The 5 Business Strategies

Summary : There are only five business strategies: cost, quality, distribution, technology, and intellectual property (IP). All business strategies break down into these five, or some combination of them. As a general principle, focusing your organization on one is the easiest to execute. The risk of failure grows exponentially as a company combines these strategies.

There are only five business strategies: cost, quality, distribution, technology, and intellectual property (IP)

All business strategies break down into these five, or some combination of them.  As a general principle, focusing your organization on one is the easiest to execute.  The risk of failure grows exponentially as a company combines these strategies.

Companies still have to execute in all these areas.  However, the strategic apex is where a company’s core strengths lie and where it puts its emphasis in driving how customers view it.  The other strategy classes become tactical arms subservient to implementing the main strategy.  If a company puts equal emphasis on all, its message will diffuse into confusion in the customer’s mind at best.  At worst, a negative view emerges – such as when the low-cost strategy is poorly blended with the technology strategy so that the customer forms the opinion that it’s cheap technology or when low cost is combined with quality and the customer gets the message that it’s just cheap.  Here are the details behind each strategy:

 

1) The low-cost strategy provides the only unassailable market position.  Low cost results in low prices, which is the easiest way to differentiate your products.  With low cost, one does not need a superior product.  In fact, an inferior product will often outsell a superior one if it is priced low enough.  The low-cost strategy is also the easiest to maintain.  One needs little customer focus.  All one needs is a dedicated focus to systematically reduce cost. You can be a fast or not so fast follower, saving tons on R&D.  This is a one-vector issue focused solely on internal execution.  Moreover, it systematically results in continuous market-share increases.  Once there is an established advantage in market share, a company will have a systematic advantage in cost via dealing with suppliers.  The disadvantage is that it is easy for an organization to confuse cost with price and lapse into consistently poor profits.  But well executed, this strategy offers long-term advantages.  The most well-known company that executes it well is Wal-Mart. Wal-Mart initially uses both technology and PICOS power over suppliers to achieve the lowest cost. Anybody can PICOS; it was their implementation of IT technology that gave them a competitive cost and revenue advantage because they kept their stores stocked with things that were moving and didn’t buy what wasn’t. Generic drug suppliers are another. By aligning with drug stores, they hacked their distribution and marketing costs. Japan’s semiconductor industry was famous for this strategy in the eighties.  Its strategy faltered in the nineties, when it failed to respond to the emergence of lower-cost suppliers in the Asian tigers.  This occurred as it lost focus on its low-cost strategy and attempted to move to a technology strategy. It failed to bring its customers with it, because it was weak in digital technology & design. They failed because their strategy was not aligned with their core strengths and they were entering markets that American companies already dominated and had the core strengths.  Another weakness of the low-cost strategy is that it is easy for companies to become complacent about marketing.  As they become inwardly focused to drive costs down, they ignore the market and even customers.  They often cut marketing expenses below life-sustaining levels, leaving them easy prey. 

The low-cost strategy may be unassailable, but this characteristic is not absolute.  Companies with technology strategies can beat low-cost companies by obsoleting them.  Ford Motor Company found this out in the mid-twentieth century when General Motors out-innovated it in styling by stealing Ford’s leadership position (styling is technology because it is a subcomponent of product development).  Intersil and Synertek were obsoleted by Linear Technology’s and Maxim’s move to CMOS Linear.   Intel built its business in the late sixties and early seventies against low-cost leaders Fairchild, Motorola, and Texas Instruments by focusing on its ability to integrate.  In every case, the low-cost competitor didn’t respond and lost their leadership position over time. When it couldn’t compete with Asia on cost in memories it shifted to microprocessors, where technology still mattered.

 

2) The quality strategy is only a little more difficult than the cost strategy.  That is because it is too internally focused.  Like low cost, it is a one-vector issue focused solely on internal execution.  But the quality strategy is more difficult because it requires sophisticated tactical execution in both manufacturing, marketing, and supplier partnering .  It is extremely difficult to execute with outsourcing.  Quality can only be built in with really good business processes.  Moreover, the best companies with quality strategies invariably have their manufacturing where work ethics are strong and have a long tradition of quality.  The work force is critical when it comes to a quality strategy.  This is why Japanese companies are the preeminent quality strategists.  Advantest, Canon, Nikon, and Tokyo Electron are all famous for their quality.  German companies are close behind, which is why so many companies choose M+W Zander for building cleanrooms and, of course, no mention of quality strategies could go without mentioning Zeiss.  To a great extent, German and Japanese companies’ most important supplier is their workers. They go to great extents to keep them happy.

They also treat their suppliers well as a part of their quality tactics. If you look at Toyota, they are superb at dealing with their suppliers, not cutting them off in downturns. GM on the other hand kills its partners in every cycle and it was one of the earliest users of PICOS.

But you don’t have to be from these countries to take advantage of their work forces.  AMD and HP, which had or have factories in Japan and Germany as well as the mid-western United States, built strong quality reputations.

A risk with the quality strategy is cultural shifts in a company’s management or workforce, as well as with the nation as a whole.  Management can easily lose focus on quality and become enamored with cost.  This happened to many companies in Japan as the value of the yen rose in the eighties.  Sony is a good example to study.  Japan was hit with a double whammy in the eighties, as its workforce grew discontent with working long hours for seemingly little reward.  Social trends can be insidious over the long term and will destroy the company that is unaware and uncomprehending.

 

3) The distribution strategy is based on a company building its strength through its distribution network.  This strategy appears simple on the surface, but it is not.  It is not a distributor strategy.  Companies with distribution strategies build national and, in the case of most technology companies, international networks.  It is a very costly strategy to implement properly.  But when well implemented, the distribution strategy’s scope builds huge barriers to entry. 

