Choose a well-known company and look at its webs

CHAPTER 3 STRATEGY

Donald L. Anderson

Learning Objectives

In this chapter you will learn

Why strategy is important for organization design.

Definition of strategy and types of generic strategies.

Key concepts in strategy.

New perspectives on strategy that are important for a design practitioner to know.

Among concepts in the field of management in the past 50 years, perhaps none has been written about or debated more than strategy. Chandler (1962), whose pioneering comparative analysis of four companies we reviewed in Chapter 1, appears to have been the first to apply the strategy concept to the business environment, a concept he likely adapted from his connection with teaching at a military college (Freedman, 2013). Books by Drucker (1964) and Ansoff (1965) created a dramatic rise in the interest in business strategy in the 1960s that has never declined. Since then, consulting companies and publications seem to generate new tools and frameworks every year. As a result, the field of strategy has created a “dizzying sequence of grand ideas, the appearance of gurus … [a] proliferation of management fashions and fads … with cacophony and inconsistency” (Freedman, 2013, p. 561). It is no wonder that many executives find themselves overwhelmed with strategy concepts and advice. Some observers remark that “it is a dirty little secret that most executives don’t actually know what all the elements of a strategy statement are, which makes it impossible for them to develop one” (Collis & Rukstad, 2008, p. 84). If you are hesitant in approaching this topic, you are not alone.

This chapter will introduce foundational ideas and concepts about strategy. This overview is by its nature a selective one specifically for those new to organization design. Strategy can be a difficult concept, full of complex theories and dense writings. Our goal here will not be to convert you into a corporate strategy officer, but to instead, provide enough information so that you can use the organization’s strategy decisions as a launching point for the remainder of the organization design. This overview will help you (1) understand why strategy is a compelling concept for design practitioners, (2) recognize when an organization does or does not have a strategy that is agreed upon by a leader or design team, (3) identify what kind of strategy the organization has, and (4) begin to formulate ideas about how the strategy should impact the rest of the design.

Why Strategy Is an Important Concept for Organization Design

Strategy is at the top of the STAR model for a reason. By providing the starting point for the organization’s required capabilities (and thus the design criteria as you recall from Chapter 2 ), strategy has an influence on nearly every other design decision. Specifically, strategy is important for designers for four reasons:

Strategic clarity and agreement are required for effective design. “If the strategy is not clear, or not agreed upon by the leadership team, there are no criteria on which to base other design decisions” (Galbraith, Downey, & Kates, 2002, p. 3). Without strategic clarity, it will be almost impossible to gain agreement on the prioritized organizational capabilities reviewed in the previous chapter. If a leadership team does not agree on the strategy, it will be difficult to make design decisions affecting organizational structure, key metrics, or required skills of employees to deliver on the strategy. In these cases, it is worth investing additional time up front in strategy development before beginning on the remainder of the design.

Different strategies require different designs. To reemphasize a point from Chapter 1, “[T]here is no one-size-fits-all organization design that all companies—regardless of their particular strategy needs—should subscribe to” (Galbraith, 2002, p. 14). Just because Nordstrom and Banana Republic are both in the apparel industry and Nike and Adidas are shoe manufacturers does not mean that they should have identical organization designs. Understanding and facilitating organization design thus requires an understanding of how and why strategy has an impact on the design.

Organization design can be a strategic advantage. If an organization can master a new capability and embed it into its organization design faster or more effectively than a competitor, it can achieve a strategic advantage. Nike’s digital capabilities were given strategic focus in 2010 in its digital sports division (Galbraith, 2014b). That capability is visible in its Nike+ sensors embedded in running shoes and in its online NikePlus.com community, which sets Nike apart from competitors that do not offer these features. Unique organization designs can differentiate an organization or help it achieve operating efficiencies that competitors cannot easily replicate.

Organization design can facilitate strategy execution. Some experts believe that strategies can be copied, but what distinguishes a company’s success is its ability to execute on that strategy. As we have seen, many problems with strategy execution can be traced to poor design. Knowledge of strategy can help an organization designer identify creative ways to embed that strategy into each element of the STAR model.

