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The Milner Strategy Handbook 12 tools to help your business succeed

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Introduction

This white paper contains 12 tools that Milner Strategic Marketing uses with clients when formulating a company’s strategy. These tools have been tried and tested over the previous decades and have benefi ted companies such as Shell, GE and Johnson & Johnson (Fulmer et al, 2000). By managing strategy formulation as a journey, these tools fall into 4 categories:

l Analysing the marketl Generating strategic optionsl Deciding between options l Measuring success

Formal strategic tools provide executives and managers with structured approaches to work through their situation and options. Once a company has understood and evaluated all areas of its strategy, it will be able to make well-informed decisions that have the best chance of success in the market (Wright et al, 2013). Milner has designed, organised and run 30 customised strategy workshops to support this decision making and strategy formulation.

Tool Purpose

Analysing the market

1. Porter’s Five Forces Understand the balance of power in the industry

2. Scenario Planning Prepare for possible market futures

3. Porter’s Four Corners Predict competitor actions

4. Price Tree Analysis Understand competitor pricing

5. SWOT Analysis Summarise the external and internal environment

Generating strategic options

6. Porter’s Generic Strategies Decide the basis of strategy

7. Ansoff Matrix Decide the direction of strategy

8. Product Lifecycle Understand the whole lifetime of a product

9. BCG Matrix Evaluate the product portfolio for current/future revenue

10. GE McKinsey Matrix Decide which products to keep and which to divest

Deciding between options

11. Johnson and Scholes’ Strategic Options Choose the best strategy

Measuring success

12. Kaplan and Norton’s Balanced Scorecard

Set comprehensive objectives and measure progress

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Today’s business environment is characterised by intense competition. With the advent of new digital technologies, businesses are not just competing on a local or national scale but a global one. This creates considerable pressures for companies, who need to sustain a competitive position in the market (Wright et al, 2013). A clear strategy is needed to address the challenges in the market, plot the best development path and use resources efficiently, which will give a company the best chance of success.

Companies can struggle to decide whether their efforts on strategy development will be worth the investment of time and resources (Van der Heijden, 2011). However, there are many benefits of developing and implementing a formal strategy. These include:

l Understanding the company’s source of competitive advantage

l Awareness of opportunities and threats, both current and future

l Clarity of company mission and purposel Planning for the future of the marketl Focusing on the right customers with the right

productsl Efficient resource allocationl Improving employee buy-inl Aligning the companyl Consistent messaging

The most compelling reason to be strategic is that it saves money. Without a clear strategy and implementation plan, the best a company can hope for is confusion and at worst chaos (see Figure 1). If every employee is doing what they think is best, they will all be pulling in different directions. This confuses existing customers, makes it more difficult to win new business and means that departments are working on projects that conflict with each other.

Why be strategic?

Figure 1 Strategy and implementation matrix

NIGHTMARE CLARITY

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The strategic planning process The strategic planning process has developed since the 1960s, with numerous strategic tools devised by experts in both academia and industry (The Economist, 2009). Although this means utilising tools and models for strategy is still a relatively new science, it helps companies think intelligently about all areas of the market, from competitor strategies to threats from substitutes to the future of their product portfolio.

Many companies choose to have an offsite meeting to formulate their strategy. This means executives can focus on the long-term future of the company, without the distractions of their day-to-day tasks. However, strategy is not a one-time activity; many of the tools and techniques in this handbook require research, discussion and buy-in to ensure that they are suitable for the whole company, and can be implemented successfully once adopted. The end product should be a strategy document that can be shared and understood throughout the company.

To ensure the strategy planning process is comprehensive, Milner has outlined a four step approach (Figure 2). By following this structured approach, a company can make sure that all areas of their strategy are considered.

1. The fi rst step is to analyse the market. There are a number of tools that can be used to understand key current and future issues in the market, track competitor behaviour and assess the company’s current performance.

2. With the information from the market analysis, companies can then generate strategic options. Tools focus on establishing the sources of competitive advantage, managing the product portfolio and deciding where to invest in future to grow revenue and profi ts.

3. Once a number of options have been generated, they can be evaluated individually using the Johnson and Scholes framework. This will allow companies to choose the strategy that best fi ts their unique situation.

4. Having a strategy in place is not suffi cient: the last step is measuring success as the strategy is implemented. The strategy is implemented through the company business plan which will include Key Performance Indicators (KPIs). Regular reporting against the KPIs will show company performance which will be a combination of the strategy and the quality of the implementation. The strategy should be reviewed and refreshed when market conditions evolve and new information becomes available.

The following pages describe the tools within each step of this approach. Each double-page spread details: l A description – ‘What is it?’ l ‘When to use it’l ‘How to use it’ l ‘Strengths and weaknesses’We hope that you fi nd this concise information useful and have provided further reading on each strategy tool.

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Analysing the market

Generating strategicoptions

Deciding between options

Measuring success

Figure 2 Strategic planning process

What is it?Porter’s Five Forces provides a framework for analysing the external microenvironment that a company is operating in. The tool shows where the balance of power lies in a specifi c industry, and how this will affect the profi tability of products/services (Porter, 2008).

The insights gained from this tool mean that companies can identify the wider potential threats and opportunities that will affect their businesses, that they might not otherwise have anticipated.

According to Porter’s Five Forces, the 5 key forces in the industry are:

Threat of new entrants: A profi table industry will naturally attract new entrants who want a share of these profi ts. The ability of incumbents to retain profi ts depends on how easy it is to enter the industry.

Threat of substitutes: Substitutes are products/services that compete for the same customer budget, so may be very different from the organisation’s product. For example, tablets are replacing TVs as household entertainment.

Power of suppliers: Supplier power encompasses suppliers such as employees as well as vendors of equipment and materials. If supplier power is strong, a company’s costs will be high which will mean lower profi ts.

Power of customers: Customers can have high bargaining power in an industry and force down profi tability. This is most common when there are a small number of customers making high-value orders.

Rivalry among existing competitors: The intensity and basis of competition in the industry can drive down profi ts. As a market matures, increased price competition and standardised products mean competitive pressures increase and unit-level profi ts decrease.

Figure 4 gives a detailed breakdown of the major factors infl uencing the strength of the 5 forces.Since introduction of the tool in 1979, relative power of other stakeholders and complements have been proposed as 6th and 7th forces. However, it is best to consider their impact on the 5 main forces (Porter, 2008).

When to use itPorter’s Five Forces is ideal for medium to long-term strategic planning, because it broadens the leadership team’s thinking to take into account longer-term threats and opportunities affecting their industry. It means that executives need to think outside the direct competition to consider the threats of other stakeholder groups.

The tool can also be used for decision-making, to assess whether to enter (or leave) an industry. Managers should invest in industries where the forces are in their favour, or will be in their favour in future (Johnson et al, 2008).

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Porter’s Five Forces

Figure 3 Porter’s Five Forces

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How to use itPorter’s Five Forces should be used to start conversations within an organisation about the changing environment, and different departments will have different perspectives on this. Therefore a range of opinions should be sought – from the sales team who hear from the customer’s mouth what they are thinking and the alternative products and providers they are considering, to the marketing team who see which alternative products are competing for their Adwords keywords, to the senior management team who discuss industry issues at global conferences.

When using the tool, quantitative information should be gathered as well as qualitative. This enables companies to assess the scale of the threat or opportunity and whether it is in their favour or not. It is good practice to look at how the forces are changing over time, to correctly identify future threats and opportunities as well as those in the current environment.

