What is Strategy?

The Three Levels of Strategy

Learn about the three levels of strategy,

in this video.

You've probably heard the term "business strategy" used in the workplace.

But what is strategy, exactly? And are you aware that you need different types of strategy at different
levels within your organization?

In this article, we're looking at some common definitions of strategy. We'll focus on three strategic
levels corporate strategy, business unit strategy, and team strategy and we'll look at some of the
core tools and models associated with each area.
Defining Strategy

Strategy has been studied for years by business leaders and by business theorists. Yet, there is no
definitive answer about what strategy really is.

One reason for this is that people think about strategy in different ways.

For instance, some people believe that you must analyze the present carefully, anticipate changes in
your market or industry, and, from this, plan how you'll succeed in the future. Meanwhile, others think
that the future is just too difficult to predict, and they prefer to evolve their strategies organically.

Gerry Johnson and Kevan Scholes, authors of "Exploring Corporate Strategy," say that strategy
determines the direction and scope of an organization over the long term, and they say that it should
determine how resources should be configured to meet the needs of markets and stakeholders.

Michael Porter, a strategy expert and professor at Harvard Business School, emphasizes the need for
strategy to define and communicate an organization's unique position, and says that it should determine
how organizational resources, skills, and competencies should be combined to create competitive
advantage.

While there will always be some evolved element of strategy, at Mind Tools, we believe that planning
for success in the marketplace is important; and that, to take full advantage of the opportunities open to
them, organizations need to anticipate and prepare for the future at all levels.

For instance, many successful and productive organizations have a corporate strategy to guide the big
picture. Each business unit within the organization then has a business unit strategy, which its leaders
use to determine how they will compete in their individual markets.

In turn, each team should have its own strategy to ensure that its day-to-day activities help move the
organization in the right direction.

At each level, though, a simple definition of strategy can be: "Determining how we are going to win in
the period ahead."

We'll now look more deeply at each level of strategy corporate, business unit, and team.
Corporate Strategy

In business, corporate strategy refers to the overall strategy of an organization that is made up of
multiple business units, operating in multiple markets. It determines how the corporation as a whole
supports and enhances the value of the business units within it; and it answers the question, "How do
we structure the overall business, so that all of its parts create more value together than they would
individually?"

Corporations can do this by building strong internal competences, by sharing technologies and resources
between business units, by raising capital cost-effectively, by developing and nurturing a strong
corporate brand, and so on.

So, at this level of strategy, we're concerned with thinking about how the business units within the
corporation should fit together, and understanding how resources should be deployed to create the
greatest possible value. Tools like Porter's Generic Strategies , the Boston Matrix , the ADL Matrix and
VRIO Analysis will help with this type of high-level analysis and planning.

The organization's design is another important strategic factor that needs to be considered at this level.
How you structure your business, your people, and other resources all of these affect competitive
advantage and can support your strategic goals.
Business Unit Strategy

Strategy at the business unit level is concerned with competing successfully in individual markets, and it
addresses the question, "How do we win in this market?" However, this strategy needs to be linked to
the objectives identified in the corporate level strategy.

Competitive analysis, including gathering competitive intelligence , is a great starting point for
developing a business unit strategy. As part of this, it's important to think about your core competencies
, and how you can use these to meet your customers' needs in the best possible way. From there you
can use USP Analysis to understand how to strengthen your competitive position.

You will also want to explore your options for creating and exploiting new opportunities. Porter's Five
Forces is a must-have tool for this process, while a SWOT Analysis will help you understand and
address the opportunities and threats in your market.
Note:

For smaller businesses, corporate and business unit strategy may overlap or be the same thing.
However, if an organization is competing in different markets, then each business unit needs to think
about its own strategic direction.

It's important, though, that each business unit's strategy is aligned with the overall strategy of the
corporation, particularly where the corporation's brand is important.

Your business unit strategy will likely be the most visible level of strategy within each business area.
People working within each unit should be able to draw direct links between this strategy and the work
that they're doing. When people understand how they can help their business unit "win," you have the
basis for a highly productive and motivated workforce. As such, it's important to have a clear definition
of the business unit's mission, vision and values .
Team Strategy

To execute your corporate and business unit strategies successfully, you need teams throughout your
organization to work together. Each of these teams has a different contribution to make, meaning that
each team needs to have its own team-level strategy, however simple.

This team strategy must lead directly to the achievement of business unit and corporate strategies,
meaning that all levels of strategy support and enhance each other to ensure that the organization is
successful.

This is where it's useful to define the team's purpose and boundaries using, for example, a team charter
; and to manage it using techniques such as Management by Objectives and use of key performance
indicators .

You need to be working efficiently to achieve the strategic objectives that have been set at higher levels
of the organization; so, an important element of your team strategy is to implement best practices to
help your team to meet its objectives. Activities that optimize supplier management, quality, and
operational excellence are also important factors in creating and executing an effective team strategy.
Key Points

Strategy can be difficult to define, but a good definition is: "Determining how we will win in the period
ahead."

In business there are different levels of strategy. Each of these has a different focus, and needs different
tools and skills.

Corporate strategy focuses on the organization as a whole, while business unit strategy focuses on an
individual business unit or market.

Finally, team strategy identifies how a team will help the organization meet its overall goals and
objectives.
Lafley and Martins Five-Step Strategy Model
Making Effective Strategic Choices
Lafley and Martin's Five-Step Strategy Model

You can use these five questions to develop a winning strategy.

iStockphoto/Ridofranz

What business strategy is all about what distinguishes it from all other kinds of business planning
is, in a word, competitive advantage. Without competitors there would be no need for strategy, for the
sole purpose of strategic planning is to enable the company to gain, as efficiently as possible, a
sustainable edge over its competitors. Kenichi Ohmae.

Every day, your company competes with other companies to survive and succeed. Your competitors
have the same goal as you: to win. This is why you need to think carefully about how you'll get ahead
you need to develop a winning strategy.

It's hard to do this. If you get your strategy wrong (and this includes not thinking about strategy at all),
you'll fall behind your rivals, and you may never recover your position. However, get strategy right, and
you can pull ahead of the competition.

So, how can you develop a winning strategy?

In this article, we'll examine Lafley and Martin's Five-Step Strategy Model, a tool that that you can use to
do this for your organization.
About the Model

A.G. Lafley and Roger Martin developed the Five-Step Strategy Model and published it in their 2013
book, "Playing to Win." Lafley is a former CEO of Procter & Gamble, and Martin was previously Dean at
the Rotman School of Management.

According to Lafley and Martin, strategy is " an integrated set of choices that uniquely positions the
firm in its industry, so as to create sustainable advantage and superior value relative to the
competition."

The authors developed a framework that decision makers can use to select the right strategic approach
for their organization. They can then make operational choices that support this strategy.

To develop a winning strategy, you need to answer the following five questions in order:

What is our winning aspiration?

Where will we play?
How will we win?
What capabilities must we have in place to win?
What management systems are required to support our choices?

Figure 1 Lafley and Martin's Five-Step Strategy Model

Lafley and Martins Five-Step Strategy Model

From "Playing to Win: How Strategy Really Works" by A.G. Lafley and Roger Martin. Published by
Harvard Business Review Press, 2013.

Once you've answered each question, be prepared to to revisit earlier questions to refine your answers.
Applying the Five Steps

Let's look at each of the five steps in detail, and think about how you can apply each one to your
organization.
1. What is our Winning Aspiration?

Your winning aspiration is your organization's guiding purpose it's the reason that it does what it does.

Lafley and Martin maintain that...

SWOT Analysis
Discover New Opportunities. Manage and Eliminate Threats.

Find out more about SWOT,

with James Manktelow & Amy Carlson.

SWOT Analysis is a useful technique for understanding your Strengths and Weaknesses, and for
identifying both the Opportunities open to you and the Threats you face.

Used in a business context, it helps you carve a sustainable niche in your market. Used in a personal
context , it helps you develop your career in a way that takes best advantage of your talents, abilities
and opportunities.

This article looks at how to use SWOT in a business context. (Click here to learn how to do a Personal
SWOT Analysis .
Business SWOT Analysis

What makes SWOT particularly powerful is that, with a little thought, it can help you uncover
opportunities that you are well-placed to exploit. And by understanding the weaknesses of your
business, you can manage and eliminate threats that would otherwise catch you unawares.

More than this, by looking at yourself and your competitors using the SWOT framework, you can start to
craft a strategy that helps you distinguish yourself from your competitors, so that you can compete
successfully in your market.
How to Use the Tool

Originated by Albert S Humphrey in the 1960s, the tool is as useful now as it was then. You can use it in
two ways as a simple icebreaker helping people get together to "kick off" strategy formulation, or in a
more sophisticated way as a serious strategy tool.
Tip:

Strengths and weaknesses are often internal to your organization, while opportunities and threats
generally relate to external factors. For this reason, SWOT is sometimes called Internal-External Analysis
and the SWOT Matrix is sometimes called an IE Matrix.

To help you to carry out upir analysis, download and print off our free worksheet, and write down
answers to the following questions.

Strengths

What advantages does your organization have?

What do you do better than anyone else?
What unique or lowest-cost resources can you draw upon that others can't?
What do people in your market see as your strengths?
What factors mean that you "get the sale"?
What is your organization's Unique Selling Proposition (USP)?

Consider your strengths from both an internal perspective, and from the point of view of your
customers and people in your market.

Also, if you're having any difficulty identifying strengths, try writing down a list of your organization's
characteristics. Some of these will hopefully be strengths!

When looking at your strengths, think about them in relation to your competitors. For example, if all of
your competitors provide high quality products, then a high quality production process is not a strength
in your organization's market, it's a necessity.
Weaknesses

What could you improve?

What should you avoid?
What are people in your market likely to see as weaknesses?
What factors lose you sales?

Again, consider this from an internal and external basis: Do other people seem to perceive weaknesses
that you don't see? Are your competitors doing any better than you?

It's best to be realistic now, and face any unpleasant truths as soon as possible.
Opportunities

What good opportunities can you spot?

What interesting trends are you aware of?

Useful opportunities can come from such things as:

Changes in technology and markets on both a broad and narrow scale.

Changes in government policy related to your field.
Changes in social patterns, population profiles, lifestyle changes, and so on.
Local events.

Tip:

A useful approach when looking at opportunities is to look at your strengths and ask yourself whether
these open up any opportunities. Alternatively, look at your weaknesses and ask yourself whether you
could open up opportunities by eliminating them.
Threats

What obstacles do you face?

What are your competitors doing?
Are quality standards or specifications for your job, products or services changing?
Is changing technology threatening your position?
Do you have bad debt or cash-flow problems?
Could any of your weaknesses seriously threaten your business?

Tip:

When looking at opportunities and threats, PEST Analysis can help to ensure that you don't overlook
external factors, such as new government regulations, or technological changes in your industry.
Further SWOT Tips

If you're using SWOT as a serious tool (rather than as a casual "warm up" for strategy formulation),
make sure you're rigorous in the way you apply it:

Only accept precise, verifiable statements ("Cost advantage of US$10/ton in sourcing raw material x",
rather than "Good value for money").
Ruthlessly prune long lists of factors, and prioritize them, so that you spend your time thinking about
the most significant factors.
Make sure that options generated are carried through to later stages in the strategy formation
process.
Apply it at the right level for example, you might need to apply the tool at a product or product-line
level, rather than at the much vaguer whole company level.
Use it in conjunction with other strategy tools (for example, USP Analysis and Core Competence
Analysis ) so that you get a comprehensive picture of the situation you're dealing with.

Note:

You could also consider using the TOWS Matrix . This is quite similar to SWOT in that it also focuses on
the same four elements of Strengths, Weaknesses, Opportunities and Threats. But TOWS can be a
helpful alternative because it emphasizes the external environment, while SWOT focuses on the internal
environment.
Example

A start-up small consultancy business might draw up the following SWOT Analysis:
Strengths

We are able to respond very quickly as we have no red tape, and no need for higher management
approval.
We are able to give really good customer care, as the current small amount of work means we have
plenty of time to devote to customers.
Our lead consultant has strong reputation in the market.
We can change direction quickly if we find that our marketing is not working.
We have low overheads, so we can offer good value to customers.

Weaknesses

Our company has little market presence or reputation.

We have a small staff, with a shallow skills base in many areas.
We are vulnerable to vital staff being sick, and leaving.
Our cash flow will be unreliable in the early stages.

Opportunities

Our business sector is expanding, with many future opportunities for success.
Local government wants to encourage local businesses.
Our competitors may be slow to adopt new technologies.

Threats

Developments in technology may change this market beyond our ability to adapt.
A small change in the focus of a large competitor might wipe out any market position we achieve.

As a result of their analysis, the consultancy may decide to specialize in rapid response, good value
services to local businesses and local government.

Marketing would be in selected local publications to get the greatest possible market presence for a set
advertising budget, and the consultancy should keep up-to-date with changes in technology where
possible.
Key Points

SWOT Analysis is a simple but useful framework for analyzing your organization's strengths and
weaknesses, and the opportunities and threats that you face. It helps you focus on your strengths,
minimize threats, and take the greatest possible advantage of opportunities available to you.

It can be used to "kick off" strategy formulation, or in a more sophisticated way as a serious strategy
tool. You can also use it to get an understanding of your competitors, which can give you the insights
you need to craft a coherent and successful competitive position.

When carrying out your analysis, be realistic and rigorous. Apply it at the right level, and supplement it
with other option-generation tools where appropriate.
Using the TOWS Matrix
Developing Strategic Options From an External-Internal Analysis

Sometimes it helps to look at a problem from a different perspective.

iStockphoto/skilpad

TOWS Analysis is a variant of the classic business tool, SWOT Analysis.

TOWS and SWOT are acronyms for different arrangements of the words Strengths, Weaknesses,
Opportunities and Threats.

By analyzing the external environment (threats and opportunities), and your internal environment
(weaknesses and strengths), you can use these techniques to think about the strategy of your whole
organization, a department or a team. You can also use them to think about a process, a marketing
campaign, or even your own skills and experience.

Our article on SWOT Analysis helps you perform a thorough SWOT/TOWS Analysis. At a practical level,
the only difference between TOWS and SWOT is that TOWS emphasizes the external environment whilst
SWOT emphasizes the internal environment. In both cases, this analysis results in a SWOT (or TOWS)
Matrix like the one shown below:
Strengths

Weaknesses

Opportunities Threats

In this article, we look at how you can extend your use of SWOT and TOWS to think in detail about the
strategic options open to you. While this approach can be used just as well with SWOT as TOWS, it's
most often associated with TOWS.
Identifying Strategic Options

SWOT or TOWS analysis helps you get a better understanding of the strategic choices that you face.
(Remember that "strategy" is the art of determining how you'll "win" in business and life.) It helps you
ask, and answer, the following questions: How do you:

Make the most of your strengths?

Circumvent your weaknesses?
Capitalize on your opportunities?
Manage your threats?

A next step of analysis, usually associated with the externally-focused TOWS Matrix, helps you think
about the options that you could pursue. To do this you match external opportunities and threats with
your internal strengths and weaknesses, as illustrated in the matrix below:
TOWS Strategic Alternatives Matrix

External Opportunities
(O)
1.
2.
3.
4.

External Threats
(T)
1.

2.
3.
4.

Internal Strengths
(S)
1.
2.
3.
4.

SO
"Maxi-Maxi" Strategy

Strategies that use strengths to maximize opportunities.

ST
"Maxi-Mini" Strategy

Strategies that use strengths to minimize threats.

Internal Weaknesses (W)

1.
2.
3.
4.

WO
"Mini-Maxi" Strategy

Strategies that minimize weaknesses by taking advantage of opportunities.

WT
"Mini-Mini" Strategy

Strategies that minimize weaknesses and avoid threats.

TOWS Matrix 1982 Heinz Weihrich, Ph.D.

This helps you identify strategic alternatives that address the following additional questions:

Strengths and Opportunities (SO) How can you use your strengths to take advantage of the
opportunities?
Strengths and Threats (ST) How can you take advantage of your strengths to avoid real and potential
threats?
Weaknesses and Opportunities (WO) How can you use your opportunities to overcome the
weaknesses you are experiencing?
Weaknesses and Threats (WT) How can you minimize your weaknesses and avoid threats?

Using the Tool

Step 1: Print off our free SWOT Worksheet and perform a TOWS/SWOT analysis, recording your findings
in the space provided. This helps you understand what your strengths and weaknesses are, as well as
identifying the opportunities and threats that you should be looking at.

Step 2: Print off our free TOWS Strategic Options Worksheet , and copy the key conclusions from the
SWOT Worksheet into the area provided (shaded in blue).

Step 3: For each combination of internal and external environmental factors, consider how you can use
them to create good strategic options:

Strengths and Opportunities (SO) How can you use your strengths to take advantage of these
opportunities?
Strengths and Threats (ST) How can you take advantage of your strengths to avoid real and potential
threats?
Weaknesses and Opportunities (WO) How can you use your opportunities to overcome the
weaknesses you are experiencing?
Weaknesses and Threats (WT) How can you minimize your weaknesses and avoid threats?

Note:

The WT quadrant weaknesses and threats is concerned with defensive strategies. Put these into
place to protect yourself from loss, however don't rely on them to create success.

The options you identify are your strategic alternatives, and these can be listed in the appropriate
quadrant of the TOWS worksheet.
Tip:

When you have many factors to consider, it may be helpful to construct a matrix to match individual
strengths and weaknesses to the individual opportunities and threats you've identified. To do this, you
can construct a matrix such as the one below for each quadrant (SO, ST, WO, and WT).
SO Matrix
O1
O2
O3
O4

S1

S2

S3

S4

This helps you analyze in more depth options that hold the greatest promise. Note any new alternatives
you identify on the TOWS Strategic Alternatives worksheet.

Step 4: Evaluate the options you've generated, and identify the ones that give the greatest benefit, and
that best achieve the mission and vision of your organization. Add these to the other strategic options
that you're considering.
Tip:

See the Mind Tools Strategy and Creativity Sections for other useful techniques for understanding your
environment, and analyzing your strategic options. And see our Problem Solving and Decision Making
Sections for techniques for understanding these options in more detail, and deciding between them.
Key Points

The TOWS Matrix is a relatively simple tool for generating strategic options. By using it, you can look
intelligently at how you can best take advantage of the opportunities open to you, at the same time that
you minimize the impact of weaknesses and protect yourself against threats.

Used after detailed analysis of your threats, opportunities, strength and weaknesses, it helps you
consider how to use the external environment to your strategic advantage, and so identify some of the
strategic options available to you.
Porters Five Forces
Assessing the Balance of Power in a Business Situation

Assess the balance of power in a business situation, with

James Manktelow & Amy Carlson.

The Porter's Five Forces tool is a simple but powerful tool for understanding where power lies in a
business situation. This is useful, because it helps you understand both the strength of your current
competitive position, and the strength of a position you're considering moving into.

With a clear understanding of where power lies, you can take fair advantage of a situation of strength,
improve a situation of weakness, and avoid taking wrong steps. This makes it an important part of your
planning toolkit.

Conventionally, the tool is used to identify whether new products, services or businesses have the
potential to be profitable. However it can be very illuminating when used to understand the balance of
power in other situations.
Understanding the Tool

Five Forces Analysis assumes that there are five important forces that determine competitive power in a
business situation. These are:

Supplier Power: Here you assess how easy it is for suppliers to drive up prices. This is driven by the
number of suppliers of each key input, the uniqueness of their product or service, their strength and
control over you, the cost of switching from one to another, and so on. The fewer the supplier choices
you have, and the more you need suppliers' help, the more powerful your suppliers are.
Buyer Power: Here you ask yourself how easy it is for buyers to drive prices down. Again, this is driven
by the number of buyers, the importance of each individual buyer to your business, the cost to them of
switching from your products and services to those of someone else, and so on. If you deal with few,
powerful buyers, then they are often able to dictate terms to you.
Competitive Rivalry: What is important here is the number and capability of your competitors. If you
have many competitors, and they offer equally attractive products and services, then you'll most likely
have little power in the situation, because suppliers and buyers will go elsewhere if they don't get a
good deal from you. On the other hand, if no-one else can do what you do, then you can often have
tremendous strength.
Threat of Substitution: This is affected by the ability of your customers to find a different way of doing
what you do for example, if you supply a unique software product that automates an important
process, people may substitute by doing the process manually or by outsourcing it. If substitution is easy
and substitution is viable, then this weakens your power.
Threat of New Entry: Power is also affected by the ability of people to enter your market. If it costs
little in time or money to enter your market and compete effectively, if there are few economies of scale
in place, or if you have little protection for your key technologies, then new competitors can quickly
enter your market and weaken your position. If you have strong and durable barriers to entry, then you
can preserve a favorable position and take fair advantage of it.

These forces can be neatly brought together in a diagram like the one in figure 1 below:

Figure 1 Porter's Five Forces

Porter's Five Forces Diagram

Using the Tool

To use the tool to understand your situation, look at each of these forces one-by-one and write your
observations on our free worksheet .

Brainstorm the relevant factors for your market or situation, and then check against the factors listed for
the force in the diagram above.

Then, mark the key factors on the diagram, and summarize the size and scale of the force on the
diagram. An easy way of doing this is to use, for example, a single "+" sign for a force moderately in your
favor, or "--" for a force strongly against you (you can see this in the example below).

Then look at the situation you find using this analysis and think through how it affects you. Bear in mind
that few situations are perfect; however looking at things in this way helps you think through what you
could change to increase your power with respect to each force. Whats more, if you find yourself in a
structurally weak position, this tool helps you think about what you can do to move into a stronger one.

This tool was created by Harvard Business School professor, Michael Porter, to analyze the
attractiveness and likely-profitability of an industry. Since publication, it has become one of the most
important business strategy tools. The classic article which introduces it is "How Competitive Forces
Shape Strategy" in Harvard Business Review 57, March April 1979, pages 86-93.
Example

Martin Johnson is deciding whether to switch career and become a farmer he's always loved the
countryside, and wants to switch to a career where he's his own boss. He creates the following Five
Forces Analysis as he thinks the situation through:

Figure 2 Porter's Five Forces Example: Buying a Farm

Porter's Five Forces Example

This worries him:

The threat of new entry is quite high: if anyone looks as if they're making a sustained profit, new
competitors can come into the industry easily, reducing profits.
Competitive rivalry is extremely high: if someone raises prices, they'll be quickly undercut. Intense
competition puts strong downward pressure on prices.
Buyer Power is strong, again implying strong downward pressure on prices.
There is some threat of substitution.

Unless he is able to find some way of changing this situation, this looks like a very tough industry to
survive in. Maybe he'll need to specialize in a sector of the market that's protected from some of these
forces, or find a related business that's in a stronger position.
Key Points

Porter's Five Forces Analysis is an important tool for assessing the potential for profitability in an
industry. With a little adaptation, it is also useful as a way of assessing the balance of power in more
general situations.

It works by looking at the strength of five important forces that affect competition:

Supplier Power: The power of suppliers to drive up the prices of your inputs.
Buyer Power: The power of your customers to drive down your prices.
Competitive Rivalry: The strength of competition in the industry.
The Threat of Substitution: The extent to which different products and services can be used in place of
your own.
The Threat of New Entry: The ease with which new competitors can enter the market if they see that
you are making good profits (and then drive your prices down).

By thinking about how each force affects you, and by identifying the strength and direction of each
force, you can quickly assess the strength of your position and your ability to make a sustained profit in
the industry.

You can then look at how you can affect each of the forces to move the balance of power more in your
favor
PEST Analysis

Identifying "Big Picture" Opportunities and Threats

(Also Known as PESTLE, PESTEL, PESTLIED, STEEPLE, SLEPT and LONGPESTLE)

Understand your environment,

with James Manktelow & Amy Carlson.

Changes in your business environment can create great opportunities for your organization and cause
significant threats.

For example, opportunities can come from new technologies that help you reach new customers, from
new funding streams that allow you to invest in better equipment, and from changed government
policies that open up new markets.

Threats can include deregulation that exposes you to intensified competition; a shrinking market; or
increases to interest rates, which can cause problems if your company is burdened by debt.

PEST Analysis is a simple and widely used tool that helps you analyze the Political, Economic, SocioCultural, and Technological changes in your business environment. This helps you understand the "big
picture" forces of change that you're exposed to, and, from this, take advantage of the opportunities
that they present.

In this article, we'll look at how you can use PEST Analysis to understand and adapt to your future
business environment.
About the Tool

Harvard professor Francis Aguilar is thought to be the creator of PEST Analysis. He included a scanning
tool called ETPS in his 1967 book, "Scanning the Business Environment." The name was later tweaked to
create the current acronym.

PEST Analysis is useful for four main reasons:

It helps you to spot business or personal opportunities, and it gives you advanced warning of
significant threats.

It reveals the direction of change within your business environment. This helps you shape what you're
doing, so that you work with change, rather than against it.
It helps you avoid starting projects that are likely to fail, for reasons beyond your control.
It can help you break free of unconscious assumptions when you enter a new country, region, or
market; because it helps you develop an objective view of this new environment.

Note:

PEST Analysis is often linked with SWOT Analysis , however, the two tools have different areas of focus.
PEST Analysis looks at "big picture" factors that might influence a decision, a market, or a potential new
business. SWOT Analysis explores these factors at a business, product-line or product level.

These tools complement one another and are often used together.
How to Use the Tool

Follow these steps to analyze your business environment, and the opportunities and threats that it
presents.

Use PEST to brainstorm the changes happening around you. Use the prompts below to guide your
questioning, and tailor the questions to suit the specific needs of your business.
Brainstorm opportunities arising from each of these changes.
Brainstorm threats or issues that could be caused by them.
Take appropriate action.

Our worksheet guides you through these steps.

Step 1: Brainstorm Factors
Political Factors to Consider

When is the country's next local, state, or national election? How could this change government or
regional policy?
Who are the most likely contenders for power? What are their views on business policy, and on other
policies that affect your organization?

Depending on the country, how well developed are property rights and the rule of law, and how
widespread are corruption and organized crime? How are these situations likely to change, and how is
this likely to affect you?
Could any pending legislation or taxation changes affect your business, either positively or negatively?
How will business regulation, along with any planned changes to it, affect your business? And is there
a trend towards regulation or deregulation?
How does government approach corporate policy, corporate social responsibility, environmental
issues, and customer protection legislation? What impact does this have, and is it likely to change?
What is the likely timescale of proposed legislative changes?
Are there any other political factors that are likely to change?

Economic Factors to Consider

How stable is the current economy? Is it growing, stagnating, or declining?

Are key exchange rates stable, or do they tend to vary significantly?
Are customers' levels of disposable income rising or falling? How is this likely to change in the next
few years?
What is the unemployment rate? Will it be easy to build a skilled workforce? Or will it be expensive to
hire skilled labor?
Do consumers and businesses have easy access to credit? If not, how will this affect your
organization?
How is globalization affecting the economic environment?
Are there any other economic factors that you should consider?

Tip:

Use Porter's Diamond to align your strategy with your country's business conditions.
Socio-Cultural Factors to Consider

What is the population's growth rate and age profile? How is this likely to change?
Are generational shifts in attitude likely to affect what you're doing?

What are your society's levels of health, education, and social mobility? How are these changing, and
what impact does this have?
What employment patterns, job market trends, and attitudes toward work can you observe? Are
these different for different age groups?
What social attitudes and social taboos could affect your business? Have there been recent sociocultural changes that might affect this?
How do religious beliefs and lifestyle choices affect the population?
Are any other socio-cultural factors likely to drive change for your business?

Tip:

Values take a central role in any society. Use the Competing Values Framework to identify your
organization's values, and Hofstede's Cultural Dimensions to explore the values of your customers.
Technological Factors to Consider

Are there any new technologies that you could be using?

Are there any new technologies on the horizon that could radically affect your work or your industry?
Do any of your competitors have access to new technologies that could redefine their products?
In which areas do governments and educational institutions focus their research? Is there anything
you can do to take advantage of this?
How have infrastructure changes affected work patterns (for example, levels of remote working)?
Are there existing technological hubs that you could work with or learn from?
Are there any other technological factors that you should consider?

Note:

There are variations of PEST Analysis that bring other factors into consideration. These include:

PESTLE/PESTEL: Political, Economic, Socio-Cultural, Technological, Legal, Environmental.

PESTLIED: Political, Economic, Socio-Cultural, Technological, Legal, International, Environmental,
Demographic.

STEEPLE: Social/Demographic, Technological, Economic, Environmental, Political, Legal, Ethical.

SLEPT: Socio-Cultural, Legal, Economic, Political, Technological.
LONGPESTLE: Local, National, and Global versions of PESTLE. (These are best used for understanding
change in multinational organizations.)

Choose the version that best suits your situation.

Step 2: Brainstorm Opportunities

Once you've identified the changes that are taking place in your business environment, it's time to look
at each change, and brainstorm the opportunities that this could open up for you. For example, could it
help you develop new products, open up new markets, or help you make processes more efficient?
Step 3: Brainstorm Threats

It's also important to think about how these changes could undermine your business. If you understand
this early enough, you may be able to avoid these problems, or minimize their impact.

For example, if a core part of your market is in demographic decline, could you open up other areas of
the market? Or if technology is threatening a key product, can you master that technology and improve
the product? (Risk Analysis can help you to assess these threats and devise strategies to manage them.)
Step 4: Take Action

Where you have identified significant opportunities, build the actions you'll take to exploit them into
your Business Plan . Where you've identified significant risks, take appropriate action to manage or
eliminate them.
Key Points

PEST Analysis helps you understand the Political, Economic, Social, and Technological changes that will
shape your business environment.

You can use these headings to brainstorm the "big picture" characteristics of a business environment
(this could be a country, a region, or a new or existing market), and, from this, draw conclusions about
the significant forces of change operating within it.

This provides a context for more detailed planning, within which you will be able to minimize risk and
take full advantage of the opportunities that present themselves.
Critical Success Factors
Identifying the Things That Really Matter for Success
Critical Success Factors

How will you measure success?

iStockphoto/wakila

So many important matters can compete for your attention in business that it's often difficult to see the
"wood for the trees".

What's more, it can be extremely difficult to get everyone in the team pulling in the same direction and
focusing on the true essentials. That's where Critical Success Factors (CSFs) can help.

CSFs, also known as Key Results Areas (KRAs), are the essential areas of activity that must be performed
well if you are to achieve the mission, objectives or goals for your business or project. By identifying
your Critical Success Factors, you can create a common point of reference to help you direct and
measure the success of your business or project.

As a common point of reference, CSFs help everyone in the team to know exactly what's most
important. And this helps people perform their own work in the right context and so pull together
towards the same overall aims.
About CSFs

The idea of CSFs was first presented by D. Ronald Daniel in the 1960s. It was then built on and
popularized a decade later by John F. Rockart, of MIT's Sloan School of Management, and has since been
used extensively to help businesses implement their strategies and projects.

Inevitably, the CSF concept has evolved, and you may have seen it implemented in different ways. This
article provides a simple definition and approach based on Rockart's original ideas.

Rockart defined CSFs as: "The limited number of areas in which results, if they are satisfactory, will
ensure successful competitive performance for the organization. They are the few key areas where
things must go right for the business to flourish. If results in these areas are not adequate, the
organization's efforts for the period will be less than desired."

He also concluded that CSFs are "areas of activity that should receive constant and careful attention
from management."

Critical Success Factors are strongly related to the mission and strategic goals of your business or
project. Whereas the mission and goals focus on the aims and what is to be achieved, Critical Success
Factors focus on the most important areas and get to the very heart of both what is to be achieved and
how you will achieve it.
Using the Tool: An Example

CSFs are best understood by example. Consider a produce store "Farm Fresh Produce", whose mission
is:

"To become the number one produce store in Main Street by selling the highest quality, freshest farm
produce, from farm to customer in under 24 hours on 75% of our range and with 98% customer
satisfaction."

(For more on this example, and how to develop your mission statement, see our article on Vision
Statements and Mission Statements .)

The strategic objectives of Farm Fresh are to:

Gain market share locally of 25%.

Achieve fresh supplies of "farm to customer" in 24 hours for 75% of products.
Sustain a customer satisfaction rate of 98%.
Expand product range to attract more customers.
Have sufficient store space to accommodate the range of products that customers want.

In order to identify possible CSFs, we must examine the mission and objectives and see which areas of
the business need attention so that they can be achieved. We can start by brainstorming what the
Critical Success Factors might be (these are the "Candidate" CSFs.)
Objective

Candidate Critical Success Factors

Gain market share locally of 25%

Increase competitiveness versus other local stores

Attract new customers

Achieve fresh supplies of farm to customer in 24 hours for 75% of products
relationships with local suppliers
Sustain a customer satisfaction rate of 98%

Sustain successful

Retain staff and keep up customer-focused training

Expand product range to attract more customers

Source new products locally

Extend store space to accommodate new products and customers

Secure financing for expansion

Manage building work and any disruption to the business

Once you have a list of Candidate CSFs, it's time to consider what is absolutely essential and so identify
the truly Critical Success Factors.

And this is certainly the case for Farm Fresh Produce. The first CSF that we identify from the candidate
list is relationships with local suppliers". This is absolutely essential to ensure freshness and to source
new products.

Another CSF is to attract new customers. Without new customers, the store will be unable to expand to
increase market share.

A third CSF is financing for expansion. The store's objectives cannot be met without the funds to invest
in expanding the store space.
Critical Success Factors Example

Tip: How Many CSFs?

Whilst there is no hard and fast rule, it's useful to limit the number of CSFs to five or fewer absolute
essentials. This helps your CSFs have maximum impact, and so give good direction and prioritization to
other elements of your business or project strategy.
Using the Tool: Summary Steps

In reality, identifying your CSFs is a very iterative process. Your mission, strategic goals and CSFs are
intrinsically linked and each will be refined as you develop them.

Here are the summary steps that, used iteratively, will help you identify the CSFs for your business or
project:

Step One: Establish your business's or project's mission and strategic goals (click here for help doing
this.)

Step Two: For each strategic goal, ask yourself "what area of business or project activity is essential to
achieve this goal?" The answers to the question are your candidate CSFs.
Tip:

To make sure you consider all types of possible CSFs, you can use Rockart's CSF types as a checklist.

Industry these factors result from specific industry characteristics. These are the things that the
organization must do to remain competitive.
Environmental these factors result from macro-environmental influences on an organization. Things
like the business climate, the economy, competitors, and technological advancements are included in
this category.
Strategic these factors result from the specific competitive strategy chosen by the organization. The
way in which the company chooses to position themselves, market themselves, whether they are high
volume low cost or low volume high cost producers, etc.
Temporal these factors result from the organization's internal forces. Specific barriers, challenges,
directions, and influences will determine these CSFs.

Step Three: Evaluate the list of candidate CSFs to find the absolute essential elements for achieving
success these are your Criticial Success Factors.

As you identify and evaluate candidate CSFs, you may uncover some new strategic objectives or more
detailed objectives. So you may need to define your mission, objectives and CSFs iteratively.

Step Four: Identify how you will monitor and measure each of the CSFs

Step Five: Communicate your CSFs along with the other important elements of your business or project's
strategy.

Step Six: Keep monitoring and reevaluating your CSFs to ensure you keep progressing towards your
aims. Indeed, whilst CSFs are sometimes less tangible than measurable goals, it is useful to identify as
specifically as possible how you can measure or monitor each one.
Key Points

Critical Success Factors, also known as Key Results Areas, are the areas of your business or project that
are absolutely essential to its success. By identifying and communicating these CSFs, you can help
ensure your business or project is well-focused and avoid wasting effort and resources on less important
areas. By making CSFs explicit and communicating them with everyone involved, you can help keep the
business and project on track towards common aims and goals.
Competitive advantage

Core Competence Analysis

Building Sustainable Competitive Advantage

What makes you stand out from the crowd?

iStockphoto/abzee

The idea of "core competences" is one of the most important business ideas currently shaping our
world. This is one of the key ideas that lies behind the current wave of outsourcing, as businesses
concentrate their efforts on things they do well and outsource as much as they can of everything else.

In this article we explain the idea and help you use it, on both corporate and personal levels. And by
doing so, we show you how you can get ahead of your competition and stay ahead.

By using the idea, you'll make the very most of the opportunities open to you:

You'll focus your efforts so that you develop a unique level of expertise in areas that really matter to
your customers. Because of this, you'll command the rewards that come with this expertise.
You'll learn to develop your own skills in a way that complements your company's core competences.
By building the skills and abilities that your company most values, you'll win respect and get the career
advancement that you want.

Explaining Core Competences: The Value of Uniqueness

The starting point for understanding core competences is understanding that businesses need to have
something that customers uniquely value if they're to make good profits.

"Me too" businesses (with nothing unique to distinguish them from their competition) are doomed to
compete on price: the only thing they can do to make themselves the customer's top choice is drop
price. And as other "me too" businesses do the same, profit margins become thinner and thinner.

This is why there's such an emphasis on building and selling USPs (Unique Selling Points ) in business.

If you're able to offer something uniquely good, customers will want to choose your products and will be
willing to pay more for them.

The question, though, is where this uniqueness comes from, and how it can be sustained.

In their key 1990 paper "The Core Competence of the Corporation," C.K.Prahalad and Gary Hamel argue
that "Core Competences" are some of the most important sources of uniqueness: these are the things
that a company can do uniquely well, and that no-one else can copy quickly enough to affect
competition.

Prahalad and Hamel used examples of slow-growing and now-forgotten mega corporations that failed to
recognize and capitalize on their strengths. They compared them with star performers of the 1980s
(such as NEC, Canon and Honda), which had a very clear idea of what they were good at, and which
grew very fast.

Because these companies were focused on their core competences, and continually worked to build and
reinforce them, their products were more advanced than those of their competitors, and customers
were prepared to pay more for them. And as they switched effort away from areas where they were
weak, and further focused on areas of strength, their products built up more and more of a market lead.

Now you'll probably find this an attractive idea, and it's often easy to think about a whole range of
things that a company does that it can do well. However, Hamel and Prahalad give three tests to see
whether they are true core competences:

Relevance The competence must give your customer something that strongly influences him or her
to choose your product or service. If it does not, then it has no effect on your competitive position and is
not a core competence.
Difficulty of imitation The core competence should be difficult to imitate. This allows you to provide
products that are better than those of your competition. And because you're continually working to
improve these skills, means that you can sustain its competitive position.
Breadth of application It should be something that opens up a good number of potential markets. If
it only opens up a few small, niche markets, then success in these markets will not be enough to sustain
significant growth.

For example, you might consider strong industry knowledge and expertise to be a core competence in
serving your industry. However, if your competitors have equivalent expertise, then this is not a core
competence. All it does is make it more difficult for new competitors to enter the market. More than
this, it's unlikely to help you much in moving into new markets, which will have established experts
already. (Test 1: Yes. Test 2: No. Test 3: Probably not.)
Using This in Your Business and Career

To identify your core competences, use the following steps:

Brainstorm the factors that are important to your clients.

If you're doing this on behalf of your company, identify the factors that influence people's purchase
decisions when they're buying products or services like yours. (Make sure that you move beyond just
product or service features and include all decision-making points.)

If you're doing this for yourself, brainstorm the factors (for example) that people use in assessing you
for annual performance reviews or promotion, or for new roles you want.

Then dig into these factors, and identify the competences that lie behind them. As a corporate
example, if customers value small products (for instance, cell phones), then the competence they value
may be "component integration and miniaturization."
Brainstorm your existing competences and the things you do well.
For the list of your own competences, screen them against the tests of relevance, difficulty of
imitation, and breadth of application, and see if any of the competences you've listed are core
competences.
For the list of factors that are important to clients, screen them using these tests to see if you could
develop these as core competences.
Review the two screened lists, and think about them:
If you've identified core competences that you already have, then great! Work on them and make
sure that you build them as far as sensibly possible.
If you have no core competences, then look at ones that you could develop, and work to build
them.
If you have no core competences and it doesn't look as if you can build any that customers would
value, then either there's something else that you can use to create uniqueness in the market (see our
USP Analysis article), or think about finding a new environment that suits your competences.

Think of the most time-consuming and costly things that you do either as an individual or a company.

If any of these things do not contribute to a core competence, ask yourself if you can outsource them
effectively, clearing down time so that you can focus on core competences.

For example, as an individual, are you still doing your own cleaning, ironing and decorating? As a small
business, are you doing you own accounts, HR and payroll? As a bigger business, are you manufacturing
non-core product components, or performing non-core activities?

Tip 1:

As with all brainstorming, you'll get better results if you involve other (carefully-chosen) people.
Tip 2:

On a personal basis and in the short term, it might be difficult to come up with truly unique core
competences. However, keep this idea in mind and work to develop unique core competences.
Tip 3:

You may find it quite difficult to find any true core competences in your business. If you've got a
successful business that's sustainably outperforming rivals, then maybe something else is fuelling your
success (our article on USP Analysis may help you spot this).

However, if you're working very hard, and you're still finding it difficult to make a profit, then you need
to think carefully about crafting a unique competitive position.

This may involve developing core competences that are relevant, real and sustainable.
Tip 4:

As ever, if you're going to put more effort into some areas, you're going to have to put less effort into
others. You only have a finite amount of time, and if you try to do too much, you'll do little really well.

Porter's Generic Strategies

Choosing Your Route to Success
Porter's Generic Strategies

Just one strategic option for airlines.

iStockphoto/alandj

Which do you prefer when you fly: a cheap, no-frills airline, or a more expensive operator with fantastic
service levels and maximum comfort? And would you ever consider going with a small company which
focuses on just a few routes?

The choice is up to you, of course. But the point we're making here is that when you come to book a
flight, there are some very different options available.

Why is this so? The answer is that each of these airlines has chosen a different way of achieving
competitive advantage in a crowded marketplace.

The no-frills operators have opted to cut costs to a minimum and pass their savings on to customers in
lower prices. This helps them grab market share and ensure their planes are as full as possible, further
driving down cost. The luxury airlines, on the other hand, focus their efforts on making their service as
wonderful as possible, and the higher prices they can command as a result make up for their higher
costs.

Meanwhile, smaller airlines try to make the most of their detailed knowledge of just a few routes to
provide better or cheaper services than their larger, international rivals.
Generic Strategies

These three approaches are examples of "generic strategies," because they can be applied to products
or services in all industries, and to organizations of all sizes. They were first set out by Michael Porter in
1985 in his book "Competitive Advantage: Creating and Sustaining Superior Performance."

Porter called the generic strategies "Cost Leadership" (no frills), "Differentiation" (creating uniquely
desirable products and services) and "Focus" (offering a specialized service in a niche market). He then
subdivided the Focus strategy into two parts: "Cost Focus" and "Differentiation Focus". These are shown
in Figure 1 below.
Porter's Generic Strategies Diagram
Tip:

The terms "Cost Focus" and "Differentiation Focus" can be a little confusing, as they could be
interpreted as meaning "a focus on cost" or "a focus on differentiation." Remember that Cost Focus
means emphasizing cost-minimization within a focused market, and Differentiation Focus means
pursuing strategic differentiation within a focused market.

The Cost Leadership Strategy

Porter's generic strategies are ways of gaining competitive advantage in other words, developing the
"edge" that gets you the sale and takes it away from your competitors. There are two main ways of
achieving this within a Cost Leadership strategy:

Increasing profits by reducing costs, while charging industry-average prices.

Increasing market share through charging lower prices, while still making a reasonable profit on each
sale because you've reduced costs.

Tip:

Remember that Cost Leadership is about minimizing the cost to the organization of delivering products
and services. The cost or price paid by the customer is a separate issue!

The Cost Leadership strategy is exactly that it involves being the leader in terms of cost in your
industry or market. Simply being amongst the lowest-cost producers is not good enough, as you leave
yourself wide open to attack by other low-cost producers who may undercut your prices and therefore
block your attempts to increase market share.

You therefore need to be confident that you can achieve and maintain the number one position before
choosing the Cost Leadership route. Companies that are successful in achieving Cost Leadership usually
have:

Access to the capital needed to invest in technology that will bring costs down.
Very efficient logistics.
A low-cost base (labor, materials, facilities), and a way of sustainably cutting costs below those of
other competitors.

The greatest risk in pursuing a Cost Leadership strategy is that these sources of cost reduction are not
unique to you, and that other competitors copy your cost reduction strategies. This is why it's important
to continuously find ways of reducing every cost. One successful way of doing this is by adopting the
Japanese Kaizen philosophy of "continuous improvement."

The Differentiation Strategy

Differentiation involves making your products or services different from and more attractive those of
your competitors. How you do this depends on the exact nature of your industry and of the products
and services themselves, but will typically involve features, functionality, durability, support and also
brand image that your customers value.

To make a success of a Differentiation strategy, organizations need:

Good research, development and innovation.

The ability to deliver high-quality products or services.
Effective sales and marketing, so that the market understands the benefits offered by the
differentiated offerings.

Large organizations pursuing a differentiation strategy need to stay agile with their new product
development processes. Otherwise, they risk attack on several fronts by competitors pursuing Focus
Differentiation strategies in different market segments.
The Focus Strategy

Companies that use Focus strategies concentrate on particular niche markets and, by understanding the
dynamics of that market and the unique needs of customers within it, develop uniquely low-cost or wellspecified products for the market. Because they serve customers in their market uniquely well, they
tend to build strong brand loyalty amongst their customers. This makes their particular market segment
less attractive to competitors.

As with broad market strategies, it is still essential to decide whether you will pursue Cost Leadership or
Differentiation once you have selected a Focus strategy as your main approach: Focus is not normally
enough on its own.

But whether you use Cost Focus or Differentiation Focus, the key to making a success of a generic Focus
strategy is to ensure that you are adding something extra as a result of serving only that market niche.
It's simply not enough to focus on only one market segment because your organization is too small to
serve a broader market (if you do, you risk competing against better-resourced broad market
companies' offerings.)

The "something extra" that you add can contribute to reducing costs (perhaps through your knowledge
of specialist suppliers) or to increasing differentiation (though your deep understanding of customers'
needs).
Tip:

Generic strategies apply to not-for-profit organizations too.

A not-for-profit can use a Cost Leadership strategy to minimize the cost of getting donations and
achieving more for their income, while one with pursing a Differentiation strategy will be committed to
the very best outcomes, even if the volume of work they do as a result is lower.

Local charities are great examples of organizations using Focus strategies to get donations and
contribute to their communities.
Choosing the Right Generic Strategy

Your choice of which generic strategy to pursue underpins every other strategic decision you make, so
it's worth spending time to get it right.

But you do need to make a decision: Porter specifically warns against trying to "hedge your bets" by
following more than one strategy. One of the most important reasons why this is wise advice is that the
things you need to do to make each type of strategy work appeal to different types of people. Cost
Leadership requires a very detailed internal focus on processes. Differentiation, on the other hand,
demands an outward-facing, highly creative approach.

So, when you come to choose which of the three generic strategies is for you, it's vital that you take
your organization's competencies and strengths into account.

Use the following steps to help you choose.

Step 1:

For each generic strategy, carry out a SWOT Analysis of your strengths and weaknesses, and the
opportunities and threats you would face, if you adopted that strategy.

Having done this, it may be clear that your organization is unlikely to be able to make a success of some
of the generic strategies.
Step 2:

Use Five Forces Analysis to understand the nature of the industry you are in.
Step 3:

Compare the SWOT Analyses of the viable strategic options with the results of your Five Forces analysis.
For each strategic option, ask yourself how you could use that strategy to:

Reduce or manage supplier power.

Reduce or manage buyer/customer power.
Come out on top of the competitive rivalry.
Reduce or eliminate the threat of substitution.
Reduce or eliminate the threat of new entry.

Select the generic strategy that gives you the strongest set of options.
Tip:

Porter's Generic Strategies offer a great starting point for strategic decision-making.

Once you've made your basic choice, though, there are still many strategic options available. Bowman's
Strategy Clock helps you think at the next level of details, in that it splits Porter's options into eight substrategies. You can also use USP Analysis and Core Competence Analysis to identify the areas you
should focus on to stand out in your marketplace.
Key Points

According to Porter's Generic Strategies model, there are three basic strategic options available to
organizations for gaining competitive advantage. These are: Cost Leadership, Differentiation and Focus.

Organizations that achieve Cost Leadership can benefit either by gaining market share through lowering
prices (whilst maintaining profitability) or by maintaining average prices and therefore increasing profits.
All of this is achieved by reducing costs to a level below those of the organization's competitors.

Companies that pursue a Differentiation strategy win market share by offering unique features that are
valued by their customers. Focus strategies involve achieving Cost Leadership or Differentiation within
niche markets in ways that are not available to more broadly-focused players.
Apply This to Your Life

Ask yourself what your organization's generic strategy is. How does this affect the choices your make
in your job?
If you're in an organization committed to achieving Cost Leadership, can you reduce costs by hiring
less expensive staff and training them up, or by reducing staff turnover? Can you reduce training costs
by devising in-house schemes for sharing skills and knowledge amongst team members? Can you reduce
expenses by using technology such as video conferencing over the Internet?
If your organization is pursuing a Differentiation strategy, can you improve customer service?
Customer Experience Mapping may help here. Can you help to foster a culture of continuous
improvement and innovation in your team?
And if you're working for a company that has a chosen a Focus strategy, what knowledge or expertise
can you use or develop to add value for your customers that isn't available to broad market
competitors?

Developing Your Strategy

Finding Your Path to Success
Creating a Strategy

How are you going to win in the period ahead?

iStockphoto/DamirK

"How are you going to win in the period ahead?" That's the key question behind developing strategy.

To win at anything worthwhile, you need a game plan. Professional sports teams know this, and this
idea applies to your organization, your department, your team and even to yourself as an individual.

To be successful means knowing how to use your talent and resources to best advantage, and it's very
difficult to "win" if you don't have this game plan in place.

This article introduces you to a common-sense, systematic approach to strategy development.

Approaches to Strategy

In a for-profit company, for which competition and profitability are important, your goals will differ from
those of a nonprofit or government department. Likewise, objectives for a department or team will have
a different scope from objectives for your organization as a whole.

For example, and depending on scope and circumstances, you may want to develop strategies to:

Increase profitability.
Gain more market share.
Increase approval ratings, or boost customer satisfaction.
Complete a project under budget.

To determine your strategy, you must understand fully the internal and external environmental factors
that affect you. With that understanding, you can identify your clear advantages and use these to be
successful. From there, you can make informed choices and implement your strategy effectively.

So, strategy creation follows a three-stage process:

Analyzing the context in which you're operating.

Identifying strategic options.
Evaluating and selecting the best options.

We'll look at this process, and review some useful tools that can help you develop your strategy.

Stage 1: Analyzing Your Context and Environment

In this first stage, you ensure that you fully understand yourself and your environment. Do the following:

Analyze Your Organization

Firstly, examine your resources, liabilities, capabilities, strengths, and weaknesses. A SWOT Analysis
is a great tool for uncovering what you do well and where you have weaknesses, providing that you use
it rigorously. It's much easier to achieve your objectives when your strategy uses your strengths without
exposing your weaknesses.

Also, look at your Core Competencies . These highlight your unique strengths, and help you think
about how you can set yourself apart from your competitors.
Analyze Your Environment

Now you need to examine your current operating environment to predict where things are moving.
Are there exciting opportunities that you should pursue? What future scenarios are likely in your
industry, and how will these impact the work that you do?

PEST Analysis , Porter's Diamond , and Porter's Five Forces are great starting points for analyzing
your environment. They show where you have a strong position within the larger environment, and
where you may have issues.

As you prepare to create your strategy, make sure that you're working in a way that's aligned with
changes in your operating environment, rather than working against them. These external factors are
often beyond your control, so if you pursue a strategy that requires a change in one of these elements,
you may have a long, exhausting, unprofitable battle ahead of you.
Tip:

A TOWS matrix can help you with your internal and external analysis. This framework combines
everything you learned in your SWOT Analysis (TOWS is SWOT in reverse), and then applies it to
developing a strategy that either maximizes strengths and opportunities, or minimizes weaknesses and
threats.
Analyze Your Customers and Stakeholders

Your strategy defines how you'll win, and winning is typically framed by how well you satisfy your
customers. For-profit companies must keep their customers and shareholders happy. Governments,
nonprofits, and project teams all have other stakeholders to satisfy as well. Strategy creation must
consider these needs.

Identify your clients and stakeholders. What do your clients want? And who are the key stakeholders
in your success? A Stakeholder Analysis will help you uncover these needs and preferences.

Also, look at your market in detail. Answer key questions such as "How is our market segmented ?",
"What subpopulations can we reach cost-effectively?" and "What is our optimal Marketing Mix ?"
Analyze Your Competitors

In a traditional for-profit company, you must understand how your products compare with
competitors' products, and what your competitors' competencies are. How easy, or difficult, is it to
enter your market? What alternatives do customers have?

Our article on USP Analysis helps you identify ways in which you can compete effectively. You'll also
find many useful tools that can help you understand competitors in our article on Competitive
Intelligence .

Non-profits, departmental teams and projects have competitors too. Other projects and teams within
the department compete for money and other resources. Therefore, you must prove that you can add
value , meet objectives, and contribute to organizational success.

Stage 2: Identifying Strategic Options

In Stage 1, you developed an understanding of how your organization or team fits within the context of
the internal and external environments. Now it's time to think about the different things that you could
do to create a clear advantage, and meet your objectives. Here are some fundamental activities that can
help you make this decision.

Brainstorm Options

Use creativity tools like Brainstorming , Reverse Brainstorming and Starbursting to explore projects
that you could run to develop competitive advantage. Guide your brainstorming with reference to the
organization's mission statement, but, depending on your role in the organization, consider how far you
should be constrained by this.
Examine Opportunities and Threats

Your SWOT Analysis identified some of the main opportunities and threats you face. Using this as a
starting point, brainstorm additional ways to maximize your opportunities, minimize your threats, or
perhaps even turn your threats into opportunities.
Solve Problems

A problem-solving approach can also help at this stage. If your problem is that you're not achieving
your goals, ask yourself how you can ensure that you do. (If everyone in your industry finds it hard to
deal with a particular problem, then you may gain a competitive edge by dealing with it.)

For example, if you want to increase your customer satisfaction ratings in an industry plagued by poor
customer relations, your starting position is "low satisfaction." Brainstorm why this is the case, and
create strategic options that would increase satisfaction. Tools like Root Cause Analysis , the 5 Whys ,
and Appreciative Inquiry can give you some interesting new perspectives on these problems.

Stage 3: Evaluating and Selecting Strategic Options

The final stage is to evaluate strategic options in detail, and select the ones that you want to pursue.

Evaluate Options

By this stage, you've probably identified a range of good projects that you could run. You must now
evaluate these to choose the best strategic options. Consider every option you've identified, but don't
make a final judgment until you've completed your assessment.

Start by evaluating each option in the light of the contextual factors you identified in Stage 1. What do
these tell you about each option?

Techniques like Risk Analysis , Failure Modes and Effects Analysis and Impact Analysis can help you
spot the possible negative consequences of each option, which can be very easy to miss. Make sure that
you explore these thoroughly.

Many options will be analyzed on a financial basis. Here, techniques like Cost-Benefit Analysis , BreakEven Analysis , use of Net Present Values (NPVs) and Internal Rates of Return (IRRs) , and Decision
Trees are helpful.

Decision Matrix Analysis is particularly helpful for bringing together financial and non-financial
decision criteria. It helps you weight individual decision criteria, and consider subjective features - like
team fit and the likelihood of team buy-in - as well as objective, tangible factors like cost and return on
investment.
Choose the Best Way Forward

With your evaluation complete, you now must choose the best strategic option or strategic options,
making sure that you don't choose so many options that you spread your resources too thinly.

Check your ideas for consistency with your organization's Vision, Mission and Values , and update
these if necessary. It's easy to forget about these critical elements during strategic planning, so ensure
that what you want to "win" is something that contributes towards the organization's overall purpose.

Check your assumptions using the Ladder of Inference . This helps you confirm the soundness of the
reasoning process used to develop your strategy.

Tip:

There's a lot of debate and disagreement about the best way of developing a strategy. Don't be afraid to
adapt this approach to your own, specific circumstances!
Implementing Strategy

It's no good developing a strategy if you don't implement it successfully, and this is where many people
go astray.

See our articles on VMOST Analysis and the Balanced Scorecard for ways of bridging the gap between
strategy development and implementation, and our Project Management menu for the techniques
you'll need to use to implement strategy successfully.
Key Points

Your strategy tells you how you'll achieve success, no matter how that success is defined. And whether
you're developing a strategy at the personal, team or organizational level, the process is as important as
the outcome.

Identify your unique capabilities, and understand how to use these to your advantage while minimizing
threats. The process and tools identified above will help you identify a variety of potential strategies for
success, so that you can ultimately choose the one that's right for you.
Apply This to Your Life

Practice strategy development by thinking about your own, personal circumstances. Complete the
analyses below to think about your personal way forward. Here are some key questions to consider:

What are your personal strengths, weaknesses, opportunities or threats, and what are your "core
competencies"?
What are you capable of achieving if you put your mind to it?
What are the "big picture" trends in your environment?
How can you monitor or adapt to these external factors?
Who are the people who are important to your success (your stakeholders)?
What options do you have?
Which of these should you consider?

Mintzberg's 5 Ps of Strategy
Developing a Better Strategy
Mintzberg's 5Ps for Strategy

Learn about these five strategy definitions.

 iStockphoto/kWaiGon

What's your approach to developing strategy?

Many of us brainstorm opportunities, and then plan how we'll take advantage of them.

Unfortunately, while this type of approach is important, we need to think about much more than this if
we want to be successful. After all, there's no point in developing a strategy that ignores competitors'
reactions, or doesn't consider the culture and capabilities of your organization. And it would be wasteful
not to make full use of your company's strengths whether these are obvious or not.

Management expert, Henry Mintzberg, argued that it's really hard to get strategy right. To help us think
about it in more depth, he developed his 5 Ps of Strategy five different definitions of (or approaches
to) developing strategy.
About the 5 Ps

Mintzberg first wrote about the 5 Ps of Strategy in 1987. Each of the 5 Ps is a different approach to
strategy. They are:

Plan.
Ploy.
Pattern.
Position.
Perspective.

By understanding each P, you can develop a robust business strategy that takes full advantage of your
organization's strengths and capabilities.

In this article, we'll explore the 5 Ps in more detail, and we'll look at tools that you can use in each area.
1. Strategy as a Plan

Planning is something that many managers are happy with, and it's something that comes naturally to
us. As such, this is the default, automatic approach that we adopt brainstorming options and planning
how to deliver them.

This is fine, and planning is an essential part of the strategy formulation process.

Our articles on PEST Analysis , SWOT Analysis and Brainstorming help you think about and identify
opportunities; the article on practical business planning looks at the planning process in more detail;
and our sections on change management and project management teach the skills you need to deliver
the strategic plan in detail.

The problem with planning, however, is that it's not enough on its own. This is where the other four Ps
come into play.
2. Strategy as Ploy

Mintzberg says that getting the better of competitors, by plotting to disrupt, dissuade, discourage, or
otherwise influence them, can be part of a strategy. This is where strategy can be a ploy, as well as a
plan.

For example, a grocery chain might threaten to expand a store, so that a competitor doesn't move into
the same area; or a telecommunications company might buy up patents that a competitor could
potentially use to launch a rival product.

Here, techniques and tools such as the Futures Wheel , Impact Analysis and Scenario Analysis can
help you explore the possible future scenarios in which competition will occur. Our article on Game
Theory then gives you powerful tools for mapping out how the competitive "game" is likely to unfold,
so that you can set yourself up to win it.
3. Strategy as Pattern

Strategic plans and ploys are both deliberate exercises. Sometimes, however, strategy emerges from
past organizational behavior. Rather than being an intentional choice, a consistent and successful way of
doing business can develop into a strategy.

For instance, imagine a manager who makes decisions that further enhance an already highly responsive
customer support process. Despite not deliberately choosing to build a strategic advantage, his pattern
of actions nevertheless creates one.

To use this element of the 5 Ps, take note of the patterns you see in your team and organization. Then,
ask yourself whether these patterns have become an implicit part of your strategy; and think about the
impact these patterns should have on how you approach strategic planning.

Tools such as USP Analysis and Core Competence Analysis can help you with this. A related tool, VRIO
Analysis, can help you explore resources and assets (rather than patterns) that you should focus on
when thinking about strategy.
4. Strategy as Position

"Position" is another way to define strategy that is, how you decide to position yourself in the
marketplace. In this way, strategy helps you explore the fit between your organization and your
environment, and it helps you develop a sustainable competitive advantage .

For example, your strategy might include developing a niche product to avoid competition, or choosing
to position yourself amongst a variety of competitors, while looking for ways to differentiate your
services.

When you think about your strategic position, it helps to understand your organization's "bigger picture"
in relation to external factors. To do this, use PEST Analysis , Porter's Diamond , and Porter's Five Forces
to analyze your environment these tools will show where you have a strong position, and where you
may have issues.

As with "Strategy as a Pattern," Core Competence Analysis , USP Analysis , and VRIO Analysis can help
you craft a successful competitive position. You can also use SWOT Analysis to identify what you do
well, and to uncover opportunities.
Note:

There can be a lot of overlap between "Strategy as Position" and other elements of the 5 Ps. For
instance, you can also achieve a desired position through planning, and by using a ploy. Don't worry
about these overlaps just get as much value as you can from the different approaches.
5. Strategy as Perspective

The choices an organization makes about its strategy rely heavily on its culture just as patterns of
behavior can emerge as strategy, patterns of thinking will shape an organization's perspective, and the
things that it is able to do well.

For instance, an organization that encourages risk-taking and innovation from employees might focus on
coming up with innovative products as the main thrust behind its strategy. By contrast, an organization
that emphasizes the reliable processing of data may follow a strategy of offering these services to other
organizations under outsourcing arrangements.

To get an insight into your organization's perspective, use cultural analysis tools like the Cultural Web ,
Deal and Kennedy's Cultural Model , and the Congruence Model .
Using the 5 Ps

Instead of trying to use the 5 Ps as a process to follow while developing strategy, think of them as a
variety of viewpoints that you should consider while developing a robust and successful strategy.

As such, there are three points in the strategic planning process where it's particularly helpful to use the
5 Ps:

When you're gathering information and conducting the analysis needed for strategy development, as
a way of ensuring that you've considered everything relevant.
When you've come up with initial ideas, as a way of testing that that they're realistic, practical and
robust.
As a final check on the strategy that you've developed, to flush out inconsistencies and things that
may not have been fully considered.

Using Mintzberg's 5 Ps at these points will highlight problems that would otherwise undermine the
implementation of your strategy.

After all, it's much better to identify these problems at the planning stage than it is to find out about
them after you've spent several years and millions of dollars implementing a plan that was flawed
from the start.
Key Points

The 5 Ps of Strategy were created by Henry Mintzberg in 1987. Each of the 5 Ps stands for a different
approach to strategy:

Plan.
Ploy.
Pattern.
Position.
Perspective.

As a Plan, strategy needs to be developed in advance and with purpose. As a Ploy, strategy is a means of
outsmarting the competition.

With strategy as a Pattern, we learn to appreciate that what was successful in the past can lead to
success in the future.

With Position, strategy is about how the organization relates to its competitive environment, and what it
can do to make its products unique in the marketplace.

Perspective emphasizes the substantial influence that organizational culture and collective thinking can
have on strategic decision making within a company.

Understanding and using each element helps you develop a robust, practical and achievable business str
Scenario Analysis
Exploring Different Futures

iStockphoto

Imagine that you're facing a really significant decision, which could fundamentally affect your personal
life, or could determine the future of your business. Maybe you're thinking about "stretching your
finances" to buy a bigger house. Or maybe you're thinking of launching a new product which you know
could "cannibalize" existing sales.

Perhaps you've done the numbers, and these seem OK. But deep down, you dread what could go wrong.
After all, no one has a foolproof vision of the future, and while you may have strong instincts as to how
things may develop, any single projection of the future is clearly vulnerable to disruption by a range of
different factors.

Scenario Analysis helps you bring these fears into the open and gives you a rational and professional
framework for exploring them.

Using it, you can make decisions in the context of the different futures that may come to pass. The act of
creating scenarios forces you to challenge your assumptions about the future. By shaping your plans and
decisions based on the most likely scenarios, you can ensure that your decisions are sound even if
circumstances change.
How to Use the Tool

In Scenario Analysis, the scenarios are stories about the way the world might turn out if certain trends
continue and if certain conditions are met.

We offer a simple five-phase Scenario Analysis process, as follows:

1. Define the Problem

First, decide what you want to achieve, and think about the time horizon you want to look at. This will
be driven by the scale of the plans and scenarios that you want to test.
Example:

Barry was starting to plan a new business that focused on helping corporate clients implement a popular
financial management software package. He wanted the business to grow to a reasonable size over the
next five years. With this in mind, he decided to use scenario thinking to look at what the future might
hold over this period.
2. Gather Data

Next, identify the key factors, trends, and uncertainties that may affect the plan. If your plan is a largescale one, you may find it helpful to do a PEST Analysis of the context in which it will be implemented

to identify political, economic, socio-cultural, and technological factors that could impact it. Then,
identify the key assumptions on which the plan depends.
Example:

Amongst others, Barry identified the following factors as important:

The state of the economy (people don't buy much new software in a recession).
The ongoing importance of new software in increasing clients' productivity.
Whether the software package would maintain its market position.
Whether he could recruit enough skilled implementation consultants.

3. Separate Certainties From Uncertainties

You may be confident in some of your assumptions, and you may be sure that certain trends will work
through in a particular way. After challenging them appropriately, adopt these trends as your
"certainties." Separate these from the "uncertainties" trends that may or may not be important, and
underlying factors that may or may not change. List these uncertainties in priority order, with the
largest, most significant uncertainties at the top of the list.
Example:

Based on analysis of recent vacancy rates, Barry was confident that, provided he paid attention to
recruitment, he could find a sufficient number of new employees. And seeing the new technologies
shortly to be deployed by the software vendor, he was confident that clients would reap considerable
efficiency gains by implementing the next versions of the software.

He was anxious, however, that a global software giant might enter the market and displace the current
vendor. Furthermore, he'd seen plenty of implementation companies go bust in the previous recession.
4. Develop Scenarios

Now, starting with your top uncertainty, take a moderately good outcome and a moderately bad
outcome, and develop a story of the future around each that fuses your certainties with the outcome
you've chosen.

Then, do the same for your second most serious uncertainty.

Don't do too many scenarios in this step, or you may find yourself quickly hitting "diminishing returns."
Example:

Barry decided to prepare the following scenarios:

"All's going well": The economy grows steadily over the five-year period with only minor slowdowns,
and he's "backed the right horse." The software vendor consolidates itself in the market and moves into
a position of market leadership.
"Economic slowdown": Toward the end of the period, a commodity price shock pushes the economy
into mild recession. While some new software implementations do go ahead, many clients decide to
defer implementation until things pick up.
"Intensifying competition": The global giant enters the market. While it takes time to get its products
established, toward the end of the period, it is starting to squeeze the current supplier.

5. Use the Scenarios in Your Planning

You can now use the scenarios you came up with in your planning.
Example:

Having looked at the scenarios, Barry's aware that there's some risk to the business in the medium term.

In his business planning, he decides to gear the business to use a mix of full-time staff and short-term
contractors so he can scale his business quickly, depending on the circumstances.

And he notes that he's going to have to monitor the activities of software companies entering the
market so he can cross-train personnel if a new entrant starts to threaten the existing supplier.
Tip 1:

In identifying trends, be careful to base your assessment on evidence rather than supposition. And make
sure that trends are built on secure foundations.

Also, remember that trends tend to be damped down by other factors. No revolution is instantaneous.
Tip 2:

Peter Schwartz, one of the fathers of scenario thinking, mentions the following as plots of common
scenarios:

Evolution: All trends continue as expected. Things gently move toward a predictable end point.
Revolution: A new factor fundamentally changes the situation.
Cycles: What goes around comes around. Boom follows bust follows boom follows bust.
Infinite Expansion: Exciting trends continue. Think of the computer industry in the 1950s.
Lone Ranger: The triumph of the lone hero against the forces of inertia.
My Generation: Changes in culture and demographics affect the situation.

From "Art of the Long View" by Peter Schwartz. 1991 Peter Schwartz. Published by Profile Books,
2003. Reproduced with permission of John Wiley & Sons Ltd.
Key Points

Scenario Analysis is a useful way of challenging the assumptions you naturally tend to make about the
situation in which your plans will come to fruition.

By building a few alternative scenarios, you can foresee more unknowns that may come to pass, and
therefore you will be able to plan measures to counteract or mitigate their impact.ategy.
STRATEGY PRIORITIZATION

Porter's Value Chain

Understanding How Value is Created Within Organizations
Porter's Value Chain

Porter's Value Chain.

How does your organization create value?

How do you change business inputs into business outputs in such a way that they have a greater value
than the original cost of creating those outputs?

This isn't just a dry question: it's a matter of fundamental importance to companies, because it
addresses the economic logic of why the organization exists in the first place.

Manufacturing companies create value by acquiring raw materials and using them to produce
something useful. Retailers bring together a range of products and present them in a way that's
convenient to customers, sometimes supported by services such as fitting rooms or personal shopper
advice. And insurance companies offer policies to customers that are underwritten by larger reinsurance policies. Here, they're packaging these larger policies in a customer-friendly way, and
distributing them to a mass audience.

The value that's created and captured by a company is the profit margin:

Value Created and Captured Cost of Creating that Value = Margin

The more value an organization creates, the more profitable it is likely to be. And when you provide
more value to your customers, you build competitive advantage.

Understanding how your company creates value, and looking for ways to add more value, are critical
elements in developing a competitive strategy. Michael Porter discussed this in his influential 1985 book
"Competitive Advantage," in which he first introduced the concept of the value chain.

A value chain is a set of activities that an organization carries out to create value for its customers.
Porter proposed a general-purpose value chain that companies can use to examine all of their activities,
and see how they're connected. The way in which value chain activities are performed determines costs
and affects profits, so this tool can help you understand the sources of value for your organization.
Elements in Porter's Value Chain

Rather than looking at departments or accounting cost types, Porter's Value Chain focuses on systems,
and how inputs are changed into the outputs purchased by consumers. Using this viewpoint, Porter
described a chain of activities common to all businesses, and he divided them into primary and support
activities, as shown below.
Porter's Value Chain Diagram
Primary Activities

Primary activities relate directly to the physical creation, sale, maintenance and support of a product or
service. They consist of the following:

Inbound logistics These are all the processes related to receiving, storing, and distributing inputs
internally. Your supplier relationships are a key factor in creating value here.
Operations These are the transformation activities that change inputs into outputs that are sold to
customers. Here, your operational systems create value.
Outbound logistics These activities deliver your product or service to your customer. These are
things like collection, storage, and distribution systems, and they may be internal or external to your
organization.
Marketing and sales These are the processes you use to persuade clients to purchase from you
instead of your competitors. The benefits you offer, and how well you communicate them, are sources
of value here.
Service These are the activities related to maintaining the value of your product or service to your
customers, once it's been purchased.

Support Activities

These activities support the primary functions above. In our diagram, the dotted lines show that each
support, or secondary, activity can play a role in each primary activity. For example, procurement
supports operations with certain activities, but it also supports marketing and sales with other activities.

Procurement (purchasing) This is what the organization does to get the resources it needs to
operate. This includes finding vendors and negotiating best prices.
Human resource management This is how well a company recruits, hires, trains, motivates, rewards,
and retains its workers. People are a significant source of value, so businesses can create a clear
advantage with good HR practices.

Technological development These activities relate to managing and processing information, as well
as protecting a company's knowledge base. Minimizing information technology costs, staying current
with technological advances, and maintaining technical excellence are sources of value creation.
Infrastructure These are a company's support systems, and the functions that allow it to maintain
daily operations. Accounting, legal, administrative, and general management are examples of necessary
infrastructure that businesses can use to their advantage.

Companies use these primary and support activities as "building blocks" to create a valuable product or
service.
Using Porter's Value Chain

To identify and understand your company's value chain, follow these steps.
Step 1 Identify subactivities for each primary activity

For each primary activity, determine which specific subactivities create value. There are three different
types of subactivities:

Direct activities create value by themselves. For example, in a book publisher's marketing and sales
activity, direct subactivities include making sales calls to bookstores, advertising, and selling online.
Indirect activities allow direct activities to run smoothly. For the book publisher's sales and marketing
activity, indirect subactivities include managing the sales force and keeping customer records.
Quality assurance activities ensure that direct and indirect activities meet the necessary standards.
For the book publisher's sales and marketing activity, this might include proofreading and editing
advertisements.

Step 2 Identify subactivities for each support activity.

For each of the Human Resource Management, Technology Development and Procurement support
activities, determine the subactivities that create value within each primary activity. For example,
consider how human resource management adds value to inbound logistics, operations, outbound
logistics, and so on. As in Step 1, look for direct, indirect, and quality assurance subactivities.

Then identify the various value-creating subactivities in your company's infrastructure. These will
generally be cross-functional in nature, rather than specific to each primary activity. Again, look for
direct, indirect, and quality assurance activities.
Step 3 Identify links

Find the connections between all of the value activities you've identified. This will take time, but the
links are key to increasing competitive advantage from the value chain framework. For example, there's
a link between developing the sales force (an HR investment) and sales volumes. There's another link
between order turnaround times, and service phone calls from frustrated customers waiting for
deliveries.
Step 4 Look for opportunities to increase value

Review each of the subactivities and links that you've identified, and think about how you can change or
enhance it to maximize the value you offer to customers (customers of support activities can internal as
well as external).
Tip 1:

Your organization's value chain should reflect its overall generic business strategies . So, when deciding
how to improve your value chain, be clear about whether you're trying to set yourself apart from your
competitors or simply have a lower cost base.
Tip 2:

You'll inevitably end up with a huge list of changes. See our article on prioritization if you're struggling
to choose the most important changes to make.
Tip 3:

This looks at the idea of a value chain from a broad, organizational viewpoint. Our separate article on
value chain analysis takes different look at this topic, and uses an approach that is also useful at a team
or individual level. Click here to explore this.
Key Points

Porter's Value Chain is a useful strategic management tool.

It works by breaking an organization's activities down into strategically relevant pieces, so that you can
see a fuller picture of the cost drivers and sources of differentiation, and then make changes
appropriately.
Porter's Value Chain
Understanding How Value is Created Within Organizations

Porter's Value Chain.

How does your organization create value?
How do you change business inputs into business outputs in such a way that they have a greater value
than the original cost of creating those outputs?
This isn't just a dry question: it's a matter of fundamental importance to companies, because it
addresses the economic logic of why the organization exists in the first place.
Manufacturing companies create value by acquiring raw materials and using them to produce
something useful. Retailers bring together a range of products and present them in a way that's
convenient to customers, sometimes supported by services such as fitting rooms or personal shopper
advice. And insurance companies offer policies to customers that are underwritten by larger reinsurance policies. Here, they're packaging these larger policies in a customer-friendly way, and
distributing them to a mass audience.
The value that's created and captured by a company is the profit margin:
Value Created and Captured Cost of Creating that Value = Margin
The more value an organization creates, the more profitable it is likely to be. And when you provide
more value to your customers, you build competitive advantage.
Understanding how your company creates value, and looking for ways to add more value, are critical
elements in developing a competitive strategy. Michael Porter discussed this in his influential 1985 book
"Competitive Advantage," in which he first introduced the concept of the value chain.
A value chain is a set of activities that an organization carries out to create value for its customers.
Porter proposed a general-purpose value chain that companies can use to examine all of their activities,
and see how they're connected. The way in which value chain activities are performed determines costs
and affects profits, so this tool can help you understand the sources of value for your organization.
Elements in Porter's Value Chain

Rather than looking at departments or accounting cost types, Porter's Value Chain focuses on systems,
and how inputs are changed into the outputs purchased by consumers. Using this viewpoint, Porter
described a chain of activities common to all businesses, and he divided them into primary and support
activities, as shown below.

Primary Activities
Primary activities relate directly to the physical creation, sale, maintenance and support of a product or
service. They consist of the following:

Inbound logistics These are all the processes related to receiving, storing, and distributing
inputs internally. Your supplier relationships are a key factor in creating value here.

Operations These are the transformation activities that change inputs into outputs that are
sold to customers. Here, your operational systems create value.

Outbound logistics These activities deliver your product or service to your customer. These
are things like collection, storage, and distribution systems, and they may be internal or external
to your organization.

Marketing and sales These are the processes you use to persuade clients to purchase from
you instead of your competitors. The benefits you offer, and how well you communicate them,
are sources of value here.

Service These are the activities related to maintaining the value of your product or service to
your customers, once it's been purchased.

Support Activities
These activities support the primary functions above. In our diagram, the dotted lines show that each
support, or secondary, activity can play a role in each primary activity. For example, procurement
supports operations with certain activities, but it also supports marketing and sales with other activities.

Procurement (purchasing) This is what the organization does to get the resources it needs to
operate. This includes finding vendors and negotiating best prices.

Human resource management This is how well a company recruits, hires, trains, motivates,
rewards, and retains its workers. People are a significant source of value, so businesses can
create a clear advantage with good HR practices.

Technological development These activities relate to managing and processing information, as

well as protecting a company's knowledge base. Minimizing information technology costs,
staying current with technological advances, and maintaining technical excellence are sources of
value creation.

Infrastructure These are a company's support systems, and the functions that allow it to
maintain daily operations. Accounting, legal, administrative, and general management are
examples of necessary infrastructure that businesses can use to their advantage.

Companies use these primary and support activities as "building blocks" to create a valuable product or
service.
Using Porter's Value Chain
To identify and understand your company's value chain, follow these steps.
Step 1 Identify subactivities for each primary activity
For each primary activity, determine which specific subactivities create value. There are three different
types of subactivities:

Direct activities create value by themselves. For example, in a book publisher's marketing and
sales activity, direct subactivities include making sales calls to bookstores, advertising, and
selling online.

Indirect activities allow direct activities to run smoothly. For the book publisher's sales and
marketing activity, indirect subactivities include managing the sales force and keeping customer
records.

Quality assurance activities ensure that direct and indirect activities meet the necessary
standards. For the book publisher's sales and marketing activity, this might include proofreading
and editing advertisements.

Step 2 Identify subactivities for each support activity.

For each of the Human Resource Management, Technology Development and Procurement support
activities, determine the subactivities that create value within each primary activity. For example,
consider how human resource management adds value to inbound logistics, operations, outbound
logistics, and so on. As in Step 1, look for direct, indirect, and quality assurance subactivities.
Then identify the various value-creating subactivities in your company's infrastructure. These will
generally be cross-functional in nature, rather than specific to each primary activity. Again, look for
direct, indirect, and quality assurance activities.

Step 3 Identify links

Find the connections between all of the value activities you've identified. This will take time, but the
links are key to increasing competitive advantage from the value chain framework. For example, there's
a link between developing the sales force (an HR investment) and sales volumes. There's another link
between order turnaround times, and service phone calls from frustrated customers waiting for
deliveries.
Step 4 Look for opportunities to increase value
Review each of the subactivities and links that you've identified, and think about how you can change or
enhance it to maximize the value you offer to customers (customers of support activities can internal as
well as external).
Tip 1:
Your organization's value chain should reflect its overall generic business strategies . So, when deciding
how to improve your value chain, be clear about whether you're trying to set yourself apart from your
competitors or simply have a lower cost base.
Tip 2:
You'll inevitably end up with a huge list of changes. See our article on prioritization if you're struggling
to choose the most important changes to make.
Tip 3:
This looks at the idea of a value chain from a broad, organizational viewpoint. Our separate article on
value chain analysis takes different look at this topic, and uses an approach that is also useful at a team
or individual level. Click here to explore this.
Key Points
Porter's Value Chain is a useful strategic management tool.
It works by breaking an organization's activities down into strategically relevant pieces, so that you can
see a fuller picture of the cost drivers and sources of differentiation, and then make changes
appropriately.

Mission and Vision Statements

Unleashing the Power of Purpose

Does your team know your mission and vision?

Imagine going to work each day, full of purpose and conviction. You strongly believe in your
organization's values, and you are passionately committed to its mission.

Because you understand the good that your organization does in the world, you love what you do.
You're happy to come into the office, and you put your heart and soul into your work, because you know
it matters.

People can be genuinely inspired if their organization has a compelling vision and a clear, worthwhile
mission; and these can be powerfully expressed in well-crafted mission and vision statements.

These statements can be highly motivating when they are expressed clearly and with intent, and when
they are communicated effectively to everyone in the organization. They also express your
organization's purpose to customers, suppliers and the media, on whom they can have the same effect,
too.

In this article, we'll explore how to create motivating statements.

Mission and Vision Statements Explained

These statements are the words leaders use to explain an organization's purpose and direction. When
expressed clearly and concisely, they can motivate your team, or the organization as a whole, with an
inspiring vision of the future.
Purpose

The two statements do distinctly different jobs.

Mission statements define the organization's purpose and primary objectives. These statements are set
in the present tense, and they explain why you exist as a business, both to members of the organization
and to people outside it. Mission statements tend to be short, clear and powerful.

Vision statements also define your organization's purpose, but they focus on its goals and aspirations.
These statements are designed to be uplifting and inspiring. They're also timeless: even if the
organization changes its strategy, the vision will often stay the same.
Application

Usually, people write these statements for an organization, or for an organizational unit or a team. You
can also create statements to define the goals of long-term projects or initiatives.
Examples

Some examples of mission statements are shown below:

Bristol-Myers Squibb Company (pharmaceuticals) "To discover, develop, and deliver innovative
medicines that help patients prevail over serious diseases."
ConocoPhillips (gas/energy) "Our mission is to power civilization."
Walgreens (drugstores) "To be the most trusted, convenient multichannel provider and advisor of
innovative pharmacy, health and wellness solutions, and consumer goods and services in communities
across America."
Nike (athletics) "To bring inspiration and innovation to every athlete in the world."
The Dow Chemical Company (chemicals) "To passionately create innovation for our stakeholders at
the intersection of chemistry, biology and physics."

Some examples of vision statements are shown below:

Amazon (online retail) "Our vision is to be earth's most customer-centric company where customers
can find and discover anything they might want to buy online at the lowest possible prices."
PepsiCo (retail) "Our vision is put into action through programs and a focus on environmental
stewardship, activities to benefit society, and a commitment to build shareholder value by making
PepsiCo a truly sustainable company."
Amnesty International (nonprofit) "Our vision is of a world in which every person regardless of
race, religion, ethnicity, sexual orientation, or gender identity enjoys all of the human rights enshrined
in the Universal Declaration of Human Rights and other internationally recognized human rights
standards."
Ikea (retail) "To create a better everyday life for the many people."
The American Society for the Prevention of Cruelty to Animals (ASPCA) (nonprofit) "The vision of the
ASPCA is that the United States is a humane community in which all animals are treated with respect
and kindness."

Tip:

These examples are concise, focused and inspiring. Do everything you can to make your statements
similarly succinct long, rambling statements can show that managers haven't made tough-butnecessary decisions.
How to Create a Mission Statement

To develop your mission statement, follow the steps below.

Step 1: Develop Your Winning Idea

First, identify your organization's "winning idea," or unique selling proposition (USP). This is the idea or
approach that makes your organization stand out from its competitors, and it is the reason that
customers come to you and not your competitors.
Tip:

Developing a "winning idea" is a core goal of business strategy , and it can take a lot of effort to find,
shape, test, and refine it. To start, see our articles on USP Analysis , SWOT Analysis and Core
Competence Analysis .
Step 2: Clarify Your Goal

Next, make a short list of the most important measures of success for this idea.

For instance, if your winning idea is to create cutting-edge products in a particular industry, how will you
know when you've accomplished this goal? If your idea is to provide excellent customer service in an
area, what key performance indicator will let you know that your customers are truly satisfied?

You don't have to include exact figures here, but it's important to have a general idea of what success
looks like, so that you know when you've achieved it.

Combine your winning idea and success measures into a general, but measurable goal . Refine the
words until you have a concise statement that expresses your ideas, measures and a desired result.

Keep this statement in the present tense, and make sure it is short, simple , clear, and free of jargon .
Yes, the language needs to be inspiring, but don't include adjectives just so it "sounds better."

Example 1

Take the example of a produce store, "Farm Fresh Produce", whose winning idea is "providing farm
freshness." The owner identifies two key measures of her success: freshness and customer satisfaction.
She creates the following mission statement, which combines the winning idea and her measures of
success:

"To be the number one produce store in Main Town by selling the highest quality, freshest farm produce
directly from farm to customer, with high customer satisfaction."
Example 2

Carl has just become the leader of a new team. The team will focus on one key project: streamlining the
organization's internal databases, so that the entire system runs smoothly and without problems.

With this in mind, Carl creates a mission statement to guide his team's understanding of their purpose:

"Our team's goal is to streamline our organization's database management system within 12 months.
We will develop a new system that is easy to use, and reduces the frequency of user errors."
How to Create a Vision Statement
Step 1: Find the Human Value in Your Work

First, identify your organization's mission. Then uncover the real, human value in that mission. For
example, how does your organization improve people's lives? How do you make the world a better
place?

Our article on working with purpose has tips that you can use to find the deeper meaning in what you
do.
Step 2: Distill Into Values

Next, identify what you, your customers and other stakeholders value the most about how your
organization will achieve this mission. Distill these into values that your organization has, or should
have.

Some examples of values include excellence, integrity, teamwork, originality, equality, honesty,
freedom, service, and strength.

If you have a hard time identifying your organization's values, talk to your colleagues and team
members. What values do they think the organization stands for, or that it should stand for?
Step 3: Combine Your Mission and Values

Combine your mission and values, and polish your words until you have an inspiring statement that will
energize people, inside and outside your organization.

It should be broad and timeless, and it should explain why the people in your organization do what they
do.
Example 1

The owner of Farm Fresh Produce examines what she, her customers and her employees value about
her mission.

The four most important values that she identifies are freshness, healthiness, tastiness, and the "localness" of the produce. Here's the vision statement that she creates and shares with employees,
customers and farmers alike:

"We encourage the families of Main Town to live happier and healthier lives by providing the freshest,
tastiest, and most nutritious local produce: from local farms to your table in under 24 hours."
Example 2

Carl looks at the values that are key to achieving this goal, and considers his team's mission statement.
He identifies several important values, such as challenge, dependability and teamwork. He then creates
this statement that combines his team's mission and values:

"We will challenge our skills and abilities, and create a database system that's strong, dependable and
intuitive, allowing our colleagues to work quickly and effortlessly."
Key Points

Mission and vision statements are concise, inspiring statements that clearly communicate the direction
and values of an organization.

These statements can powerfully explain your intentions, and they can motivate your team or
organization to realize an inspiring vision of the future.

When writing them, make sure that you understand your organization's USP, or "winning idea." You'll
also need to clarify your organization's values, and distill them into statements that are concise,
engaging and uplifting.

The Pyramid of Purpose

Communicating Your Organization's Strategy Concisely

iStockphoto/geopaul
Effective strategic planning is essential to the success of any business. It's the process that senior
executives use to think about how the business will win in the future; and without it, the
organization is most-likely doomed to failure.
But however good your strategy is, it will fail if people don't understand it. They won't know
where the organization is going, or how to help you get there. They'll probably get frustrated and
confused; customers may feel dissatisfied; and other stakeholders may lose their faith in your
organization's ability to deliver.
So your business needs both effective strategic planning and good communication of strategy.
And just as a map is usually more effective than a list of directions, so a graphical description of
your strategy can often communicate your strategy more effectively than a weighty document.
One popular technique for communicating strategy graphically is called "the Pyramid of
Purpose". It is called this because it describes the elements of strategy graphically.

Understanding the Tool

There are many ways of describing strategy. One approach, which also illustrates the hierarchical
structure well, thinks of business strategy as answering the following questions:
1.
2.
3.
4.

Why are we doing what we are doing?

What do we need to do to fulfill our intended purpose?
How exactly are we going to do what needs to be done?
Who (or what) is going to make sure it's done?

Answering these questions can help you articulate your strategy very comprehensively, covering
the key ingredients that are generally needed in a strategic plan:

Question 1 "why" refers to your organization's values, mission, and vision.

Question 2 "what" covers objectives and goals.
Question 3 "how" refers the actions needed to realize these goals.
Question 4 "who" refers to the people, systems and tools which deliver these.

A hierarchy of questions emerges: In order to answer question 4, you need to answer question 3;
to answer question 3, you need to answer question 2; and to answer question 2, you need to
answer question 1.
The high level elements of organizational values, the mission and the vision (the "why"), flow
through the business and permeate every aspect.
Likewise, the objectives and goals (the "what") flow down to determine the actions and
approaches that are necessary (the "how").
And these planning elements all need certain resources (people, systems and so on), to get them
done (the "who").
This can be represented in a pyramid like the one in figure 1:

Using the Tool: Building Your Pyramid Of Purpose

The starting point for your Pyramid of Purpose is to explain the "why", which will draw on
values, mission statement and vision statement for the organization.
The way you do this depends on your audience: What exactly do you need to communicate and
who to? And so you must explain each element of your strategy in a way that suits that audience
and the messages you wish to convey.
If the purpose is to communicate strategy to customers and stakeholders of your organization (an
external audience), a good place to start your pyramid is with a vision statement. For an internal
audience, the "why" level might focus on the mission statement, or indeed include both vision
and mission statements in your pyramid. Our article on Vision and Mission Statements explains
the distinction between the two, and will also help you create a vision or mission statement for
the "why" level of your Pyramid of Purpose.
Once you have described the "why", the next steps of building your pyramid must define the
"what", then the "how" and finally the "who". And you need to do this in a way that clearly
explains your strategy to your specific audience.

Example

An entrepreneur must explain the strategic plan of his fledgling business to potential investors.
He uses a Pyramid of Purpose to communicate the key points of his strategic plan:

Why: Vision / Mission

To delight and enthrall parents and children alike with beautiful, collectable, wooden toys and
games, and in so doing, become the nation's leading retailer of high quality, wooden toys and
games.

What: Objectives
Prove the concept by launching a pilot store and reaching profitability within 18 months.

How: Actions

Identify the pilot store location

Source good quality wooden toys and games
Design attractive store front and merchandising approach
...

Who: People

Responsible for location selection.

Responsible for supplier identification and product sourcing.
Responsible for selecting store designers and shop fitters.
...

Key Points
The Pyramid of Purpose is a graphical depiction of an organization's strategic plan. By putting
the various elements of a good strategic plan into a pyramid form, it is easy to see the "big
picture" and relationships between different elements of the plan in a form that is easy to
understand: The purpose shown at the apex cascades from one level of strategy to the next.
There are no hard and fast rules for building a Pyramid of Purpose: Use it to convey your plan in
the way your intended audience is most likely to understand.

The Triple Bottom Line

Measuring Your Organization's Wider Impact

iStockphoto

Imagine going to work everyday for a company that you are truly excited about, and proud to be a part
of.

Sure, the pay is decent and there's a company crche, but those aren't the only reasons why you love
working there.

You're proud to be a part of this company because they're honorable.

They stand out from the typical "cut-throat" business world by the way they treat suppliers, their
commitment to environmental sustainability, and their desire to empower and promote their team
members instead of dragging them down. There is a constant air of excitement and possibility at the
office, and you love coming to work everyday.

Sounds pretty amazing, right? Well, a company like this isn't just a fantasy anymore. And one approach
to building this type of company like this, and monitoring what it does, is to use "the triple bottom line".
What is the Triple Bottom Line?

The triple bottom line was first fully explained by John Elkington in his 1997 book "Cannibals With Forks:
The Triple Bottom Line of 21st Century Business". It's a bottom line that continues to measure profits,
but also measures the organization's impact on people and on the planet. The triple bottom line is a way
of expressing a company's impact and sustainability on both a local and a global scale.

The concept behind the triple bottom line is that companies are responsible first and foremost to all
their stakeholders, and these include everyone that is involved with the company whether directly or
indirectly, as well as the planet we're all living on. This approach sees shareholders as part of the
stakeholder group, but only as part of it.

At first, this approach can seem nave. However, a number of important trends support the need for
organizations to be benevolent, at least to some extent:

Many organizations are critically dependent for success on hiring, motivating and retaining good
people. At the extreme, think of leading sports teams or media organizations, in which the people
earning big money are the stars, not the shareholders. These organizations have no option but to be
focused on their people.
In many parts of the world, particularly in certain industries, good people are in short supply. Baby
Boomers are moving out of the workplace into retirement, and there are fewer people in the following

generations. Organizations that don't look after their workforces will quickly find they can't attract and
retain the people they need.
Different generations have different attitudes to work. While earlier generations may have tolerated
impoverished conditions at work, people in generations X and Y are likely to be looking for more
meaning. Unless they find this meaning, they'll move on.
Consumers and potential recruits have many more choices than they had in the past, and are more
aware of the ethical and environmental stance of large companies. Some base their purchase and career
decisions on these things.

So let's look at the three bottom lines in more detail:

People

Companies that follow the triple bottom line way of doing business think about the impact their actions
have on all the people involved with them. This can include everybody from farmers supplying raw
materials, on up to the CEO of the company. Everyone's well being is taken into consideration. The
company offers health care, good working hours, a healthy, safe place to work, opportunities for
advancement and education, and does not exploit their labor force (by using child labor or offering
sweatshop wages). In some cases, the "people" bottom line can also include the community where the
company does business.

While the concept of the people bottom line is certainly attractive, the difficulty comes in deciding how
far you go with this. Do you apply it to employees? Their families? Suppliers? People near company
buildings? How near? And what should you do if you need to restructure the business to remain
competitive and shed some staff? Should your concern for people mean that you refuse to make
redundancies even though this risks the long term viability of the organization for all staff?
Planet

Triple bottom line companies take pains to reduce or eliminate their ecological footprint. They strive for
sustainability, recognizing the fact that "going green" may be more profitable in the long run. But it's not
just about the money. Triple bottom line companies look at the entire life cycle of their actions and try
to determine the true cost of what they're doing in regards to the environment. They take pains to
reduce their energy usage, they dispose of any toxic waste in a safe way, they try to use renewable
energy sources and they don't produce products that are unsafe or unhealthy for people and the planet.
Profit

The financial bottom line is the one that all companies share, whether they're using triple bottom line or
not. When looking at profit from a triple bottom line standpoint, the idea is that profits will help
empower and sustain the community as a whole, and not just flow to the CEO and shareholders.
The Triple Bottom Line in Practice

While you may or may not consider the Triple Bottom Line appropriate for your business, it makes sense
to recognize the way in which the workplace is changing, and consider whether you need to adapt your
approach to business to reflect this.

If you decide to explore the concept further, start out by researching what other companies are doing to
make a positive change in the way they do business. Looking at the steps they've taken will save you
time brainstorming on ways to improve your own business. Some examples from different industries
include:

An international shipment and packaging company has taken drastic steps to reduce its ecological
footprint, and currently has about 30% of its stores using renewable energy.
An ice cream business has set a goal to reduce its carbon dioxide emissions by 10% over the next few
years. It also has started investigating more environmentally friendly ways to package its ice cream, and
plans to cut waste by at least 1,000 tons.
A coffee company only buys its beans from farmers who grow coffee in an environmentally friendly
manner, and it takes pains to ensure that all its workers are treated fairly, and receive a living wage for
their skills.
A computer company focuses a lot of its community efforts towards training and education programs.
It helps underprivileged kids by giving them access to technology, and has goals to recycle 60% of its
annual waste.

By taking the time to start using the triple bottom line approach, you might be surprised at just how
positive the reaction will be from your colleagues and your customers.
When to Use the Triple Bottom Line

The Triple Bottom Line is essentially a reporting system. Of itself, it doesn't actually improve the
company's impact on people or the environment, any more than the action of producing a set of
management accounts would affect profits.

However, it can be used to drive improvements in the way an organization impacts people and the
environment by helping managers focus on what they need to do to improve all of the bottom lines, and
keeping this work high on their agendas. In this case, the Triple Bottom Line is being used as a type of
Balanced Scorecard .

As with all measurement systems, though, the cost of monitoring and calculating three bottom lines can
be considerable. And you can only justify this cost if you can do some greater good as a result of having
the figures. What's more, you certainly don't have to have Triple Bottom Line reporting in place to treat
people well, or be conscientious about your impact on the environment. In many cases, money that
could be spent on monitoring the Triple Bottom Line could better be used on people- or planet-friendly
initiatives.
Tip:

This also needs to be considered in the context of monitoring and managing the organization's progress
towards achieving its Critical Success Factors .
Key Points

The Triple Bottom Line is a way of measuring an organization's impact on people and the environment
as well as its finances.

Some companies find that using it to monitor more than just the financial line helps them improve the
way that they treat people both within and outside the organization, and reduce their adverse impact
on the environment.
Segmentation, Targeting and Positioning Model
Increasing Revenue by "Going Niche"

The following are trademarks: "Marriott International," "Courtyard by Marriott," "Ritz-Carlton," and
"ExecuStay" are trademarks of Marriott Worldwide Corporation (see www.marriott.com); "Instagram" is
a trademark of Instagram LLC (see www.instagram.com); and "Pinterest" is a trademark of Pinterest, Inc
(see www.pinterest.com).
Segmentation, Targeting and Positioning Model

Are you giving your customers exactly what they want?

 iStockphoto/Rrrainbow

Sofia has just started a new job as a marketing manager for a fashion outlet. She conducts a careful
analysis of sales data within the first few weeks, and quickly identifies a profitable opportunity with a
particular group of high-value customers.

So, she brainstorms several ideas with her team, and they come up with an exciting new product which
has the potential to be a real success for the company.

Sofia has identified a profitable segment of the market, but how has she done this? How can her team
members develop a perfect product for these people? And how should they communicate its benefits?

In this article, we'll look at the Segmentation, Targeting and Positioning (STP) Model*, an approach that
you can use to identify your most valuable market segments, and then sell to these successfully with
carefully targeted products and marketing.
About the Model

The STP Model consists of three steps that help you analyze your offering and the way you communicate
its benefits and value to specific groups.

STP stands for:

Step 1: Segment your market.

Step 2: Target your best customers.
Step 3: Position your offering.

This model is useful because it helps you identify your most valuable types of customer, and then
develop products and marketing messages that ideally suit them. This allows you to engage with each
group better, personalize your messages, and sell much more of your product.
Example

Marriott International owns a number of different hotel chains that target specific consumer groups.

For example, Courtyard by Marriott hotels focus on travelers on the road, who want a nice, clean place
to stay during their trip; Ritz-Carlton hotels target those who don't mind paying a premium for luxury;
and Marriott ExecuStay hotels are aimed at professionals who need a longer-term, comfortable place
to stay.

As you can imagine, Marriott International doesn't communicate the same marketing message to all its
customers. Each hotel is designed and positioned to appeal to the unique wants and needs of a specific
group.
Applying the STP Model

Follow the steps below to apply the STP Model in your organization.
Step 1: Segment Your Market

Your organization, product or brand can't be all things to all people. This is why you need to use market
segmentation to divide your customers into groups of people with common characteristics and needs.
This allows you to tailor your approach to meet each group's needs cost-effectively, and this gives you a
huge advantage over competitors who use a "one size fits all" approach.

There are many different ways to segment your target markets. For example, you can use the following
approaches:

Demographic By personal attributes such as age, marital status, gender, ethnicity, sexuality,
education, or occupation.
Geographic By country, region, state, city, or neighborhood.
Psychographic By personality, risk aversion, values, or lifestyle.
Behavioral By how people use the product, how loyal they are, or the benefits that they are looking
for.

(You can use Simonson and Rosen's Influence Mix to identify factors that influence customer
purchases.)
Example

The Adventure Travel Company is an online travel agency that organizes worldwide adventure
vacations. It has split its customers into three segments, because it's too costly to create different
packages for more groups than this.

Segment A is made up of young married couples, who are primarily interested in affordable, eco-friendly
vacations in exotic locations. Segment B consists of middle-class families, who want safe, family-friendly
vacation packages that make it easy and fun to travel with children. Segment C comprises upscale
retirees, who are looking for stylish and luxurious vacations in well-known locations such as Paris and
Rome.
Step 2: Target Your Best Customers

Next, you decide which segments to target by finding the most attractive ones. There are several factors
to consider here.

First, look at the profitability of each segment. Which customer groups contribute most to your bottom
line?

Next, analyze the size and potential growth of each customer group. Is it large enough to be worth
addressing? Is steady growth possible? And how does it compare with the other segments? (Make sure
that you won't be reducing revenue by shifting your focus to a niche market that's too small.)

