Creating Value

Shiv Sahai Mathur, Shiv Mathur, Alfred Kenyon

• Publisher: Routledge
• Year: 2012
• eBook ISBN: 9781136413407
• Topic: Business
• Subtopic: Business General
• Index: Business

'Creating Value through Business Strategy' is the new edition of 'Creating Value: Shaping Tomorrow's Business', winner of the MCA price for best management in 1997. This new edition provides constructive guidelines to readers to open their minds to the challenges of creating value. It extends and updates the reasons for the choice of the individual offering as the strategy unit and intensifies and extends the challenges to standard approaches and conventional thinking. Updates to all the material from the first edition are included and new examples have been added throughout.

Purpose, Scope and Basics

DOI: 10.4324/9780080503349-1

Introduction: The Purpose of This Book

This book is about business strategy, meaning strategy in business. The task of business strategy is to make the business more valuable by a specific route: that of targeting profitable customers. If this book helps managers to see how they can best do that, it will have achieved its purpose.

The book therefore makes two fundamental assumptions. The first is that business exists to satisfy its financial funding markets. This assumption is discussed in Chapter 2. The second is that a business can only achieve this financial aim in its customer markets, by successfully targeting profitable customers. Customers are profitable if the business can sell to them at margins which yield returns at least equal to the cost of capital.

The focus of this book is on the strategic issues of competitive business. Its distinctive feature is its concentration on how customers choose what they buy. In normal conditions it is the customer who decides whether and what to buy.

Much of the literature on business strategy is implicitly focused on the issues facing large and complex companies. That is natural, because vexing management problems of the who-should-do-what-and-at-what-level kind do not arise to anything like the same extent in very small businesses. However, the competitive issues of strategy are just as critical for even the one-person business, and we hope that such businesses will find this book just as relevant and helpful as the mammoths.

The Objective: Financial Results from Customer Markets

The primary focus of this framework is therefore on financial results and customer markets. This emphasis is not of course unique. Many have said that the purpose of business is to produce financial results, and very few writers would deny that financial results are mainly achieved by success in customer markets. However, that central insight is not always followed through. Much writing and much managerial practice gives one of two extreme impressions. One is that financial results depend entirely on operating efficiencies. At the other extreme the object of business strategy is seen as maximum sales volume and market share, meeting customer preferences as if that alone were enough to produce acceptable levels of performance. The first focuses exclusively on costs, the second ignores them.

Organization- V Customer-Centred, Supply V Demand Perspective

Writers commonly treat competitive strategy as determining how the whole company or perhaps part of the company such as a strategic business unit (SBU) relates to its customers and competitors. For example whether it competes by differentiation or on price. These writers seem to focus on the general stance of the company, and to imply that this strategic decision will effectively determine what kind of offerings the company will market; they will all be tarred with the same brush. For example, the offerings will all be differentiated or all undifferentiated, but low-priced. We might call that an organization-centred (OC) strategy, because its concern is with the company’s own resources, skills, outlook, culture and ethos. This book acknowledges the need for such OC-strategies in many, if perhaps not all companies. Our focus however is on customer-centred (CC) strategies, strategies entirely concerned with what offerings the company is to sell in the future, and on how customers will see those offerings in comparison with their competing substitutes. Chapter 3 will come back to this distinction between OC- and CC-strategies.

However, a CC-strategy is not just a matter of taking care of the demand side. A successful CC-strategy will only sustain the building of financial value if its offering simultaneously both:

• occupies a favourable market position in relation to customers and competitors, discussed in Part Two, and
• exploits the company’s distinctive winning resources, discussed in Part Four.

Both conditions must be met.

In economic terms, the first condition covers the demand, and the last the supply side of the task. In the context of strategy, the demand and supply sides confront managers with very different challenges. Consequently strategy must deal with each of these issues separately before bringing them together. This book will therefore not get properly to grips with supply side issues until Part Three and especially Part Four. Chapter 12 will finally bring the two sides together. We deal with the demand side first, not because we regard it as more important, but because it should make the presentation easier to follow.

Winning resources on the supply side are no less important to success than competitive positioning on the demand side. By the same token positioning is not simply a sub-issue of winning resources, as some proponents of the resource-based view appear to believe.¹ Customer preferences are often shaped by the actions of sellers, but they are certainly also affected by social and economic changes over which suppliers have no influence. The demand side needs to be analysed in its own right. In any case we shall argue that even if all the company’s offerings were differentiated, their competitors and competitive positions would vary greatly.

The resource-based view (RBV) was originally designed to explain why some companies persistently performed better than others. This could not occur in conditions of pure competition. The RBV’s explanation was that companies had different resource endowments. Our question in this book on the other hand is how our company can persistently outperform others. Our answer is that this requires full attention to both issues: resources and competitive position.

Non-Profit-Making Enterprises

Business strategy is concerned with the challenges of creating financial value in competitive markets. Some departments of state and some public agencies and corporations, as well as private charities, handle similar tasks. In fact, governments have recently tried to simulate market conditions² in their business or near-business operations. The aim is to become more responsive to the varying needs of their customers or clients. The framework outlined in this book may be of some value to those who manage such enterprises. On the other hand, there will also be fundamental differences. A state health service will seek to look after the needs of those most in need, such as the poor and the old, who may be the least profitable customers in financial terms. A private healthcare business, on the other hand, may not be able to afford to serve them. The ultimate goal of the activity must affect its strategy.

