Chapter 11This part of the book is about what is done within organisations and by managers and why. The main things to know and understand are:
beyond this there is the need for a core foundation or generic position from which to compete. This is normally defined as
- the need for clarity of purpose direction and priorities
- the ability to support and justify why the organisation is pursuing its what and how
If the strategy is clear then everything else flows from this – marketing, product and service, HR and technology strategies all have a clear basis for development. If the core position is not clear or precise, then everything else gets clouded also, and people (above all, customers and backers) become uncertain and so will gravitate towards those who do have a greater clarity.It is also essential that you define strategy as a process, and define the problems and issues associated: above all the need for development, consolidation and investment, the incremental and radical approaches that some companies take; and the signs of failure (especially where costs are rising and/or income or sales are falling).
- either cost leadership or cost advantage
- brand leadership or brand advantage
- focus or niche
- something else (eg convenience, reputation)
- Additional Readings
- Case Studies and Examples
- Discussion Questions
- Web links
For all of the work done on strategy since, these remain the most authoritative works on the foundations of effective competitive strategy. They deal in detail with establishing and securing your competitive position; defining your markets; establishing the difference between core and peripheral markets; and defining strategy as a process.
- M Porter (1980) Competitive Strategy – Free Press
- M Porter (1985) Competitive Advantage – Free Press
Other excellent sources include:
- D Campbell, D Edgar and G Stonehouse (2011) Business Strategy: an Introduction – Palgrave Macmillan
- C Christensen et al (2004) Business Policy – Irwin
- H Mintzberg and J Quinn (2011) The Strategy Process – Free Press
ACN provides a range of discounted utilities, products and services. Founded in Chicago in 1989 it has grown to establish a presence in the USA and Canada, 18 countries in Western Europe and Australia. The company headquarters is in Chicago, and it has regional headquarters in Amsterdam and Sydney. The activities in the different locations are:
- North America: telecommunications, gas, electricity and water;
- Australia: telecommunications;
- Western Europe: telecommunications, mainly landline but with some mobile telecommunications in some countries.
The core product and service is landline telecommunications. For all the products and services, the basis for business is to acquire capacity from the particular utilities providers, and then sell this capacity on to individual consumers at rates immediately below the local provider's prices and charges. Thus for example:
The product is sold as a niche brand immediately below the mass market and established provider rates.
- in France, ACN acquired the right to sell landline telecommunications capacity from France Telecom at 1 Cent per minute. France Telecom sells to customers at 2.5 Cents per minute; and so ACN will sell at 2.2 Cents per minute;
- in the USA, ACN acquired the right to sell electrical supply capacity from the electricity generating companies at 0.5 Cents per kilowatt hour (kWh); the rate charged to customers by other providers is 1.5 Cents per kWh; and so ACN sell to customers at 1.3 Cents per kWh.
The business gained initial momentum through taking advantage of the deregulation of the US telecommunications and energy markets. Whenever, and wherever, particular markets have been deregulated, the result has been to attract entrepreneurs, pioneers, business developers (and sharks) to provide competition for the existing public monopoly or near-monopoly.
ACN was one of many such companies at the time. The position was replicated in these sectors in the UK and elsewhere. In the UK telecommunications sector, BT was ordered to give up part of its landline monopoly. This led to Mercury and others being able to offer landline services. Companies such as OneTel and Unix were able to buy landline capacity from BT and sell it on at their own preferred rates and ranges of costs and charges. ACN entered the UK telecommunications market in 2002, buying capacity from BT and selling it on at their own preferred charge levels, coming in as usual at just below BT rates.
ACN entered the French telecommunications market in early 2004. ACN followed its usual pattern of buying capacity from the national monopoly, in this case France Telecom (FT; now Orange/EE). ACN then set about selling to the French population. ACN have always used a form of multi-level marketing (MLM). MLM is a method of product and service distribution that relies on one individual finding a number of customers to sell to, and these customers then find another number of customers to sell to, and these customers then find another number of customers to sell to, and so on. A web or network is created.
In some cases, MLM has worked well; in others this has been less successful and more contentious. Some MLM approaches have led to accusations of pyramid selling, a similar process to MLM whereby products and services have to be bought and paid for in full by individuals who are then faced with sole and independent responsibility for selling on. This is strictly illegal in the UK.
ACN use an adopted format. The difference between ACN and other MLM (or pyramid selling) is that there are no products or inventories to hold. ACN's people are all independents, associates, and otherwise this service is sold in these ways. Individual rewards are gained from finding new customers, signing them up, and from their subsequent volume telephone usage. Further rewards are additionally gained when the first person's customers then sign up customers of their own. Each level of customer thus contributes both to their own prosperity; and especially to the prosperity of those above them.
