT in value-added networks.

The move to alliances reminds us that the same forces are often working on several strategic choices at the same time. Globalization has already presented a challenge to thinking about the choice of arena and the directions for growth. But this force puts equally insistent pressure on the need to form alliances. Their appeal lies in the way they help defray the immense fixed costs that must be borne because of the broadened market base. Few companies can afford the costs of building and maintaining a brand name, while investing in automated factories, distribution networks, and communications networks to serve a global market at a pace that will keep them ahead of their rivals. But alliances are only one of a number of means to this end. The essence of strategy is knowing which choices to make, and then making sure they happen.

ADAPTATION AND RENEWAL: GROWTH DIRECTIONS TO PURSUE

Sooner or later all market arenas lose their luster, as sales growth stagnates, profit margins are squeezed, and competition intensifies. Management can't wait until this has happened before taking action, for then they will surely be too late to capitalize on emerging market opportunities. Delay means attractive positions will already be staked out by competitors, and the best opportunities for alliances and acquisitions are likely to have been preempted.

Vigilant companies constantly seek new opportunities in related markets, products, and services, where their distinctive competencies can be effectively utilized. When senior management is committed to finding new sources of growth, the rest of the organization is energized to innovate and propose new directions with some confidence they will be heeded. However, unmanaged growth can be just as dangerous as complacency and inertia, if it leads the business into diverse markets that management doesn't understand, where the available competencies can't be used, and unanticipated competitors are better situated. Such unproductive directions distract management and diffuse their scarce resources. Thus, the choices of where to look for new opportunities, and how aggressively to move, have to be made very carefully. These choices are specified by a growth strategy that gets major attention in Chapters 11 and 12. This growth strategy specifies the growth paths worth pursuing, the purpose of new products and markets, the size of the risks to be taken, and the alternative entry strategies to be used to reduce the risks of internal development.

Challenges. Managers will find that charting new directions for their business will be increasingly difficult. Each market has its own sources of uncertainty and opportunity -- but few will be exempt from the three megaforces of demographic and life-style changes, technology change, and environmental concerns.

At the heart of demographic and life-style changes are population aging, and seemingly insatiable demands for convenience and service. By the year 2000, the baby boom generation will be 36 to 54 years old, and their households include more than half the U.S. population. Japan and Germany will have even older populations, all with tastes that will be difficult for youth-oriented firms to satisfy. Whole new markets are being created to satisfy the fastest growing of all demographic groups that is over 85 years old.

Technological change will be the main impetus behind new market opportunities. The possibilities range from so-call "super" technologies such as superconductors, fusion power, and robotics, to "appropriate" technologies including micro refineries and photovoltaics, "bio" technologies that promise designer genes, and "information" technologies that are being created by advanced generations of lightning-fast microprocessors coupled to modern computer networks.

The least predictable influence on new market directions is environmentalism. Escalating concerns about acid rain, ozone depletion, water quality, and waste disposal foreshadow the future. The global plastics and petrochemical industry is one of the most likely to bear the brunt of these concerns. West German chemical companies are already devoting about half of their capital spending to the environment and safety. While few industries will be as exposed as this, it is also unlikely that many will entirely escape the growing social and political forces at work to deal with the public consequences of private consumption.

SUCCESSFUL MARKET MANAGEMENT

There are three kinds of companies: those that make things happen, those who watch things happen, and the rest who wonder what happened.
Anonymous

Strategic choices have wide-ranging ripple effects through the organization. They determine the key success factors, dictate the programs and projects to initiate and continue, define the skills and resources to mobilize or acquire, and shape expectations for profit and growth performance. In short, they give meaning and direction to the myriad activities of the business. Yet without effective implementation the clearest strategic thinking will be for nought -- mired in functional conflicts, ill-conceived programs, budget overruns, missed schedules, and poor follow-through. The penalties are loss of confidence, missed opportunities, diminished capabilities, and poor performance.

