Very soon after the crash of 2008, most of the conventional conceptual and operational frameworks for strategy formulation and strategy choice ran out of steam. Five years later, as this author notes, the search is still on for more compatible models for strategy analysis, formulation, choice and implementation. In this article he offers a model and four options for applying it that he believes is an answer for most firms still searching.

 

The problem

Conceptual frameworks for strategy formulation and strategy choice are running out of steam today. They are losing a great deal of relevance within rapidly and radically changing environments. Decades of largely positive, fairly stable and reasonably consistent growth in output and trade is giving way to a widespread decline in economic activity and the retreat of trade across the globe.  Capital markets that were only recently characterized by easy credit, massive leveraged buyouts and a thriving private equity industry have been rudely disrupted by the powerful forces of economic instability.  This change in fundamentals is leading to the search for more compatible models for strategy analysis, formulation, choice and implementation.

This search is the focus of this article.

Earlier work by the author introduced the concept of systemic strategic behaviour as the core of a model that could accommodate turbulence and provide a novel framework for strategy formulation (Ivey Business Journal, September-October, 2012). According to this model, contemporary strategic behaviour is closely associated with the capital resource base and the competency profile of the respective corporation. Attributes of those determinants lead to four patterns of strategic behaviour:  seeking concentration, seeking focus, seeking competency and seeking end game.

The following article carries the analysis one step further.  It explores the dynamics of those four patterns of strategic behaviour.  More importantly, it translates the concept into a dynamic graphic model that illustrates the variables and demonstrates the flows of company strategic thinking.  It constitutes a powerful applied tool for corporate strategy formulation. Case evidence supplements the analysis.

The article draws on past conceptual frameworks on strategy, economics and politics. It also draws evidence from recent histories of key corporate players.

 

Systemic strategic behaviour: the concept

Let us recall that strategic behaviour is the process of formulating and expressing strategic choices. Systemic strategic  behaviour is  behaviour that expresses  strategic choices that are congruent with structural  business conditions.  It  rests on two fundamental,  turbulence-prone forces:  the capital resource base, and the competency profile of the organization. Capital resource base is a configuration of corporate capital resources, i.e., tangible capital assets, intangible capital assets and potential capital assets.  Competencies, on the other hand, are demonstrations of exceptional, value-added performance.

Since the Reagan era,  capital markets have played a  fundamental  role in driving corporate   investment and divestment  decisions  (El Namaki, 2012). Deregulation , structured finance, leveraged investment  and the like have  left a deep mark on corporate strategies.  The resultant convulsions are well documented  and the future will , more likely than not, bear a structural impact of what we have witnessed.  The role and impact may even go beyond  past and present experience if one is to  go by current projections.  Key indicators point to:

• A substantial prospective increase in capital supply (Bain Report, November  14, 2012),
• A   measurable decline in equity investments (McKinsey, Dec 2011),
• A  tendency towards corporate capital hoarding (New York Times, February 8, 2013)
• Symptoms of a balance-sheet recession (Koo, 2011)
• A revival of risk-laden structured finance (Financial Times, December 9, 2012)
• A key global role for the Chinese capital market (Zhou, 2009).

Competencies demonstrated, and continue to demonstrate, volatility as well. Consider the following:

• Measurable increase  in  industry concentration (El Namaki, 2012)
• Oscillations in competency rooted  mergers, acquisitions and divestment (The Economist, January 3, 2008)
• Change in an R&D  focus and spending  (Science and Engineering Indicators, 2010)
• Brand volatility (The future of brands, 2004).

 

Interaction between the capital resource base and the competency profile of the organization could be illustrated by what we may term “The Systemic Strategy Analysis Model” or “SSAM”. This is a graphic representation of the interaction between the two determinants, where each determinant is assigned an axis and company attributes are plotted along each of the two axes.  A line connecting company attributes embodies a strategic position. Shifts in that line, or a change in the slope, constitute a strategy shift.

Company positioning along the two axes could be done for the company as a whole or of a strategic business unit (SBU) or both.

The model allows for an illustration of today’s strategic position (or positions) as much as alternative future scenarios.