Once the changes in the market have been understood, the company can choose the best strategy to address these changes. For example, if a new entrant posed a major threat the company could launch a brand-building campaign to protect against

this or could consider acquiring the new entrant, such as Facebook’s acquisition of WhatsApp in 2014.

Strengths and weaknessesThe main advantage of Porter’s Five Forces is that it reframes a company’s thinking about the market, expanding the focus beyond current direct competitors to take into account the power of new entrants, substitutes, suppliers and customers (Porter, 2008).

A potential weakness of the tool is that it relies on users’ knowledge of the market, so if there are market developments that the company is unaware of, these will not be accounted for in the analysis and will skew the outcome. This is particularly true when it is difficult to define the ‘right’ industry or when industries are converging (e.g. smartphones and cameras).

Additionally, some companies may rely on qualitative information, which can be overly subjective and may not provide an accurate analysis of the market forces. Therefore companies should provide quantitative information within each of the boxes, such as the market shares of suppliers in the market or the number of recent new entrants.

Threat of new entrants

Threat of substitutes

Power of suppliersPower of

customers

Rivalry among existing

competitors

Barriers to entry (supply-side and demand-side)

Closeness of substitutes (price, performance)

Number of industries served by suppliers

Importance of each customer to the business

Number of competitors

Reaction from incumbents

Power of incumbent brand

Number of suppliers Number of customers Market size and growth

Switching costs Switching costs Switching costs Switching costs Brand loyalty

Capital investment Differentiated products Price sensitivity Product differentiation

Distributor relationships Backwards integration Cost structure

Legal protection Exit barriers

Figure 4 Factors affecting the strength of each of the 5 forces (Porter, 2008)

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Scenario Planning

What is it?Scenario planning is a well-established technique through which a range of possible futures can be explored. It provides a structured process for consciously thinking about future environments within which a company may need to operate.

The basis of scenario planning is that the future is uncertain. It enables executives to fully explore the range of possible futures, or ‘scenarios’ (see Figure 5) and identify the main drivers of change. The tool uses the interactions between important variables or ‘market drivers’ to create and explore the potential scenarios.

The scenarios range from probable and plausible scenarios to “wildcards” (things which might have been thought impossible, like the global banking crisis).

The science behind this approach dates back to the 1950s when Hermann Kahn developed scenario planning as a distinct activity at RAND Corporation. He encouraged people to think about nuclear war and its consequences. Kahn’s ideas gained momentum among economists and politicians before they emerged in the corporate world, and were adopted by companies such as SRI International and Royal Dutch Shell. Shell subsequently used the tool to predict the Arab-Israeli war and fall of the Berlin Wall using these scenarios to plan responses and grow their market share.

When to use itScenario planning has two main applications:1. To explore all possible futures to identify the most probable scenario. The main company business plan can then be developed to address this most probable future.

2. To develop contingency plans for a range of different scenarios. This is valuable because it allows companies to respond to changing market dynamics more quickly than their competition, which is key in today’s turbulent markets (Lindgren and Bandhold, 2003). As a result of scenario planning, the most probable changes in the market will have been analysed and a plan of action agreed.

How to use itThe leadership of the company needs to assemble a group of people with a broad range of skills and expertise from across all areas of the business.

The scenario planning process starts with identifying all the market drivers that could affect the future. These are called variables. This is done using brainstorming techniques.

Each variable is scored on two axes:

Impact: The level of potential impact that each driver could have on the market is scored from low to highUncertainty: The uncertainty of future changes in each variable occurring is scored from low to high.

The variables are then plotted on a chart with Impact on the y axis and Uncertainty on the x axis (see Figure 6). Using the chart, variables can be divided into three categories:l Monitorl Important l Critical

Figure 5 The range of possible scenarios

‘Wildcard’

Scenario

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Strengths and weaknessesScenario planning opens executives’ minds to the range of possibilities before agreeing on what is probable. This is important because standard strategic planning often assumes that the future will be similar to the present, which is not always true.

A further strength of scenario planning is that it is a group exercise. Stakeholders from across the business will have different opinions about the key drivers. The discussion which occurs around market drivers is a very valuable activity. This increases the robustness of the fi nal scenario and ensures buy-in from all business areas.

However, the qualitative narrative used to describe scenarios is subjective, which means it is diffi cult to identify whether the scenario has been described correctly. The story needs to be combined with quantitative evidence in order to be credible (Wilkinson and Kupers, 2013).

Figure 7 Scenario ChartExample: Global warming vs Oil reserves

Variables that fall into the ’monitor’ and ’important’ categories will either have a low impact on the market, or already be accounted for in strategic planning due to their high certainty. It is the ‘critical’ variables which need to be explored more deeply to prepare for the most important changes in a company’s market.

This is done by exploring how the critical variables could interact with each other, using a four step process:

1. The range of outcomes for each variable is agreed. This creates a scale for each axis of the scenario chart.

2. The interactions between each of the variables are explored, plotting 2 variables against each other (see Figure 7). If there are four critical variables, there will be six different charts to explore. If fi ve critical variables are identifi ed, this increases to 10 charts.

3. A short narrative is written to explain what is happening in each quadrant. Each quadrant is summarised by assigning a nickname. Circles are plotted to identify where the market is now and where it is likely to be in the future.

4. The fi nal step is to understand how each of the most probable scenarios from each of the charts interact simultaneously. This is written as a single narrative telling the ‘story’ of the future market. Alternatively, a contingency plan can be written for each possible scenario.

Figure 6 Impact and Uncertainty Analysis Matrix

‘The Day After Tomorrow’

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1bn barrels

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Important scenario variables

Critical scenario variables

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What is it?The Four Corners model was developed by Michael Porter to provide a structured competitor analysis technique. It is useful because it helps executives generate insights about competitors’ future actions and reactions based on an in-depth understanding of their businesses. Unlike other predictive models, Four Corners goes beyond a competitor’s current strategy and capabilities to consider underlying motivations (Straube, 2013).

The model examines the two characteristics that underpin a competitor’s future strategy (see Figure 8):

1. Competitor motivationsThe competitor motivations are subdivided into:a. Drivers: these can be future goals of the competitor (which range from fi nancial goals to changing corporate culture or structure), the characteristics of the leadership team, external constraints on the business or the business philosophy. Analysing a competitor’s drivers assists in understanding whether they are satisfi ed with their current performance and market position. This helps predict how they might react to external forces and how likely it is that they will change their strategy.

b. Management assumptions: the assumptions that a competitor has about itself and the industry are judged. These include the competitor’s perceptions of each industry player’s strengths and weaknesses, competitor culture, traits and values, wider industry forces, and a belief about their organisational goals. The perceptions and assumptions a competitor has are important because they infl uence its strategic decision making. Analysing these assumptions can help identify the competitor’s biases and blind spots.

2. Competitor actionsThe competitor actions are subdivided into:a. Current strategy: this is exhibited in the way that the organisation creates value, where it chooses to invest and in the relationships and networks the company has chosen to develop. A company’s strategy determines how it competes in the market.

However, there can be a difference between ‘intended strategy’ (the strategy as stated in annual reports, interviews and public statements) and the ‘realised strategy’ (the strategy that the company is following in practice, as evidenced by acquisitions, capital expenditure and new product development). Where the current strategy is yielding satisfactory results, it is reasonable to assume that the competitor will continue to compete in the same way as it currently does.

b. Capabilities: these are demonstrated through the competitor’s product/service range, marketing skills, ability to service different channels, intellectual property rights, strength of balance sheet and strength of the leadership team. The characteristics, probability and timing of a competitor’s actions are determined by its drivers, assumptions and strategy. However, the competitor’s capabilities will affect its ability to carry out these actions.

ACTIONSMOTIVATIONS

Porter’s Four Corners

Figure 8 A summary of Porter’s Four Corners analysis

Management Assumptions

Competitor’s Future Strategy

Capabilities

Current StrategyDrivers

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When to use itThe Porter’s Four Corners model is particularly useful when a company wants to predict how a competitor might respond to a given stimulus. The stimulus could be a change in market dynamics as a result of a new tactic or strategy of one of the market players, or a macroenvironmental change, such as political, economic or legislative changes. Understanding the competitor’s motivations and past actions enables the company to hypothesise future actions and responses.

How to use itThe model provides structure to an assessment of a company’s competitors. A separate Four Corners assessment should be prepared for each competitor, each involving a two stage audit of motivations and actions.

First, a detailed secondary research project should be initiated. This will involve reviewing publically available information about each competitor from sources such as the company website, annual reports, press releases and wider news stories.

Second, this background information should be coupled with primary research gathered from both internal and external sources: l Internal staff who have contact with customers

and/or competitors should be interviewed to gather anecdotal information about competitor behaviour

l If resources allow, additional external stakeholder interviews should be organised with journalists and analysts to yield further invaluable insights

The information should be fed into a Four Corners model for each competitor and used to write a profile. This can then be analysed to hypothesise the likely strategy changes a competitor might make and how successful they might be.

Strengths and weaknessesThis approach to competitor analysis is much more sophisticated than a qualitative assessment. Porter’s Four Corners models are based on the understanding that every company is part of a larger industrial ecosystem. The strength of this is that it reminds business leaders that the success of their strategic actions depends on the behaviour of competitors in the market. It shows companies how competitors shape their individual strategies and respond when their core goals and assumptions are challenged (Fuld, 2010). The forward-looking nature of the output is important when a company is considering the potential impact of implementing different strategies.

By aiming to have the same information as the competitor’s decision-makers, the company should be able to predict competitive behaviour with a degree of certainty. By looking at both a competitor’s capabilities (what it can do) and underlying implicit factors (its motivations and strategy) companies improve their predictions of a competitor’s actions. However, a weakness is that the model is built on an underlying assumption that companies make rational and logical decisions, which may not be true in practice.

Another weakness is that to successfully create a Four Corners model, just gathering information on the competitor in question is not enough. Executives need to see the market through the competitor’s eyes, which is very difficult (Fuld, 2010).

This highlights the challenges of developing the correct assumptions to underpin each model. If incorrect competitor or market assumptions are utilised to build a company strategy, then organisations may find themselves competing in the wrong areas or targeting an opportunity that doesn’t exist.

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Price Tree Analysis

What is it?Pricing is a cornerstone of marketing, which drives companies to generate revenue and profits. Price Tree Analysis is a strategic tool for visualising and setting product or service market prices with clear reference to competitor prices.

When to use itBoards, leadership and marketers will find price trees useful as part of:l Strategic positioningl Competitor analysisl Communicating with investors

Price trees are also very useful for product managers who need to:l Set a market price for a new product/servicel Review prices of existing productsl Understand price elementsl Communicate a competitive pricing plan to the

market

How to use itTo create a price tree, draw a base and a tree trunk for each product/service. Then draw branches to correspond to your company on the left side and the competitors on the right side (see Figure 9).

Notate each branch with your services and your competitors’ names and price. The base of the trunk is zero and the trunk uses a ratio scale i.e. if a price is half way up the trunk compared to the top price, then it is half price (see Figure 10).

Pricing elementsWhere a product or service has different elements or is priced differently depending on circumstance (e.g. whether it is Import or Export), then each element is the subject of a different tree (see Figure 11). Competitor logos and prices can be added to the completed price trees. This will make it quicker for companies to understand the big picture. The completed price trees in Figure 11 also illustrate that competitors may price some elements at zero and make their revenues from other parts of a service.

Figure 9 Basic Price Tree

Figure 10 Price tree with pricing data

Figure 11 Completed Price Trees

Product/Service element

Competitor 1 £1300

Annual maintenance

Competitor 2 £1200

Competitor 3 £1100Our Gold Service £1050

Our Basic Service £750

Import Price Export Price

Our Service 2 £1.25

Our Service 1 £1.70

Competitor 1 £2.00

Competitor 2 £1.00

Competitor 3 £0.00

Our Service 2 £0.10

Our Service 1 £0.70

Competitor 2 £3.80

Competitor 3 £0.00

Competitor 1 £4.57

1111

Sources of competitor dataCollecting timely and accurate competitor data can be a challenge. In B2C, prices can easily be collected by desk research.

However in B2B, prices are often secret or customised, which makes finding precise data difficult. In cases like this, the important principle is to seek accuracy not precision. Contacting trade associations, market analysts, or others who have a broad view of the market can be helpful. Customers will have a view of the pricing submitted in the bid and may be willing to share it. Plus, staff who have worked for competitors can sometimes be helpful for background information too. Where it is of vital importance, techniques such as ‘mystery shopper’ can be used but this takes more time and money.

Standardising unitsSometimes when competitor data has been collected, the underlying pricing structures may be different. For example, one client from the logistics industry gave prices for shipping containers by container size whereas a competitor priced on weight of the loaded container. In cases like this, or when different currencies are used, the methodology for standardising measurement units must be made clear.

Having collected together all known competitor pricing data and adding your prices (as in Figure 11), check that it makes initial sense. For example, are competitors with a reputation for premium pricing at the top of the tree? Also, if you were to add all the elements of a price together for each competitor, do their overall prices make sense? Are the new entrants or those with weaker brands pricing below the main brands? Triangulating the prices of competitors usually generates further questions and testing of data and sources.

Add trees where neededTo review pricing in different countries or list prices versus discounted prices, additional price trees may be used.

Price declinePrices are higher at the early stages of the product lifecycle when demand is high and competition is weaker. Prices change on a regular basis and so price trees need updating and all sources (and the dates when the data was collected) should be made clear. Annual price decline can be shown by having different trees for different years. In practice, price curves are a better way of showing the shape and rate of price trends.

Strengths and weaknessesStrengthsl Visual and easy to understandl A lot of data can be shown simultaneouslyl Shows the main competitorsl Highlights gaps in understanding of competitor

pricing during data collection

Weaknessesl Technique depends on quality of input data so

where competitor data is hard to get or prices are bundled, trees can be incomplete

l Not showing price trends

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What is it?SWOT analysis is a strategic planning tool that evaluates a business’s environment and its strategic capability. It enables companies to identify both internal and external influences. The output of a SWOT can be used to generate strategic options and assess future courses of action (Johnson et al, 2008).

The purpose of SWOT is to synthesise and audit information. It is a useful way to structure environmental analysis, grouping findings into internal (strengths and weaknesses) and external (opportunities and threats) sections. This structure is shown in Figure 12. SWOT analysis is made up of four sections:

Strengths: Strengths are internal factors that are favourable for achieving an objective. A core strength is a resource or capacity that the company can use effectively. When listing something as a strength, it is important to assess whether it provides a significant competitive advantage.

Weaknesses: Weaknesses are internal factors that restrict the company’s progress towards its strategic objectives. Weaknesses are often known but ignored.

Opportunities: Opportunities are external chances to improve performance in the environment. The opportunity can be a trend or change in the market or an overlooked customer need, which if the company could address, would increase demand for its product or service.

Threats: Threats are external factors in the environment that are potentially damaging to the company’s strategy. A threat may be a barrier, a constraint, a competitor or anything external that might cause problems, damage or injury.

When to use itSWOT analysis should be used when executives and managers want to understand both internal and external factors that affect a business situation so they can set appropriate objectives. It invites decision makers to consider important aspects of their company’s environment and helps them organise their information sources, assessing the impact of each factor. As a result, the company objectives take into account the market the company is operating in.

SWOT analysis can also be used as an icebreaker to help executives and managers “kick off” strategy formulation. Based on the analysis, they will be able to develop competitive strategies in line with the requirements of the business environment. SWOT is particularly useful for differentiating a company from its competitors.

Businesses environments are rarely stable and change over time. Therefore the tool should be used regularly as a way for companies to re-evaluate their business relative to the external market. Analysing the implications of these changes helps companies modify the way that they react to them. Failure to do this could result in a potential opportunity evolving into a threat or a strength not being leveraged.

Figure 12 The SWOT Matrix

SStrengths

W Weaknesses

O Opportunities

T Threats

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Figure 13 The matching and converting process

How to use itThe process starts with collecting and listing a set of relevant facts about the company and its environment. Ideally, SWOT analysis needs input from a panel of stakeholders that have specialist knowledge and supporting data. This generates realistic, comprehensive insights and maximises the effectiveness of the process.

Based on the environmental scanning, companies evaluate and summarise the most important factors accompanied by detailed explanations. Executives should then identify the correlations between internal and external factors, so they can utilise matching and converting (see Figure 13).

Matching is fi nding competitive advantages by matching the strengths to opportunities.

Converting is applying an actionable set of initiatives to convert weakness into strengths or threats into opportunities. An example of conversion strategy is to fi nd new markets. If the threats or weakness cannot be converted a company should consider how to minimise or avoid them (Mehta, 2000).

A more rigorous approach to SWOT analysis is to assign magnitude and importance to each element in the matrix. This increases the sophistication by scoring attributes. This allows companies to capture the factors that are most likely to have the biggest impact.

Strengths and weaknessesSWOT analysis is a simple, albeit comprehensive tool, which makes it popular with companies of all sizes.

The strength of SWOT analysis also comes from its fl exibility. It can be applied to various business scenarios, at a company level as well as at a product or product-line level.

Despite its frequent usage, SWOT has some limitations. First, it can result in long lists of generalities without clarifying the key drivers. This leads to no logical actions and only serves to reduce its relevance to the company’s marketing problems (McDonald, 2013). It can also fail to provide clear defi nition when factors are described too broadly, rather than applied specifi cally to the company.

Second, SWOT analysis often relies on subjective judgements. Therefore, it is recommended that companies support conclusions with relevant empirical data.

Strengths Weaknesses

Opportunities ThreatsConverting

Mat

chin

g Converting

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What is it?Porter’s Generic Strategies outlines the different ways a company can pursue competitive advantage within its chosen market (Porter, 1985).

According to Michael Porter (ibid), there are three generic strategies for achieving success in an industry: cost leadership strategy, differentiation strategy and focus strategy (which includes two variants: cost focus and differentiation focus).

Cost Leadership: In a cost leadership strategy, the company seeks to become the lowest cost producer in its industry. To achieve this, the company needs to find and exploit all sources of cost advantage throughout the value chain. However, low cost does not necessarily imply low price, as a cost leader can price at competitive parity whilst earning a bigger margin than competitors.

Differentiation: In a differentiation strategy, the company seeks to establish a unique position in its industry. The company needs to develop points of difference in its offerings that are widely valued by customers. The differentiation point needs to be inimitable by the competition and can be rewarded with a premium price.

Focus: The focus strategies concentrate on a narrow area within an industry, which allows a company to focus on the area’s specific needs. The company selects one segment or a small group of market segments and tailors its strategy to serving it to the exclusion of others.

The focus can either be a Cost Focus or a Differentiation Focus. Cost focus exploits differences in costs in the target segments while differentiation focus exploits the special needs of buyers in the target segments.

These generic strategies are defined by two dimensions (Figure 14):1. Competitive Advantage looks at the strength a company possesses, which can be lower costs or differentiation.2. Competitive Scope determines if the company targets the whole market or if it focuses on a niche within it.

When to use itPorter’s Generic Strategies should be used when companies are determining how to compete in the market. The tool enables companies to find and improve their relative position by determining their source of competitive advantage and their competitive scope.

The tool is particularly useful when companies are unsure how to respond to competitive pressures. The matrix enables them to identify how and where they are going to compete, and how they can defend against market forces. For example, a differentiation strategy can discourage potential new entrants due to customer loyalty, reduce buyers’ bargaining power due to few close alternatives and eliminate the threat of substitutes due to the company’s strong differentiating attributes.

How to use itAll three generic strategies have the potential to result in above-average profits. To identify the best approach an audit of the competitive environment and the company’s internal factors is needed.The audit should review four factors (Figure 15):l Company strengths and weaknesses: its profile

of assets and skills relative to competitors, including financial resources, cost base, technological skills, brand perceptions etc.

l Personal values of the key implementers: the objectives, motivations and needs behind the strategy implementation

Porter’s Generic Strategies

Figure 14 Porter’s Generic Strategies

Cost Leadership Differentiation

Cost Focus Differentiation Focus

Competitive Advantage

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l Industry opportunities and threats: the overall competitive environment, with its potential risks and rewards

l Broader societal expectations: the impact on the company of government policy, social concerns etc.

Having understood the external and internal context, each possible strategy needs to be evaluated. The three generic strategies require different resources and skills for successful implementation (Figure 16). They also suit differing organisational arrangements, control procedures, and incentive systems. All these requirements need to be reviewed to decide which strategy fits the company best.

Strengths and weaknessesPorter’s Generic Strategies is widely utilised because it characterises strategic positions at the simplest and broadest level. It provides a good starting point for exploring competitive strategy and is easy to understand and communicate.

Some companies try to use both cost leadership and differentiation strategies, which will result in poor performance (Porter, 1980). Therefore a choice needs to be made between the two. However, in a differentiation strategy most companies still need to consider their product’s cost. Meanwhile, in a cost leadership strategy, companies often struggle to admit that their product is essentially the same as that of others (Macmillan and Tampoe, 2000).

Generic Strategy Commonly Required Skills and Resources Common Organisational Requirements

Cost Leadership

l Sustained capital investment and access to capitall Process engineering skillsl Intense supervision of labourl Products designed for ease of manufacturel Low-cost distribution system

l Tight cost controll Frequent, detailed control reportsl Structured organisation and responsibilitiesl Incentives based on meeting strict quantitative targets

Differentiation

l Strong marketing abilitiesl Product engineeringl Creative flairl Strong capability in basic researchl Corporate reputation for quality or technical leadershipl Long tradition in the industry or unique combination of skills drawn from other businessesl Strong co-operation from channels

l Strong co-ordination among functions in R&D, product development and marketingl Subjective measurement and incentives instead of quantitative measuresl Amenities to attract highly skilled labour, scientists or creative people

Focusl Combination of the above policies directed at the particular strategic target

l Combination of the above policies directed at the particular strategic target

Figure 15 The context in which competitive strategy is formulated (Porter, 1980)

Figure 16 Requirements of the generic strategies (Porter, 1980)

Factors Internal to the

Company

Factors External to the

Company

Company strengths and weaknesses

Personal values of key implemeters

Broader societal

expectations

Industry opportunities and threats

(Economic and technical)

Competitive strategy

16

What is it?The Ansoff Matrix is a strategic planning tool created by Igor Ansoff in 1957. It provides a framework that helps executives and managers devise market strategies for future growth (Johnson et al, 2008).