While strategy guides implementation, it is equally true that implementation has a steering effect on the strategic choices. No strategy is so prescient that it can anticipate all eventualities and opportunities. Instead, there must be enough latitude to permit wide-ranging adaptation and learning at the operating level where the changing market reality is continually encountered. These bottom-up experiments, initiatives, and adjustments, continuously made by informal problem-solving groups and ad hoc task forces, go a long way toward deciding the future strategic choices. As we'll see in Chapter 3, these inputs are a crucial ingredient to a robust planning process.

Some firms are consistently better at managing the process, making the right strategic choices, and ensuring superior execution. They can be contrasted with their lagging peers along two critical dimensions -- each of which will be woven throughout the succeeding chapters. Winners are:

* guided by a shared strategic vision,

* driven to be responsive to market requirements and continuously strive to satisfy their customers.

THE ROLE OF STRATEGIC VISION

A vision is a guiding theme that articulates the nature of the business and its intentions for the future. These intentions are based on how management collectively believes the environment will unfold, and what the business can and should become in the future. Visions are not vague expressions of goodwill, but explicit systems about what it takes to succeed in the future.

Without a vision, and the leadership to rally others around the vision, the organization is likely to be reactive in its present arena and aimless in pursuit of new directions. One well-known strategy typology calls them "Reactors" to highlight an organizational mind-set that dwells solely on how to protect past gains. A reactor's world is full of threats, while opportunities are filtered through a haze that is like glaucoma. New directions are pursued with little relish by individual contributors responding to customer requests, new findings in the lab, or preemptive moves by competitors. Broad-based encouragement for initiatives is hard to find since the organization lacks guiding principles to help distinguish between sensible moves that might support a future direction versus tangential undertakings that dissipate effort.

While there is abundant evidence that successful businesses are guided by a meaningful vision, it is unclear whether the losers suffered because they simply lacked a vision or were following a misguided vision. To avoid being misguided, however, there are four defining characteristics of meaningful visions: they are informed, shared, competitive, and enabling.

Informed. A vision must be grounded in a solid understanding of the business, and the ability to foresee how the forces operating in the market will change in the future. Here vision is equated with insight, of the sort that distinguishes Perrier from its competitors. Perrier has become almost a generic term for mineral water, by understanding that their business was neither water nor soft drinks, but natural beverages. This may seem a subtle distinction, but it has a profound impact on how the market is approached, and was missed by some formidable competitors including Anheuser-Busch and Nestlé, who have largely abandoned the market.

Shared. Visions will motivate organizations when they are created through collaboration, with the leader serving as the articulator and sponsor of the vision that emerges from the team's collaboration. The vision must reflect the leader's view of opportunities, values, and important trade-offs. However, as one CEO put it,

Visions are more powerful when they are inspired by strong personal conviction and motivation. They are richer when they flow from an internal source that can constantly respond with different aspects of the vision as new and changing circumstances arise. And yet visions are powerless unless they are derived from and embraced by those individuals in the organization who will collectively achieve them.

If the leader's vision is not accepted, the price is likely to be high. In fact, Charles Parry, who became CEO of Alcoa in 1983, was deposed because his vision was rejected by a deep-seated, conservative company culture. For years Alcoa, the largest U.S. producer of aluminum, had suffered through boom-bust cycles in the industry. By the early eighties the combination of chronic excess capacity to produce ingots, and several state-owned competitors who were more concerned with job protection than profits, reduced profits to a break-even level. In response Parry articulated a vision of Alcoa as the preeminent producer of highly engineered alloys, using ceramics, composites, and plastics. His eventual aim was to derive 50 percent of revenues from nonaluminum markets. Unfortunately, Parry had already alienated most of his management with a series of shutdowns to cut costs and they were in no mood to fund diversification adventures with aluminum profits. Meanwhile the board, which generally endorsed the need to reduce dependency on primary aluminum, were uneasy with the 50 percent goal which had never been explicitly justified. They were further disenchanted with the logic of the acquisitions being proposed, and by 1987 withdrew their support.

Competitive. Powerful visions are also statements of intent that create an obsession with winning throughout the organization. By focusing attention on a desired leadership position, measuring progress against that achievement, and continually searching for new ways to gain competitive advantage, the actions and aspirations of the organization are given meaning.