Strategic behaviour under turbulence

The interaction between capital and competency force fields can result in four patterns of strategic behaviour:

1. Seeking concentration

2. Seeking competencies

3. Seeking focus

4. Seeking end game.

 

1. Seeking concentration

Concentration refers to the number of major competitors within a given industry.  High concentration refers to the dominance of a few firms in an entire industry.  Concentration ratios, or the ratio of sales by the four largest firms in the industry to aggregate industry sales, are measures of this dominance and the level of competition within the respective industry. Highly concentrated industries are mostly oligopolistic industries with moderate to high entry barriers and dominance by a few firms (Scherer, 1996).

A strong capital resource base matched by an equally strong competency profile could lead to a search for concentration. Figure (2) illustrates two possible concentration strategy moves:

• Absolute concentration strategy
• Partial concentration strategy

Absolute concentration is a drive to achieve virtual control over the respective market or industry.  Partial concentration does that only partly.

 

Concentration strategies are prevalent within the United States.

The investment banking industry provides one example. A four-firm concentration ratio for the investment banking and securities dealing industry amounted to 51.7 percent in 2007. An eight-firm ratio amounted to 76.6 percent in the same year (U.S. Census Bureau’s economic census, 2012).  One can speculate that this high level of concentration has evolved as a result of  President Reagan’s deregulation drive of the early 80’s, President Clinton’s repeal of the 1933 Glass-Steagall  Act in 1999.(Stiglitz, 2009) and, of course, the financial crisis events of the year 2008 and beyond. A combination of those events induced a search for absolute concentration by investment capital operators such as Goldman Sachs and the ill-fated Lehman Brothers.

 

2. Seeking competencies

A competency is an exceptional measure of performance within a functional domain. Examples range from branding and proprietary technology to supply chain, strategic alliance, scale and even retaliation. Competencies are dynamic and evolve over time.  A continuous search for competencies could provide the backbone of corporate strategic behaviour.  Corporations regularly evaluate their “portfolio” of competencies and seek strategic adjustment congruent with the emerging conditions (Zook, 2007).

Search for competencies could stem from a comprehensive loss of strategic competitive advantage and an urgent need for substitution. The choice then is between the two in Figure 3:

• Competency acquisition strategy
• Competency capacity generation strategy

Both moves could represent a merger or an acquisition. Competency generation may connote a merger, an acquisition, an R&D effort or all of the three.

Fujifilm, the Japanese filmmaker, is a typical case. In the late 1990’s, technological change sparked an internal power struggle with consumer-film executives refusing to see the grim prospects.  Restructuring followed, nevertheless. Weak distributorships, superfluous management layers and failing products were eliminated (Economist, July 2012). A competency-acquisition strategy shift was unraveling. Digital imaging, healthcare,  graphic arts, optical devices, and document solutions were identified as growth-priority areas. Funds were channeled into  R&D ,  M&A and direct investment in those areas . The company was  able to overcome the collapse of the photographic film market  by  drastically transforming its business structure , shifting to new business areas and creating its own competency- generation capacity.

3. Seeking focus

Seeking focus is tantamount to narrowing the scope of company competencies and the actual confinement to a core or periphery competency considered worth pursuing.  A core competency is an exceptional proficiency that could surface unique values and deliver sustainable competitive advantage. Core competencies could result from an integration of divergent technologies or the development of unique products and systems or both. Core competencies allow companies to invest in the strengths that differentiate them from the competition (Prahalad, Hamel, 1990).

Focus is sought when a rapid decline in the company competency profile occurs and, as a result, a process of competency rationalization takes place. Seeking focus and achieving it is illustrated in Figure (3).  There are two possible focus strategy moves:

• Core competency focus strategy
• Periphery competency focus strategy

BIC’s history illustrates a product-based focus strategy based on a set of core competencies.