What Is Strategy?

Consider these classic and recent definitions of strategy offered by well-respected strategic thinkers:

“Strategy can be defined as the determination of the basic long-term goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals.” (Chandler, 1962, p. 13)

“Strategy is about positioning an organization for sustainable competitive advantage. It involves making choices about which industries to participate in, what products and services to offer, and how to allocate corporate resources. Its primary goal is to create value for shareholders and other stakeholders by providing customer value.” (De Kluyver & Pearce, 2003, p. 1)

“A company’s strategy is management’s action plan for running the business and conducting operations.” (Thompson, A. A., Jr., Strickland, & Gamble, 2008, p. 3)

“The dynamics of the firm’s relation with its environment for which the necessary actions are taken to achieve its goals and/or to increase performance by means of the rational use of resources” (Ronda-Pupo & Guerras-Martin, 2012, p. 182)

Not surprisingly, in its history, the field of strategy has included many different definitions and schools of thought. Ronda-Pupo and Guerras-Martin (2012) have studied 91 different definitions of strategy in the first 46 years of the field, noting that “the lexicon of strategic management is internally inconsistent and tends to be confusing” (p. 162). Hambrick and Fredrickson (2001) remark that “[s]trategy has become a catchall term used to mean whatever one wants it to mean” (p. 49). Mintzberg (1987; Mintzberg, Ahlstrand, & Lampel, 1988) observes that there are five definitions or perspectives on what strategy means:

Strategy is a plan: We often describe a strategy as a consciously identified path and set of actions. In this definition, strategy is seen as a planning activity that occurs before actions take place. You might have a strategy for getting to work when there is bad weather or a traffic accident that makes your typical route a poor choice.

Strategy is a ploy: Strategy can be a threat of a proposed move in order to draw out the behavior of a competitor or opponent. A poker player might bluff to get a competitor to withdraw. A company may publicly state that it has no interest in acquiring a smaller rival in order to discourage a bidding war.

Strategy is a pattern: Strategy can be something observed in hindsight whether the actions were intended consciously as a plan or not. In this sense, we can distinguish “deliberate strategies, where intentions that existed previously were realized, from emergent strategies, where patterns developed in the absence of intentions” (Mintzberg, 1987, p. 13). We might infer a company’s strategy from the actions it takes.

Strategy is a perspective: Finally, strategy can be a worldview, or a company’s internal identity and way of perceiving the external world. SOLO eyewear had a mission to help one million people see again in developing countries through a sustainable business model of people, planet, and profit (Schroeder & Denoble, 2014). A compelling vision and laudable goal helped to create a loyal following. Leinwand and Mainardi (2016) write that IKEA’s identity “to create a better everyday life for the many people” (p. 22) translates into how they see every aspect of home design.

Scholars make a distinction between corporate strategy and business strategy (Hrebiniak, Joyce, & Snow, 1988; Porter, 1987). A corporate (also called company-wide) strategy is the answer to the overarching question, “What business should we be in?” or as Porter (1987) puts it, “What makes the corporate whole add up to more than the sum of its business unit parts” (p. 43). It might describe the diversification strategy of Berkshire Hathaway, whose subsidiaries include companies in unrelated industries such as Duracell, See’s Candies, and Helzberg Diamonds. A business strategy (also called competitive strategy) describes how each of those individual separate businesses compete in their own industries. In this chapter, we will concentrate more on strategy in the latter circumstances.