Development of Business Strategy as a Discipline

As a distinctive topic business strategy dates from around 1960. Some important ideas are older than that, but had developed as part of some other discipline like economics. Strategy has made great strides, especially in the hands of economists like Rumelt and Porter, since the 1970s. There is nevertheless little agreement about its meaning, its purpose and its structure.³

In the 1960s strategy was first thought of as a formal, largely financial, planning process. The unquestioned goal of strategy was growth. Companies had learned the art of preparing budgets for the current year. Planning often just extended the process into years 2–5.

By the mid-1970s the Boston Consulting Group’s portfolio management concept, founded on the growth/share matrix, became very influential with managers.⁴ This came in response to the problems faced by companies which had by then become larger and more diversified, in a more hostile economic climate.

Porter’s Competitive Strategy (1980) was a landmark. It (a) placed competitive strategy within the industry as the competitive arena, (b) focused on the key dichotomy between differentiation and cost leadership, but (c) applied that distinction to position the firm itself within its industry. His competitive strategy was thus an OC-strategy.⁵ Practitioners and some strategic marketing writers had for some time treated the CCstrategic choice of future offerings⁶ as the central issue.

Since then academics have mainly focused on three areas. The resource-based view explained varied performance from company to company. The second area is whether industries and strategic groups⁷ within industries are in practice appropriate units for analysing performance.⁸ A third one, stimulated by a major contribution from Porter⁹ himself, is the distinction between competitive and corporate strategy. Kay¹⁰ has synthesized many of these ideas and also stressed the objective of adding financial value.

This book focuses on CC-strategy. It asks what this company should sell tomorrow in order to become more profitable.¹¹ One sub-issue asks how future offerings will be positioned vis-à-vis customers and competitors. However, as already mentioned, this customer-centred strategy is seen as requiring equal attention to the demand and supply side, to competitive positioning and to winning resources.

Our model solves for the offering, not for price/volume. This reverses the traditional microeconomics model, which treats the offering as given, and solves for its optimum price and volume¹² under various market conditions. Whereas the main concern of microeconomics is the performance of the economy, business strategy focuses on the prosperity of the business itself.

The Role of This Book

This book puts forward an integrated framework which builds on all these more recent ideas. Its dual focus is on the customer who chooses between competing offerings and on the special endowments which help a business to excel at serving specific groups of customers. The intense focus on customers yields the insight that the unit of competitive strategy has to be the individual competitive offering and its positioning in relation to customers and competing substitutes.

Corporate strategy is seen as managing the company’s cluster of offerings. It too therefore concerns what the company should sell. In developing these concepts, the book probes deeply into the nature of differentiation and into the kind of markets in which differentiated offerings compete.

What is thus presented, is a coherent framework of:

• what business strategy is, what it helps managers to achieve, and its subdivision into competitive and corporate strategy, and
• how these two categories illuminate all the other dimensions of strategy like time-frames and geographical span, the demand and supply sides, formulation and implementation.

One disclaimer is needed. Although this is an attempt at a comprehensive treatment of the topics just listed, there is no systematic coverage here of the important behavioural and organizational aspects of business strategy. Behavioural issues are given their due priority where they arise, but are not covered systematically, or as a sub-topic in their own right.

As mentioned at the beginning, it is hoped that managers will find this framework both insightful and useful.

Care with Words

A theme which will run through this book is the need to take care in the use of words. Business strategy uses terms like industry, firm, market, competition, differentiation, resource, competitive advantage, and conglomerate. They all trip off the tongue quite easily, but they mean very different things to different people. Unfortunately thei...

Table of contents

• Cover Page
• Half Title Page
• Title Page
• Copyright Page
• Contents
• Preface to the first edition
• Preface to the second edition
• Outline: The framework in a nutshell
• 1 Purpose, Scope and Basics
• Fundamentals: The Framework and Its Main Building Blocks
• 2 Objectives: What Is Business Strategy For?
• 3 Competitive and Corporate Strategy – Why Centred on Offerings?
• Understanding Competitive Positioning and Strategy
• 4 Differentiation Creates Private, Not Public Markets
• 5 Differentiation and Its Dimensions: Classification of Competitive Strategies
• 6 Competitive Positioning: Differentiation and Price
• 7 Competitive Positioning in Imperfect Markets with Dominant Sellers
• Competitive Strategies For Profit
• 8 Competitive Strategy: What Makes It Profitable?
• 9 Competitive Strategy: Dynamics of Positioning
• Resources and Business Strategy
• 10 The Theory of Winning Resources (the Resource-Based View)
• 11 Winning Resources for the Manager
• 12 The ‘scissors' Process for Choosing a Competitive Strategy
• Corporate Strategy for Clusters of Offerings
• 13 Corporate Strategy's Task Is to Build Financial Value
• 14 False and Valid Tests of Corporate Strategy
• 15 The Corporate Raider or Catalyst
• 16 Valuable Clusters of Offerings: Relatedness
• 17 How Do Managers Develop Successful Corporate Strategies?
• Other Implications of the Framework
• 18 Where in the World to Sell and Operate
• 19 Operating and Organizational Aspects of This Framework
• Endpiece: Business strategy for a new century
• Glossary
• reference
• Index