Since deregulation, there have been many entrants into these markets as stated above. In spite of deregulation, the main providers of telecommunications services have remained the big national companies - AT&T, BT, FT. Deregulation has forced each to improve their product and service quality. In general, each has been able to use its dominant market position and enduring familiarity to do this effectively.
At the margins, new providers have been able to grow successful, profitable and effective business; the sheer volume, size and service usage in the telecommunications sector makes this both possible and also, for good providers, highly profitable. ACN target the core markets, those served by BT/FT rather than attempting to get people already with other providers to change again. In France, 85% of landline traffic is still carried by FT, so the prospects for ACN look good.
From the point of view of strategy definition and development, you have to look at the reality of the overall situation, and how people (potential customer bases) are going to behave and respond to such a proposition. So in practice you would have to consider in this case:
- whether the discounts offered were sufficiently attractive (and more importantly, looked sufficiently attractive) to entice customers away from what they were familiar with, to a provider that was unknown, untried and untested;
- whether the method of selling (by individuals as opposed to direct from the provider) was going to be acceptable to the customer bases targeted;
- what strategic marketing and customer base development was also required;
- what customer support service was required;
- you would especially question why 85% of landline traffic is still carried by FT, and why people are not changing their behaviour and their provider, especially since deregulation;
- how the proposal would be developed, as the telecommunications market itself developed and advanced. In particular, there was (and is) no reference to integration with mobile phone packages, internet services provision, or television services.
This illustrates also that a business decision is the beginning of hard work, not an end in itself. If you take a decision you have to then be prepared and committed and resourced to do everything that is consequent upon it.
Palm Spring Mineral Water Company Ltd
Palm Spring Mineral Water Company Ltd. is based in south east England. Palm Spring makes and distributes a full and comprehensive range of soft drinks all over the south-eastern quarter of the UK. Palm Spring produces its own brands of lemonade, orangeade, limeade, ginger beer for sale in a variety of sizes from grocers and supermarkets. Palm Spring produces its own colas, soda water and bottled waters 'with a hint of' many different flavourings including peach, apple, lemon and lime. Additionally, Palm Spring makes and distributes soft drinks under license to Coca-Cola and the UK's main supermarket chains.
The company was founded in 1951 by Daniel Royston. Mr Royston's first products were lemonade, orangeade and ginger beer, produced in small bottles for the pub and restaurant trade. Mr Royston subsequently diversified into orange, lime and blackcurrant cordials, also for the pub trade. The original core market was then developed from pubs into supplying restaurants, cafes and snack bars in the seaside and market towns in Kent and Sussex. Mr Royston was very successful and began to produce soft drinks for the wider retail market. These activities grew also. In 1980, Mr Royston handed over to his eldest son Stephen. His three other sons, Daniel, David and Peter, continued to act as functional directors. The family retains a majority shareholding in the company.
The company has grown both market and manufacturing capacity over the years. Today it owns factories in Basingstoke, Henley, Banbury, Tonbridge Wells and Saffron Walden. All of this has been achieved through policies of merger, acquisition and take-over, and attention to the quality, capacity and speed of the production technology used for the manufacture of the drinks themselves.
As stated above, as the result of this expansion and acquisition, Palm Spring now has contracts to manufacture, under license, for Coca-Cola and the big UK supermarket chains. All ventures are both successful and profitable. Also as stated above, both as the result of the mergers and acquisitions, and also as the result of improvements in the quality and speed of production technology, the company has spare capacity, capacity which could improve output volumes by up to 30% if required.
The key question is: if output is to be increased, which new markets should be targeted? Stephen Royston and his brothers have engaged in a brief brainstorming session, and the following options seem to be open or potentially open:
The point is always going to be why a particular strategy is engaged, rather than what is chosen. So it is important to work out in full detail the lines of reasoning that ought to be engaged for each of the above propositions, so that you can see why any conclusions that were arrived at might have arisen, and the strengths and weaknesses in each.
- Go overseas, opening markets in northern France, Belgium and the low countries;
- Gain contracts to supply incoming supermarkets such as Aldi and Lidl;
- Go north, and seek especially to open up contacts and contracts with Morrison's supermarkets on a nationwide basis;
- Reduce production capacity by closing down one or two locations;
- Developing the relationships with Coca-Cola and the supermarkets, to see if they will take extra production volumes if prices can be agreed;
- Doing nothing but going along at the moment with what is a very profitable line of business, even allowing for the over-capacity.
Discuss the view that (as one company at least has put it) ‘our strategy is to have no strategy’. If this is indeed the case, what is needed to ensure that the company does indeed retain clarity of purpose?
You should also be familiar with the links to the regulatory and statutory bodies with which you have dealings as the result of involvement in particular industries, sectors and locations.
You should also be familiar with universal statutory bodies: