SELECTING COMPETITIVE TACTICS: TRY A STRATEGY MAP

INTRODUCTION

When developing strategy, a manager considers how various tactics will affect

short-term performance and broad strategic direction. The skilled fit manager

keeps those factors in mind and, simultaneously, gauges what the competition is

up to. The authors describe a mapping technique that will help managers to do

just that. Not only does the technique provide an accessible measure of relative

competititve standing, but it also allows managers to simulate tactical changes

and analyze their probable impact on business performance.

STRATEGIC MAP

A company’s competitive environment that is, the industry characteristics and the

behaviours of competitors in a given business – is the key determinant of that

company’s strategy and performance. However, as any manager can attest,

knowing this simple fact and acting on it are two different things. Clearly, to

survive in a competitive environment, a strategic planner must not only identify

an industry’s relevant performance measures, but also develop tools to

understand the relationships among them.

The use of actual corporate data precludes identifying the industry mapped out.

Strategy map is illustrated by using an existing industry, to show competitive

advantage, market share and market growth and to show performance measure.

To see how such a map can be developed, consider a simple, intuitive example.

Suppose you have the performance information for two competing firms. You

simply develop a graph showing the location of the firms relative to the

performance measures. However, this pattern is consistent with both theory and

practice for many industries. And, as most managers will attest, it is extremely

difficult to improve all performance criteria at the same time. The map allows a

manager to gauge what tradeoffs he or she will make in pursuing a given

strategy – or what tradeoffs a competitor is making – and therein lies its major

benefit.

BUSINESS LEVEL STRATEGY

The distribution of the performance measures suggests what overall strategies

businesses might pursue. The horizontal dimension appears to be profitablity

versus growth: cash flow investment, cash flow/revenues, and return on

investment are toward the left end of the axis; return on sales, real sales growth,

and change in market share are toward the right end of the axis. As one moves

from left to right, growth is pursued at the expense of profitability, and vice versa.

Measures of competitive position – market share and relative market share –

strategy associated with the upper half of the vertical axis.

The clustering of serveral businesses indicates the existence of what Porter calls

strategic groups. This evidence, in turn, gives the manager a yardstic for

comparison and can suggest new positions that may be reasonable to aim for.

The question then becomes, “What tactics are necessary to change – and

improve – my competitive position?”

How Business Location Relates to Tactical Variables.

The arrow length represents the individual variable’s impact on performance – in

other words, the importance of the of the tactic for movement in the direction of

the arrowhead. We refer to this set as the “Strategic compass”.

In this particular industry, employee productivity, process R&D/revenues, relative

advertising, and relative product quality appear to have the largest impact on

performance. This finding makes sense, since theee industry is mature and

fragmented. For example, one would expect process R&D because of product

maturity and the drive toward efficiencey in the latter stages of the product life

cycle.

The angle that the strategic vector (arrow) makes with each major axis

corresponds to the relationship between the tactical variable it represents and the

axis dimension. For example, a growth strategy would involve increasing both
receivables and capital intensity (gross book value). This relationship makes

sense: the business is adding marginal customers by increasing receivables; it is

expanding the plant by increasing capital intensity to handle the business it

hopes to generate. This particular strategy is appealing, because all businesses

in this study were operating near maximum capacity and so needed to expand

their plants in order to grow.

FUNCTIONAL LEVEL STRATEGY.

Conversely, a profitability strategy would entail reducing those two strategy

variables and simultaneously increasing relative advertising and process

R&D/revenues. Decreasing receivables/revenues should help reduce the

marginally profitable customers; decreasing capital intensity will dampen its well-

known detrimental effect on profitability. Increasing advertising, on the other

hand, can inexpensively achieve product differentiation when products and their

technologies are basically simple. In addition, increasing process R&D/revenues

should improve production efficiency.

Finally, a market-share leadership strategy would focus more on heavy-use

customer groups (i.e., high relative customer size) and employee productivity,

and less on vertical integration and relative salesforce. It seems reasonable to

decrease attention to vertical integration. Both the product and its manufacturing

are relative simple. And, since these businesses are the last link in their

companies’ vertical chain, there are few opportunities to add value either
backward or forward through additional manufacturing. On the other hand, using

a relatively smaller salesforce for higher market share positions seems

counterintuitive. However, at the mature stage, businesses can maintain

superior market-share positions with relatively fewer salespeople. That is, by

selectively focusing on heavy-demand segments of their market, they should be

able to “get more for less”.

As should be evident from the preceeding discussion, the strategy map gives a

clear picture of the specific nature of the industry it represents. To the degree

that mature fragmented industries are similar.

CORPORATE LEVEL STGRATEGY

Changing Location

Strategic mapping allows the manager to simulate different strategies’ probable

impact on performance – and therein lies its power. The manager may conclude

that a change in location would make sense. Specifically, he or she may want to

move toward a profitability strategy via increased cash flow and Return On

Investment.

Obviously, other desired locations would generate different performance results

and strategic changes. However, unreasonable moves would not be possible.

For example, if a business tried to move to another location, its ability to make

the required adjustments in tactical variables would be severely limited. In fact, if

quadrant. We hasten to point out that there may be a good reason for business

4’”s present location – all businesses in this industry are at the bottom of the

vertical chain, so their performance goals may be determined by other corporate

considerations.

Creating a Strategy Map

Strategy maps are generated using a technique known as multidimensional

scaling, which is commonly used by marketing specialists to create product

maps. The program listing used here is called GENFOLD2. Developed by

DeSarbo and Rao, it is available to those interested in using this approach.

The Data.

Clearly, a manager using this approach needs to have industry data on the

competition’s performance and on the relevant tactical variables. However, the

key issue is defining the relevant information for your firm’s industry or market.

No single source of data can or should be used for very business. For firms with

highly developed competitor intelligence systems, the information is already

being gathered. For firms without such a system, this approach presents an

opportunity to develop one. In the latter case, managers can start by using

public resources, particularly government documents and trade sources. One

very good starting point is Information USA, Inc., which publishes The Data
Informer. For Information-Hungry Decision Makers. Corporate business

databases are becoming more readily available, but may be restricted either to

project participants or to certain industries or markets.

For this demonstration, we used data drawn from the Profit Impact of Marketing

Strategies (PIMS) project, an annual, large-scale statistical study of

environmental, strategic, and performance variables for individual strategic

business units. Our example draws from what is known as the yearly database.

The businesses come from a single fragmented, mature industry identified by

use of a four-digit SIC code. We used fourteen businesses that had complete

data on all of the performance and tactical variables over a four-year period.

That period ot time was not needed to develop the map, but rather to help

validate the results. More than fourteen businesses exist in this industry; we

used just fourteen for two reasons.

First, the data was complete.

Second, since this is a mature, fragmented industry where competition tends to

be constrained within a local area (as opposed to the entire U.S or world market),

the use of a subset would not distort the results. Obviously, the appropriate

number of businesses to use will depend on the specification confronting the

manager.
We chose the tactical variables because they represent the best selection

available in the database for these businesses and because they are conscious

with Porter’s generic strategies. We used both correlation and theoritical

analyses to identify tactical variables whose impact on performance was

essentially the same. For example, employee productivity and manufacturing

costs/revenues were almost perfectly negatively correlated over the eight

performance measures used.

The performacne measures we used fall into four categories typically discussed

in the literature market position, profitablity, cash flow, and growth. We chose

two measures for each category.