In today’s extreme competitive environment, the most successful companies are those that are ambidextrous. Managers must craft and execute a competitive strategy that works for their company’s product-market context while simultaneously re-examining each of the 5Cs, with a view to how their strategic innovation will impact each of the five elements. Readers will learn how to achieve that balance in this article.
In many circles today, “reinvention” seems to be the operative word. At least it should be, as every organization needs to find ways of coping with the dynamic, unpredictable change that is impacting it at all levels. Today, organizations desperately need to reinvent themselves completely in order to win in tomorrow’s market place. Reinvention means throwing away existing strategies and even best practices.
Every CEO understands the pressing need for a clear competitive strategy as well as the need for strategic innovation. In fact, a CEO must understand this need, because unless companies have a clear idea about how they are going to be distinctly different and how they should differentiate themselves from the competition, they are going to get overtaken – if not become a spent force — by the hyper-intense competition. But that’s only half of the story.
The other half is the daunting challenge of striking a balance between competing effectively in today’s marketplace while strategically innovating to capitalize on tomorrow’s opportunities, or inventing tomorrow’s business. Developing such strategic ambidexterity is critical if an organization is to maximize value creation over the long run. However, for the most part, it remains a relatively rare capability. This article suggests how C-suite executives can develop this ambidexterity.
Competitive strategy
Let’s begin by examining the concepts of “competitive strategy” and “strategic innovation.”
Competitive strategy represents the choices that a company makes to configure itself, and deploy its resources and capabilities to compete against industry rivals or new entrants. It is important to note that this definition applies to strategy in a well-defined, product-market context.
Strategic innovation means applying strategic foresight to imagine a future, thereby creating a new market or disrupting the established market. This can take the form of new product or service categories, or processes and business models that can fundamentally change the mental models and rules of competition.
Prudent managers design and execute the competitive strategy that will enable their organizations to succeed today, while simultaneously engaging in strategic innovation efforts that will lay the groundwork to compete in the future.
The Competitive Strategy Framework: The 5 C’s
The following framework highlights five, key inter-related components of competitive strategy:
- Customers
- Competitors
- Channel configurations
- Cost structure
- Core capabilities
The successful company is one that deftly manages the inter-relationships among these components to deploy a competitive framework in which it can leverage its advantages to fulfill customer needs better than its rivals.
1. Customers
Good strategy is about focus, and one of the most crucial parts of this focus is the task of identifying which customer segments it should serve. Generally speaking, it is more effective to focus energy on serving a set of distinct customer segments well than to attempt to be all things to all people – often a recipe for peril.
Treating one’s customers as one, homogenous whole can lead to sub-optimization, as people will respond in very different ways to the same offering. Customers differ on myriad dimensions, including geographic, demographic, psychographic and behavioral – all of which shape their varying needs and preferences. And of course, customers also vary in terms of their potential profitability to a company – certainly a key consideration.
In order to succeed, companies must segment the market in ways that are appropriate to their business and then select those key segments that it can serve most effectively and profitably. Once these segments are identified, the company should then target its offerings to meet these customers’ needs and so improve its competitive position.
It is also important to note that this is not a stationary target. Customer segments’ needs evolve, as does their profitability relative to new and emerging segments. Managers must keep a watchful eye and continue to monitor and act accordingly.
2. Competitors
A company must be acutely aware of its competitors and their offerings in order to better serve their chosen customer segments. Indeed, the competition is a key element of a company’s operating context, one that must be considered when developing and honing its own differentiated offering. Given the dynamic nature of competition, companies should continually assess themselves versus their rivals, vis-à-vis the key success factors of the specific product-market theater.
A well-known challenge for many companies is the need to adapt quickly and properly to the rapid, continuous change that threatens its competitive position. However, there is a select group of savvy companies that bypass the traditional hand-to-hand combat of direct competition by offering something entirely different and new – strategic innovation at play. These companies find a strategic window and open it when there is an intriguing potential for a fit between new success factors and its own distinctive competencies.
An emerging technology may create or destroy opportunities in one market or allow companies to simply modify existing products to fit in with the needs of a new customer segment with high-growth potential.
Technological control is not, however, necessarily a critical success factor. Keniche Ohmae, a renowned strategist, argues that the most effective shortcut to a competitive leadership position is an early concentration of major resources in a single, strategically significant function in order to excel in that area, and consolidate the lead in the other functions.
3. Channel configurations
Managers must thoroughly understand the channel dynamics of their companies in order to compete effectively. It is critically important to analyze channel choices and options as part of the strategic process.
Unfortunately, channel options are often ignored and most companies seldom confront head-on the choices of channel mix, e.g. whether to appoint an exclusive dealer network or push for intense distribution. Such a decision should not simply be determined by the characteristics of the product or service. On the contrary, these are highly strategic choices that must be made after much discussion and consideration.
Distribution strengths often play a distinctive role in reinforcing superior product performance and maintaining a strong market position in the end-user market. And, in the case of information products, the channel may be the defining elements of the product.
Passive acceptance of existing channel choices has become increasingly risky for two reasons. Companies in all industries are facing increasingly high sales costs, with little evidence of increased productivity to offset these costs. And customers continue to place a high demand on manufacturers that permit direct communication and information flow, forcing companies to reconsider the use and design of traditional channels.
4. Cost structure
It is vital to have a deep understanding of the relative cost standing of one’s company. Cost relates almost directly to scale and scope. Until recently, decisions on scale and scope were always guided two rules of thumb: bigger is better, and, keep as many activities as possible under one roof to remain in control and maximize revenues. In the past, adherence to these beliefs led to extensive vertical integration and continuously striving for scale and mass marketing with a strong volume orientation – all of which led to a high cost burden.
5. Core capabilities
As the elements of a company’s playing field are framed and focused, managers must examine organizational capabilities closely and assess their alignment with the competitive market demands. The importance of having the right capabilities for the chosen product-market focus cannot be overstated. This is why the assessment exercise is crucial. Examples of relevant and beneficial capabilities include logistics excellence in the retail sector, and design and engineering excellence in the consumer electronics arena.
An organization’s capabilities are the product of a number of inter-connected factors, including skills, culture, processes and behavior. Companies should examine the particular market dynamics closely to determine which capabilities are needed to compete and to what extent it possesses these capabilities. Some capabilities are latent and can be fully actualized by making adjustments. Others can be acquired and developed, though the question remains whether this can be done within a reasonable timeframe, given the rapid pace of change.
In sum, managers must ensure that their organizations possess and deploy the capabilities that are most relevant to their chosen product-market focus in order to compete.
Four archetypes of strategic innovation
In addition to making incremental innovation a part of the competitive strategy for today’s product-market context, managers need to keep a watchful eye on the future and act accordingly. Opportunities are plentiful for the future, but the questions remain: What are they and how to capitalize on them. Cost control and cash management are important for the short-term but they will not position a company to be a leader in the future. That’s why companies need a mindset that says: “We’re not only competing for today—We’re going to create a new future.”
One needs to be realistic about the operating environment as well as the resources and capability available. The trick is to take care of both, but in a way that moves the company towards a desirable future state. This could involve a re-examination to determine which consumer needs have shifted and which industry boundaries have become blurred, in order to capitalize on white-space opportunities that emerge.
The following sections introduce four potent archetypes of strategic innovation that a company can deploy:
- Attacking the mass market by designing a new value configuration;
- Opening a new market by maximizing economies of scope through horizontal integration, value bundles and friendly customer experience;
- Opening a new market by maximizing economies of scale through vertical and virtual integration;
- Pursuing the unserved, under-served or non-consumers by servicing to that segment.
1. Attack the mass market by designing a new value configuration.
Many companies find themselves in an arms race with competitors, one that is based on a well-worn set of performance criteria. Often, a scenario of frequent one-upmanship typically plays out, resulting in incremental improvements along these criteria, following a predictable path. However, some companies courageously and deliberately step out of the tried and true and boldly attack the market with a new value configuration. They change the rules of the game by introducing new performance criteria that influence consumer behavior.