Sustainable Competitive Advantage

One of the core concepts that has captivated strategists has been that of developing a “sustainable competitive advantage” (for a history and overview, see N. Hoffman, 2000). On this subject, among scholars of strategy in the last several decades, perhaps none is more cited or well known than Michael Porter. It is a fair assumption that virtually every student of strategy since 1996 has been assigned Porter’s classic article, “What Is Strategy?” that appeared in the Harvard Business Review that year. For Porter, strategy is about “the general principles of creating and sustaining competitive advantage” (Magretta, 2012, p. 93). This means being different—not trying to mimic others or copy a competitor but to find a unique path to stand out in a lasting way. In other words, “A company can outperform rivals only if it can establish a difference that it can preserve” (Porter, 1996, p. 62). How is a company to stand out and perform better than the competition? Porter explains that

Competitive advantage grows fundamentally out of value a firm is able to create for its buyers that exceeds the firm’s cost of creating it. Value is what buyers are willing to pay, and superior value stems from offering lower prices than competitors for equivalent benefits or providing unique benefits that more than offset a higher price. (1985, p. 3)

A company that finds a competitive advantage will be more profitable than competitors because it will operate at lower cost or have the ability to charge a premium price to customers because of the value that is provided.

If you look around your home and ask yourself why you purchased any given item or service, it’s likely that the answer will effectively boil down to one of those two reasons. Perhaps you chose the item because it was less expensive, and you judged the competitors to be essentially equal in features. You determined that one brand of stapler or copy paper or orange juice is as good as its alternatives, and you chose the one that cost the least. Or, perhaps you chose the product or service because it was different or unique. You chose premium coffee because you like the taste better, your top-of-the-line flat screen TV because it had unique features, or the more expensive dry cleaner that offers faster service. You were willing to pay more in these instances rather than only evaluating cost. For those companies, your decision criteria formed the basis of their competitive advantage over the alternatives that you did not select.

Activity Systems and Strategic Trade-offs

In Porter’s classic 1996 article, he articulated two key principles to define the essence of strategy, including activity systems and strategic trade-offs.

Strategy Rests on Unique Activities

Porter writes that “[t]he essence of strategy is in the activities—choosing to perform activities differently or to perform different activities from rivals” (Porter, 1996, p. 62). In this sense, being different and unique is central to strategy. Most companies that produce a product or service must do similar things such as product development or design, manufacturing and production, service delivery, sales, finance, and marketing. If every company did these activities in exactly the same way, there would be little difference between them. If a company can discover how to manufacture a product at a lower cost, however, that lower cost can be passed on to the customer in terms of lower prices and the company can gain an advantage over a competitor. Or, if a company has a superior product design process that provides an attractive set of new features that no other competitor can match, they also have an advantage. Porter explains:

Ultimately all differences between companies in cost or price derive from the hundreds of activities required to create, produce, sell, and deliver their products or services, such as calling on customers, assembling final products, and training employees…. Activities, then, are the basic units of competitive advantage. Overall advantage or disadvantage results from all of a company’s activities, not only a few. (Porter, 1996, p. 62)

Activities are grouped together in activity systems, and when the entire activity system is oriented toward a particular goal, competitive advantage can result. A single activity (lower-cost manufacturing) can provide an advantage, but a sustainable advantage comes from organizing a series of activities into a system that is more difficult for competitors to copy.

Consider the example of Southwest Airlines. Ask most people what Southwest’s strategy is, and most will come up with some version of “low cost.” But that simple label fails to capture the myriad of activities internally to Southwest that allows them to maintain a cost advantage. Southwest does not just replicate everything that United Airlines does but charge less for the service—to do so would be to settle for lower profitability. Instead, Southwest is able to offer lower prices by also making other choices that decrease costs, such as offering more limited service (no meals, no seat assignments, no baggage transfers to other airlines, no connections). While this has changed somewhat in recent years, Southwest initially chose a smaller lower-cost airport location outside of major hub cities (e.g., Chicago Midway instead of Chicago O’Hare). Using the same fleet of 737 aircraft has meant that Southwest can have standardized training, and pilots and crew members do not have to be limited to only the aircraft they are trained to work. Maintenance costs are lower because spare parts inventory from panels to bolts to coffee pots will all fit every plane, improving the efficiency of maintenance crews. Fast gate turnaround times and efficient boarding practices keep planes flying (when they are making money, versus standing on the ground) and allow more departures per day. In short, everything Southwest does in its major activity system is in the service of providing lower costs to customers. Perhaps another competitor could come along and do the same thing as Southwest by engaging in a few of these activities—charging similarly low prices and offering limited service routes. Other competitors, however, have had difficulty replicating the entire activity system that gives Southwest a unique advantage.

