To Hamel and Prahalad, innovation and the ability to challenge one's own practices and assumptions are necessary core competencies for the successful 21st century corporation. Successive waves of organizational improvement tend to play within existing boundaries and do little to shape markets in helpful ways. Corporate restucturing and reengineering are two major sets of initiatives that lower costs and improve efficency but ignore core issues of value definition and renewal. Hamel and Prahalad's work represents a healthy and invigorating reaction to hierarchical strategic planning, encouraging everyone to be more proactive in recognizing opportunities, innovating, and making their own work more meaningful. Their message is delivered in award-winning Harvard Business Review articles like "Strategic Intent," books like Competing for the Future and Leading the Revolution, and the work of Strategos, the strategy consulting firm that Hamel heads.

The Two Dimensions and Their Extremes. The Beyond Customer Led matrix (Figure 6.2) explores the two dimensions of Needs and Customers:

The Four Quadrants. Companies can meet the known needs of existing customers, or they can venture further into new and promising areas of potential and future needs. The Beyond Customer Led matrix identifies four possible need groups:

Example: The Chrysler Minivan. In the 1950s, U.S. automobile production accounted for two-thirds of the world total. By the 1970s, that number had been cut to 23 percent due directly to the growing strength of its offshore competitors in Japan and Europe. The oil crunch of the 1970s added to the problem, leaving thousands of gas-guzzling sedans sitting in Detroit plant parking lots while consumers flocked to buy fuel-efficient cars from overseas.

In the early 1980s, Hal Sperlich was working at Ford to develop what would become the now ubiquitous minivan. When he couldn't convince Ford this was a good idea, he left to join Chrysler. The rest is history.

The North American automobile companies were losing market share for a number of good reasons. Built for volume production, their assembly lines and factories were costly and inflexible. A disaffected workforce was more concerned with protecting labor gains than making their companies innovative and more competitive. Probably most worrisome, competitors' cars were outperforming theirs, using new lean manufacturing methods that were almost impossible to apply in older car plants.

The cost structure and underlying business model of the North American companies made innovation nearly impossible, yet this was precisely what was needed to revitalize the sector. When Sperlich launched his campaign within Ford, it ran afoul of both the strategic thrust and the company executives, eventually leading to his being fired. "[Ford] lacked confidence that a market existed, because the product didn't exist. The auto industry places great value on historical studies of market segments."^[43]

Demographics painted a clear picture of the coming period. Relatively affluent and growing North American families needed larger interior car space. They just didn't know they did because nothing like the minivan yet existed. The minivan provided that extra bit of space that made trips to the cottage more comfortable, hockey equipment easier to cart around, and home repairs less painful (Figure 6.3).

The Beyond Customer Led matrix shows how unarticulated needs can be used to inform strategic vision and ultimately help redirect investments. "In 10 years of developing the minivan we never once got a letter from a housewife asking us to invent one. To the skeptics, that proved there wasn't a market out there."^[44]

Sperlich's innovation and Chrysler chairman Lee Iaccoca's vision and courage were instrumental in pulling Chrysler out of a desperate decline. When the MPV model was launched in 1983, it sold more than half a million units, helping right Chrysler and overnight creating a new car category.

Context. Beyond Customer Led is ideal for strategic planning and product-service reinvigoration. This is a simple and powerful way to tap creative thinking within a firm and in dialogue with partners and customers. It is also a useful device for auditing future plans once they have been developed by asking questions from the perspective of each of the four needs groups—for example, Will these plans meet the known needs of existing customers?

Method. There is a highly intuitive feel to applying this framework as a tool. The process works best as a creative search exercise, responding to a set of questions which elicit content for each of the quadrants. Once this is done, patterns in needs and opportunities can be identified. This tool works well for individuals and teams:

Hamel, G. Leading the Revolution. Boston: Harvard Business School Press, 2000.

Hamel, G., and Prahalad, C. K. "Strategic Intent." Harvard Business Review, May 1989.

Hamel, G., and Prahalad, C. K. Competing for the Future. Boston: Harvard Business School Press, 1994.

The technology adoption life cycle, developed at Harvard University in the 1930s, originally described the pattern and rate of acceptance of new seed potatoes in the U.S. Midwest. Shaped like the typical bell curve, it elegantly mapped how a new technology grows from an experimental notion to a widely used commodity. As a technology matures and becomes less risky, different groups of customers, each with a distinct set of characteristics and needs, adopt it. The earliest adopters are technically oriented, with genuine interest in the product features. Later buyers tend to be pragmatic and conservative, and care most about business benefits resulting from the technology's use.

Geoffrey Moore expanded on the cycle in his 1991 book, Crossing the Chasm, describing what occurs when the technology is discontinuous and disruptive. In these cases, as was true for many of the Internet companies in Silicon Valley when Moore wrote his book, successful movement through the cycle involves bridging a set of gaps. Color TVs and laptop computers are continuous technological improvements, drawing on preexisting infrastructures and user skills. Wireless computing and electric cars are discontinuous and demand greater patience, investment, and learning while the technology becomes fully functional and supported by manufacturers, servicers, and standards. Not all new technologies successfully cross the chasm between the early experimenters and the more risk-averse majority buyers.

The book became a marketing bible for information technology companies during the supercharged 1990s, and Moore's Chasm Group was called on to guide hundreds of entrepreneurial ventures through the technology adoption life cycle. Discontinuous technology is by definition a risky business, and Moore's modeling offered structure, principles, and method to convert innovation into profitable business. Begin by understanding where your technology fits in the adoption cycle, focus on the right customers for the stage you are at, and deliver value that responds to current needs and interests. Strategy and communications change dramatically as a technology matures and one audience is replaced by the next.

The Discontinuity and Life Cycle framework (Figure 6.4) is the core tool employed by the Chasm Group for strategic diagnosis and market planning, integrating the cycle with market forces and customer types. Although this framework describes the world of discontinuous technologies, the method and lessons are relevant for most businesses involved in launching new products.

The Discontinuity and Life Cycle matrix is a highly integrated planning tool that communicates three sets of information: the technology adoption life cycle, the customer audiences being served, and the forces driving and restraining market adoption. At first glance, the picture may appear complex; however, each of the three sets of information is valid, relevant, and intuitively clear. The key to deciphering the map is to follow the life cycle, which moves in a clockwise direction starting in the upper left quadrant.