Pharmaceutical companies are masters of this strategy. They face what is arguably the most complex selling and support tree. The doctor is the decision maker; the patient the user; the insurance company pays; while the drug store serves as the local distributor.  This is why biotech companies aligned with them for sales and distribution rather than compete with them.  It is also why we now see biotech companies merging into them. Though the high valuation mergers have been ignited by R&D strategies largely failing at big pharma over the last two decades, which shows how a strong distribution strategy can overpower a technology strategy. You can build it, but they won’t necessarily come, leaving you with a field of broken dreams.

Applied Materials shifted to this strategy in semiconductor equipment very effectively starting in the late eighties, when chip makers became more concerned with delivery and support than with technology and gee-wiz product features (like upside-down or air-bearing wafer transport, which never worked well).  Building huge manufacturing capacity along with local parts depots and 24/7 service centers gave it the ability to respond faster in upturns as well as service the equipment it had installed faster.

The weakness of the distribution strategy is that large companies can easily copy it. GM and Ford had a distribution strategy. But it was easily circumvented by Toyota, which took a quality strategy and saw distribution as a tactical necessity.  Since quality is more important to customers, the distribution strategy was null. In this case, Toyota gave consumers choice. They no longer had to buy what the big three were selling, which were largely variants of the same thing.

The lesson learned here is that when you gain dominance with one strategy, don’t forget that you still need tactical solutions to the four other strategies. As the market consolidated in the United States and Unions gained veto power over where revenues would come in via strikes, the business focus shifted to appeasing the Unions rather than satisfying the customer. Quality crashed, as prices rose to pay increasingly costlier, yet poorer performing labor. This left an open door for German and then Japanese suppliers, which in a sad ending would cost labor dearly.

 

4) The technology strategy combines being at the cutting edge of both technology and manufacturing.  The two are used to deliver an unstoppable product.  It is generally the most profitable in technology, because it prevents margin stacking.  But it is also the most difficult to execute.  It requires internal manufacturing.  While I show the technology strategy as separate to the IP strategy, it is really a subcategory of the ‘we’ll think of something’ strategy (the other is the IP strategy).  Everybody understands this strategy.  It is simple; your organization is simply smarter than every other company around you.  The ‘we’ll think of something’ strategies only work if your company can be consistently innovative. 

If it doesn’t think of something, it quickly becomes toast.  Great examples of this are what happened to Apple when Scully pushed Steve Jobs out, when Fairchild pushed Bob Noyce and Gordon Moore out, and when big Pharma tried to automate its drug discovery processes with random combinatorial chemistry. 

The advantage to this strategy over the IP strategy is that customers will often hang through lapses in innovation because of your manufacturing prowess.  TI, AMD, and Intel were able to shift from memories to microprocessors successfully in the eighties, because they had strong technology strategies. Big Pharma has worked through it by licensing, manufacturing, and distributing the drugs developed by biotech companies. The other advantage of the technology strategy is that it is easier to sell because you have things to sell, not just ideas.

 

5) The IP or intellectual property strategy is essentially a technology strategy without manufacturing, which is why it is so popular with small start-ups.  It is the cheapest way to enter a market and the easiest strategy to lose a market and business with, because you have nothing to fall back on if you don’t think of something.  It differs from the technology strategy in that it relies solely on the ‘we’ll think of something strategy.’ W. L. Gore is the most common example of this strategy.  Essentially, an IP strategy company thrives by selling licenses to its intellectual property.  The difficulty with this strategy for Tech is that electronics is an industry that abhors paying for IP.  This is particularly true of Asia; and it is an industry that is largely centered in Asia.  Tech companies will do just about anything to avoid paying licenses, including breaking the law.  In fact, the most common defense against an IP company is simply to copy the technology and wait for them to sue you.  The one who is bigger and has more lawyers often wins.  KLA-Tencor is an interesting hybrid, because I would characterize them as really being an IP company – even though they appear to be a technology company.  This is because K-T shrink-wraps their IP in a metal box with a computer.  Doing this has made them very successful.

In the pharmaceutical industry, the biotech companies have been the ones to take the IP strategy. While their products are far more difficult to reverse engineer than the chemical compounds found in classical pharmacology, it is the Big Pharma companies that have typically come out on top in revenue share due to their vertically integrated sales and distribution channels. 

There are multiple ways to blend these strategies.  For example, the value strategy blends low cost with technology and is very common.  There is the overlord strategy that blends distribution with low cost.  It is extremely difficult to beat, as Wal-Mart has proven.  The other overlord variant is to blend distribution with technology or vice-versa.  Overlord strategies are very effective at reversing customer dominant markets, which is why I call them overlord strategies.  They often result from customer abuse of their dominant positions.  As weak suppliers exit the market, the market consolidates and a leading supplier will usually emerge as an overlord.  This occurred in many areas of the electronics and transportation industries after customers aggressively pursued PICOS buying practices in the late nineties.

The hard part about any of these strategies is in moving from one to another.  Toyota did move away from a low-cost strategy with Lexus, by bringing out a completely different brand.  What drove them was the need to deal with rising Yen rates. They had to raise prices.  Many thought Lexus would never succeed because it would be viewed as an expensive Toyota.  Instead, they got customers to invert, thinking of Toyotas as an inexpensive Lexus.  The key is that they effectively stressed a quality strategy for both and raised prices to communicate the quality message.   Nissan copied but was not very successful with Infinity because they didn’t make the inversion and they incurred a price of lower quality as they cut costs to deal with the rising Yen.  They also didn’t have the guts to stick to higher prices.  By discounting, they hurt their image and earnings, which ultimately hurt their quality.  Confusion about the appropriate strategy among management is probably the most to blame.  Clarity of strategy and having the discipline to stick to a chosen strategy is essential to success.

By G Dan Hutcheson

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