Strategy Requires Trade-offs

Listen to many business executives articulate their strategies, and you may hear some version of “We want to offer the highest-quality product at the lowest cost with the best customer service.” This is misguided, in Porter’s view. He advises that “a strategic position is not sustainable unless there are trade-offs with other positions” (1996, p. 68). He points to what happened with Continental Airlines (now United Continental Holdings) in the mid-1990s when it decided to compete with Southwest by launching a service called Continental Lite. It offered low prices (one popular incentive invited customers to bring a friend on the flight and be charged only a penny more), no meals, and the same routes. But by maintaining its full-service routes, frequent flier program, and travel agent incentives, it was not able to reduce its costs as Southwest had. Eventually it cut frequent flier benefits and travel agent costs, angering both constituencies. The company’s CEO resigned in 1994 and the Continental Lite service was discontinued in 1995 at what is estimated to have cost $140 million (Bryant, 1995).

Porter’s view is that “[a] sustainable strategic position requires trade-offs” (1996, p. 68). This means that companies accept the idea that they cannot meet all needs of all customers, and they must make deliberate decisions not to pursue certain types of customer or market. Magretta (2012) describes how the Swedish furniture designer IKEA chose to target price-conscious customers with less expensive furniture designs. IKEA chooses not to design and sell luxury goods or hand-constructed dining tables. Customers agree to the trade-off of assembling the furniture themselves, packing it in their own vehicles, and with almost no individualized sales assistance. Trade-offs are important for three reasons, Porter (1996) writes:

“Inconsistencies in image or reputation” (p. 68) arise without trade-offs, because customers will be confused about the mixed messages. If a company is trying to lead the market with a lower-cost product, it will be challenging to convince new customers that a high-end offering is worth the price. If IKEA added an expensive leather sofa to its line with the ability to select among 50 color options, or if Gucci created a $30 sports watch, customers would likely react negatively to the discrepancy with the rest of the company’s products.

Different strategies require different product configurations, different equipment, and different management systems. Without trade-offs, these different strategies dramatically increase complexity. IKEA’s manufacturing line that is organized to build modular furniture for self-assembly would not be suitable for the leather sofa.

Without trade-offs and a clear signal, employees can be confused about priorities. If IKEA introduced a custom-built set of kitchen cabinets that were made to order, employees from designers to procurement to manufacturing would need to stop and rethink how to cope with the offering that goes against the processes used for the rest of the company’s product lines. This requires different employee behavior and a different set of skills.

Magretta (2012) concludes that “if there is one important takeaway message, it is that strategy requires choice…. Trade-offs play such a critical role that it’s no exaggeration to call them strategy’s linchpin” (p. 121).

Types of Strategy

In this section, we will examine different formulations of types of strategy that scholars have observed. We will cover three strategy frameworks: Porter’s generic strategies, Treacy and Wiersema’s value disciplines, and Miles and Snow’s strategy typology.

As we will see in later chapters, it is important for the organization designer to be able to identify the type of strategy that an organization is adopting in order to be able to disseminate the implications of that choice throughout the rest of the design and ensure alignment.

