ch11.pdf

Chapter 11

Strategic Choice

11.1 Importance of choice in the strategyformulation process

Strategic choice is the third logical element of the strategy formulation process.Choice is at the centre of strategy formulation. If there are no choices to be made,

there can be little value in thinking about strategy at all. On the other hand, there willalways, in practice, be limits on the range of possible choices. In general, small enter-prises tend to be limited by their resources, whereas large enterprises find it difficultto change quickly and so tend to be constrained by their past. In large corporations,managers may find their range of choice limited because some choices are made at ahigher level or in another country. In the public sector, the genuine strategic choicesmay be made by politicians so that the role of the manager is limited to devising howbest to implement strategies rather than to ponder fundamental choices of futuredirection for themselves.

Even when managers are apparently free to make strategic choices, results mayeventually depend as much on chance and opportunity as on the deliberate choicesof those managers. When considering future strategies, it may seem that there areclear choices to be made. When reflecting on outcomes in retrospect, it is oftenclear that events, and particularly unexpected events, played a major role indetermining results. When considering choice, it is necessary to take a prescriptiveview. Descriptive ways of thinking may help to explain the outcomes after theevent.

In a tidy logical world, any process of choice could be rationally divided into foursteps—identify options, evaluate the options against preference criteria, select thebest option, and then take action. This suggests that identifying and choosing optionscan be done purely analytically. In practice, it may be difficult to identify all possibleoptions with equal clarity or at the same time. Unexpected events can create newopportunities, destroy foreseen opportunities, or alter the balance of advantagebetween opportunities. Identifying and evaluating options is a useful approach but it

strategic choice 133

has limitations. It is necessary to remember that the future may evolve differentlyfrom any of the options.

Good strategic choices have to be challenging enough to keep ahead of competitorsbut also have to be achievable. Analysis has an important role in making strategicchoice but judgement and skill are also critical. For instance, sometimes it may bebetter to delay making a decision whereas at other times a wrong decision may bebetter than no decision. Strategic choices that keep options open may be preferablein an uncertain future to defined strategies that depend for their success on uncertainevents happening. Such judgements require wisdom as much as analytical skill.

These words of caution lay the ground for this chapter that might otherwise seemto make the process of strategic choice sound too mechanistic.

Since strategic choice tends to be so fuzzy, it is useful to define the words beingused. We shall adopt the following definitions.

� Choice and strategic choice refer to the process of selecting one option for implemen-tation.

� An option is a course of action that it appears possible to take. The simplest form ofchoice is therefore between taking an option and not taking it—doing it or notdoing it. Most choices have more shades of possibility than this.

� 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 anoption to enter a new market in a new country. The entry to that market with achosen method of distribution and known way of acquiring necessary distributionresources—in fact, a complete business plan of how to enter the new marketsuccessfully—would become a strategic option.

� Chosen Strategy is the strategic option that has been chosen. The nature of this formsthe content of strategy and is addressed in Part IV.

11.2 Structure of strategic choice

Figure 11.1 reproduces the right-hand half of Figure 6.3 introduced in Chapter 6.It shows how the three logical elements of the strategy formulation process

interlock. The shaded background is a reminder of the importance of context asdetermining the issues to be resolved by strategic choice.

Figure 11.2 expands the detail to illustrate the significance of the overlaps. Thecommon ground between any two circles is of some interest but it is only where allthree circles overlap that logically viable options exist. The chosen strategy emergesas the chosen viable option. It is where the differing requirements of intent andassessment are most fully met—that is, where the three logical elements overlap.

The areas where any two circles overlap are also of interest. The criteria for choicederive from intent and assessment. Feasible options may exist which are not alignedto strategic intent. This, of course, may raise the question of whether the strategic

134 the strategy formulation process

intent should be changed. Infeasible options may seem highly attractive and mayhave powerful supporters, so the reasons why they are infeasible may need to becarefully 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 likeFigure 11.3, although the reality is likely to be much messier. The structure of thischapter is also based on this figure.

The process of choice starts by identifying available options. The chosen strategy


will have to answer the questions ‘what’, ‘how’, ‘why’, ‘who’, and ‘when’, so eachoption 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 aretypical but not necessarily exhaustive.