Audacious intentions can be powerful, in light of evidence that they are often realized even when they outrun the current capabilities and resources. It is unlikely that so many Japanese firms like Honda, Matsushita, and NEC would have achieved global leadership had they been content to tailor their intentions to their resources of 10 to 15 years ago.

Aggressive intentions are most likely to be realized when the target competitor has low aspirations, and is willing to concede its leadership position under pressure. This nearly happened to Caterpillar, when they suffered global losses of shares to Komatsu who had an avowed intent of "encircling Caterpillar." By 1986 Komatsu had gained 12 percent of the U.S. market, despite starting in 1970 with revenues that were only 35 percent of Caterpillar's and mostly from the sales of small bulldozers within Japan. But unlike many of its American peers Caterpillar intended to do everything possible to protect market share. When Komatsu began underselling it by as much as 40 percent in the early 1980s the company cut prices heavily in markets around the world. Although some market share was lost, the company would have fared far worse had they not stood their ground. Their intention to maintain leadership by beating back Komatsu also benefited from the high quality of their product. By comparison with U.S. automakers, their machines had set the world standard for workmanship for decades.

Visions that merely strive to catch up to the competition and match "best" practices that are visible in the market are usually flawed and unproductive. The flaw lies in the transparency of the resulting strategic moves to competitors that have already mastered them, and are already preparing the next generation of moves that will continue to keep them ahead. Imitative moves are also unproductive because they won't create competitive advantages. This is not to say that efforts to rationalize product lines to improve global economies of scale, institute quality circles to improve quality, or follow the lead of other banks to institute "relationship" banking programs, are not worthwhile. But if all the energy of management is expended to reproduce the cost and quality advantages their competitors have already achieved, there won't be much energy left to devote to finding meaningful ways to be different.

Enabling. Visions flourish within organizations where individual managers have enough latitude to make meaningful decisions about strategies and tactics. These individuals are empowered to use the general framework articulated by the vision to decide which opportunities or threats to respond to, and which to ignore. They have confidence that they will not be second-guessed by their superiors, who realize they are unable to anticipate every twist and turn in the market environment and must delegate downwards.

MARKET-DRIVEN MANAGEMENT

Compelling visions are best nourished in market-driven organizations. While there are many views on what this means, all start with Drucker's original formulation of the marketing concept as a general management responsibility. This concept holds that, "There is only one valid definition of a business purpose: to create a satisfied customer....It is the customer who determines what the business is." While being customer-oriented is an essential condition it is not sufficient, for there has to be an equally intense emphasis on outperforming the competition. This keeps the business focused on well-defined market segments and the continual enhancement of their competitive advantages. Thus it pervades all the strategic choices made by the business.

The rewards that come from being market-driven are an integrating theme of this book. Virtually every chapter is a demonstration of why responsiveness to customers is a prerequisite to superior performance. Yet many firms continue to behave otherwise, by emphasizing internal concerns and short-term financial performance rather than long-run customer satisfaction.

Recently there has been a "rediscovery" of the marketing concept as firms wrestle with new or intensifying environmental challenges. The growing acceptance of the need to be market-driven closely parallels the evolving role of the marketing function:

* Until the mid-1950s marketing was equated with sales. The marketer's job was to convince prospects to want what the firm could most readily produce.

* The 1960s and early 1970s was the golden era of acceptance of the marketing concept as the driving philosophy for a business. Volume, production, or sales orientations toward the market were seen as less profitable than satisfying the needs of attractive customer segments with appropriately tailored products. The role of marketing was seen as persuading the firm to have what the customer wanted -- not the other way round.

* Throughout the 1970s the commitment to a customer-orientation waned, as strategic planning ascended in the favor of top management. Only retrospectively was it realized that these approaches to setting strategic direction were overweighted with top-down financial imperatives, and analyses of industry structures as guidelines to action. The main emphasis was on managing share, and allocating cash flows to conserve scarce financial resources. Even firms that had been market-driven lost their focus on the customer, and marketing was relegated to short-run tactical concerns.