Porter’s Generic Strategies

Porter (1980, 1985) explains that there are three generic strategies from which companies can choose: cost, differentiation, and focus, a typology that Campbell-Hunt (2000) called “unquestionably among the most substantial and influential contributions that have been made to the study of strategic behavior in organizations” (p. 127). As we have seen, Porter has noted that a company must choose one of these strategies to the exclusion of the other two, writing that “sometimes the firm can successfully pursue more than one approach as its primary target, though this is rarely possible” (1980, p. 35), a point that has generated considerable attention

Cost Leadership

A company enjoys a cost-leadership advantage if it can find ways of operating at a lower cost than competitors. A cost-leadership strategy can work in two ways. First, it can result in higher than average profits even when the company charges generally the same as competitors, because the company’s costs are lower and thus its profits will be higher. Second, the company can charge less than competitors and attract more price-sensitive customers, maintaining higher profits by selling more volume. The sources for this advantage can vary depending on the industry, but commonly involve the following:

Economies of scale (bulk purchasing to reduce costs from suppliers or volume manufacturing, which reduces the cost per unit manufactured)

More efficient uses of facilities such as manufacturing (perhaps designing products specifically for ease of manufacturing)

More productive employees (due to more efficient processes) or lower-cost labor (shifting work to lower-cost locations)

Low overhead costs or cost management in areas such as marketing and information technology

More efficient uses of raw materials (less waste in the manufacturing process) or using less expensive raw materials

Outsourcing or vertical integration to take advantage of the capabilities of other companies and thus reduce costs

Using the Internet or lower-cost distribution channels to sell directly to customers and eliminate a salesforce, distributors, or dealers

Most companies want to be efficient and will look for cost reductions periodically regardless of strategy. A cost-leadership strategy as its primary objective, however, aligns managers and employees to the goal of aggressively examining all internal sources of cost and pursuing cost reductions throughout the organization. A company might invest resources in technology that show real-time inventory levels or automatically package and ship orders from a warehouse. The same can occur with companies that offer services instead of products, making service calls more efficient and thus increasing profitability by performing more services in the same amount of time as a competitor. A low-cost–leadership position can often be sustained by continued reinvestment in efficiencies, new equipment, or new facilities (Porter, 1980).

Differentiation

The second generic strategy is that of differentiation. A differentiation strategy seeks to gain advantage by offering something that no one else offers, and thus can command a premium price. However, creating uniqueness comes at a cost, perhaps in research and development, additional staff, costly raw materials, and more. Differentiation will be profitable only when the premium price that is charged is higher than the cost incurred to create the differentiation (Porter, 1985). Differentiation can take many forms:

Additional or better features not offered by competitors (a different size, flavor, or color; a new capability such as Internet connectivity; unique, attractive, or specialized design)

Product quality (premium materials, better reliability, better taste)

Services that set the company apart (personal assistance or consulting, free installation support or training, free upgrades, overnight delivery, available spare parts, a comprehensive set of services or one-stop shop)

Removal of something buyers do not want (packaging materials; worry or fear such as in the case of lost computer files; high fructose corn syrup, trans fats, dyes, chemicals, or fragrance)

Location, delivery, or distribution channel (many locations that offer local convenience, the ability to purchase or maintain an account online, online help or chat)

Enhancing value to buyers (lowering buyers’ costs, saving their time)

Perceptions of image or reputation (exclusivity, brand recognition and image, technological superiority)

Some features that differentiate a product or service provide an advantage only temporarily, until a competitor can add the same feature (if Tide creates a lemon-scented laundry detergent, then Wisk can do the same relatively quickly). An enhanced feature is not a differentiator if customers do not want it, and it is not profitable if it costs a great deal to invest in the differentiator but customers are not willing to pay extra for it. The differentiation can provide a sustainable competitive advantage as long as competitors cannot duplicate it, customers still desire it, and they perceive that a company has it.

Focus

The third generic strategy is a focus strategy. A focus strategy targets a specific market niche or customer type. Jitterbug, a cell phone provider, targets seniors with simple software on their smartphones, easy to read larger screens, and preinstalled apps that store medical history or dial urgent care with the touch of a button. Law Tigers is a professional association of injury lawyers who specialize in motorcycle accident litigation. Golf Channel shows only programming related to the sport of golf. By focusing on a specific target market, these companies narrow their customer base (to seniors, motorcycle riders, golf enthusiasts) but thereby seek to outperform other companies within that market by specializing. Many companies might target specific market segments, but as Porter notes, for a focus strategy to be effective, “the target segments must either have buyers with unusual needs or else the production and delivery system that best serves the target segment must differ from that of other industry segments” (1985, p. 15). Companies that use a focus strategy hope to demonstrate to customers that they have additional expertise gained by focusing on the target customer segment. They try to show that other companies do not understand the customer and have lost focus with their wider target market.