11.3 Options for markets andproducts/services

The most obvious type of option relates to which products or services to offer inwhich markets. Igor Ansoff was the first to suggest the diagram shown in Figure

11.4 for structuring this decision.The axes of the diagram are product (including services and any form of offering),

market need (which can be any group of potential customers whether defined bytheir needs, inclinations, or income bracket), and market geography (geographical


location). The model defines four cells for the present market geography. The top-leftof these cells represents the present status of the business. The possible futurechoices about products and markets can be represented as movements within oraway from this cell.

One set of choices is possible within the existing product/market set.

� ‘Do nothing’—that is, continue present strategies. This strategy is important as it isusual to compare any proposed change with the ‘do nothing’ option as a baseline.The ‘do nothing’ option is rarely viable for the long term as it is likely that competi-tors will gradually take the market by improving their products, their processes, ortheir relationships.

� ‘Withdraw’—leave the market by closing down or selling out. This appears tobe a negative option but may be necessary to focus available resources into areasof greater strength. It is common in declining markets to see some of the com-petitors selling out to others who can operate the combined operation morecheaply.

� ‘Consolidate’—attempt to hold market share in existing markets. This is a defen-

Box 11.1 Example of options and a strategic choice

In April 1999, Ford announced the agreed acquisition of Kwik Fit. Ford had thereforemade a strategic choice. Ford has a strategic intent to move into automotive services. Astrategic assessment of Ford should show that its existing resources of large plants andskills in design, marketing, finance, and assembly of new cars are inadequate tosupport a service business. The decision to acquire Kwikfit would then be made fromoptions about:

� what types of services to offer and in which markets;� what resources and capabilities are needed to support these services;� how to acquire or build these resources.

Clearly there are multiple options in response to each question and there are linksbetween the question. A strategic option for Ford would be a set of options that seem tomake sense together.

Without any detailed knowledge of the deliberations within Ford, it would seem thatFigure 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 byirrational elements not illustrated in Figure 11.3. For instance, it happens that AlexTrotman, the recently retired Chairman of Ford, and Tom Farmer, the Chairman andmajority shareholder of Kwik Fit, are both natives of Edinburgh. It is likely that they haveknown each other for some time.

We have no evidence that this had any relevance to Ford’s decision in this case. Thepoint is that people and events often influence strategic choices. Structured diagramssuch as Figures 11.2 and 11.3 only show part of the truth.


sive option which usually involves cutting costs and perhaps prices. It is morecommon in markets that are mature or beginning to decline.

� ‘Market Penetration’—increase market share of the same market. This is a moreaggressive option and usually involves investing in product improvement, advertis-ing, or channel development. Acquiring the businesses of competitors who arewithdrawing from the market may be a necessary related resource option.

Other possible options (which involve moving out of the front left-hand top cell ofFig. 11.4) are either to develop or acquire new products (product development) or toaddress new market needs (market development). These two options are easy tounderstand at the generic level but clearly have to be spelt out in detail before theyhave any practical meaning for a real discussion in a particular context.

Diversification is entry into new markets with new products. Diversification maybe of two kinds—related and unrelated. Related diversification again divides intobackward, forward, and horizontal integration. Backward integration is a movetowards suppliers and raw materials in the same overall business. An example of thiswould be a brewer acquiring malting facilities or growing hops. Forward integrationis a move towards the market place or customers in the same overall business. Anexample of this would be a manufacturer acquiring retail outlets or a hop growerbeginning to brew his own beer. Horizontal integration is a lateral move into a closelyrelated business such as selling by-products.

Diversification which is not of any of the above types is ‘unrelated’. Even unrelateddiversification usually has (or is thought to have) some degree of synergy (or fit) withthe original business. Examples of synergy are the ability to share facilities—a salesforce, for instance—or a balance in the timing of cash flow. Often the fit is less thanexpected, 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


number of very well-known and apparently successful conglomerates. Porter, forexample, studied the 1950–86 diversification of thirty-three leading US companiesand concluded (Porter 1987) that the track record of diversification was poor and thatin many cases acquisitions were subsequently divested. More generally, it seems thatdiversified businesses grow faster and growth tends to be greatest if the diversifica-tion is unrelated. However, related diversification tends to be more profitable. Ingeneral, there is less fit than anticipated so that the benefits expected are often notfully realized.

While research may measure how successful different forms of market or productdevelopment are in general, the management choice has to focus on the relativeattractiveness of available options. If the present position is bad enough, even rela-tively risky alternatives may be preferable to doing nothing.

The third dimension of Figure 11.4 represents choices about geographical marketsand represent a third dimension of choice.

11.4 Options for building resources,capabilities, and competence

Just as strategic assessment was necessarily concerned with both the internal andexternal perspectives, so strategic choice has to consider options about resources,

capabilities, and competencies as well as those for markets and products. It may wellbe, therefore, that the strategic assessment has identified strengths and weaknessesin existing resources and capabilities in comparison with competitors. This may leadto identifying the improvements needed either to shore up weakness or to build onexisting strengths. It is also likely that potential market/product options will requiresupporting changes in resources and capabilities (as was apparent in the Fordexample in Box 11.1).

The time-scales for developing resources and capabilities may be very long and maybe longer than the time-scale for market entry. For instance, people are a majorresource, but changing the overall mix of people in a company is likely to take years ordecades. Strategic options about building skills and experience may therefore have toprecede choices to enter new markets or to develop individual products. Similarly,computer systems usually take several years to develop and install and then may be inplace for a decade or more. Information technology investments may therefore haveto be seen as much as a strategic building of future capability as being justified onimmediate cost-benefit grounds.

It may be, of course, that the thinking should be about capability options first andmarket options second, so that we are looking for ways to build unique competenciesand then to seek markets and products to demonstrate them.

There are likely to be multiple links between market/product options and resource/


capability options. Entry into new markets is likely to require acquiring access to newdistribution channels and product support. New products may require a fundamentalrethink of development resources and field staff skills. While the resource needs arethe most obvious, the capabilities needed to succeed may be much more subtle. Forinstance, the resources may need to be world-class and all the pieces may have to fitinto a working whole.

11.5 Options in methods of implementation

There are likely to be options in methods of implementation. There are four mainmethods by which companies can grow their capabilities—internal development,

acquisition, contractual arrangements and strategic alliances.

Internal development

Internal development is perhaps the most obvious approach to growth. It involvesdeveloping the necessary skills among existing staff and acquiring the necessaryproduction capacity piecemeal. The main disadvantage of internal development isthat it takes time during which competitors may move faster or opportunities may belost. On the other hand, the risks may be lower than for other methods.

Acquisition

Acquisition is a very common implementation option, particularly in countries suchas the UK and USA where the structure of financial markets and equity ownershipmakes take-overs relatively easy to achieve. Take-overs and mergers have sometimesbeen 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 thewhole is greater than the sum of the parts) can occur, although less often thanexpected. The disadvantages of mergers are that they can cause deep operational andpsychological 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 oncustomers rather than on internal changes. One real problem is that the thinkingabout mergers and acquisitions is often less than objective. Senior managers andprofessional advisers tend to benefit from mergers in the short term whatever thelong-term outcome. There is also a tendency for the strategic rationale for the mergerto be lost in the excitement of the chase. Often, too, pressure from competingacquirers can cause the price to rise to too high a level. Many acquisitions may bebeneficial at the right price but may destroy shareholder value at too high a price.


Contractual arrangements

Contractual arrangements come in many different forms. Consortia are groups ofcompanies 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 separatepartners may find themselves competing, possibly in different consortia, for the nextproject. 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. Thefranchisee pays the franchiser a fee for services and royalties, typically for use of thecompany name, business approaches, and central advertising. The franchisee is half-way between an employee and an independent entrepreneur with his risk limited bythe 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 iswhen a small inventive company licenses its product or patent to be manufacturedand marketed by others. This can allow quick growth by avoiding the need to buildmanufacturing or distribution capability. At the same time, the intellectual propertyrights for the invention are retained. Licensing is probably most frequent in hightechnology businesses and the creative arts. Agents are a long-standing means of doingbusiness, particularly in foreign countries or specialized markets where volumes ofbusiness may be too low to justify a permanent presence. The agent is familiar withlocal requirements and calls for additional support from the principal whenopportunities arise. The difficulties with agents include conflicts of interest when thesame agent acts for competing principals or is simply inert.

All the above arrangements have in common the need for a written contract whichbinds the two or more parties into a clear agreement as to who will do what and paywhat. Such contracts will normally have a defined duration. The contracts can be veryvaried to suit the needs of each individual. Disputes can be handled through thecourts, by agreed arbitration procedures, or by not renewing the contract at theexpiry of the contracted term.

Strategic alliances and partnerships

Strategic alliances and partnerships have come into vogue over the last ten years.While there may be contracts between the parties, there is a wider intention to co-operate at a strategic level, to share information, and to work together in a way thatgoes beyond a clear contractual arrangement. It is argued that in a rapidly changingworld, strategic alliances are the only way in which the necessary speed of responseand global spread can be achieved. There are dangers in strategic alliances in that theobjectives of the two parties may drift apart over time and the arrangement is hard toterminate neatly because of the lack of firm contracts. The Rover–Honda alliance is anexample of an arrangement that seemed to work well for a time but ended messilywhen Rover was acquired by BMW.

Strategic alliances have been much studied in recent years. See, for instance, Lor-ange and Roos (1992), Egan (1995), or Faulkner (1992).


11.6 Grouping options into strategicoptions

Options about product/markets, resources/capabilities, and the method of imple-mentation have to be combined into a much smaller number of strategic

options. This may be a bottom-up or top-down process. The bottom-up approachimplies linking what might be done in detail into potential strategies that seem tomake wider sense. The top-down approach means testing general ideas of futuredirection against detailed options. In practice, the process is likely to combinetop-down and bottom-up thinking.

11.7 General tests of strategic options

Each strategic option has then to pass two tests based on the logic of Figures 11.2and 11.3. It must be:

� 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?’

� Feasible in that the capabilities and resources necessary for success can be madeavailable. This answers the question: ‘Will it work?’ This test is likely to draw on theanalysis 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 toapprove it and those who will have to implement it. This question relates closely toSection 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 tochoose 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 andculture.

In practice, the number of strategic options is rarely large. The tests, thoughimportant, cannot be completely objective.


11.8 Who should be involved with thechoice?

Strategic choice is as much a political as a logical process. In a book it is easier todescribe the logic than the politics. Each context will have its own pattern of

politics which will be important in determining both how and what strategicdecisions are made. Questions that may help to reveal the political reality include:

� Who stands to gain or lose from a particular strategic choice?� What existing coalitions exist and how will these be affected?� Who may be seen to have originated or supported particular choices or arguments?

Ultimately it is likely that a strategic choice will need approval by the board butthis may well be the formal confirmation of a decision that has been made beforethe actual meeting. For a clear and realistic exposition of how to influence commit-tees, see Parkinson (1960). His advice, in summary, is to focus attention on themembers of the committee who are undecided or even perhaps fail to understandthe issues.

Formal approval is necessary but no strategy will be effective unless it also has theactive support of a far wider range of people who both understand the proposals andare prepared to work to make the necessary changes happen. This issue will beaddressed in Part V but one way of achieving this support is to involve these people inthe process of making the decision.

Both the logic and politics of the choice may be heavily dependent on the context.In some cases, strategy is driven solely by competitive advantage. In other cases, theremay be a strategic intent or vision that determines long-term direction so that thestrategic choices are about means rather than direction.

11.9 Theoretical frameworks for assistingstrategic choice

Several attempts have been made to provide theoretical frameworks for makingstrategic choices. One that was highly influential when first devised was the con-

cept of Generic Strategies (Porter 1985). Porter suggested that the most fundamentalchoices facing any business are the scope of the markets that it attempts to serve andhow it attempts to compete in these chosen markets. The scope can either be broad—tackling the whole market—or narrow—tackling only a particular part of the market.He also suggested that there were only two effective ways of competing in a market.


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 aredifferent in ways which are valued by customers. The axes of Figure 11.5 are thereforethe scope of the chosen market and the chosen basis of competition.