The Two Dimensions and Their Extremes. Two kinds of discontinuity shape the technology adoption life cycle: Paradigm Shock and Application Breakthrough. It is helpful to think of these forces as variations of Cost (Paradigm Shock) and Benefit (Application Breakthrough):

Figure 6.4. Discontinuity and Life Cycle Matrix

The Four Quadrants. The four quadrants in this model help to organize and align key elements of a marketing strategy:

Example: Winners and Losers in the PC Industry. The early years of computing were dominated by IBM, which at one point accounted for almost 80 percent of computer-related revenues worldwide. As the computing paradigm switched from mainframes to minis and PCs, a new generation of hardware, software, and services companies entered the scene, redefining the market. Out of this competitive chaos, two companies emerged as winners: Microsoft in software and Intel in the microchip market. In 1993, Intel took 50 percent of the total profit earned by the top 150 high-tech companies in Silicon Valley and by 2003 had a market value approaching that of IBM. Microsoft's market value is roughly twice that of IBM.

Organized first around the DOS operating standard and subsequently around the now ubiquitous Windows, the pair has dominated the computing world and benefited disproportionately from waves of innovation and the ever-growing number of users. How Microsoft and Intel achieved this success and continue to exercise such influence is made apparent by the discontinuity and life cycle analysis (see Figure 6.5).

Until the late 1970s, computing was principally the domain of specialists and hobbyists. Computers were expensive, large, and complicated. Interacting with them required learning elaborate programming languages. Prototypes of faster, smaller computers were being tested, but materials, design, and usage barriers kept all but the keenest enthusiasts away.

Figure 6.5. Wintel Adoption Cycle Matrix

This all began to shift in the 1970s with the introduction of smaller minicomputers and desktop personal computers. The revolution was under way as visionaries at Bell Labs, Apple, and a few other places designed personal computers that were functional and held the promise of applicability to a wider audience. At the core of the new machines was a small, affordable microprocessor that enabled miniaturization and an operating system that was more intuitive and human-friendly.

To get through the first Chasm organized around the DOS operating system, the Wintel coalition contained a host of strategic partners, including Lotus for its spreadsheet software, MicroPro's Wordstar word processor, HP for printers, Conner for hard disk drives, and Novell for a network operating system. As these firms came together to deliver a complete working system, the Bowling Alley strategy quickly accumulated the energy needed to launch a Tornado that would lock in whole markets to the new systems and standards, with Microsoft and Intel at its center. The key to unleashing the Tornado was the flood of applications that independent software developers created to support the common platform. The move to Main Street occurred once technical and cost barriers had been removed and the infrastructure was solid.

The cycle was repeated again in 1991, but more quickly, when the Windows operating system was introduced. This time, fewer partners were included in the core coalition. Intel remained with its 486 and Pentium chips, as did HP, but Microsoft took the opportunity to integrate its own word processing package, Word, and spreadsheet application, Excel. One of the lessons of Tornado marketing is that markets want to deal with the fewest number of vendors organized around standard offerings. The outcome, as we know, is that the Microsoft Office suite of applications quickly became the desktop standard, much as Windows was the dominant operating system.

Margins compressed as these products matured and found their way onto Main Street, but market size increased exponentially. In successive mini-waves of innovation, additional partner functions have been integrated into the core set, like Novell's network operating system. However, by providing a standard, they have been able to preserve their role, adding improvements and cutting costs to stay ahead of the competition.

Context. The framework is applicable to strategy and marketing efforts of businesses where innovation and technology development are central to success. Each phase of the technology adoption life cycle has a unique set of requirements and opportunities, and it is dangerous and wasteful to be working from the wrong starting point.

Method. The object is to gain market acceptance in the quickest and most effective manner. While accuracy of analysis is important, the first critical task is to align the business leadership team around their assessment of the phase of development of the technology category to which the innovation belongs:

Moore, G. Crossing the Chasm: Marketing and Selling High-Tech Products to Mainstream Customers. New York: HarperBusiness, 1991.

Moore, G. Inside the Tornado: Marketing Strategies from Silicon Valley's Cutting Edge. New York: HarperCollins, 1995.

Wiefels, P. The Chasm Companion: A Fieldbook to Crossing the Chasm and Inside the Tornado. New York: HarperBusiness, 2002

What does it mean to develop a customer-driven fulfillment network? The concept of the customer as value manager (CVM) comes from a multimillion-dollar research project into the future of supply chains conducted by Digital 4Sight in 2000. It explored how companies use information technology to support sales and let individual customers design those parts of the product or service experience that matter to them. There are great variations in the degree to which customers want to play an active role in processes related to product design, configuration, sales, delivery, and support. Some prefer to act through intermediaries; others want to buy on-line. Some care about product configuration; others are concerned with fast delivery. The model encourages companies to think in terms of enabling customers to access only those parts of the supply chain that add value for them (Figure 6.6). When we view customers as value managers, we present them with an individualized supply chain that perfectly fits their needs. Ideally, we isolate and emphasize supply chain capabilities to meet customer needs rather than the needs of mass production.

Figure 6.6. Customer as Value Manager Matrix

The Two Dimensions and Their Extremes. The CVM model differentiates customer groups by the degree to which they actively participate in offering design and by the way they access supply chain activities:^[48]

The Four Quadrants. The model segments buyers by their purchasing preferences rather than by demographic or economic characteristics:

Method. Follow these steps to conduct a Customer as Value Manager analysis:

Tapscott, D., Ticoll, D., and Lowy, A. Digital Capital: Harnessing the Power of Business Webs. Boston: Harvard Business School Press, 2000.

Are your customers satisfied with your current offerings? Do you know why they are satisfied? Is it because of your price or your value? And even if they report that they are deeply satisfied, under what conditions would they switch to a competitor's product or service?

These are questions that marketers find difficult to answer. Customer satisfaction surveys are helpful, but only fill in part of the picture. Customer Value Analysis (CVA) is a powerful tool that reveals how specific product attributes contribute to customer perception of value and the buying decision. It enables one to focus on the aspects of product or service that are most likely to increase customer acquisition, retention, and profitability.