A focus strategy has two variations—the same two that we have reviewed above—cost and differentiation, and the same principles apply to reduce costs or enhance differentiation. This can be especially desirable as a strategy for smaller businesses that do not have the resources to compete on a large scale against bigger competitors. Thus, focus can be a starting strategy as the business grows. A boutique consulting firm may decide to specialize in consulting on marketing for regional food and beverage companies, leaving McKinsey to consult with globally recognized brands. One requirement for a focus strategy is to identify true differences in the needs of the target customer segments. In addition, there is always the risk that the larger competitors will develop their own segmented brands to compete in the focused market.

Treacy and Wiersema’s Value Disciplines

In 1993 (and later expanded in 1995), Treacy and Wiersema articulated their value disciplines approach to strategy, arguing that “no company can succeed today by trying to be all things to all people” (1995, p. xii) and that “to choose a value discipline … is to define the very nature of a company” (p. 32). They argued that in earlier decades, customers made choices based on quality or price or some combination, but their observations showed that customers were making more complex buying decisions based on convenience, their customer experience, and postsales service and support. Industry leaders, they wrote, succeeded by focusing on a specific type of customer value. Some customers are more price sensitive than others and seek a no-frills experience, others are willing to pay more for the best product, and still others want their needs met in a customized way with a total solution. They label these three value disciplines as operational excellence, product leadership, and customer intimacy.

Treacy and Wiersema found that top companies were able to “change what customers valued and how it was delivered, then boosted the level of value that customers expected” (1993, p. 84). As they observed market leaders in different industries, they found four rules that seemed to govern the leaders’ success:

Rule 1: Provide the best offering in the marketplace by excelling in a specific dimension of value.

Rule 2: Maintain threshold standards on other dimensions of value.

Rule 3: Dominate your market by improving value year after year.

Rule 4: Build a well-tuned operating model dedicated to delivering unmatched value (1995, pp. 21–25)

They point out that based on Rule 2, “choosing one discipline to master does not mean that a company abandons the other two, only that it picks a dimension of value on which to stake its market reputation” (1995, p. xii). Savvy customers know what they are doing, they point out. Customers who expect an exceptional experience at Nordstrom know that they are likely to pay more for the service, but not irrationally so. Customers who want low prices at Walmart know that personal service is unlikely, but still expect time waiting in line to be reasonable.

Operational Excellence

The operational excellence value discipline means “providing customers with reliable products or services at competitive prices and delivered with minimal difficulty or inconvenience” (Treacy & Wiersema, 1993, p. 84). Companies pursuing an operational excellence approach appeal to customers based on lower prices or convenient, hassle-free service. Costco, for example, has fewer products than most large stores, and does not invest in the ambience of its facilities, which are typically warehouses with huge shelves and industrial lighting. With aggressive supplier negotiations and ruthless product selection, Costco carries and prices items that are popular and where savings can be passed on to the customer. Too many items would contribute too much complexity, which would cost more to organize and operate, so few items and bulk purchasing creates cost effectiveness and simplicity. Operational excellence implies that companies will focus on end-to-end process controls, from sales to supply chain to service, rooting out waste and seeking constant improvement. Companies that are successful in this approach often have standard, simple practices, process checks and monitoring, and management and rewards systems that reinforce process compliance and efficiency.

Product Leadership

Product leadership means “offering customers leading-edge products and services that consistently enhance the customer’s use or application of the product, thereby making rivals’ goods obsolete” (Treacy & Wiersema, 1993, p. 85). Product leadership companies seek innovation and creative development of new products, new features for existing products, or new ways to use products. Product le

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