The four quadrants of Figure 11.5 suggest four possible generic strategies. If thescope 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 theproduct, whereas focus implies a difference in target market. In the Porter view ofgeneric 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 firstpublished and the ideas were used extensively. Gradually, however, it became clearthat reality was less black and white in its distinction between differentiation andcost. 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 allthe others. David Sainsbury, in a public discussion with Michael Porter, pointed outthat the Sainsbury’s slogan ‘Good food costs less at Sainsbury’s’ was a clear statementof being stuck in the middle but had also proved a successful strategy for Sainsbury’sover a long period of time.

Porter’s Generic Strategy model has been extended into the Strategy Clock (seeFig. 11.6). This allows for combinations of the original generic strategies.


Box 11.2 Examples of generic strategies

Porter used the car industry as an example of generic strategies in practice.

Toyota is (or was at the time) the low cost producer in the industry. Toyota achieves itscost leadership strategy by adopting lean production, careful choice and control ofsuppliers, efficient distribution, and low servicing costs from a quality product. Notehow the cost leadership must be in all aspects of the business (or value chain).

BMW is an example of a differentiation strategy. BMW still serves a relatively wide rangeof the total market but its cars are differentiated in the eyes of the customer who isprepared to pay a higher price for a BMW than for a Toyota, for instance, of similarspecification.

Morgan is an example of a Focus strategy. It only addresses a very small part of themarket—(i.e. those who enjoy getting wet and like the sound of an engine more thanconversation!). Each of these three companies has been successful by pushing aparticularly generic strategy successfully.

B


The important addition is the ‘hybrid’ strategy that is an optimal balance betweenprice and the added value perceived by the customer. This coincides with experiencewhen purchasing household goods. The offerings may often fall into three broadcategories. There are ‘cheap’ offerings which give minimal facilities and appeal tocustomers to whom price is the most important issue. At the other end of the scaleare the ‘luxury’ offerings that have demonstrably high quality or numerous featuresand appeal to customers who want the best and the most differentiated. In the middleare the ‘good-value’ offerings that compromise between the two extremes by offeringa good trade-off between price and value. This category often accounts for a sizeablepercentage 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 theleading food retailer in southern England for many years. If it has lost this positionthis would seem to be because its original strategy has been successfully imitatedrather than because it was a poor strategy.

11.10 Strategic choices in the case examples

The ICL case example illustrates how a strategic choice was made in a period of afew months. It gives some indications of the strategic options open to ICL at the

time and also how the crisis broadened the options that could be considered. The caseexample also shows how creditors, potential partners, the government, and a newmanagement team were all relevant both to the choice that was made and to howthat choice was made.

The relevance of different stakeholder groups to making strategic choice is alsoclear in the Nolan, Norton case example. In this case, the strategic choice aboutgeneral future direction was made over a period of years but the eventual choice of aspecific partner was necessarily made in a period of just a few weeks.

Marks & Spencer clearly have a large number of options for markets and productson a global basis. This does not necessarily make their strategic choice any easier as,with such a high performance record from the past, options will have to meet rigor-ous tests of feasibility and acceptability both in terms of financial performance and fitwith values.

11.11 Summary

Strategic choice is the third logical element of the strategy process and has acentral 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.


There are likely to be possible options about product and services and about marketsegments defined by both customer need and geography. There will also be optionson what resources and capabilities are needed and how to build these—implementation options. Indicators of what is possible and what is required may wellfollow from the results of a strategic assessment.

The various options are likely to be inter-related so it is necessary to identify a smallnumber of strategic options made up of appropriately related options. Strategicchoice involves comparing strategic options both logically and politically. Strategicoptions 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 totreat strategic choice just as the logical comparison of strategic options. The processof decision is also political. It is important that those who will be crucial to imple-menting the strategy support the choice made.

ReferencesAnsoff, I. (1987) Corporate Strategy, rev. edn. (London: Penguin).

Egan, C. (1995) Creating Organizational Advantage (Oxford: Butterworth Heinemann),146–65.

Faulkner, D. (1992) ‘Strategic Alliances: Cooperation for Competition’, in The Challenge ofStrategic Management, ed. D. Faulkner, and G. Johnson (London: Kogan Page), 119–46.

Lorange, P., and Roos, J. (1992) Strategic Alliances: Formation, Implementation andEvolution (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,May–June.