The branch of economics that is concerned with how consumers make decisions is called utility theory and has its roots in the work of economist Jeremy Bentham in the late eighteenth century. Modern Customer Value Analysis is the result of work done by Bradley Gale and others at AT&T in the 1980s. A generally satisfied customer, they found, does not necessarily produce repeat business or improved financial results. The CVA principles and method described in Gale's 1994 book, Managing Customer Value, were created to get at the critical drivers and interdependencies influencing customer buying decisions (see Figure 6.7).

Figure 6.7. How Customers Choose Among Competitors

Customer Value Analysis is built on the proposition that customers choose among suppliers based on perceived value. Value (Figure 6.8) is a combination of price and quality. Lowering the price or raising the quality of a product will improve its overall perceived value relative to competitors' products (provided, of course, that such information is communicated convincingly to potential customers).

Customer Value Analysis is a two-step process. First, measure how customers perceive the quality and price of your products versus those of your competitors. Then plot these data on a Customer Value Map. Firms that are perceived to be lower in price and higher in quality than competitors are poised for market share gains. Conversely, a low score in either or both of these measures is cause for concern. The fair value line indicates where quality and price are in balance. Gale uses the terms "Customer-Perceived Price" and "Customer-Perceived Quality" (or "Market-Perceived Quality") to reflect that the profiles are determined principally by gauging customer perceptions.

The Two Dimensions and Their Extremes. The Customer Value Map explores two key dimensions: Customer-Perceived Price and Customer-Perceived Quality:

Figure 6.8. Generic Customer Value Map

The Four Quadrants. Each quadrant (Figure 6.9) corresponds to a general relative value and suggests a particular action. The fair value line sits at a different angle for different product categories. For example, in luxury goods, a small quality improvement may justify a large price differential. However, for commodities, consumers may be indifferent to quality differentiation, suggesting a more horizontal fair value line:

Figure 6.9. Customer Value Map Quadrants

An area chart of customer value, sometimes called a defection-acquisition index (Figure 6.10), is used to gain insight at a more granular level into factors influencing customer decision making. Each horizontal bar represents an attribute or feature, such as style, service, or image. Ratings to the left of the bar indicate that a company is perceived as performing worse than its competition, making it vulnerable to customer defection. Ratings to the right indicate it is perceived as better than the competition, suggesting opportunities for customer acquisition.

In addition to targeting product and service investments into areas that will have the greatest impact on ability to win and retain business, the area chart also is useful in identifying areas of potential investment or cost savings. For example, if it is expensive to improve feature 1 but relatively easy to improve feature 3, the firm could gain the most customers for the least dollars by focusing its investments on feature 3. This type of modeling is also sometimes referred to as performance impact analysis.

Example: Denim Jeans. Let's use a hypothetical example based on recent events. In the denim jeans market of recent years, Levi's has consistently lost market share, falling from $7 billion of revenue in 1996 to $4.2 billion in 2001. It lost business on the high end to more stylish and innovative competitors such as Calvin Klein and fashionable upstarts such as Diesel. Conversely, it lost low-end business to companies such as Arizona Brands. For much of this period, Levi's was heavily dependent on U.S.-based manufacturing and couldn't compete on price with offshore competitors. In such a situation, one can well imagine that existing Levi's customers might respond positively on a traditional customer satisfaction survey, but still purchase a different brand. A customer value analysis can provide insight into the situation.

Figure 6.10. Area Chart of Customer Value

The key components of quality in a pair of jeans might include materials, cut or styling, availability, peer group approval, and advertising. The hypothetical CVA analysis in Figure 6.11 shows that although Levi's is lower priced than many competitors, it is still on the wrong side of the fair value line. Merely cutting the price is unlikely to right the fair value equation. Instead, Levi's needs to change the product or the perception of the product, or some combination of the two. Deeper analysis of customer value on a feature-by-feature basis may reveal that Levi's invests too much on some attributes of the product and not enough in others.

Method. An in-depth CVA implementation requires marketing research skills and familiarity with statistical analysis techniques described in Gale's book. Many consulting companies specialize in Customer Value Analysis as a specific offering. For a general introduction to the method, we suggest trying the following exercise. If customers are not easily available for surveying, have your sales teams rate the products and those of the competition.

Figure 6.11. Customer Value Map for Levi's Jeans

Creating a Quality Profile. There are three steps to creating a quality profile:

The simplest way to determine the components or attributes of quality is to ask a group of survey subjects what they believe they are. Then ask them how you and your competitors rate on each attribute of quality. (It may also be useful with some products to gather information from secondary sources such as research firms to objectively define product performance. For example, if you were comparing motorcycles, you might factor in objective data about performance and handling or warranties.) Next, ask them to weight each quality attribute by dividing 100 points among all of the attributes based on their relative importance in the overall purchasing decision. A market-perceived quality ratio is then created by multiplying each competing product's score by the weight of the factor.

Table 6.1 contains a sample quality profile. Company A surveys handbag buyers to find out which features are most important to their purchasing decisions. It discovers that there are three key features: materials, style, and brand image. Company A also finds that although purchasers rate it above competitors in terms of materials and brand image, they rate it at the same level with competitors on style. This is important because style is the product attribute that customers rate as most influential to their buying decisions. The overall weighted ratio is 115.375 (a score of 100 indicates relative parity with competitors), indicating the company is well positioned versus competitors in terms of perceived quality.

Creating a Price Profile. Perceptions about the costs of purchasing and owning a product can be as important as actual price in influencing purchases. This is especially true in the case of expensive products such as cars, where the anticipated costs of maintenance, financing, and the gain or loss through resale value figure prominently. To capture this information, price profiles are calculated based on customers' perceptions of the cost of components that constitute the total price of a particular good (Table 6.2). Weighting these components produces a market-perceived price ratio, similar to the quality ratio.

Once price and quality ratios are completed, the outcomes are plotted on a Customer Value Map that compares perceived quality and price points for a company and its competitors. Points on the map correspond to each company's relative performance in terms of overall quality and overall price. At any point on the fair value line, a company should neither lose nor gain market share.

Gale, B. T. Managing Customer Value: Creating Quality and Service That Customers Can See. New York: Free Press, 1994.

The future is unknowable and therefore risky.^[51] Traditional planning methods work well enough when the time frame is the next quarter or perhaps one to two years into the future. But beyond that, projections based on current reality are dangerously unreliable. Reality rarely unfolds in a linear fashion, and unpredictable events—wars, revolutions, scientific breakthroughs, stock market booms, natural disasters, and others—spoil the best-laid plans.

Scenario planning aims to reduce longer-term risk by creating imagined futures based on an appreciation of key forces driving social, economic, political, and technological change. Companies, governments, and other large institutions create scenarios to make judgments about the future viability of current strategies and to explore areas of long-range concern that would never show up in a typical planning exercise. Many of the most useful scenario planning efforts adapt readily to the 2 × 2 form. We'll examine two of them in this section.

Scenario planning emerged as a serious business method at Shell in 1960s and 1970s where Pierre Wack led a group that developed scenario methods and anticipated the oil price shocks of 1973. Later, Wack, working closely with Willis Harman, Peter Schwartz, and other scenario developers at the Stanford Research Institute, refined the methods. Schwartz himself took over scenario planning at Shell, where he had the opportunity to improve the technique further, anticipating issues such as the fall of the Eastern bloc countries. In 1987, he and a group of visionary thinkers and writers, including Jay Ogilvy, Stewart Brand, Lawrence Wilkinson, and Napier Collins, formed the Global Business Network, a firm specializing in scenarios. Today, the technique is widely used in government, academia, and corporate planning exercises.

The goal of scenario planning is not to create the one right scenario. Rather, it is to create a set of viable options—robust scenarios that may hew closely to the future as it unfolds. Parts of each of the scenarios are likely to become manifest over time. To be useful, modeling needs to push limits so aspects of the scenarios are radical enough to encompass wild card events.

Choosing axes is the most critical step in scenario matrix development. Each axis must represent a dynamic force that is likely to be a defining feature of any future reality. Well-chosen axes create four plausible futures that help assess the risks of particular positions and strategies. Defining the axes frequently begins with asking questions that could have a great impact on the institution's future, such as, "What happens if economic growth slows down or increases greatly?" "Will social attitudes become more liberal or more conservative?" "Will raw material prices be stable or fluctuate greatly?"

We look at two examples here that illustrate the range and impact of the method: one on the future of automobiles and the other on libraries.

Example 1: The Future of Automobiles

This example was developed by the Global Business Network in the 1980s while working with an automotive company. The work influenced Detroit's thinking about the increasing appeal of sports utility vehicles (SUVs) and spurred development of other multifunction vehicles.

The Two Dimensions and Their Extremes. This matrix (Figure 6.12) explores two key dimensions: Fuel Prices and Societal Values:

The Four Quadrants. Values, combined with Fuel Prices, spawned four plausible yet vastly different scenarios:

At the time this set of scenarios was being developed, the two upper quadrants seemed quite likely. The world had become accustomed to higher oil prices in the 1970s, and there was little expectation that we would have sustained energy deflation throughout the 1990s, but that is what happened. Gas prices in real terms were far lower in the 1990s than in the two previous decades. At the same time, people in North America moved right on the horizontal axis, becoming more inner directed overall. The lower right quadrant turned out to model the automotive future more accurately than the other three. By the end of the century, light trucks, vans, and SUVs dominated car sales, and foreign firms had racked up impressive gains in market share.

Example 2: Librarian Scenario

The basic structure of the Librarian Scenario matrix was developed by Lawrence Wilkinson of the Global Business Network.^[52] It was adapted by Tom Wilson of the University of Sheffield to explore the future of library services and its impact on the job prospects of librarians.^[53]

The Two Dimensions and Their Extremes. The matrix explores two key dimensions: Social Contract and Locus of Concern (Figure 6.13):

The Four Quadrants. The four quadrants illustrate the possibilities:

Under all four scenarios, physical libraries were considered likely to decline and on-line services would grow. Also, there would be a demand for librarian services under all four scenarios. In some, such as New Civics and Ecotopia, this appears to be greater due to the commitment to maintaining physical libraries, but overall, the scenarios demonstrated a continuing demand for fee-based and public library services.

Method. Scenario planning can be an intensive process, involving many people and lasting several months. In his book The Long View, Peter Schwartz provides an overview of the scenario planning process that is adapted here:^[54]

Ringland, G. Scenarios in Business. New York: Wiley, 2002.

Schwartz, P. The Art of the Long View. New York: Doubleday, 1992.

van der Heijden, K., and others. The Sixth Sense: Accelerating Organizational Learning with Scenarios. New York: Wiley, 2002.

Wilkinson, L. "The Future of the Future." Wired (special edition), 1995, pp. 77–81.

[http://www.wired.com/wired/scenarios/build.html].

Wilson, T. "The Role of the Librarian in the Twenty-First Century." Keynote address for the Library Association Northern Branch Conference, Longhirst, Northumberland,

Nov. 17, 1995. [http://www.shef.ac.uk/~is/wilson/publications/21stcent.html].

Major information technology buying decisions are among the most expensive and fateful that executives make. They must choose suppliers that understand their business, stand behind the product, and can provide needed services. The investments are typically long term, so they must choose a vendor that will be around in the future—one with the vision and foresight to survive in the cutthroat technology marketplace.

Gartner Inc., founded in 1979 in Stamford, Connecticut, is the leading research firm providing insight and advice to corporations on technology markets and products. Gartner associates serve as independent counsel on strategic business issues and often are called before the U.S. Congress to discuss the technology issues driving the economy.

The Gartner Magic Quadrant (Figure 6.14) describes the relative positioning and future prospects of firms in technology hardware, software, and services. Producers take Gartner's ratings seriously and devote significant marketing resources to building the case that they are material for the upper right—the Leaders quadrant.

The Two Dimensions and Their Extremes. The Magic Quadrant measures firms' offerings by contrasting two business values: Ability to Execute and Completeness of Vision. Long-term success in information technology requires both. Completeness of Vision is most important when a product category is new and customer needs are evolving rapidly. Ability to Execute becomes more important over the longer term as companies require support and customized solutions to meet specific needs.

The Four Quadrants. Combinations of the two dimensions define four possible competitive positions:

Example: Supply Chain Software. The matrix is a regular feature of the Gartner Group's research reports on software and hardware technology. Each Magic report includes market analysis, vendor inclusion criteria, and comments from Gartner's army of analysts. Page 124 contains two examples of what a completed matrix looks like. (While names have been deleted, each dot represents a real company evaluation.) The quadrant in Figure 6.15 compares supply chain management (SCM) software vendors. SCM software is typically bought in a suite that may include applications for demand planning, manufacturing planning and scheduling, distribution transportation planning, and other processes. A firm needs to meet stiff criteria, including a global presence and broad product offering, to be considered for inclusion in the Magic Quadrant. As a result, new entrants are often excluded. In this example, only two firms are ranked above the midpoint on the Ability to Execute dimension. Since Gartner maps are issued frequently, each one is a current snapshot, and it is not uncommon for companies to change their position on the map over time.

In new markets, few products or firms meet all the criteria for leadership. The Portal Software example (Figure 6.16) is a map of the emerging company portal software industry in 2000. At that time, the market was still quite small, and few products or companies had proved they could adequately meet customer needs or implement and service their products. Gartner rightly identified that no companies ranked high on Ability to Execute.

Figure 6.15. Magic Quadrant for Supply Chain Software

Figure 6.16. Magic Quadrant for Portal Software

Context. The Gartner Magic Quadrant offers a relatively simple and powerful way to model industry competitors. It is well suited to corporate strategic planning exercises in any field where technology changes increase the risks of vendor selection.

Method. Follow these steps to conduct a Magic Quadrant analysis:

The Gartner Group [http://www.gartner.com].

Not all customer accounts are worth pursuing or maintaining. Companies understandably have a difficult time rejecting business, but this is sometimes precisely what they should do. This applies to existing accounts as well as those in the sales pipeline. The Portfolio Analysis matrix provides a useful structure and set of criteria for assessing the relative value of customers (Figure 6.17).

The Two Dimensions and Their Extremes. The Portfolio Analysis matrix explores two key dimensions: Business Quality and Mutual Value:

Figure 6.17. Portfolio Analysis Matrix

The Four Quadrants. Careful consideration of Business Quality and Mutual Value produces four strategic options:

Method. Use the Portfolio Analysis matrix to evaluate and optimize client relationships:

Watts Wacker is perfectly at home in the future. As a former futurist at SRI and now with his own firm, First Matter, he advises top corporations on how to nurture long-range planning capabilities. In The Visionary Handbook, he coaches firms to set up an internal futures council to continually assess issues related to their future development. The council creates a future vision for the company and monitors evolving sets of problems and solutions that may have significant impact on the company in the future.

The Problems and Solutions matrix (Figure 6.18) asks, "How do we apply company resources to the problems and solutions in our future vision?"

The Two Dimensions and Their Extremes. The Problem and Solution matrix explores two key dimensions: Problems and Solutions:

The Four Quadrants. Different action is needed depending on whether Problems and Solutions are known. The four basic options are described as follows:

Method. The method has three steps:

Wacker, W., Taylor, J., and Means, H. The Visionary Handbook. New York: Harper-Collins, 2000.

SWOT is the acronym for strengths, weaknesses, opportunities, and threats. In a traditional SWOT analysis, these four categories are investigated independently and fed into the planning process. In dialectical SWOT, we treat Strengths and Weaknesses as internal factors and Opportunities and Threats as external. Traditional SWOT analysis generates a powerful and reasonably comprehensive strategic snapshot. The unique value in this approach comes from juxtaposing information from these two categories, as shown in Figure 6.19. Each quadrant of the matrix represents a unique combination of Internal and External conditions, and each produces a specific recommendation.

The Two Dimensions and Their Extremes. The SWOT matrix explores two key dimensions: External Environment and Internal Environment:

The Four Quadrants Dialectical SWOT defines four zones of risk and reward, each demanding a different response. The key to success often lies in being proactive:

Method. Follow these steps to conduct a dialectical SWOT analysis:

East Lancashire Training and Enterprise Council. [http://www.nvq5.com/].

It is not unusual for technology markets to be dominated by a single technology standard, and sometimes by a single large firm. The Market Tipping matrix (Figure 6.20), introduced by Carl Shapiro and Hal R. Varian in Information Rules, examines whether a developing technology market will tip to a single dominant player. It is risky to compete in "tippy" markets, since losers can end up with zero market share.

Figure 6.20. Market Tipping Matrix

The Two Dimensions and Their Extremes. The Market Tipping matrix explores two key dimensions: Demand for Variety and Economies of Scale:

The Four Quadrants. The matrix describes four degrees of likelihood that a market will "tip" to a single supplier:

Method. You need to make qualitative judgments about variety and scale to determine the likelihood that a market will tip to a dominant vendor or standard:

Shapiro, C., and Varian, H. R. Information Rules: A Strategic Guide to the Networked Economy. Boston: Harvard Business School Press, 1999.

Ansoff's 1965 classic, Corporate Strategy, contains one of business's most important and enduring strategic formulations. Before becoming a distinguished academic, writer, and consultant in the mid-1960s, Ansoff progressed through a series of planning positions at the Rand Corporation and Lockheed, ending this phase of his career as vice president and general manager of the Industrial Technology Division at Lockheed Electronics. Experience with diversification planning helped him formulate key issues and tensions that firms face in choosing a growth strategy. The operating problem is akin to determining the best way to milk a cow. The strategic challenge is of a different order: "But if our basic interest is not the cow but in the most milk we can get for our investment, we must make sure that we have the best cow money can buy."^[61] In strategic terms, this translates into product-market combinations that are most advantageous to the firm. The Product-Market matrix (sometimes called the Corporate Strategy matrix) defines the options for achieving this (Figure 6.21).

The Two Dimensions and Their Extremes. The Product-Market matrix explores two key dimensions: Product and Market:

Figure 6.21. Product-Market Matrix

The Four Quadrants. In Ansoff's terms, each of the four possible options defines a core strategic response to a different set of internal and external conditions. Careful assessment leads to better understanding and decision making:

Example: Green Mountain Coffee Roasters. Green Mountain Coffee Roasters (GMCR) began as a house brand at a small café in Waitsfield, Vermont, in 1981. Brewed from high-quality beans roasted on the premises, the coffee quickly became a favorite of locals and vacationers. Before long, it had expanded far beyond the café walls to become one of the top specialty coffee companies in America, generating annual revenues of $97 million with a growth rate close to 20 percent.^[62]

It is hard to think of a more generic item than coffee, the second most highly traded commodity in the world after oil. The $55 billion industry in the United States is dominated by four global companies (Nestlé, Procter & Gamble, Sara Lee, and Kraft) that buy almost 50 percent of the world's coffee. The specialty category of excellent brewed coffee took shape in the 1970s, with several brands and retail chains gaining great popularity. Starbucks has emerged as the category gorilla, growing from a single outlet in 1971 to almost six thousand locations worldwide today.