An unfortunate and costly side effect of the enthusiasm for strategic planning was a deflection of attention away from customer satisfaction as the main source of long-run competitive advantage and profitability. This lapse was adroitly exploited by off-shore competitors who invested heavily to bring new products and processes to segments that had been smugly underserved by domestic competitors. Indeed, much of the economic history of the eighties was shaped by the successful global conquests of Japanese and European firms and the efforts of American firms to redress their shortcomings and become market-driven. There are many manifestations of American resurgence, including greater emphasis on customer value through quality enhancement, leaner and more flexible organizations that are closer to their markets, a search for innovative strategies to combat competitive incursions -- and ultimately the recognition that marketing is everyone's job.

SUMMARY: WHEN STRATEGY MATTERS

The need for a forward-looking competitive strategy, that specifies how a business intends to compete in its chosen markets wasn't always as pressing as it is today. When markets are stable or slowly evolving in predictable ways, and the rules of competition are accepted by all the players, it is possible to prosper with a trial-and-error approach. This puts a premium on maintaining programs and activities that seem to be working and dropping those that have stopped working. In effect, the business is reacting to events, and the strategy is only understood after the fact by looking for consistent patterns in the stream of decisions taken piecemeal through the year.

The implicit assumption of a reactive strategy is that the organization can adapt faster than the environment is changing. This was never a very good assumption, but is increasingly dangerous in light of the intensifying forces impinging on competitive markets:

* markets are fragmenting, and traditional boundaries are blurring,

* previously self-contained national markets are being transformed into linked global markets,

* competitive advantages are harder to sustain as product life cycles shorten, and global competitors contest more markets,

* supply gluts further intensify competitive pressures by giving customers more bargaining power,

* customer relationships are changing as customers reduce the number of suppliers and information technologies permit closer links,

* new market opportunities are being created from demographic and life-style changes, technological changes, and rising environmental concerns,

* old organization arrangements are suffering at the hands of more agile, entrepreneurial specialists.

Three ingredients are necessary for a business to successfully steer a strategic course through market turbulence and become proactive in shaping events and competitive behavior to its advantage. The first is a strategic vision or theme that articulates the nature of the business and focuses the energies of all parts of the organization toward the task of outperforming the competition. The second ingredient is a market orientation in which the beliefs and values that pervade the organization emphasize the need to put the customer first. Finally, a successful business needs a robust process for formulating and choosing the best strategy in light of the issues facing the business. The next three chapters deal with the design and cultivation of planning processes that will yield effective strategies.

Copyright © 1990 by George S. Day

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Introduction

Introduction This book was written a decade ago in the belief that sound business strategies had to be based on a deep understanding of customer requirements and their anticipated behavior, and the capabilities and intentions of competitors. My approach was also guided by the premise that the process of making strategy mattered more than the plan that eventually emerged. Today, there are many more companies acting on these premises and devising new ways to gain advantage with superior customer value.

While technology and the business environment have changed, Market Driven Strategy continues to offer a comprehensive and productive framework for developing a deeper market perspective. The continued popularity of this book is an indication that it still has much to offer managers. I have been pleased to see that after a decade the senior executives I work with at Wharton and around the world still find the tools and frameworks are useful for guiding their strategy development process.

As managers seek to gain the benefits of market-driven strategies, they soon encounter limitations imposed by their organizations. They find they have to rethink the culture, capabilities, and configurations of their firms. The companion volume to this work published this year, The Market Driven Organization: Understanding Attracting, and Keeping Valuable Customers, addresses the challenges of creating organizations that support market-driven strategies and fully utilize new information technology and emerging organizational structures. This is the next important step in the process of becoming market-driven, building on the foundation established by this earlier work.

The publication of this companion volume is an opportune time to reflect on the distinctive features of this first book in strategy.

Each component of the title -- Market Driven Strategy -- and the subtitle -- Processes for Creating Value -- describes an element of the overall approach. In combination they articulate what it takes for a business to successfully steer through market turbulence and shape the competitive game to its advantage.

MARKET-DRIVEN

Being market-driven is the theme that did most to set this book apart. It had long been an article of faith that successful businesses were driven to be responsive to market requirements and anticipate changing market conditions. They were not product-driven or sales-driven -- instead their beliefs, values, and behaviors emphasized getting close to their customers and staying ahead of competitors. What was lacking was practical guidance on how to implement this theory, which was the gap this book began to fill.

Curiously, there is still some misunderstanding about what it means to be market-driven. One school of thought argues it is better to be market-driving than market-driven. Rather than giving customers what they say they want, firms should be creating markets -- even ones that were never envisaged by customers. This is a distinction without a difference. The real gains from being market-driven come from anticipating opportunities and getting to them ahead of rivals. Another point of confusion equates being market-driven with a customer focus. While a customer focus is an essential condition, it is not a sufficient guide to action. The only way a business can succeed is to deliver superior customer value, and that requires an intense emphasis on the competitors who set the performance standard. Being customer-focused sometimes metastasizes into a compulsion, where customers are given everything they want. Then firms complain that, when they tried to be responsive to their customers, their profits suffered and resources were deflected from developing the next generation of technology. But every customer is not equally valuable, nor does every need demand equal attention. Instead, market-driven firms achieve superior profits by selectively nurturing the customers with the highest profit potential.

STRATEGY

This is the foundation of the book. A sound strategy is a directional statement -- not a fixed location -- that describes the array of choices a firm makes to deliver a particular value proposition to a target group of customers. It includes the distinctive configuration of activities, processes, and investments that the firm deploys to gain a competitive advantage. Everyone in the organization contributes to the strategy, which makes it difficult to condense a strategy into a few snappy shorthand phrases.

There are a myriad of choices for any business to make. This book dealt with the four that collectively determine the market strategy. These became known as the "4A's," which is a tribute to their alliterative appeal. They are: arena, the choice of markets to serve and segments to target; advantage, which uses superior customer value as the litmus test; access via distribution and communication channels; and activities that determine the scale and scope. There was a fifth "A" that tended to get overlooked, but signaled the need to adapt the other four A's to impending threats and emerging opportunities.

Most of the attention was given to how advantage was gained. Clarity of thinking demanded distinguishing between sources (how were the advantages gained), the positions (based on superior customer value or lowest delivered cost), and performance (the rewards of superior customer satisfaction, loyalty, profit, and share). This proved to be a rich framework for understanding strategies because it captured the difference between the sources of advantage that could be influenced by managerial action -- assets, capabilities, and controls -- and the consequences in the market. It also nearly disposed of the lingering controversy over gaining market share as a strategy. It isn't! Instead, market share is something that has to be earned, and is simply one outcome of a successful strategy.

In my mind, strategy was and still is a holistic concept. Nonetheless, the last decade has seen persistent efforts within the strategy field to decompose strategy into the external factors which comprise the positional advantage and internal factors such as core competencies, distinctive capabilities, or critical resources. Those who make these distinctions do so in order to support an argument that what really defines a firm is its superior capabilities, and go on to proclaim the value of reengineering, total quality management, time-based competition, and other worthy initiatives. In practice it is hazardous to concentrate only on internal resources while ignoring the competitive position, for the resources of the firm only gain value if they distinguish a firm favorably in a served market. They have no intrinsic value in and of themselves.

PROCESSES

Here we enter the domain of the subtitle: Processes for Creating Value. Perhaps because this part of the book was subordinated in the title, it did not get the recognition I had hoped. The role of planning processes in the book is a case in point.

At the time this book was written, few companies felt they were getting much value from their planning processes. Some would argue that not much has changed even now. Too often planning was a bureaucratic exercise, following a fixed schedule and devoid of creativity. Managers had good reason to believe that their five-year plan was only a thinly disguised prelude to the annual budget.

Accepted practice implied a linear progression of activities, from mission or vision to objectives, and then to the strategy for achieving the objectives, concluding with the tactics to implement the strategy. This sequence clashed with the reality I found as a facilitator of planning sessions in several dozen companies. The actual process of strategy making was messy, iterative, independent of the calendar, and driven as much from the bottom-up as the top-down. The healthiest processes were team-based with a robust dialogue about the fundamentals of the business, with top-down intentions and resources meshing with bottom-up insights about market opportunities. From this experience, and my observations of best practice companies, I evolved the concept of adaptive planning, with the following features:

* The integrating theme is the creation of competitive advantage. The objectives of growth, market share, and shareholder value creation were treated as constraints to be satisfied.
* Issues are the main currency of the strategy dialogue. They are a useful device for concentrating the plethora of forces, problems, opportunities, and uncertainties into manageable chunks. In this form they are focal points for decision making.
* Strategy making requires the creative development and evaluation of multiple alternatives. If the job of management is to make the best choices possible, then to choose we must have choices; so the planning team must generate two to three viable alternatives. The job of top management is to challenge the planning team to stretch their efforts beyond what can be easily reached and then give them the resources they need.
* The planning cycle starts whenever there is a need, perhaps because the strategy lacks clarity, performance is unsatisfactory, or key assumptions have been proven wrong.

Firms that plan adaptively have an uncanny ability to learn from experience and to seize opportunities ahead of rivals. They apply clear-eyed insights into the market and their own capabilities when they make strategic choices. This is a planning approach that is well suited to market-driven organizations.

After another decade of experience with adaptive planning, I remain comfortable with the base principles and premises. My discomfort is with two persistent problems that bedevil all efforts to use the planning process to guide the allocation of resources. One is the tendency of managers to overstate the rewards from the strategy they are advocating -- perhaps because of optimism, games-playing, or an inability to anticipate competitive actions and counteractions. A partial antidote is a vigorous strategy review that challenges the underlying assumptions in the forecasts. The second problem is an inability to cope with high levels of uncertainty. Sometimes there are so many complex interactions among multiple dimensions of uncertainty that the environment is almost impossible to comprehend. This is what companies face when coming to grips with emerging technologies like gene therapy or intelligent sensors. Managers are pushed to understate the level of uncertainty to make a persuasive case for their strategy. New approaches to strategy making that recognize the need to retain flexibility in the face of uncertainty are needed.

CREATING VALUE

This was a play on words that was intended to signal two arguments. First, that without superior customer value, a firm could not deliver superior shareholder returns. Second, that despite profound differences in approach, variables, and measures, strategy analysis and shareholder value analysis were complementary. Ten years later the two approaches to strategy making are still not reconciled, and if anything there is a growing tension.

Shareholder value analysis (SVA) is widely accepted as the best way for firms to keep score. By holding managers accountable for the cost of the capital consumed by their strategy proposal, the shareholders' interests are kept front and center. As a methodology it is best suited to squeezing returns out of established businesses. The critics argue that it doesn't help managers create strategic breakthroughs that exploit new opportunities. Worse, it is argued, SVA encourages short-teem strategic fixes such as cutting costs or shedding assets. The proponents of SVA reply that short-termism is not an intrinsic flaw, but there has to be a realignment of the incentives toward long-run returns to avoid the problem. No doubt the marriage of modern financial theory and strategic planning will continue because both represent valid approaches, to managing for the future. As always it will take judgment and recognition of the pitfalls to ensure sound choices are made.

A RETROSPECTIVE-APPRAISAL

This opportunity to reissue the book prompted two questions: What are the reasons for the book's continued acceptance, and what would I change if I were writing the book now? With a caveat that these are difficult for an author to address objectively, let me offer some opinions.

The main reason for the book's acceptance is surely that the issues have not changed. The frameworks and concepts presented in the book remain valuable handrails for managers trying to chart a strategic direction and build their organizational capabilities. Managers still struggle to keep their organizations aligned with volatile markets. If anything, it has become more difficult to be market-driven because competitors keep raising the standards of performance. New technologies, especially the Internet, are reshaping the landscape of most markets -- by reducing friction, expanding buyer power, and introducing new competitors and strategies that were only dreamed about a decade ago. Yet the underlying rules of competition haven't changed, and firms will only prevail over rivals by delivering superior customer value. While markets-fragment and mass-customization offers the promise of offerings tailored to segments of one or a few, the platform concepts of market segmentation, channel functions, and choice of value proposition remain valid but in need of significant adaptation. Shareholder value is still the best metric for comparing strategies, but the tough questions to be used to probe the assumptions underlying the financial forecast are even more important to assure the inputs are valid.

The Evolution of Strategic Thinking. The book also benefited from good timing. A compressed history of thinking about competitive strategies would show three phases of development, with this book a precursor of the latest phase.

