Theory of Constraints Handbook - James Cox Iii [346]
Theories of Business Strategy
In this section, several theories of strategic management will be examined. Four dominant theories include Ansoff’s (1965) matrix of four strategies, Porter’s list of strategic foci, learning/emergent strategies, and the resource-based view. A brief review of Mintzberg and Lampel’s (1999) summarization of the various schools of strategic management follows. This section concludes with a discussion of the scope of strategic management, which demonstrates how extensive and demanding the formulation and implementation of a strategic plan can be. The complexity of strategic management perhaps explains in some small way why business strategies often go awry.
Ansoff’s Matrix of Four Strategies
In his book Corporate Strategy (1965), Ansoff introduced his concept of strategy. He believed that firms should develop a “common thread” that suggests plausible extensions of the firm’s product-market position. Ansoff dubbed these extensions growth vectors as represented in the 2 × 2 matrix shown in Fig. 17-1. The four strategies are market penetration, product development, market development, and diversification.
In market penetration, the strategy is to increase market share for current products in the markets in which they are currently offered. In today’s competitive marketplace, market penetration generally means not so much finding new users as taking users away from existing competitors—always a challenging strategy.
Product development is the process of conceiving, engineering, and constructing new product solutions for customer problems, such as the development of the flash drive to make possible the convenience of portable data.
Market development is new “missions” for a company’s products. Ansoff really means that new product uses and applications are discovered and promoted to existing customers. The use of Arm & Hammer Baking Soda® as a refrigerator deodorizer is a classic example.
Finally, diversification, a more risky approach, moves the company out of its comfort zone into new kinds of products and markets with which the firm has little experience. Diversification adds new businesses to a company not found in its core industry (Hill and Jones, 2007, 340). These sorts of strategy “jumps” can be immensely profitable but also have a higher-than-average probability of failure because the firm’s competencies may or may not be adequate to make such a leap. Companies often see an opportunity in another industry, for example, that seems attractive only because the company does not fully understand the challenges of entering that industry.
Although Ansoff’s matrix is quite simple and, as viewed today, rather primitive, it continues to be representative of the broad strategic moves open to companies that wish to grow. An important weakness, however, is that such a matrix is purely descriptive rather than prescriptive. It does not tell a company which of several possible growth vectors would be most profitable, most risky, or most easily implemented. Further, the matrix does not provide any sort of plan for the implementation of any growth vectors that may be chosen.
Porter’s List
Ansoff’s list was helpful but hardly comprehensive. His focus was in extending the existing strategic direction of the company. In 1980, Michael Porter introduced a different list of generic strategies, which focused on the initial identification of a business strategy (Porter, 1980). Porter theorized that only two basic strategies were available for companies to pursue—low-cost or differentiation. Porter combines these two strategies in the ubiquitous 2 × 2 matrix format to create the