The matrix simplifies a company’s competitive situation into two dimensions: products and markets. Within this framework, it generates four alternative options for strategy development (see Figure 17). The strategic classification is determined by the ‘newness’ of the product to the company and the ‘newness’ of the product to the intended market. The 4 strategies are:

Market Penetration (lowest risk): A strategy to grow market share by selling existing products to existing markets. This involves increasing sales to established customers or attracting new customers within existing markets. However, once the market approaches saturation, another strategy must be pursued to continue growth, depending on the company’s ambition and competencies.

Product Development (medium risk): A strategy to develop or acquire new products for existing markets. Product development implies a high degree of innovation, rather than simply the modification of features. The choice to launch new products can be influenced by customer feedback, but needs to be underpinned by extensive R&D activities including testing and piloting. Therefore, the process can be expensive and risky.

Market Development (medium risk): A strategy to sell existing products to new markets. This can be achieved by expanding into new geographies or selling to new market sectors/segments. The risk is that the reputation and trust established by the company may not be easily transferable to new markets.

Diversification (highest risk): A strategy to enter new markets with a completely new offering, which can either be related to the current business to create a synergy (through vertical integration or horizontal integration) or unrelated to it (resulting in a conglomerate). Diversification is considered to be the

highest risk option as it involves both products and markets where the company has no current expertise. Large companies sometimes choose to acquire another business to achieve diversification.

The four strategies are not mutually exclusive; it is possible that companies would implement different strategies for different product ranges, depending on each specific situation.

When to use itThe matrix should be used when companies are deciding how to meet their growth objectives. It encourages executives and managers to use a product-market focused approach to increase sales revenue, whilst considering the risks associated with each option.

It is also useful for executives and managers who want to explore how they can leverage their companies’ tangible and intangible assets to support growth. For example, companies that choose the product development strategy can derive benefits from leveraging established brand awareness and strong customer and channel relationships in the current market. Greater success is likely if companies can fully exploit their existing assets with their new strategies.

The Ansoff Matrix

Figure 17 The Ansoff Matrix

Market Penetration

Product Development

Market Development Diversification

ProductsM

arke

ts

Present New

New

Pre

sent

17

How to use itAs each of the strategies involves a different level of risk and investment, they should be evaluated individually.

To carry out this evaluation, a three step approach is required. First, a market audit is needed to understand the company’s operating performance and external environment. This means its strengths, weaknesses, opportunities and threats can be identifi ed. The company’s strategy choice must take these factors into account.

The second stage is to identify the gap between company objectives and current trends. Company objectives (which may include sales revenue, profi t and costs) are plotted against a forecast of the current trend if the existing strategy is followed. This highlights whether a gap exists over the planning period.

Third, in order to choose the right strategy to fi ll the gap, a rating and weighting system can then be applied to the strategic options to assess their suitability. The criteria and weighting factors used should be consistent with the market audit (McDonald, 1999).

As outlined in Figure 18, the gap can be fi lled by implementing one of fi ve different growth strategies, which include the four categories within the Ansoff Matrix and productivity improvement (e.g. reduce manufacturing time, improve sales force productivity etc.). If the objectives still can’t be met, the company should consider reviewing the objectives.

Strengths and weaknessesThe power of the matrix is that it simplifi es the process of evaluating growth opportunities. This makes decision-making processes easier for managers and executives and ensures that they have considered which strategy will be most appropriate for their objectives.

However, the matrix fails to take into account all the market elements that impact the company; there are many factors that infl uence the market attractiveness such as market growth rate, demand variability, intensity of competition etc. For example, if a company decides to extend an existing product into a new market, it should consider if there is a demand for it.

Time

Growth Strategies Diversifi cation

Market development

Product development

Market penetration

Productivity

Sal

es GA

P

Current trend

Company objective

Figure 18 The relationship between Ansoff’s strategies and gap analysis (McDonald, 1999)

18

What is it?The Product Lifecycle is a tool that enables executives and managers to understand the different stages that their product will go through over its lifetime, and the expected sales, profitability and appropriate marketing mix at each stage.

According to the Product Lifecycle, there are 4 key stages that every product progresses through over the course of its life: Introduction; Growth; Maturity; Decline. Each of these phases is shown in Figure 19.

Introduction: The product is launched into the market and marketing promotes maximum awareness. Trial or impulse purchases will occur. Costs are high and sales are limited, and some products do not progress beyond this stage.

Growth: Sales growth increases and more competitors enter now that the opportunity has been validated. The product growth rate is dependent on the number of competitors. Product and brand differentiation begin and brand preference becomes vital for success (Levitt, 1965).

Maturity: There is intense competition as the product reaches saturation. Vendors compete on differentiators such as customer service and promotions as well as price, and need to maintain customer loyalty. Sales volumes become stable during this stage.

Decline: Customer demand declines, forcing some vendors to exit. Disruptive innovation may occur, which means new products cannibalise existing product sales.

When to use itThe Product Lifecycle should be applied when managers and executives need to understand, react to and anticipate changes in the supply and demand for a product, and create strategies that take advantage of the changes to minimise costs and maximise share of sales or profits. Analysing your product’s lifecycle position offers key insights into the expected characteristics: the competitive landscape, product features, advertising expenditure, pricing strategy, profits and customer types (Macdivitt, 2013). The tool can also be used when a manager needs to evaluate a portfolio as a whole, making investment decisions based on where products are in the lifecycle and highlighting future revenue opportunities.

How to use itExecutives can use secondary information gathered about the product group and their teams’ own knowledge of changes to inform a qualitative understanding of the stages that their product has progressed through. If external data is available this will be invaluable for calculating the product sales volume and growth rates over time; this means that the position of the product in the lifecycle over time can be plotted and forecast accurately for a full understanding.

Sal

es p

er a

nnum

Figure 19 The Product Lifecycle

I N T R O D U C T I O N G R O W T H M A T U R I T Y D E C L I N E

The Product Lifecycle

Product Lifecycle

19

It is important that portfolio evaluation is done objectively; personal attachment to individual products or threats to their budget or role may cause managers to be too optimistic about the sales forecast, which means that the correct strategic decisions will not be made.

Strengths and weaknessesOnce you know which of the four stages your product is in, you can explore what the external dynamics look like at the moment and anticipate how they will change going forwards. This will enable you to keep one step ahead of the competition when these changes gradually occur, and you can pre-plan your response to the changes which means you can act quickly to gain/retain market share. Figure 20 describes these marketing changes in more detail.

The Product Lifecycle emphasises the need to manage the product throughout its whole lifetime, including its decline and withdrawal from the market when there may be ongoing support that needs to be

budgeted for. Taking a view of the entire portfolio and each product’s stage in the Product Lifecycle means that products can be evaluated based on their future profitability, rather than historic profits, and end-of-life situations can be managed appropriately.