Green Mountain Coffee Roasters has followed a different path to success, staying clear of the fiercely contested retail outlet market space, which coincidentally would not have fit the company philosophy of matching quality product and experience with ecological and ethical practices.

In Ansoff's terms, GMCR started life as most start-ups do, with an attractive value proposition that the originators were uniquely qualified to deliver (Figure 6.22). Their first expansion efforts took the form of Market Penetration. The popular coffee almost sold itself: visitors bought bags to take home with them and eventually began to order by mail. GMRC sold more of the core product to existing customers to max out its return on the original business platform.

Figure 6.22. Green Mountain Coffee Roasters Strategy

Success with the core business led to a second strategic phase, Market Development. The demand for high-quality, ethically produced coffee was expanding, and this demographic segment of the population was not opposed to paying a premium to attain what they wanted. With excellent positioning and word-of-mouth viral marketing in their favor, they expanded the customer base through mail order sales, eventually producing an on-line and paper catalogue.

The third strategic phase, Product Development, grew in conjunction with catalogue-based sales, as customers welcomed a range of complementary item offers, from cups to roasters.

Context. The Product-Market matrix is one of the most intuitive and flexible strategic frameworks, applied by planners and decision makers in organizations of all sorts and sizes. The ideal time to use the framework is at the start of the planning cycle or to help in making tough decisions about business focus.

Method. The Product-Market matrix presents a structured approach to investigate and prioritize four basic strategic options for expanding a business. The method typically starts with what is and ends with what is imaginable. Risk increases as strategy moves further from the current situation:

Ansoff, I. Corporate Strategy. New York: McGraw-Hill, 1965.

Hussey, D., and Ansoff, I. "Continuing Contribution to Strategic Management." Strategic Change, 8(7), 375–392.

In his epic 1980 book, Competitive Strategy, Michael Porter lays out one of the most complete and coherent foundations in the field of strategy. Each industry is shaped by a set of competitive forces that determine its nature and profitability in structured and predictable ways. Competition within industries is natural and inevitable. Firms gain a competitive advantage by creating value for buyers. Strategy should be intentional, not accidental or optional. Two central issues shape the work of the business strategist: the attractiveness of the industry and the relative positioning of a firm within an industry.

An industry's attractiveness is largely determined by the interplay between a set of core competitive factors. Applying what is now known as Porter's Five Forces model, strategists are directed to a careful consideration of Entry Barriers, Buyer Power, Supplier Power, Threat of Subsitutes, and Rivals to understand the structural makeup of an industry. For example, concentrated Buyer or Supplier Power limits the range of freedom and negotiating room, while low Barriers to Entry will keep incumbent competitors more vigilant and price sensitive than ever before. Not all industries are equally attractive, and Porter offers a rich analytic approach to determining what is going on and where to concentrate investment efforts.

Profitability and long-term sustainability depend on a firm's positioning within an industry. Even some relatively unprofitable industries, like computers and cable television, reap sizable rewards for certain of the value chain participants. In Porter's modeling of Generic Strategy options (Figure 6.23), he maintains that firms may possess a myriad of interesting and unique strengths and weaknesses. However, their competitve advantage is determined by one of two things: low cost or differentiation. Strengths are relevant to the extent that they enable or block these two strategies. The context in which this advantage is pursued can be either broad or focused, creating an additional set of strategic approaches. Companies are advised to avoid straddling more than one option, since dilution limits their ability to execute their strategy and makes them vulnerable to others with greater focus and discipline.

Porter has continued to develop his ideas on competition and strategy, first looking at their application to governments in the Competitive Advantage of Nations, and more recently the competitive importance of geographically based clusters like Silicon Valley for computing, Grand Rapids, Michigan, for furniture, and northern Italy for weaving.

Figure 6.23. Generic Strategy Matrix

The Two Dimensions and Their Extremes. The Generic Strategy matrix explores two key dimensions: Competitive Advantage and Competitive Scope:

The Four Quadrants. Porter writes, "'Being all things to all people' is a recipe for strategic mediocrity and below average performance, because it often means that a firm has no competitive advantage at all."^[64]

Firms often gain advantage by adopting one of the generic strategic approaches, and then relinquish it when they attempt to pursue one of the other strategies in tandem. While it may be tempting at times to do this (Porter refers to this as "getting stuck in the middle"), it is rarely advisable or sustainable. Each of the four options in the matrix is a unique response to industry structure and the strengths a company can call on:

There are numerous ways firms go about differentiating themselves. They can add features and functionality to a product, improve process effectiveness to the point that it is truly significant, or dramatically enhance service quality, creating a noticeably better experience than their competitors. Unlike Low Cost, a number of competitors can pursue Differentiation strategies simultaneously, each exploiting a different valued attribute of the offering.

Example: Automotive Industry. By the turn of the twentieth century, an assortment of electric-, steam-, and gasoline-powered vehicles were being produced by a large number of mostly small craft operations.^[65] Each automobile took several days to build, and product performance was spotty. Use of cars was reserved for the wealthy, who drove primarily for luxury and sport. The industrial revolution had provided the means for manufacturing key automotive ingredients like metal and rubber. It was the application of assembly line thinking to building the car itself that enabled wider access by lowering prices and increasing volume and quality control capabilities.

The Generic Strategy view is that over time, the strongest strategy will win. Companies need to draw on their strengths to respond competitively to the industry context, which is defined by Porter's five forces. The history of the automotive industry is instructive, as illustrated by the strategic approaches of a number of well-known companies (Figure 6.24).

In 1913, the Ford Motor Company introduced the first moving assembly line in the automobile industry and quickly became the largest car company in the world. Buyers wanted a reliable low-cost option and gladly traded uniqueness for the new standard. For almost a decade, Ford dominated the market, setting the pace for suppliers and customers, without any real direct competitors in sight.