Let’s take the case of the console video game industry. For many years, rivals Sony, Microsoft and Nintendo engaged in a seemingly never-ending series of successive battles involving faster chips and better graphics, as these were the established performance criteria. Then, in 2006, Nintendo stepped into the pantheon of great innovations with the introduction of its revolutionary and wildly successful Wii console. The Wii was designed not to compete on speed and graphics. Rather it introduced totally different performance criteria such as playability and accessibility to more family members, and just plain old-fashioned fun. In effect, Nintendo deliberately chose a new mode of competition, and invested in designing and developing an offering that would outpace the competition along the newly defined performance criteria. The rest is history.
2. Open a new market by maximizing economies of scope by exploiting opportunities through horizontal integration, value bundles and customer experience design.
The business world is littered with examples of companies that have tried – without effect — to diversify through horizontal integration and sell new and unrelated products under their brand. Many of these companies clumsily bolt on the new offerings, ignoring the better-off test, that is, determining if and how the new venture benefits from its association with the company (e.g. brand relevance and power, ability to leverage existing infrastructure, etc.). On the other end of the spectrum, there are great companies that develop interfaces prized by their customers, and which they use as monetizable platforms that enable horizontal integration and lead to successful outcomes.
A shining example of the latter is Apple Inc. Among Apple’s truly brilliant moves was the creation of the seminal iTunes store. As everyone knows, it served initially as a store for music files only – a companion for its iPod product. This interface gained solid traction with millions of users and provided Apple an invaluable platform for integrating video, and famously, apps, which opened an entirely new, tremendously successful market for the company. Consumers were primed and ready for the new offerings. This also opened up a host of opportunities, including bundling. All of this was predicated on the development and ownership of a key consumer interface – Itunes.
3. Open a new market by maximizing economies of scale by exploiting opportunities through virtual vertical integration.
Historically, a company would need a tremendous amount of capital in order to reach scale and vertically integrate its operations. And as companies reached scale, they made decisions about which customer segments to serve, and conversely, on which segments to not serve (or under-serve). This presented an intriguing opportunity for companies to deliver on customers’ unmet needs in creative ways.
Today, the size of capital commitments required to achieve vertical integration has fallen dramatically, due to the emergence of virtual integration. That is, companies can choose to lease expensive value-chain elements such as a manufacturing capability in order to step in and deliver an offering that fulfills needs that are under-fulfilled by the industry giants. Firms can in effect find a niche, open a new market and enjoy economies of scale in a cost-effective, asset-light fashion that affords the flexibility to scale up and down, depending on performance.
4. Pursue the unserved, under-served or non-traditional consumers with tailored offerings and new business model design.
Competitors often leave white-space opportunities in the market that can serve as promising growth areas. This is certainly the case with customer segments, many of which remain unserved or under-served, or that do not contain traditional consumers, e.g. recent immigrants. Rather than going with the crowd and overlooking these segments, a forward-thinking company could take a close look at them and determine whether there is a way to create an offering that would drive value by serving them in a creative way.
Western Union is an example of a company that capitalized on this type of white-space opportunity. Many recent immigrants have a need and desire to send money to relatives in their home countries, but these needs were not adequately served by many major banks, which may not have chosen to focus on this customer segment. In effect, Western Union has become an invaluable service for the customers in this segment and has created a market that drives value.
Given the realities of today’s extreme competitive environment, the most successful companies are those that are ambidextrous. Managers must craft and execute a competitive strategy that works for their company’s product-market context today while simultaneously re-examining each of the 5Cs, with a view to how their strategic innovation will impact each of the five elements.
Strategy is all about focus, but unfortunate side effects are inertia and the emergence of blind spots. Companies can strategically innovate in their core and future businesses and play two games at the same time, if they are successful in discovering a new strategic position. Striking the right balance between competing today and investing for tomorrow is a key ingredient for creating long-term, sustainable competitive advantage. Organizations with rigid, top-down hierarchical management structures have high levels of control, low connectivity and are less agile. Organizations that are flat and decentralized are more agile and able react to external changes. We need to consider a new organizational design that can both manage stability and handle change. The ability to continuously adjust and adapt strategic and tactical moves as a function of strategic ambitions and new consumer behavior will inspire new business models and innovative ways to create value for a company. This is the ultimate sustainable competitive advantage.