However, the Product Lifecycle has limitations. Firstly, sales data can be difficult to source and has a time lag, which means that having an accurate forecast of sales is essential for making up-to-date decisions (for more information on forecasting, see Milner’s white paper ‘Forecasting the Future for Profit’). Secondly, the length and shape of the Product Lifecycle will vary by product, with some products spending more time in certain stages or accelerating faster than others. For example, tablet PCs spent many years in the Introduction phase before rapid growth began with the release of the Apple iPad (2010). This can make it difficult to predict the exact timing of changes accurately, and consequently difficult to set the correct strategy.

Introduction Growth Maturity Decline

ProductSome quality issues,

production processes not yet perfected

Different, competing products

Standardisation Standardisation

PlaceDifficult to establish

appropriate distribution channels

Channels to market are accessible

Differentiation between channels

Few, standardised channels

PriceHigh due to low volumes,

need to recoup R&D costs, lack of competition

Fall due to competition and lower costs

Price pressure, profits achieved from high

volumesLow, slim margins

Promotion Lots, awareness-focusedFocus on differential

benefitsFocus on value-added

itemsMinimal

Figure 20 Marketing changes during the Product Lifecycle. Source: Wilson, 2013

20

What is it?The Boston Consulting Group (BCG) Matrix is a portfolio management tool created in 1970 by Bruce Henderson. The purpose of the matrix is to enable companies to ensure long-term revenues by balancing products requiring investment with products that should be managed for remaining profits. The BCG matrix has two axes: relative market share (indicating profitability, through economies of scale) and market growth rate (indicating market attractiveness), which means assets can be classified into 4 categories: Question Marks, Rising Stars, Cash Cows or Dogs.

Ideally, the path of an asset through the matrix is, first to be launched into a growing market as a Question Mark, then grow share to become a Rising Star; as market growth slows the asset maintains share to become a Cash Cow, and eventually if its share falls it becomes a Dog. Executives need to make strategic decisions that drive assets onto this path, in order to maximise lifetime profitability.

Question Marks: New assets enter the market as Question Marks. Executives should focus on growing market share to convert them to Rising Stars.

Rising Stars: Rising Stars generate significant revenues and can generate profits, but they also require investment and focused marketing in order to maintain their positions in the market.

Cash Cows: Cash Cows are in a low growth market which means market share is difficult to win and margins are tight. Therefore they should be ‘milked’ for remaining revenues and profits. Cash Cows are often the main source of company profits, which can then be invested in Question Marks and Stars to maintain profits in the future portfolio.

Dogs: As assets with low market share in a slow-growing market, Dogs usually represent the last stage in an asset’s life and should be considered for divestment.

When to use itThe BCG matrix should be used as part of strategic portfolio management to manage cashflow (McDonald, 1999). The matrix enables you to determine which assets could produce future revenues and make investment decisions that ensure funds are allocated to the right assets.

The tool can reveal portfolio weaknesses that may threaten a company’s future cashflow. If a company is not developing many Question Marks, it needs to consider where income will come from in future.

How to use itTo classify your assets, the market growth rate and relative market share of the competitors need to be estimated accurately for each asset. Each asset should be represented by a circle, proportional to the asset’s annual sales. Assets in high growth markets should then be allocated high levels of investment to increase capacity and raise brand awareness (Johnson et al, 2008).

Figure 21 The Boston Consulting Group Matrix

★ ?

Relative Market Share

Mar

ket G

row

th R

ate

High LowLo

wH

igh

The Boston Consulting Group Matrix (BCG Matrix)

21

The validity of the market information and the way that the ‘market’ is defi ned is crucial for guaranteeing that different assets are assigned correctly. Data on growth and share may be available from analysts, or an independent assessor may be appointed who can judge the assets without bias.

Strengths and weaknessesThe simplicity of the BCG matrix makes it easy to interpret by employees at a range of levels, which means that it can form a useful basis for internal discussions. As well as products, it can be applied to a wide range of areas, from managing a product portfolio to a portfolio of business units to a portfolio of country divisions.

The BCG matrix is based on market data, which makes it robust and relatively objective; however this can be diffi cult to source and analyse if the relevant expertise is not available in-house.

In today’s business environment, other dimensions of market attractiveness have become important as well as the market growth rate, such as potential revenues and profi ts, risk profi le and barriers to entry (see Figure 22), and the commercial landscape is more unpredictable and diverse. Similarly, the importance of market share has reduced; increased accessibility of products means that customer loyalty has reduced, so there may not be a single leading competitor in the market (Reeves, Moose and Venema, 2014), while some premium providers such as Audi aim to maximise profi ts rather than market share.

There may also be interdependencies that the matrix does not account for. For example, a software company may need to continue to support Dogs, even though this is unprofi table, because consumers will be unwilling to buy software that will soon be out of date. Likewise some companies may need to keep some complementary assets in their portfolio to support the Rising Stars and Cash Cows, or need to present a full product range to the market.

Figure 22 Market attractiveness factors beyond the market growth rate

Size of market

Barriers to entry

Potential revenue

Potential profi t

Competitor strength

Risk profi le

Regulations

Longevity

Market Growth

Rate

22

GE McKinsey Matrix

What is it?The GE McKinsey Matrix is a tool that helps large companies allocate investment to different products or business units. It was developed by McKinsey & Company in the 1970s to help General Electric manage their portfolio.

The matrix has two axes; the first examines the quality of the market or industry in which the business unit is active (“industry attractiveness”) and the second assesses the “competitive strength of the business unit” in that market.

Each business unit is analysed and plotted on the matrix. Based on its position, a business unit is broadly categorised into one of three areas which indicate the future success of the business unit.

Invest/grow: Companies should invest in these high-performance businesses to support their continued success in attractive markets.

Selectivity/earnings: Companies should invest selectively in these business units, doing so only to maintain market traction. Where possible earnings should be harvested for investment elsewhere.

Harvest/divest: Companies should extract as much cash as possible from a business unit in this category before divesting because of the business’s poor value proposition or its unattractive market.

Using these three broad categories business units can be prioritised based on their attractiveness, for investment.

When to use itThe GE McKinsey Matrix should be used when managers want to identify the business(es) which will provide the greatest future cash flows, and prioritise areas where cash should be invested. This enables management to grow the future value of the company by investing in businesses with the most future potential.

Therefore the methodology is most appropriate for companies that have a large portfolio of business units or a large product portfolio.

How to use itEach business unit is scored for both Industry Attractiveness and Competitive Strength. These scores form coordinates which allow the business unit to be plotted on the matrix.

Industry Attractiveness: This axis looks at the market as a whole and provides a measure of its opportunity.

To assess the Industry Attractiveness a variety of market elements should be quantified and understood. These include:l Market growth ratel Market sizel Demand variabilityl Industry profitabilityl Industry rivalryl Global opportunitiesl Macro-environmental factors

Figure 23 The GE McKinsey matrix

Invest/grow

Selectivity/earnings

Harvest/divest

Competitive strength of businesses

Low Medium High

Low

Med

ium

Hig

h

Indu

stry

att

ract

iven

ess

Priority for investment/attractiveness

Low

Medium

High

23

Competitive Strength: This axis examines the competitive strength of the business unit i.e. how well the business is performing in its industry. Businesses that have a strong value proposition for customers are likely to continue to perform well in future.

To assess this, the following elements should be examined:l Market sharel Growth in market sharel Brand equityl Distribution channel accessl Production capacity

Using this data, each business unit is plotted onto the matrix, using a circle:l The size of the circle represents the size of the

market opportunity. The larger the circle the bigger the market size

l Market share is shown by using the circle as a pie chart

Finally, the expected future direction of the business unit is documented. Once again, this is measured in terms of the attractiveness of the industry and the performance of the business unit. The direction is portrayed using an arrow.

Strengths and weaknessesThe GE McKinsey matrix allows a company to compare diverse businesses on an equal footing. This can be difficult in a widely diversified organisation because all businesses have different strengths and weaknesses. For example, one business might be competitive due to strong brand loyalty, whilst another might generate high profits, whilst a third might benefit from economies of scale.

The core strength of the matrix is the ability to simplify this complexity, enabling executives to compare the performance of diverse business units across a range of markets to identify the most attractive ones to invest in.

Without a tool like this, management are reliant on the financial projections of individual business units, which can cause problems. Without the objectivity that the GE McKinsey matrix brings, it is often the business units that are most optimistic about the future that receive the most investment.

However, the complexity of the matrix can also be a weakness. It requires the skills to analyse and accurately quantify a number of different elements of attractiveness and competitive strength, weight these elements correctly, and acquire data on areas such as market size and share. These skills, and the time required to synthesise this information, may not be available in-house.

Furthermore, the GE McKinsey Matrix isn’t and shouldn’t be used as a standalone decision-making tool. The matrix forms part of a wider analysis of the market, which needs to be built on by further questioning and research.

Invest/ grow

Selectivity/earnings

Harvest/divest

Competitive strength of businesses

Low Medium High

Low

Med

ium

Hig

h

Indu

stry

att

ract

iven

ess

Figure 24 Pie charts and arrows show the revenue, market share and future direction of the businesses

2424

Johnson and Scholes’ Strategic Options

What is it?After strategic market analysis (auditing) has been carried out, Johnson and Scholes’ strategic options framework should be used to decide the best strategy for the company. First, the strategic options should be generated using tools such as Porter’s Generic Strategies or the Ansoff matrix. Secondly, they need to be evaluated using the Suitability, Acceptability, Feasibility criteria, which will identify the best option to implement (Johnson and Scholes, 1989).

Strategic optionsThere are 3 perspectives that need to be considered when generating a company’s strategic options: the bases of strategy, the direction of the strategy, and the method of pursuing the strategy (Figure 25). Within these perspectives, a number of established strategic tools are used to generate options.

Strategic choiceOnce the strategic options in each area have been generated, the SAF framework needs to be used to determine which has the greatest likelihood of success (Kaplan, 2012), based on 3 key factors:

SuitabilitySuitability considers whether the company’s chosen strategy is appropriate given the market environment in which it is operating and its strategic position in the market. The outputs from environmental tools such as PESTER and Porter’s Five Forces, as well as other market intelligence, provide the basis for assessing suitability.

AcceptabilityAcceptability considers the expected outcomes of a strategy and the extent to which they meet the company’s objectives and the stakeholders’ expectations.

The risk and return associated with each strategy should be assessed to predict its likely impact on the company and the stakeholders. Various stakeholders will have different expectations about the company, so it is important that the acceptability of the strategy to each group is considered and communicated.

FeasibilityCompanies need to assess whether they have the resources required to implement the strategic option chosen. These resources include time, budget, personnel, processes, systems and information.

When to use itA company should use the Johnson and Scholes strategic options framework when it wants to use a thorough and comprehensive approach to strategy formulation. The tool brings together all elements of the company’s strategy to ensure that it has fully considered all aspects of how and where it will compete.

The tool is particularly useful for larger companies who need to consider complex markets, the needs of multiple stakeholders and diverse resources.

Figure 25 The strategic options framework (Johnson & Scholes, 1989)

Bases of competitive strategy

l Price based strategiesl Differentiation strategiesl Hypercompetitive strategies

Methods for pursuing strategies

l Organic developmentl Mergers and acquisitionsl Alliances

Strategic options

Strategy directions

l Market penetrationl Product developmentl Market developmentl Diversification

25

How to use itWhen choosing strategic options, the first step is to ensure that the different elements of a strategy are consistent. The strategy basis, direction and method need to make sense as a whole package or they will not work together in practice (Johnson and Scholes, 1989).

Next, Figure 26 gives some practical examples of measures that can be used to assess the suitability, acceptability and feasibility of various strategic options.

Managers should take into account that these judgements are subjective, and decisions need to be made when the suitability, acceptability and feasibility outcomes are conflicting (Johnson et al, 2008). For example, one strategy may be feasible and suitable from an organisational perspective, but not provide acceptable returns to shareholders.

Lastly the 3 criteria need to be used throughout implementation as well as when deciding on a

strategic option (Johnson et al, 2008). Hidden issues in the environment, stakeholders or internal resources may mean the strategy needs to be re-evaluated or adapted when it is turned into action.

Strengths and weaknessesFew models seek to analyse strategic choice in such depth, which is both a strength and weakness of the tool. The benefit of using the framework is that the resulting strategy decision fully considers all areas of competition. By testing out the suitability, feasibility and acceptability of the strategy the organisation can be confident that it will be successful from all perspectives.

However, applying the framework is resource-intensive and it will take time to gather and assess the necessary information. This can be mitigated by employing an external agency, who will provide an on-demand resource to the company and whose expertise can accelerate the process.

Key Success Criteria Evaluation Criteria Evaluation Tools

Suitability Market dynamics

PESTER analysisPorter’s Five ForcesLifecycle analysisValue chain analysisRankingScenariosDecision tree

Acceptability

Return

Financial analysisCost-benefit analysisReal optionsStakeholder value analysis

RiskFinancial ratiosSensitivity analysis

Stakeholder reactions Stakeholder mapping

Feasibility

Financial feasibilityCash flow analysis and forecastingBreak-even analysis

Resource deployment Resource deployment assessment

Figure 26 Strategic choice: assessing suitability, acceptability and feasibility

26

Kaplan and Norton’s Balanced Scorecard

What is it?Kaplan and Norton’s Balanced Scorecard is a measurement framework that translates the company’s vision and strategy into specific actions and measures (Cravens and Piercy, 2009). This enables an organisation to assess whether it is on the right path to meet its goals, and readjust its tactics as appropriate.

The balanced scorecard draws on the philosophy that measurement is fundamental for improvement. It aims to drive continuous performance improvement and innovation through measuring the core success drivers (Kaplan and Norton, 1992). The tool clearly demonstrates the link between the company objectives; the critical success factors required to achieve these; and the measures that should be put in place to assess performance.

Each balanced scorecard contains 4 organisational goal perspectives. These 4 perspectives are the drivers for creating long-term shareholder value (Norton, 2010). The perspectives are:

Financial perspectiveThe financial perspective is important because it measures whether the organisation’s actions are leading to improved returns for shareholders. Typical financial goals include profitability, revenue growth and shareholder value.

Internal perspectiveThis perspective encompasses internal capabilities such as employee skills, cost per unit and manufacturing capacity. Companies need to focus on sustaining their core competencies (those which give competitive advantage).

Customer perspectiveCustomer concerns centre on 4 key areas: time, quality, performance/service, cost (Kaplan and Norton, 1992). The company should focus on the areas where it can meet customer needs better than its competitors can.

Learning and growth perspectiveLearning and growth should focus on the new capabilities that will be needed for future success, such as innovating to create new products or improving process efficiency.

Figure 27 Kaplan and Norton’s Balanced Scorecard (Norton, 2010)

Vision and

Strategy

FinancialTo succeed financially, how should we appear to our

shareholders?

Objectives Measures Targets Initiatives

Learning and GrowthTo achieve our vision, how will we sustain our ability

to change and improve?

Objectives Measures Targets Initiatives

Internal Business ProcessTo satisfy our shareholders and customers, what

business processes must we excel at?

Objectives Measures Targets Initiatives

CustomerTo achieve our vision, how should we appear to

our customers?

Objectives Measures Targets Initiatives

27

When to use it?The balanced scorecard is useful when the organisation needs to refocus on its strategy and vision. In some organisations, the short-term fi nancial and tactical goals of the company may be prioritised at the expense of all other objectives. Using the scorecard means companies have to concentrate on the long-term drivers of competitive advantage.

How to use itOrganisations should start with their strategy and then select appropriate measures. Some organisations, when applying the tool, try to fi t their existing measures into the 4 perspectives (Norton, 2010). It is important to tailor the measures used to the company’s specifi c strategy.

The scorecard should be restricted to the few key areas for success. A narrow focus means the vital activities must be prioritised.

The scorecard can then be integrated into dashboards (see Figure 28), which means organisations can monitor their performance against objectives on an ongoing basis.

Strengths and weaknessesThere are few formal frameworks for performance measurement, so a major strength of the balanced

scorecard is that it provides this capability. The advantage of using the balanced scorecard is that it specifi cally relates the organisation’s critical success factors to relevant measures.

The tool shows the interconnectedness of goals and where one goal may have been achieved at the expense of another (Kaplan and Norton, 1992). For example, in Figure 28 the company’s customers are very happy, but this is due to overspending on projects, which is threatening revenue and profi tability. This knowledge enables the organisation to change objectives and measures accordingly.

The fi nal strength is that measurement means you have to gather data to support internal assumptions – for example, are customer perspectives on performance the same as management intuition? There is a difference between qualitatively thinking that customers are fairly satisfi ed, and measuring that 85% of customers were ‘satisfi ed’ or ‘very satisfi ed’ in a survey. This ensures that the decisions are being made based on accurate information.

The weakness of the potential scorecard, however, is that it relies on having the right strategy as a foundation. If a company is implementing the wrong strategy, than it will not achieve the expected results, which can be demoralising for all stakeholders.

Figure 28 An example of using the balanced scorecard in a dashboard for continuous monitoring

Financial

Objectives Targets/MeasuresCurrent levels

Current status

Revenue growth £1.2m in 2016-17£1.1m projected

Increased profi tability15% profi tability in 2016-17

12%

Internal Business Process

Objectives Targets/MeasuresCurrent levels

Current status

More effi cient project completion

Average project overrun of <10%

20% overrun

Close rate on leads15% close rate in 2016-17

10% close rate

Learning and Growth

Objectives Targets/MeasuresCurrent levels

Current status

Increase product range

Introduce one new product per year

1 new product 2016-17

Improve employee skills

1 employee completes profess. qualifi cations

2 newly certifi ed

Customer

Objectives Targets/MeasuresCurrent levels

Current status

Build customer loyalty

30% of revenue from repeat customers

40% repeat revenue

Satisfy customers75% of customers ‘satisfi ed’ or ‘very satisfi ed’

85% satisfi ed/very satisfi ed

28

Final Comments

1. We hope you’ve found this white paper interesting and it has given you tools for developing your company’s strategy further.

2. You will see that the majority of strategic tools are designed to help you:

a. Analyse the market b. Generate strategic options However, to evaluate your strategic options you

may need external/independent help from your non-executive directors or advisors.

3. The strategic process requires not just knowledge about individual tools, but an understanding of when each tool should be applied.

4. The benefi ts from engaging in a strategic planning process are signifi cant and diverse. Figure 29 lists 12 benefi ts, from setting clear direction to predicting market changes. However the process needs senior buy-in and leadership, time and resource investment and external input.

5. Not all companies have the skills or resources in-house to fi nd the data and carry out the analysis for each strategic tool. External expertise can be useful to design and carry out a strategic review and write your company strategy document.

Align the company

Clear messaging

Leadership agreement

Increase revenue

Clear directionPredict

market changes

Prioritise actions

Objective view of the situation

Set appropriate

targets

Reduce the risk of decision-

making

Focus on profi table products

Target the right

customers

Benefi ts of strategic

planning with analytical tools

Figure 29 Benefi ts of strategic planning with analytical tools

AuthorsNick Milner, PhD is the Managing Director at Milner Strategic Marketing Ltd. He has over 30 years’ experience in the international telecoms and IT industry with Azure, BT, FirstMark Communications and Brightstar.

Nick has had significant strategy and marketing experience across a range of enterprises from small start-ups to companies listed on the London and Indian Stock Exchanges. He is a Fellow of the Chartered Institute of Marketing, a Freeman of the Worshipful Company of Marketors, a Chartered Marketer and a Chartered Psychologist. He won the Company of Marketors Mais Bursary for his study on Silicon Valley Marketing.

Jonathan Davenport leads the Market Analysis team at Milner. Jonathan’s expertise lies in building bespoke market forecast models which are used to understand market dynamics, including customer buying behaviour and competitor strategies. He also specialises in strategy development, using his extensive knowledge of tools and theory to develop robust market-driven strategies. He has a strong business to business sales and marketing background, developed over 14 years working across the energy, telecoms and bio-tech industries.

Jonathan is a Chartered Marketer and Member of the Chartered Institute of Marketing. He holds the Professional Postgraduate Diploma from Cambridge Marketing College and won the prestigious Elijah Hepworth Memorial Prize when he graduated with a BSc in Technology and Management.

Kay Sharpington is a Market Analyst. She is experienced in researching and modelling markets for clients, applying her economic background to forecast future dynamics and predict the rollout of new technologies. She uses these insights to develop strategy recommendations, based on a deep understanding of geographies, sectors, customers and competitors. As part of thought leadership programmes, she has analysed survey results from almost 2,000 respondents and drawn conclusions

to share with clients and their stakeholders. Kay has previously worked in marketing and market research across 4 organisations, which involved a range of qualitative and quantitative research and analysis to support strategic decision-making.

Kay holds an MA (Cantab) degree in Economics, Psychology and Sociology from the University of Cambridge and passed the CIM Diploma in Professional Marketing with Distinction.

Cecilia Zhu is a Market Analyst. Cecilia specialises in analysing markets by gathering, structuring and segmenting data. She builds market models to forecast future dynamics, providing clients with robust information on customer and competitor behaviour, sector demand and pricing trends. Cecilia has evaluated the market potential for clients across a number of different sectors and presented data-based insights to senior management. Cecilia has previously worked at L’Oréal as a product marketing executive and has undertaken a range of roles within consulting firms and PR agencies.

Cecilia holds a Master’s degree in Corporate Communications and Public Relations from Leeds University Business School and is currently studying for the CIM Diploma in Professional Marketing. She is fluent in English and Mandarin.

About Milner Strategic Marketing LtdMilner Strategic Marketing Ltd is a business consultancy. We deliver a range of services from strategic management consultancy through to specific marketing programmes.

Our clients come to us because they need help with Market Analysis, Strategy Formulation and Marketing Programmes. Our clients range in size from small, venture-backed start-ups to large, quoted international companies. Clients are usually B2B focussed and come from three technology sectors: High-tech (ICT); Clean-tech (Renewables, Smart Grid and Energy Retail); Bio-tech (Bio-Medical and Healthcare).

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References

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