In the 1920s, General Motors (GM) read the market forces right, offering attractive features at premium prices to an increasingly affluent public that was becoming more familiar and trusting of automotive technology. Rallying to GM chairman Alfred Sloan's famous differentiation dictum, "A car for every purse and purpose," GM went on to become the number one car company.

Figure 6.24. Automotive Industry Generic Strategy Matrix

Focused Cost strategies appeal to buyers willing to do some of their own maintenance and put up with a bit of inconvenience. The Russian-made Lada was sold for several years in the West at a remarkably low price; however, the consistently poor quality and after-sales service record finally deterred even most bargain hunters. The Korean Hyundai has aggressively won market share in recent years with a higher-quality low-cost offering.

A number of Focused Differentiation brands have succeeded at the higher end of the price spectrum. Volvo, Rover, Corvette, and others have been able to attract and retain loyal customers for decades by providing a unique driving experience.

Due to the size and complexity of the automobile market, it has regularly been possible for some companies to succeed with the more dangerous stuck-in-the-middle strategy. The VW Beetle did this through the 1960s and 1970s, as have the top-selling Honda Civic and Toyota Tercel more recently.

But even in this large and diversified industry, we see that companies must eventually choose a clear strategy to remain competitive as tastes change and imitators find ways to duplicate successes and remove the uniqueness of an offer.

Context. Porter's Generic Strategy is often used in conjunction with the five forces diagnosis in devising corporate strategy. The most natural fit for the approach is in very large firms that can realistically pursue the scale of options contained in the model. It is useful for firms of all sizes for taking stock of competitive conditions and plotting the strategies of competitor firms.

Method. Generic Strategy is determined through a careful analysis of competitive forces. The steps describe the process at a high level:

Porter, M. Competitive Strategy. New York: Free Press, 1980.

Porter, M. Competitive Advantage. New York: Free Press, 1985.

Porter, M. Competitive Advantage of Nations. New York: Free Press, 1988.

Porter, M. On Competition. New York: Free Press, 1998.

Computer devices and networks make it possible for businesses to transform their offerings in two ways (Figure 6.25). First, they can change the Context—the environment in which transactions take place and the experience of consuming a good or service. As the Context moves from physical to virtual, new forms of value, such as greater inventory or twenty-four-hour availability, become possible. Alternatively, they can extend or redefine the Content of a current offering by using computer technology to add information to it. In many instances, it is possible to combine approaches, adding both virtual and informational value. Amazon's on-line transactions enable customers to buy books from any Internet browser twenty-four hours a day, and the Customer Review feature adds an information service to the book-buying experience. Hertz lets customers reserve cars on-line, while its airport kiosks provide maps and tourist information that add value to the car rental environment.

The Two Dimensions and Their Extremes. The E-Business Opportunity matrix explores two key dimensions: Context and Content:

Figure 6.25. E-Business Opportunity Matrix

The Four Quadrants. Companies should consider a mix of e-business Context and Content strategies to dramatically improve value propositions:

Method. This tool is best used with groups tasked with identifying new opportunities.^[67] A work team of five to eight people is ideal:

Tapscott, D., Ticoll, D., and Lowy, A. Digital Capital: Harnessing the Power of Business Webs. Boston: Harvard Business School Press, 2000.

Geographical expansion presents an attractive way a company can develop its business and reap further rewards from a successful offering. On the surface, it might seem obvious that every successful product in a specific market should be sold around the world. Reality is quite different. Local competitive, cultural, supply chain, and regulatory conditions present challenges. Companies differ in their readiness to sell into a global market and need to think seriously about their commitment to developing the necessary competencies. Warren Keegan has devised a useful framework for considering the major strategic options for pursuing such growth, looking at both the Product itself and the Communications strategy (Figure 6.26).

Figure 6.26. Global Product Planning Matrix

The Two Dimensions and Their Extremes. The Global Product Planning matrix explores two key dimensions, Communications and Product:

The Four Quadrants. In geographical expansion, both the Product and the Communications strategy may or may not be altered to reflect local market requirements. Consideration of possible combinations defines four major expansion strategies. Companies can choose one or several of the options for their strategic approach:

Method. The matrix is useful in two contexts: planning the geographical expansion of a single product offering and reviewing a company's portfolio of businesses.

Keegan, W. Global Marketing Management. Upper Saddle River, N.J.: Prentice Hall, 1999.

A network market is one in which the value of the product to any particular user increases with the number of users. For example, a fax machine becomes more valuable as more fax machines are connected to the network. Each new purchaser is buying the value of being connected to all of the other machines on the network. This creates strong positive feedback that drives adoption, a dynamic common to many high-technology markets.

Varian and Shapiro identify four generic strategies for innovators in network markets. Two crucial elements determine the nature of the network strategy: Migration Strategy and Platform design (Figure 6.27). Migration strategies are either in line with existing technology (evolutionary) or represent a more radical departure (revolutionary). Platform design options range from technical standards that are closed and proprietary to ones that are open and public.

The Two Dimensions and Their Extremes. The Generic Network Strategy matrix explores the two key dimensions of Migration (or Adoption) Strategy and Platform:

Figure 6.27. Generic Network Strategy Matrix

The Four Quadrants. Each quadrant defines a different strategic approach. Businesses need to assess both the competitive environment and the innovation itself in selecting the best option:

Method. One's current market position—strong or weak—and the ability to gain cooperation from other hardware and software firms have a great impact on network strategy:

Shapiro, C., and Varian, H. R. Information Rules. Boston: Harvard Business School Press, 1999.

For the first half of the twentieth century, the developed economies were defined by mass production. Markets were large and homogeneous; customer segments, where they existed, were defined crudely. Mass manufacturing and mass markets delivered finished goods at reasonable prices to many of the world's citizens. In exchange, some things were lost. In terms of quality, many early manufactured goods were not better than the handmade goods of the craft economy; indeed, they were inferior. In all instances, customers needed to sacrifice choice and customization in order to obtain the benefits of manufacturing economies of scale.

In the 1970s, firms around the world began chipping away at the mass production model, primarily through paying attention to incremental process improvements in design and manufacturing. By the early 1980s, Japanese firms had taken the quality lead in market after market, dominating consumer electronics and toys and eventually taking a large slice of fields such as autos and machine tools. Many of the flexible manufacturing techniques pioneered in this era enabled shorter product runs and quicker production process changes, leading to an explosion in consumer choice in dozens of industries. For example, from 1950 to 2000, the average supermarket went from offering three thousand items to fifty thousand or more.