BIC  started making pens as far back as 1949. It developed the manufacturing techniques that delivered reliable  low-cost pens . BIC realized that the future of writing instruments was limited and forged a product development and acquisition strategy that led to the addition of lighters and, in 1974, razors and, much later, several other products and product groups. The corporation  went on to reduce its reliance on pens and lighters by adopting a  strategy of offering   “simple, affordable solutions to everyday needs.” Acquisitions explored core competencies as manufacturing technologies, cost economies, supply chain efficiencies and branding prowess, in order to create a shift to a broader product base (BIC Annual Report, 2009).

4. Seeking end game

An end game is a process where the organization seeks an end to operations as it has always performed them. There are different types of end games. There are volatile end games (Harrigan, K; Porter, M, 1983) or end games where falling sales and excess capacity could induce fierce price warfare and an ultimate exit. There are also niche end games, where splintered market shares within a declining industry are regrouped to provide an extension of the product or the industry life cycle. Choice of an end-game strategy depends on whether the structure of the industry supports a hospitable, potentially profitable decline phase or not.

End-game strategies emerge when the company has lost the roots of business continuity. Those could relate to a competitive advantage or a financial performance  requisite.  Neither a capital assets base or competencies strategy could sustain this continuity.  Prospects of recovery are dim or nonexistent. The choice is then between:

• Niche strategy
• Quick divestment or harvest strategy

A shift to a niche is essentially a mobilization of the leftover market share and technologies and the consolidation of those in one operating unit. Quick divestment is a termination of operations based on a sense of urgency and a search for a quick conversion of remaining assets into liquidity.

 

Kodak is a case in point.

In 1976, Kodak accounted for 90 percent of film and 85 percent of camera sales in the United States. Digital photography changed that.  Kodak’s revenues declined from approximately $16 billion in 1996 to $6.2 billion in 2011. Losses, downsizing and share-price decline followed. A strategy shift, around 2005, focused on digital printing and the conversion of the firm’s huge portfolio of intellectual property into a financial asset. Both measures were too late; the restructuring attempt that followed was equally ill timed and badly executed.  There was no choice but to adopt a quick end-game shift (Economist, July 2012).

Application

Four strategy-formulation situations could benefit from the application of the discussed model.

• Corporate strategy formulation at SBU and corporate levels
• Strategy consulting situations
• Industrial policy formulation at country level
• Startup search for future strategies

Let us take Sony as an illustration of the first two applications. Sony is one of the most integrated entertainment companies in the world. Four operating segments, Electronics, Motion pictures, Music, and Financial Services carry the mission. Sony’s history is marked by cycles of success and failure.  Attempts by Aki  Morita , the co-founder, to pursue expansionary strategy  through  “convergence” or  an Internet-based link  between  film, music, and digital electronics (New York Times, 29 May, 2006)  proved unrewarding.  Morita’s  2005  successor, Howard Stringer,  divested some peripheral businesses and  focused on electronics, with modest results. A “One Sony” strategy focusing on imaging technology, gaming and mobile technology that was later introduced by yet another CEO failed to launch a genuine recovery.  Recent divestments point to a worsening situation (Bloomberg April 11, 2012; Reuters, Jan. 18, 2013).  Today, Sony stands at a crossroads.  Figure (6) displays an SSAM graph approximating this situation. The graph suggests, at considerable cost in ruggedness, a future strategic perspective for Sony.

The application of the model to industrial policy formulation strategies is very similar to that in the corporate sector. Countries weigh alternative industries in terms of their capital outlay and competency demands and opt for the combination that provides a strong market position.  In March, China’s new Prime Minister announced a concentration strategy for the Chinese automotive industry.  The use of the model by start-ups follows the same analogy, with the start-up falling short of capital but having a distinctive competency advantage. The strategy alternatives could drive the start-up into any of the directions we have outlined above.

Summary and conclusions

The past few years have witnessed the end of an era. More than 30 years of largely positive, fairly stable and reasonably consistent growth in output and trade are giving way to harsher environments. Capital markets have convulsed, economies have  contracted and a massive process of global economic restructuring is under way.  As a result, conceptual and operational frameworks for strategy formulation and strategy choice ran out of steam.

The search is on for more compatible models for strategy analysis, formulation, choice and implementation. The “SSAM” or “Systemic Strategy Analysis Model”  suggested in this article could provide the ideal vehicle.

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References

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