Last, think carefully about how well your organization can service this market. For example, are there
any legal, technological or social barriers that could have an impact? Conduct a PEST Analysis to
understand the opportunities and threats that might affect each segment.
Tip:

It can take a lot of effort to target a segment effectively. Choose only one segment to focus on at any
one time.
Example

The Adventure Travel Company analyzes the profits, revenue and market size of each of its segments.
Segment A has profits of $8,220,000, Segment B has profits of $4,360,000, and Segment C has profits of
$3,430,000. So, it decides to focus on Segment A, after confirming that the segment size is big enough
(it's estimated to be worth $220,000,000/year.)

Step 3: Position Your Offering

In this last step, your goal is to identify how you want to position your product to target the most
valuable customer segments. Then, you can select the marketing mix that will be most effective for
each of them.

First, consider why customers should purchase your product rather than those of your competitors. Do
this by identifying your unique selling proposition , and draw a positioning map to understand how
each segment perceives your product, brand or service. This will help you determine how best to
position your offering.

Next, look at the wants and needs of each segment, or the problem that your product solves for these
people. Create a value proposition that clearly explains how your offering will meet this requirement
better than any of your competitors' products, and then develop a marketing campaign that presents
this value proposition in a way that your audience will appreciate.
Example

The Adventure Travel Company markets itself as the "best eco-vacation service for young married
couples" (Segment A).

It hosts a competition on Instagram and Pinterest to reach its desired market, because these are the
channels that these people favor. It asks customers to send in interesting pictures of past eco-vacations,
and the best one wins an all-inclusive trip.

The campaign goes viral and thousands of people send in their photos, which helps build the Adventure
Travel Company mailing list. The company then creates a monthly e-newsletter full of eco-vacation
destination profiles.

Key Points

The STP Model helps you position a product or service to target different groups of customers more
efficiently. This three-step approach helps you quickly zoom in on the most profitable parts of your
business, so that you can fully exploit the opportunities these offer.

To use the model, start by segmenting your market into groups. Next, choose which of these you want
to target. Last, identify how you want to position your product, based on the personality and behavior of
your target market.

The Marketing Mix and the 4Ps of Marketing

Understanding How to Position Your Market Offering

How to use the 4Ps,

with James Manktelow & Amy Carlson.

What is marketing?

The definition that many marketers learn as they start out in the industry is:

Putting the right product in the right place, at the right price, at the right time.

It's simple! You just need to create a product that a particular group of people want, put it on sale some
place that those same people visit regularly, and price it at a level which matches the value they feel
they get out of it; and do all that at a time they want to buy. Then you've got it made!

There's a lot of truth in this idea. However, a lot of hard work needs to go into finding out what
customers want, and identifying where they do their shopping. Then you need to figure out how to
produce the item at a price that represents value to them, and get it all to come together at the critical
time.

But if you get just one element wrong, it can spell disaster. You could be left promoting a car with
amazing fuel-economy in a country where fuel is very cheap; or publishing a textbook after the start of
the new school year, or selling an item at a price that's too high or too low to attract the people
you're targeting.

The marketing mix is a good place to start when you are thinking through your plans for a product or
service, and it helps you avoid these kinds of mistakes.
Understanding the Tool

The marketing mix and the 4Ps of marketing are often used as synonyms for each other. In fact, they are
not necessarily the same thing.

"Marketing mix" is a general phrase used to describe the different kinds of choices organizations have to
make in the whole process of bringing a product or service to market. The 4Ps is one way probably the
best-known way of defining the marketing mix, and was first expressed in 1960 by E J McCarthy.

The 4Ps are:

Product (or Service).

Place.
Price.
Promotion.

A good way to understand the 4Ps is by the questions that you need to ask to define your marketing
mix. Here are some questions that will help you understand and define each of the four elements:
Product/Service

What does the customer want from the product/service? What needs does it satisfy?
What features does it have to meet these needs?
Are there any features you've missed out?
Are you including costly features that the customer won't actually use?
How and where will the customer use it?
What does it look like? How will customers experience it?
What size(s), color(s), and so on, should it be?
What is it to be called?
How is it branded?
How is it differentiated versus your competitors?
What is the most it can cost to provide, and still be sold sufficiently profitably? (See also Price, below).

Place

Where do buyers look for your product or service?

If they look in a store, what kind? A specialist boutique or in a supermarket, or both? Or online? Or
direct, via a catalogue?
How can you access the right distribution channels?
Do you need to use a sales force? Or attend trade fairs? Or make online submissions? Or send samples
to catalogue companies?
What do you competitors do, and how can you learn from that and/or differentiate?

Price

What is the value of the product or service to the buyer?

Are there established price points for products or services in this area?
Is the customer price sensitive? Will a small decrease in price gain you extra market share? Or will a
small increase be indiscernible, and so gain you extra profit margin?
What discounts should be offered to trade customers, or to other specific segments of your market?
How will your price compare with your competitors?

Promotion

Where and when can you get across your marketing messages to your target market?
Will you reach your audience by advertising in the press, or on TV, or radio, or on billboards? By using
direct marketing mailshot? Through PR? On the Internet?
When is the best time to promote? Is there seasonality in the market? Are there any wider
environmental issues that suggest or dictate the timing of your market launch, or the timing of
subsequent promotions?
How do your competitors do their promotions? And how does that influence your choice of
promotional activity?

The 4Ps of marketing is just one of many lists that have been developed over the years. And, whilst the
questions we have listed above are key, they are just a subset of the detailed probing that may be
required to optimize your marketing mix.

Amongst the other models that have been developed over the years is Boom and Bitner's 7Ps,
sometimes called the extended marketing mix, which include the first 4Ps, plus people, processes and
physical layout decisions.

Another approach is Lauterborn's 4Cs, which presents the elements of the marketing mix from the
buyer's, rather than the seller's, perspective. It is made up of Customer needs and wants (the equivalent
of product), Cost (price), Convenience (place) and Communication (promotion). In this article, we focus
on the 4Ps model as it is the most well-recognized, and contains the core elements of a good marketing
mix.
Using the 4Ps of Marketing

The model can be used to help you decide how to take a new offer to market. It can also be used to test
your existing marketing strategy. Whether you are considering a new or existing offer, follow the steps
below help you define and improve your marketing mix.

Start by identifying the product or service that you want to analyze.

Now go through and answer the 4Ps questions as defined in detail above.
Try asking "why" and "what if" questions too, to challenge your offer. For example, ask why your
target audience needs a particular feature. What if you drop your price by 5%? What if you offer more
colors? Why sell through wholesalers rather than direct channels? What if you improve PR rather than
rely on TV advertising?
Tip:

Check through your answers to make sure they are based on sound knowledge and facts. If there are
doubts about your assumptions, identify any market research, or facts and figures that you may need to
gather.
Once you have a well-defined marketing mix, try "testing" the overall offer from the customer's
perspective, by asking customer focused questions:
Does it meet their needs? (product)
Will they find it where they shop? (place)

Will they consider it's priced favorably? (price)

And will the marketing communications reach them? (promotion)
Keep on asking questions and making changes to your mix until you are satisfied that you have
optimized your marketing mix, given the information and facts and figures you have available.
Review you marketing mix regularly, as some elements will need to change as the product or service,
and its market, grow, mature and adapt in an ever-changing competitive environment.

Key Points

The marketing mix helps you define the marketing elements for successfully positioning your market
offer.

One of the best known models is the 4Ps of Marketing, which helps you define your marketing options
in terms of product, place, price and promotion. Use the model when you are planning a new venture,
or evaluating an existing offer, to optimize the impact with your target market.
Further Resources

Learn more about marketing with these resources in the Mind Tools Club:

Developing Your Marketing Strategy

Marketing Essentials: Bite-Sized Training
Free Marketing: Book Insight
Manufacturing and Operations
The Product-Process Matrix
Using the Right Process for the Volume of Work You're Doing

Match your production method to volume and product diversity.

iStockphoto/seraficus
You're up against a deadline to get 500 important letters in the mail to your customers.
Which of these approaches do you think would be most efficient?
Scenario A: You assemble each letter one by one. You fold each piece of paper, put it in the envelope,
address it, and stamp it.
Scenario B: You work on each task in batches. First you fold the letters. Then you stuff them in
envelopes. Then you address each envelope. And finally you stamp them.
Whilst it's probably more boring, Scenario B is almost certainly more efficient because you can have
the one or two items you need for that single task within easy reach, and you don't waste time
switching between tasks.
But in other situations when the same set of tasks need to be carried out multiple times whether
you're dealing with product manufacture, administrative tasks or other types of work it isn't always
obvious how best to organize things.
This is where a tool like the Product-Process Matrix can help. In this article, we'll explain exactly what
it is and how it can help you to decide how to organize processes most efficiently. The tool is
particularly useful when youre introducing or making changes to the volumes of work or product that
you need to process.
Understanding the Tool
The Product-Process Matrix was first introduced by Robert Hayes and Steven Wheelwright in the
Harvard Business Review in 1979.
It helps organizations identify the type of production approach they should use for a product, based
on the volumes of the product being produced, and the amount of customization it needs.
The matches between products and processes are shown in Figure 1 below. (This diagram shows an
example that we'll refer to later in this article.)

A Product-Process Matrix Example

Here's a quick example to illustrate how the matrix could help make production more efficient.
Sarah has just opened her first small bicycle shop. All of her bikes are custom designed and built for
clients, which is a very lengthy and expensive process. Sarah's business is in the 1a square on the
matrix: she makes and sells one bike at a time, operating a low volume job shop.
Sarah's products are very well made, and business starts to improve as more customers place orders
for her custom bikes. But Sarah doesn't change her process. She continues to build and sell one bike at
a time, and her reputation suffers because there's such a long waiting list.
This means that she's moved to the 3a square. She still builds bikes as if there's a low-volume demand
although, in reality, she now has a high-volume business.
If Sarah doesn't change her process, she might ultimately go out of business, or at least lose
customers who don't want to wait for a bike. However, if she looks at the Product-Process Matrix,
she'll realize that she needs to hire staff and set up an assembly line to handle the higher volume of
orders. Based on her increasing demand, she really needs to be in the 3c square.
The Product-Process Matrix in Detail

Although the Product-Process Matrix was originally created with manufacturing in mind, we can use
this tool to help make our own tasks and projects run more efficiently. Let's look at the key squares in
greater detail, and then discuss how you can apply the Product-Process Matrix in your own life.
1a Job Shop/Low Volume, Low Standardization
Job shops carry out small, unique production. Each item or task is done by hand, one at a time. There's
very little, or no, standardization.
Example: Sarah creates custom-made products from start to finish.

Benefits flexibility, uniqueness, quality.

Disadvantages not cost-effective, not efficient.

2b Batch/Multiple Products, Low Volume

Batch production occurs when parts of a project or product are processed together to increase
efficiency. This is still a lower-volume process, but it can handle more than the job shop.
Example: In Sarah's bike shop, she could attach the wheels onto 10 bikes that will all be built to the
same specification. Then she can attach the pedals, brakes, and so on.

Benefits increased efficiency for each step due to repetition.

Disadvantages potential for confusing flow as half-completed projects or products begin to

pile up.

3c Connected Line Flow/Few Major Products, High Volume

When volume continues to increase, an assembly line is set up. Each worker has a specific role, or
task, to complete.
Example: Sarah sets up a production line to assemble bikes. One person attaches wheels to each
frame as it passes, then it goes to someone else to add pedals, and so on. The production line is
stopped and adjusted periodically so that a different model can be made.

Benefits very efficient, easy-to-maintain standards.

Disadvantages little flexibility, less ability to customize products.

Note:
Since this matrix was developed in 1979, some companies Dell is a famous example have worked
out how to customize products on a high volume basis. However this matrix is still relevant in many
industries.
4d Continuous Flow/High Volume, High Standardization
When volume is extremely high and the range of products is extremely small, continuous flow is set
up. Continuous flow means that production never stops. This approach is used primarily in factories.
Example: Operates 24 hours per day

Benefits low cost to operate, ability to handle very large volumes.

Disadvantages no flexibility, very limited product/project range, expensive to set up.

Note:
Once a production system has got to 2b, it can EITHER move to 3c OR 4d. 3c is used where discrete
units such as bikes, bottles of soda, or garments are being produced. 4d is only suitable for
processing "bulk" raw materials such as liquids, gasses, or granular solids such as sand or coal. The
output from 4d production is often an input into a 3c system (for example, soda feeds into a soda
bottling process).
The progression which has a sugar refinery as the process for 4d in Figure 1, could start at stage 1a
with a farmer slicing up sugar beet, boiling it in a single pan, and then pressing out the sugar, and so
on. By Stage 2b, the farmer would have invested in enough equipment and people so that each
activity was handled by a different person. Someone would slice sugar beet all day, passing his
"output" to someone else who boiled pan after pan, and so on.
Key Points
We often work on projects or tasks without looking at the big picture. If we do something on a regular
basis, it might be more efficient to standardize the process and delegate it to a team. This leaves us
open to work on higher-value tasks. Use the Product-Process Matrix to help identify your tasks and
determine if they're matched with the correct processes.
Apply This to Your Life
How can you use the Product-Process Matrix in your own life?
Look at the tasks you regularly do during your workday. Do you currently use a "job shop" approach
for any, where you should really be using a batch or assembly line process?
If any tasks or projects could be standardized, write a procedure and create a plan to delegate the
project to a person or team that could create it more efficiently. Remember, look at the volume and
frequency to determine what kind of process (batch or assembly line) might be appropriate to
complete it more efficiently.
It's sometimes useful to analyze in the opposite direction. That is, perhaps some standardized
"assembly line" procedures should be handled instead with more of a "job shop" approach.
For instance, imagine that you work in a customer service department. Most consumer complaints are
handled automatically by "autoresponder" emails, which are sent to customers based on keywords
found in the initial email. However, customers often become frustrated because these
"autoresponses" don't answer their questions. In this case, the customer service department may
become more effective if it decreases efficiency and handles complaints one at a time.

Just In Time (JIT)

Reducing Inventory, Minimizing Waste, and Responding to Your Customers

Reassuring... but expensive.

iStockphoto

When is the best time to have an inventory part ready for production? Just in time.

When is the best time to have an item ready for the next step in production? Just in time.

When is the best time to have a product ready for delivery to a customer? Just in time.

So why do manufacturers build inventory of both finished goods and raw materials? Just in case!

A buffer of inventory on hand is comforting and costly. If you hold a lot of items in inventory, you're
locking away a huge amount of cash unnecessarily. These items can be lost, stolen, or damaged, or
they can deteriorate. They occupy space, which could otherwise be devoted to operations. And they
can become obsolete, particularly when products are improved or changed often (many of us can
remember images of airfields full of unwanted, obsolete cars from the 1970s and 1980s.) All of this
represents financial loss to the business.

In the 1970s, when Japanese manufacturing companies were trying to perfect their systems, Taiichi
Ohno of Toyota developed a guiding philosophy for manufacturing that minimized waste and
improved quality. Called Just In Time (JIT), this philosophy advocates a lean approach to production,
and uses many tools to achieve this overall goal.

When items are ready just in time, they aren't sitting idle and taking up space. This means that they
aren't costing you anything to hold onto them, and they're not becoming obsolete or deteriorating.
However, without the buffer of having items in stock, you must tightly control your manufacturing
process so that parts are ready when you need them.

When you do (and JIT helps you do this) you can be very responsive to customer orders after all, you
have no stake in "forcing" customers to have one particular product, just because you have a
warehouse full of parts that need to be used up. And you have no stake in trying to persuade
customers to take an obsolete model just because it's sitting in stock.

The key benefits of JIT are:

Low inventory
Low wastage
High quality production
High customer responsiveness.

The JIT Strategy

By taking a JIT approach to inventory and product handling, companies can often cut costs
significantly. Inventory costs contribute heavily to the company expenses, especially in manufacturing
organizations. By minimizing the amount of inventory you hold, you save space, free up cash
resources, and reduce the waste that comes from obsolescence.
JIT Systems

To facilitate a JIT approach, you need a variety of systems in place. The most notable is a kanban .
This is a Japanese approach to ensuring a continuous supply of inventory or product. Kanbans were
designed to support the JIT philosophy.

A kanban is a visual signal that indicates it is time to replenish stock and possibly reorder. For
instance, as the supply of bolts in a bin on the assembly line falls below a certain number, it may
uncover a yellow line painted around the inside of the storage bin. This yellow line indicates to the
foreman that he needs to prepare a requisition for more bolts. That requisition is given to the
purchasing department, which processes the order. This prevents the supply of bolts from dropping
below a critical amount and allows production continues to flow smoothly. To read more on kanban,
click here for the Mind Tools article on it.

JIT also exists in concert with continuous improvement systems. Total Quality Management and Six
Sigma are overarching programs that help you take a detailed look at every point of the production
process and identify ways to make improvements. By applying JIT, you are continuously monitoring
the production process. This gives you opportunities for making the production process smoother and
more efficient.

