Strategic Choice
has limitations. It is necessary to remember that the future may evolve differently
from any of the options.
Good strategic choices have to be challenging enough to keep ahead of competitors
but also have to be achievable. Analysis has an important role in making strategic
choice but judgement and skill are also critical. For instance, sometimes it may be
better to delay making a decision whereas at other times a wrong decision may be
better than no decision. Strategic choices that keep options open may be preferable
in an uncertain future to defined strategies that depend for their success on uncertain
events happening. Such judgements require wisdom as much as analytical skill.
These words of caution lay the ground for this chapter that might otherwise seem
to make the process of strategic choice sound too mechanistic.
Since strategic choice tends to be so fuzzy, it is useful to define the words being
used. We shall adopt the following definitions.
I Choice and strategic choice refer to the process of selecting one option for implemen-
tation.
I An option is a course of action that it appears possible to take. The simplest form of
choice is therefore between taking an option and not taking it—doing it or not
doing it. Most choices have more shades of possibility than this.
I A strategic option is a set of related options (typically combining options for product/
markets and resources) that form a potential strategy. For instance, it might be an
option to enter a new market in a new country. The entry to that market with a
chosen method of distribution and known way of acquiring necessary distribution
resources—in fact, a complete business plan of how to enter the new market
successfully—would become a strategic option.
I Chosen Strategy is the strategic option that has been chosen. The nature of this forms
the content of strategy and is addressed in Part IV.
intent should be changed. Infeasible options may seem highly attractive and may
have powerful supporters, so the reasons why they are infeasible may need to be
carefully argued with clear evidence in support. Choices of what not to do may some-
times be as important as choosing what to do.
In practice, the process for choosing a strategy may be structured something like
Figure 11.3, although the reality is likely to be much messier. The structure of this
chapter is also based on this figure.
The process of choice starts by identifying available options. The chosen strategy
strategic choice 135
will have to answer the questions ‘what’, ‘how’, ‘why’, ‘who’, and ‘when’, so each
option will provide provisional answers to each of these questions.
There are likely to be different kinds of options. Figure 11.3 shows three types—
products/services/markets, resources/capabilities, and method of progress—that are
typical but not necessarily exhaustive.
In April 1999, Ford announced the agreed acquisition of Kwik Fit. Ford had therefore
made a strategic choice. Ford has a strategic intent to move into automotive services. A
strategic assessment of Ford should show that its existing resources of large plants and
skills in design, marketing, finance, and assembly of new cars are inadequate to
support a service business. The decision to acquire Kwikfit would then be made from
options about:
I what types of services to offer and in which markets;
I what resources and capabilities are needed to support these services;
I how to acquire or build these resources.
Clearly there are multiple options in response to each question and there are links
between the question. A strategic option for Ford would be a set of options that seem to
make sense together.
Without any detailed knowledge of the deliberations within Ford, it would seem that
Figure 11.3 could be used to illustrate the structure of the decision.
It is important to notice that in practice the decision will also have been influenced by
irrational elements not illustrated in Figure 11.3. For instance, it happens that Alex
Trotman, the recently retired Chairman of Ford, and Tom Farmer, the Chairman and
majority shareholder of Kwik Fit, are both natives of Edinburgh. It is likely that they have
known each other for some time.
We have no evidence that this had any relevance to Ford’s decision in this case. The
point is that people and events often influence strategic choices. Structured diagrams
such as Figures 11.2 and 11.3 only show part of the truth.
location). The model defines four cells for the present market geography. The top-left
of these cells represents the present status of the business. The possible future
choices about products and markets can be represented as movements within or
away from this cell.
One set of choices is possible within the existing product/market set.
sive option which usually involves cutting costs and perhaps prices. It is more
common in markets that are mature or beginning to decline.
I ‘Market Penetration’—increase market share of the same market. This is a more
aggressive option and usually involves investing in product improvement, advertis-
ing, or channel development. Acquiring the businesses of competitors who are
withdrawing from the market may be a necessary related resource option.
Other possible options (which involve moving out of the front left-hand top cell of
Fig. 11.4) are either to develop or acquire new products (product development) or to
address new market needs (market development). These two options are easy to
understand at the generic level but clearly have to be spelt out in detail before they
have any practical meaning for a real discussion in a particular context.
Diversification is entry into new markets with new products. Diversification may
be of two kinds—related and unrelated. Related diversification again divides into
backward, forward, and horizontal integration. Backward integration is a move
towards suppliers and raw materials in the same overall business. An example of this
would be a brewer acquiring malting facilities or growing hops. Forward integration
is a move towards the market place or customers in the same overall business. An
example of this would be a manufacturer acquiring retail outlets or a hop grower
beginning to brew his own beer. Horizontal integration is a lateral move into a closely
related business such as selling by-products.
Diversification which is not of any of the above types is ‘unrelated’. Even unrelated
diversification usually has (or is thought to have) some degree of synergy (or fit) with
the original business. Examples of synergy are the ability to share facilities—a sales
force, for instance—or a balance in the timing of cash flow. Often the fit is less than
expected, so less synergy is achieved than was anticipated.
There is a long history of research into how successful diversification has been.
Diversification was a particularly popular strategy in the 1960s when there were a
138 the strategy formulation process
capability options. Entry into new markets is likely to require acquiring access to new
distribution channels and product support. New products may require a fundamental
rethink of development resources and field staff skills. While the resource needs are
the most obvious, the capabilities needed to succeed may be much more subtle. For
instance, the resources may need to be world-class and all the pieces may have to fit
into a working whole.
Internal development
Internal development is perhaps the most obvious approach to growth. It involves
developing the necessary skills among existing staff and acquiring the necessary
production capacity piecemeal. The main disadvantage of internal development is
that it takes time during which competitors may move faster or opportunities may be
lost. On the other hand, the risks may be lower than for other methods.
Acquisition
Acquisition is a very common implementation option, particularly in countries such
as the UK and USA where the structure of financial markets and equity ownership
makes take-overs relatively easy to achieve. Take-overs and mergers have sometimes
been so dominant as the means of implementing strategies that ‘M&A’ has some-
times become almost a synonym for ‘strategy’. There can be real advantages to acqui-
sition, particularly if there is a good fit with what is acquired. Synergy (by which the
whole is greater than the sum of the parts) can occur, although less often than
expected. The disadvantages of mergers are that they can cause deep operational and
psychological turmoil which can distract the people who have to make them work.
Competitors can take advantage of this turmoil, as they are free to concentrate on
customers rather than on internal changes. One real problem is that the thinking
about mergers and acquisitions is often less than objective. Senior managers and
professional advisers tend to benefit from mergers in the short term whatever the
long-term outcome. There is also a tendency for the strategic rationale for the merger
to be lost in the excitement of the chase. Often, too, pressure from competing
acquirers can cause the price to rise to too high a level. Many acquisitions may be
beneficial at the right price but may destroy shareholder value at too high a price.
140 the strategy formulation process
Contractual arrangements
Contractual arrangements come in many different forms. Consortia are groups of
companies that form a joint entity for a specific purpose—such as building the chan-
nel tunnel. When the project is finished, the consortium breaks up and the separate
partners may find themselves competing, possibly in different consortia, for the next
project. This form is common in the civil engineering and defence industries. Franchis-
ing is another form of contractual arrangement and is commonest in retailing. Well-
known High Street names such as the Body Shop and McDonalds are franchises. The
franchisee pays the franchiser a fee for services and royalties, typically for use of the
company name, business approaches, and central advertising. The franchisee is half-
way between an employee and an independent entrepreneur with his risk limited by
the success of the brand name and by the support and advice provided by the fran-
chiser. Licensing is a third form of contractual arrangement. A common example is
when a small inventive company licenses its product or patent to be manufactured
and marketed by others. This can allow quick growth by avoiding the need to build
manufacturing or distribution capability. At the same time, the intellectual property
rights for the invention are retained. Licensing is probably most frequent in high
technology businesses and the creative arts. Agents are a long-standing means of doing
business, particularly in foreign countries or specialized markets where volumes of
business may be too low to justify a permanent presence. The agent is familiar with
local requirements and calls for additional support from the principal when
opportunities arise. The difficulties with agents include conflicts of interest when the
same agent acts for competing principals or is simply inert.
All the above arrangements have in common the need for a written contract which
binds the two or more parties into a clear agreement as to who will do what and pay
what. Such contracts will normally have a defined duration. The contracts can be very
varied to suit the needs of each individual. Disputes can be handled through the
courts, by agreed arbitration procedures, or by not renewing the contract at the
expiry of the contracted term.
I Aligned in that it conforms to the strategic intent. This test answers the question
‘Does this option take us towards where we want to go?’
I Feasible in that the capabilities and resources necessary for success can be made
available. This answers the question: ‘Will it work?’ This test is likely to draw on the
analysis of the strategic assessment. The tests of feasibility require serious con-
sideration of what will be required to implement the necessary changes (see Part V).
