Seth Godin has a thoughtful riff today on business drivers. It's a good read.
I have always thought that one of the key problems with being Seth Godin must be that when you're right (which is 96% of the time), noodges like me keep quiet. But when you say something that begs fine tuning, the noodges come out of the woodwork. "Chipshooting" is what they call it at business school -- guys like me looking for easy points in class participation.
But that's not really what this post is about.
This sole purpose of this post is for me to have something to email VP-level candidates down the road when they need a high level primer on business strategy. And few strategic planning models give executives a better 50,000 foot perspective than Michel Robert’s Driving Force framework from his book Strategy Pure and Simple II.
This post will be a lot like cod liver oil. Leave now if that turns you off.
Still here? Onward.
The Driving Force is what determines the nature of the products, customers, market segments, and geographic areas that every company pursues. According to Robert, one must look at an organization as a body in motion. Every organization is going forward in some direction.
Adapted from Shepherd’s Law of Economics, Robert’s contention is that there is something – one single thing – that drives the organization forward in that direction and gives the company its particular identity.
Robert developed this model of strategic thinking while working with CEOs who would always assess new opportunities through a hierarchy of filters. The final filter always seemed to be the “fit” between the opportunity and one key component of the business.
Some CEOs looked for a fit between the opportunity’s products and the company’s products. Other CEOs looked for a fit between the new customer base and the markets the company served. In all cases, if the fit was poor, the opportunity was abandoned.
What are the key components of a company that drive its strategy and guide the decisions of management regarding which activities to emphasize? Robert found that every organization is composed of the following strategic areas in order of their appearance in the firm’s value chain (See Figure 1):
Robert insists that although all of these components are present in most organizations, only one is most important. And depending on which of these areas is the most important to a given organization, the decisions it makes about its future activities will vary. Furthermore, management can pursue only one driving force in order to gain competitive advantage. Supporting multiple (or vague or misunderstood) driving forces dilutes the firm’s effectiveness.
Based on Figure 1, following are the different types of generic strategies that companies pursue:
1. Product-Driven Strategy: This strategy ties the business model to a single product or group of closely related products for any market that can use them. The automobile industry is a classic example. Everything Ford and GM do revolves around the production of trucks and automobiles.
2. User Class-Driven Strategy: A user class-driven company ties its business model to a specific group of end users. The company then aims to satisfy a range of related needs that stem from those people. For example, Playboy’s value proposition of “Entertainment for Men” allows it to credibly venture into magazines, videos, calendars, and other things targeted at affluent, heterosexual males. It is more likely that Playboy would venture into casinos than manufacture playground equipment.
3. Market-Driven Strategy: This type of company is similar to the user-class driven company, except that it is focused on a known market category. For example, American Hospital Supply has identified a market to which it is anchored (hospitals) and its strategy is to satisfy the needs of that market. As a result, the product scope of AHS includes bedpans, gauze pads, electronic imaging systems, and anything else a hospital might need. If AHS were user class-driven, it would be more concerned with the needs of a given hospital’s patients.
4. Production Capacity-Driven Strategy: Capacity driven companies usually have great investments in their production facilities, and their mission is to simply keep them fully utilized. Paper mills, hotels, and airlines are good examples – and each tends to take any piece of business that optimizes their use. A paper mill running at 50% capacity would not normally venture into another business before trying to maximize its plant capacity. Likewise, this same paper mill might defend its market share to the death in a bitter price war.
5. Technology / Know-How Driven Strategy: Know-how driven companies have some distinctive technology at the root of their business. They spend their lives seeking applications for this technology and then transform it into new products. Over time these firms get into a broad array of businesses, all of which stem from this core technology. Note that Honda’s driving force is technology. Its focus on building better engines has led it into motorcycles, snowmobiles, lawn equipment, and automobiles. Honda would be less likely to impale itself in a price war with GM than Ford would.
Know-how driven companies would be likely to invest in technology that would allow them to speed up the product development process and get newly developed products to market in short cycles. Other examples include 3M, Sony, and Dupont – whose invention of Teflon has led it into kitchenware and clothing. Apparel makers such as Prada and LL Bean use Teflon-treated fabric to make their clothing stain-, water-, and wrinkle-resistant. In fact, Worth magazine advises that Dupont spends $10 million a year on R&D for Teflon and is working on ways to make clothes shrink-proof and odor-resistant.
6. Sales / Marketing Method Strategy: A sales / marketing-driven company has unique way of getting an order from its customer, and all of its products leverage this selling technique. The company does not sell products that cannot be marketed in this manner, nor will it solicit customers who cannot be reached in this way. Amway and QVC are examples of sales / marketing method driven firms.
7. Distribution Method-Driven Strategy: Companies that have a unique way of delivering their product or service employ this strategy. Telephone operating companies, with their network of wires and switches, will only entertain products and services that optimize its distribution system. Other examples include foodservice distributors, who have been known to diversify into hospital supplies, given that they were already selling the hospitals food.
8. Natural Resource-Driven Strategy: When access to or pursuit of natural resources is the key to a company’s survival, then that company is natural resource-driven. Oil and mining companies are classic examples: Exxon, Shell, Anglo-American.
9. Size / Growth-Driven Strategy: Companies that crave growth for growth’s sake or for economies of scale are usually perusing a strategy of size / growth. All decisions and technologies surround the firm’s growth objectives. Well known examples include WR Grace, Gulf & Western, and a slew of Internet retailers that pursued a land-grab strategy for customers and market share during the dot-com boom.
10. Return / Profit-Driven Strategy: When a company’s only criteria for entering a new market is a certain rate of return, then that company is return / profit driven. The most famous example of this driving force is ITT Corporation. Founded in 1920 as an international phone company, ITT saw its heyday under former Harold Geneen in the 1960s and 1970s. Geneen held the belief that sound management principles could be applied to any type of business to make it more profitable – even if the company's executives had no expertise in that business.
Geneen’s voracious appetite for acquisitions ultimately led ITT to buy 275 businesses – once acquiring 20 companies in a single month! Eventually ITT was bought by Starwood Lodging Trust for $13.7 billion after ITT’s shareholders rebuffed a takeover bid by Hilton Hotels.
Can you imagine? Are you still with me? Hello?