In phase one, the focus was largely on the outcomes of strategy. Much was made of portfolio models that prescribed market share strategies based on market attractiveness and business strength including the infamous BCG share-growth matrix. Toward the end of this phase, industry structure analysis became influential through Michael Porter's explication of the "five forces" of competition. The emphasis of. this framework was on uncovering differences among industries and helping businesses find attractive positions within the industry that minimize direct rivalry.

The second phase shifted attention to creating positional advantages within the industry to achieve lower delivered costs or superior customer value. This phase peaked in the mid-to-late eighties and focused attention on the dimensions of advantage, such as quality, channel relations, and time-to-market.

By the late eighties, a third phase had emerged as the emphasis shifted from outside to inside the firm. In effect, strategic thinkers were working back along the food chain to unravel the sources of the advantages that were achieved. This was a belated recognition that positional superiority was derived from relative superiority in the skills, assets, collective learning, and prevailing values and culture that are embedded in the firm, and the ability of management to mobilize these resources.

Of course, strategic thinking keeps progressing. Early in phase three there was much enthusiasm for the emerging concepts of core competencies, competing on capabilities, and reengineering core processes. This fit nicely with the emphasis of the early nineties on delayering and restructuring since they required reconceiving a business as a collection of linked processes. This phase ran its course as reengineering became synonymous with cost cutting and downsizing. The strategic priorities shifted to achieving growth- and renewal, while delivering superior shareholder value. An important vehicle for achieving these ends was a disciplined focus on delivering superior customer value and not trying to be all things to all customers. Meanwhile, marketing scholars were exploring the antecedents and consequences of a market orientation to uncover the role of culture, structure, incentives, human resource policies, and leadership. This work persuasively validated the long-standing belief that a market orientation was an important source of advantage and also enhanced business performance.

In light of these advances, what would I do differently if I were writing the book now? A number of new insights have emerged since the book's publication, many of which are addressed by The Market Driven Organization. Heading the list would be an expansion of the meaning of process to embrace the concept of a business as a collection of linked processes, with the distinctive capabilities being exercised through these processes. This has profound implications for how organizations are designed and advantage is gained and sustained.

This process perspective has shaped my own thinking about how organizations can better align themselves with their markets. An evolving hybrid firm has Proven. capable of maintaining deep functional specialization within a horizontal structure based on multifunctional teams. These market-driven organizations also excel at market sensing and market relating, which are two capabilities embedded in their processes.

Another area where learning has been pushed further is the respective roles of customer satisfaction versus loyalty or retention. The awkward reality is that 60 to 80 percent of customer defectors said they were "satisfied" or "very satisfied" on the last survey prior to defection. When combined with the superior profitability of loyal customers, there are profound implications for appropriate strategies and objectives. Similarly, recent research has challenged the usefulness of the distinction between the generic strategies of lowest delivered cost or differentiation. The presumed trade-off does not always have to be made, and the two strategies are not talking about the same things. A differentiation strategy is framed in external customer terms, while cost strategies are framed relative to competitors and do not offer a direct inducement to customers. What is needed is a richer palette of customer value strategies that highlights the need to serve different customers with different models (e.g., make-and-sell versus sense-and-respond).

Finally, all markets are being reshaped by the increased pace of value migration between business models, the fragmentation of markets, and the disruptive potential of the Internet and electronic commerce. Nowhere are these changes more evident than in distribution channels where distributors and retailers are being disintermediated -- and communication-channels where broadcasting is giving way to one-to-one communications with molecular markets.

Despite these forces for change, the concepts and frameworks for making market-driven strategies continue to offer a solid system for navigating through the turbulence.

Market Driven Strategy was written at a different time but addresses enduring issues. It was built on a body of cumulative knowledge contributed by many practitioners whose trial-and-error experiments-expanded the envelope of feasible practice, and scholars who learned from these experiments and extracted generalizable insights. In this way, knowledge keeps progressing. This book is now part of the basic platform of knowledge about strategy, which is being continually refreshed and expanded.

George S. Day
Bryn Mawr, PA
March 1999

Copyright © 1990 by George S. Day

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