Because JIT is intended to spread throughout the organization, it can have an impact on many areas
through improvements in processes. When the emphasis is on lean production, systems tend to be
made simpler and more predictable. From how a product moves through the building to ways to
increase worker involvement in system design, JIT improves efficiency.
JIT and Stakeholder Relationships

With JIT, it is necessary that you build strong ties with your supply chain. This will ensure that you
have access to the supplies you need when you need them. (A side benefit of this is that you're more
likely to receive forewarning of shifts in supply that may have an impact on your business.)

With a secure source of supplies, you can continue to make improvements in your production and
inventory systems. This helps you to increase your responsiveness to customer demand. If you need
to ramp up production, you can be confident knowing your suppliers will help you.

If your customers demand a newer technology, you can switch product quite easily, without worrying
about writing off a large stock of obsolete supplies and finished goods. This means that you can meet
changing customer needs more quickly.

Custom orders are simpler with a JIT system. Instead of the customer's widget being built six months
in advance and waiting on a shelf, it is built when it's ordered. By delivering product "just in time,"
you allow for last-minute changes.

Essentially, JIT allows your company to get the right products to the right customers at the right time.
In many industries, this can give you a huge competitive advantage, at the same time that it helps you
save a large amount of money.
Note:

A key drawback of JIT is that it only works if you can rely on your suppliers to deliver when they
promise to otherwise your whole operation may grind to a halt.

What's more, if material costs suddenly increase, then storing them at a lower rate might have been a
more economic option. And JIT is also based on historical patterns of need: If orders increase sharply,
adjusting to the increased need for supplies may not be easy for you or your suppliers.
Key Points

Just In Time is a way of managing operations so that they run leanly and efficiently. JIT requires giving
up your "Just In Case" safety net, and controlling supplies and inventory to levels that just support
production. The main emphasis of JIT is on cost reduction and minimal waste.

The process of implementation requires you to take a very close look at every stage of your
production and inventory carrying points. This alone is a useful exercise that will highlight some areas
for improvement. Ultimately, the more efficient you are and the higher quality product you provide,
the more appealing you will be to customers and clients.
Achieving Economies of Scale
Understanding Why Bigger Can Be Better

Do your calculations.
iStockphoto/damircudic
Imagine you work for a company in a buoyant sector. Your sales are increasing, and you could sell
more of your product if you made more units.
However, you're nervous about the risks of hiring more people and you'd also need to hire a
production manager to run a larger team. Plus, you assume you'd still make the same profit on each
item sold. You don't think the increase in volume would offset the cost of extra staff, so you decide to
keep producing the same quantity.
Your competitors, however, have had a lesson in economics. They know that growth and increased
production could bring their costs down, and therefore increase profit per unit.
What do they know that you don't know? It's called economies of scale, and we'll show you how it
works.
Without Economies of Scale
Let's illustrate this with an example: suppose that you manufacture widgets. This is your current cost
structure for each unit:
4 knobs

@ $ 0.50 each

= $ 2.00

2 rods

@ $ 1.50 each

= $ 3.00

5 bolts

@ $ 0.25 each

= $ 1.25

5 spinners

@ $ 1.00 each

= $ 5.00

30 minutes labor @ $12.00 per hour = $ 6.00

Total

$17.25

If you produce 300 widgets per month, your manufacturing cost of goods sold (COGS) is $17.25 x 300 =
$5,175.
Each widget sells for $25, leaving you with a gross profit of $2,325 per month, which is a 31% gross
profit margin.
With the higher demand for your widgets, you could increase production to 600 units per month. To
increase production, however, you'll need to hire a production manager to keep operations running
smoothly. You'll need a bigger truck to ship your units. You might even have to hire a full-time
maintenance manager instead of using a part-time contractor. When you add it up, it seems as though
you'll simply decrease your net income:
300 Units

600 Units

Revenue

$7,500 (300 units @ $25)

$15,000 (600 units @ $25)

COGS

$5,175 (300 units @ $17.25) $10,350 (600 units @ $17.25)

Gross profit $2,325

$4,650

Maintenance $1,000 (contractor)

$1,500 (maintenance manager)

Shipping

$600

$300

(1 trip/week)

Management
Net income

(2 trips/week)

$2,000 (production manager)

$1,025 (13.7% of sales)

$550

(3.7% of sales)

What do you do? The market won't allow a price increase. You might lose some customers because
you can't meet demand. But, looking at the figures, it doesn't seem to make sense to work more and
earn less.
Adding Economies of Scale
Well, if you did some research, you'd quickly realize the following:

If you increase the size of your raw material orders, your suppliers will give you a discounted
price so the actual cost to produce each unit will go down.

The shipping company would decrease your per-trip rate from $300 to $250, because bigger
orders, and more orders, mean more business for them.

Hiring production and maintenance managers would increase efficiency, so you could actually
produce 675 units, instead of 600 units, with the same labor costs (a 12.5% increase).

Let's look at the new per-unit cost structure with an output level of 675 units:
4 knobs

@ $ 0.45 each

= $ 1.80

2 rods

@ $ 1.40 each

= $ 2.80

5 bolts

@ $ 0.20 each

= $ 1.00

5 spinners

@ $ 0.80 each

= $ 4.00

27 minutes labor @ $12.00 per hour = $ 5.40

Total

$15.00

Variable costs alone have brought down your per-unit cost. Now, look at your income figures again:
675 units
Revenue

$16,875 (675 units @ $25)

COGS

$10,125 (675 units @ $15)

Gross profit $6,750

Maintenance $1,500 (maintenance manager)
Shipping

$500

(2 trips/week)

Management $2,000 (production manager)

Net income

$2,750 (16.3% of sales)

Although your total cost (COGS plus maintenance and shipping) is higher, your average cost per unit
has decreased therefore your profit margin has increased.
300 units 675 units
Total cost

$6,475.00 $14,125.00

Cost per unit

$21.58

$20.92

Gross profit margin 13.7%

16.3%

The focus with economies of scale is on the cost per unit, or average cost (AC) not the total cost. If
you take advantage of economies of scale, your unit cost will typically decrease as the number of units
increases so you'll probably earn more.
Growing bigger, and producing more, can yield significant returns. Figure 1 (below) shows a typical
average cost curve. As output increases, the average unit cost decreases.

Sources of Economies of Scale

The simple example above illustrates purchasing economies of scale. There are many other sources of
economies of scale as well:
Commercial Economies of Scale
These arise when you buy and sell material, products and services in larger volumes. You may do so
through bulk purchases, as in our earlier example. Other examples of better purchasing include
improving shipping rates because more products are moved with each shipment. They also include
using more efficient inventory management practices, such as just-in-time inventory management ,
to reduce average unit costs.
You may also see, for example, marketing economies of scale, where the fixed costs of developing
marketing materials are spread over larger numbers of prospective clients.
Technical Economies of Scale
These result when you make elements of the production process more efficient. If you're producing
sufficiently large quantities of products, it may be worth reconfiguring machines, purchasing new
machines, using better technology, and optimizing capacity. The larger the volume of products you
make, the more you can invest to make the production process more efficient, and the more costeffectively you can make each individual product.
Large, modern facilities that automate production can reduce unit costs, despite the initial capital
investment that's needed. This is because fixed production costs (such as electricity, rent, and fuel)
are spread over more units so the average cost of each unit is reduced.

Capital-intensive industries must use technical economies of scale to be profitable. Building only 100
cars per year would result in huge fixed costs spread over very few units and it would be difficult, if
not impossible, for sales to offset those costs.
Managerial Economies of Scale
Similarly, the larger the number of units produced, and the more units you can spread staff costs over,
the more you can invest in specialist expertise. Hiring a finance or customer service manager might
seem expensive at first. However, professional managers can improve quality and increase production
using the same amount of inputs. Therefore, higher labor can often be more than offset by improved
productivity and quality.
Specialized labor can also lead to increased efficiency. People who do the same task repeatedly tend
to do it faster than those who do the task only occasionally. Therefore, if you divide work into smaller
steps, you may significantly improve efficiency. In our widget example, if you use specialized labor for
each stage of work, rather than general labor for the entire unit, you may decrease total labor to 20
minutes per unit.
Financial Economies of Scale
Financing a larger amount usually leads to a lower cost of borrowing. For example, mortgage rates are
generally lower than commercial lending rates for automobiles. Also, larger companies have more
assets to use as collateral, so the interest rates they pay are usually lower. And larger companies can
typically raise equity financing more easily than smaller companies. The servicing costs of this type of
financing are significantly lower than borrowing from banks or other financial institutions.
Risk-Bearing Economies of Scale
The more a company diversifies its activities, the less overall risk it assumes in any one line of
business. Producing a wide variety of products, and operating in many geographic locations, are ways
to spread risk, but they also need a significant initial investment. Large-scale growth and
diversification strategies can pay off by taking a long-term perspective and using economies of scale.
Spreading the risk of research and development costs is another benefit for large firms.
External Economies of Scale
The economies of scale discussed above are all internal. They each relate to how an individual
company operates. But there are also external economies of scale that impact an industry as a whole.
A company may gain advantages as a result of what's happening in the industry and external
environment. Here are some common examples:

Industry growth may allow access to specialist or lower-cost suppliers.

Low demand and large supply may bring down the cost of supplies.

Where many similar companies are operating in the same area, this may mean that there are
many, pre-trained people who can be recruited.

Industry infrastructure may already be in place to support growth.

Training facilities may be available.

A good transportation network may be available.

Improved technology may drive down all costs.

External factors can also create disadvantages. For example, as more companies move into a location,
rents may rise, unemployment rates may drop, and workers may demand higher wages.
Minimum Efficient Scale
All of these economies can occur as a company grows, and increases its production.
However, what happens if it grows too much? Very large companies sometimes suffer from decreased
efficiency. They may have once had efficient labor specialization, but now there are simply too many
people doing the same thing. Too many layers of management, too little control, too many locations,
and too many products these are all potential sources of diseconomies' of scale.
There's a point at which average costs stop falling as production increases, which may also be the
point at which costs start to rise as a result of this inefficiency. This point is the company's Minimum
Efficient Scale (MES).
This is illustrated in the U-shaped curve shown in Figure 2: here, the bottom of the curve is the
optimal place to be. At production volumes higher than this, the company's size is no longer an
advantage.

Key Points
By taking advantage of the opportunities that come from larger size and increased output, companies
can reduce their average unit costs, and increase their profits. They can also create many internal
opportunities simply by growing. And sometimes the external environment also provides economies
of scale, based on things like industry size or geographic location.
Organizations must be careful about outgrowing their economies of scale and getting too big. Average
unit costs usually decrease with increased output, but only to a certain point. After that, costs may
begin to rise again as the company creates unwanted inefficiencies. These diseconomies' of scale can
also result from external events, so an organization should continuously monitor its size and growth
to seek its optimal level of efficiency.

Quality Strategy
Deming's 14-Point Philosophy
A Recipe for Total Quality

Quality matters everywhere in an organization.

iStockphoto

The concept of quality is at the core of many of our ideas about effective management and leadership,
and programs like Total Quality Management and Six Sigma have been at the heart of many
companies' success.

We know now that quality needs to be built into every level of a company, and become part of
everything the organization does. From answering the phone to assembling products and serving the
end customer, quality is key to organizational success.

This idea is very much a part of modern management philosophy. But where did this idea originate?
Before things like globalization and technological advances became so important, competitive
pressures were typically much lower, and companies were usually satisfied with focusing their quality
efforts on the production process alone. Now, quality is often thought to start and end with the
customer, and all points leading to and from the customer must aim for high-quality service and
interaction.
A New Business Philosophy

We owe this transformative thinking to Dr. W. Edwards Deming. A statistician who went to Japan to
help with the census after World War II, Deming also taught statistical process control to leaders of
prominent Japanese businesses. His message was this: By improving quality, companies will decrease
expenses as well as increase productivity and market share.

After applying Deming's techniques, Japanese businesses like Toyota, Fuji, and Sony saw great
success. Their quality was far superior to that of their global competitors, and their costs were lower.
The demand for Japanese products soared and by the 1970s, many of these companies dominated
the global market. American and European companies realized that they could no longer ignore the
quality revolution.

So the business world developed a new appreciation for the effect of quality on production and price.
Although Deming didn't create the name Total Quality Management, he's credited with starting the
movement. He didn't receive much recognition for his work until 1982, when he wrote the book now
titled "Out of the Crisis." This book summarized his famous 14-point management philosophy.

There's much to learn from these 14 points. Study after study of highly successful companies shows
that following the philosophy leads to significant improvements. That's why these 14 points have
become a standard reference for quality transformation.
Note:

Deming's points apply to any type and size of business. Service companies need to control quality just
as much as manufacturing companies. And the philosophy applies equally to large multinational
corporations, different divisions or departments within a company, and one-man operations.
The 14 Points

Create a constant purpose toward improvement.

Plan for quality in the long term.
Resist reacting with short-term solutions.
Don't just do the same things better find better things to do.
Predict and prepare for future challenges, and always have the goal of getting better.
Adopt the new philosophy.
Embrace quality throughout the organization.
Put your customers' needs first, rather than react to competitive pressure and design products
and services to meet those needs.
Be prepared for a major change in the way business is done. It's about leading, not simply
managing.
Create your quality vision, and implement it.
Stop depending on inspections.
Inspections are costly and unreliable and they don't improve quality, they merely find a lack of
quality.
Build quality into the process from start to finish.

Don't just find what you did wrong eliminate the "wrongs" altogether.
Use statistical control methods not physical inspections alone to prove that the process is
working.
Use a single supplier for any one item.
Quality relies on consistency the less variation you have in the input, the less variation you'll
have in the output.
Look at suppliers as your partners in quality. Encourage them to spend time improving their own
quality they shouldn't compete for your business based on price alone.
Analyze the total cost to you, not just the initial cost of the product.
Use quality statistics to ensure that suppliers meet your quality standards.
Improve constantly and forever.
Continuously improve your systems and processes. Deming promoted the Plan-Do-Check-Act
approach to process analysis and improvement.
Emphasize training and education so everyone can do their jobs better.
Use kaizen as a model to reduce waste and to improve productivity, effectiveness, and safety.
Use training on the job.
Train for consistency to help reduce variation.
Build a foundation of common knowledge.
Allow workers to understand their roles in the "big picture."
Encourage staff to learn from one another, and provide a culture and environment for effective
teamwork.
Implement leadership.
Expect your supervisors and managers to understand their workers and the processes they use.
Don't simply supervise provide support and resources so that each staff member can do his or
her best. Be a coach instead of a policeman.
Figure out what each person actually needs to do his or her best.
Emphasize the importance of participative management and transformational leadership.
Find ways to reach full potential, and don't just focus on meeting targets and quotas.
Eliminate fear.
Allow people to perform at their best by ensuring that they're not afraid to express ideas or
concerns.

Let everyone know that the goal is to achieve high quality by doing more things right and that
you're not interested in blaming people when mistakes happen.
Make workers feel valued, and encourage them to look for better ways to do things.
Ensure that your leaders are approachable and that they work with teams to act in the company's
best interests.
Use open and honest communication to remove fear from the organization.
Break down barriers between departments.
Build the "internal customer" concept recognize that each department or function serves other
departments that use their output.
Build a shared vision.
Use cross-functional teamwork to build understanding and reduce adversarial relationships.
Focus on collaboration and consensus instead of compromise.
Get rid of unclear slogans.
Let people know exactly what you want don't make them guess. "Excellence in service" is short
and memorable, but what does it mean? How is it achieved? The message is clearer in a slogan like
"You can do better if you try."
Don't let words and nice-sounding phrases replace effective leadership. Outline your
expectations, and then praise people face-to-face for doing good work.
Eliminate management by objectives.
Look at how the process is carried out, not just numerical targets. Deming said that production
targets encourage high output and low quality.
Provide support and resources so that production levels and quality are high and achievable.
Measure the process rather than the people behind the process.

Tip:

There are situations in which approaches like Management By Objectives are appropriate, for
example, in motivating sales-people. As Deming points out, however, there are many situations
where a focus on objectives can lead people to cut corners with quality. You'll need to decide for
yourself whether or not to use these approaches. If you do, make sure that you think through the
behaviors that your objectives will motivate.

Remove barriers to pride of workmanship.

Allow everyone to take pride in their work without being rated or compared.
Treat workers the same, and don't make them compete with other workers for monetary or other
rewards. Over time, the quality system will naturally raise the level of everyone's work to an equally
high level.
Implement education and self-improvement.
Improve the current skills of workers.
Encourage people to learn new skills to prepare for future changes and challenges.
Build skills to make your workforce more adaptable to change, and better able to find and
achieve improvements.
Make "transformation" everyone's job.
Improve your overall organization by having each person take a step toward quality.
Analyze each small step, and understand how it fits into the larger picture.
Use effective change management principles to introduce the new philosophy and ideas in
Deming's 14 points.

Key Points

Deming's 14 points have had far-reaching effects on the business world.

While they don't really tell us exactly how to implement the changes he recommends, they do give us
enough information about what to change. The challenge for all of us is to apply Deming's points to
our companies, departments, and teams. Taken as a whole, the 14 points are a guide to the
importance of building customer awareness, reducing variation, and fostering constant continuous
change and improvement throughout organizations