A third test goes beyond logic to answer the question: ‘Will this option be accept-
able?’ Acceptable means that it will win the approval of both those who will have to
approve it and those who will have to implement it. This question relates closely to
Section 11.8 below.
Any strategic option has to pass all three tests to be viable. If more than one stra-
tegic option passes these tests, they may have to be compared with each other to
choose the ‘best’. The judgement has to take into account both tangible character-
istics such as risk and return and less tangible matters such as match to values and
culture.
In practice, the number of strategic options is rarely large. The tests, though
important, cannot be completely objective.
142 the strategy formulation process
Companies achieve competitive advantage either by having the lowest product cost
(note: this is not the same as having the lowest price) or by having products which are
different in ways which are valued by customers. The axes of Figure 11.5 are therefore
the scope of the chosen market and the chosen basis of competition.
The four quadrants of Figure 11.5 suggest four possible generic strategies. If the
scope is narrow, the distinction between cost and differentiation becomes unimport-
ant so Porter defined just three ‘generic’ strategies—cost leadership, differentiation,
and focus (which combined the two lower squares in the diagram).
Note that differentiation implies a difference in the perception by clients of the
product, whereas focus implies a difference in target market. In the Porter view of
generic strategy, the worst crime (weakest strategy) is being ‘stuck in the middle’,
that is, being muddled in either of the two dimensions of Figure 11.5.
Practising managers were initially enthusiastic about generic strategies when first
published and the ideas were used extensively. Gradually, however, it became clear
that reality was less black and white in its distinction between differentiation and
cost. There are very few companies that can ignore cost however different their prod-
uct. Equally, there are very few who will admit that their product is the same as all
the others. David Sainsbury, in a public discussion with Michael Porter, pointed out
that the Sainsbury’s slogan ‘Good food costs less at Sainsbury’s’ was a clear statement
of being stuck in the middle but had also proved a successful strategy for Sainsbury’s
over a long period of time.
Porter’s Generic Strategy model has been extended into the Strategy Clock (see
Fig. 11.6). This allows for combinations of the original generic strategies.
144 the strategy formulation process
B
strategic choice 145
The important addition is the ‘hybrid’ strategy that is an optimal balance between
price and the added value perceived by the customer. This coincides with experience
when purchasing household goods. The offerings may often fall into three broad
categories. There are ‘cheap’ offerings which give minimal facilities and appeal to
customers to whom price is the most important issue. At the other end of the scale
are the ‘luxury’ offerings that have demonstrably high quality or numerous features
and appeal to customers who want the best and the most differentiated. In the middle
are the ‘good-value’ offerings that compromise between the two extremes by offering
a good trade-off between price and value. This category often accounts for a sizeable
percentage of the total market. The Sainsbury’s slogan ‘Good food costs less at Sains-
bury’s’ can be seen as an attempt to capture this middle segment. Sainsbury’s was the
leading food retailer in southern England for many years. If it has lost this position
this would seem to be because its original strategy has been successfully imitated
rather than because it was a poor strategy.
11.11 Summary
trategic choice is the third logical element of the strategy process and has a
S central role. The process of choice can only be described as deciding between
different options but this makes the process neater and tidier than it really is.
146 the strategy formulation process
There are likely to be possible options about product and services and about market
segments defined by both customer need and geography. There will also be options
on what resources and capabilities are needed and how to build these—
implementation options. Indicators of what is possible and what is required may well
follow from the results of a strategic assessment.
The various options are likely to be inter-related so it is necessary to identify a small
number of strategic options made up of appropriately related options. Strategic
choice involves comparing strategic options both logically and politically. Strategic
options have to be aligned, acceptable, and feasible. If there is more than one stra-
tegic option that meet these tests, they will need to be compared. It is simplistic to
treat strategic choice just as the logical comparison of strategic options. The process
of decision is also political. It is important that those who will be crucial to imple-
menting the strategy support the choice made.
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Egan, C. (1995) Creating Organizational Advantage (Oxford: Butterworth Heinemann),
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Faulkner, D. (1992) ‘Strategic Alliances: Cooperation for Competition’, in The Challenge of
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Lorange, P., and Roos, J. (1992) Strategic Alliances: Formation, Implementation and
Evolution (Oxford: Blackwell).
Parkinson, N. (1960) Parkinson’s Law (London: Penguin).
Porter, M. E. (1985) Competitive Advantage: Creating and Sustaining Superior Performance
(New York: Free Press).
—— (1987) ‘From Competitive Strategy to Corporate Strategy’, Harvard Business Review,
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