More recently, this trend has crystallized in the practice of mass customization, characterized by variety, time-based competition, just-in-time production, shortened product life cycles, continuous process reengineering, and customer-centric database marketing. Examples abound, from Burger King's strategy of cooking each burger for a specific customer ("Have it your way!") to the telephone companies that have gone from offering one-size-fits-all residential service to hundreds of flexible (and sometimes confusing) packages aimed at different groups and individuals. Mass consumers, media, and markets are being replaced by diverse populations, targeted media, and markets of one.

In The Experience Economy, Pine and Gilmore identify four approaches to mass customization (Figure 6.28). Core to their thesis is the idea that the sacrifices that customers make in purchasing and consuming offerings drive the opportunities for mass customization. In the past, these sacrifices were commonplace and embedded in aphorisms like: "You can have any color as long as it's black," and, "Speed, quality, and price; choose any two." Today, we still have to make trade-offs. No business can offer an infinite choice of styles and materials plus immediate delivery. However, mass customization strategies enable businesses to meet customer needs by strategically removing sacrifices that matter to specific individuals. The Mass Customization matrix offers a powerful tool for analyzing customers' sacrifices, and selecting the mass customization approach that best fits their needs.

The Two Dimensions and Their Extremes. The Mass Customization matrix explores two key dimensions: Product and Representation:

Figure 6.28. Mass Customization Matrix

The Four Quadrants. Four Mass Customization strategic approaches are defined by varying the extent to which Product and Representation are modified:

Example: Herman Miller. Herman Miller is a leading office furniture producer and progressive employer that has been named the top furniture company by Fortune magazine for fifteen of the past sixteen years. The company's roots lie in its groundbreaking designs, many of them in the permanent collections of leading museums such as the New York Museum of Modern Art and the Whitney.

Historically, Herman Miller built high-quality, durable office furniture for large corporations, offering a wide set of options with millions of combinations of color, fabric, and style. Customers typically placed large orders with long lead times. In effect, many of Herman Miller's orders were customized in terms of styling and design. The sacrifice that customers had to make—speed—was tolerable for large, stable companies that could afford to plan their office changes well in advance of when they were needed.

The same, however, was not true for smaller, less established companies, where the costs of customizing smaller orders or meeting demands for speedier delivery were prohibitive. In the late 1980s, Herman Miller embarked on a continuous improvement campaign that drastically reduced inefficiencies and accelerated manufacturing processes. Most important, it developed technologies that enabled customizing on the fly. If a customer wanted a fifty-five-inch desk rather than a standard fifty-inch model, this could be accomplished quickly. Delivery times were cut significantly, sometimes by up to several months. This set the stage for several new mass customization initiatives.

In 1996 the company rolled out Miller SQA ("Simple, Quick, Affordable"), which offered cheaper office solutions through a selection of no-frills furniture. SQA also offered built-to-order products that targeted smaller companies looking for top quality and fast-growing larger companies that needed quick delivery. Both of these groups were more interested in furniture choices that fit their needs and personalized delivery than with details like the choice of fabric. By limiting choice in the SQA lines, Herman Miller was able to satisfy customers who didn't have time to sift through options, and to deliver much more rapidly than before. SQA integrated aspects of Cosmetic, Transparent, and Collaborative customization strategies (Figure 6.29). In 1998, it launched hmstore.com, enabling customers to configure and order office furniture on-line (Collaborative customization). This concept was extended by the development of Herman Miller Red in 2000, a brand with a limited line of furniture exclusively available on-line (Cosmetic customization) and at a single store in New York City. During this same period, Herman Miller was also making its office systems offerings more modular and flexible, enabling customers to quickly change furniture to meet the varying needs of work groups (Adaptive customization).

Companies that have traveled the path that Herman Miller followed understand the paradoxes of mass customization—lower costs can lead to better service; fewer choices can mean greater customer satisfaction—and have profited from using them to reduce customer sacrifice.

Context. The Product-Representation matrix offers a creative and convenient way to customize products, services, and experiences for customer groups.

Method. The steps below provide a high-level blueprint for creating a mass customized approach to meeting customer needs:

Pine, B. J. II. Mass Customization. Boston: Harvard Business Press, 1993.

Pine, B. J. II, and Gilmore, J. H. The Experience Economy. Boston: Harvard Business School Press, 1999.

Pine, J., and Pine, J. "The Four Faces of Customization." Harvard Business Review, Jan.-Feb. 1997.

In a world overwhelmed with information, attention becomes our scarcest resource. Davenport and Beck's The Attention Economy describes how attention works and can be leveraged as a key asset in a knowledge economy. The Attentionscape tool (Figure 6.30) helps companies measure attention so it can be managed better. This has relevance both within firms, looking at how executives and employees direct their interests, and outside firms, focusing on customers.

Figure 6.30. Attentionscape Matrix

The Two Dimensions and Their Extremes. The two dimensions of Mindfulness and Choice define the Attentionscape matrix:

The Four Quadrants. Through the use of different sizes and shading of shapes, the Attentionscape presents four dimensions of information in a 2 × 2 format. Although this makes the model complex, it rewards careful study. Mindfulness is on the vertical axis, Choice on the horizontal. The third dimension, Aversion versus Attractiveness, is illustrated by the shading of the circles. An issue is considered Aversion based when we are afraid of the consequences of not paying attention to it. Many health and disease issues might fall in this area. Attraction-based attention is given to those things that fascinate and please us. Attractiveness is indicated by the darkness of the circles—the darker the circle, the more attractive the subject is. Amount of attention, the fourth dimension, is communicated by the size of the circles. The framework is illustrated here with a hypothetical survey of executives at a single company:

Method. The authors have created an Attentionscape software program to score survey respondents' answers to questions about attention. Here is a modified method that you can use to create a personal Attentionscape:

Davenport, T. H., and Beck, J. C. The Attention Economy: Understanding the New Currency of Business. Boston: Harvard Business School Press, 2002.

The assumption that loyal customers are good customers is worth questioning. This advice is the result of the authors' study of the relationship between customer loyalty and profits. They investigated three common beliefs about loyal customers: (1) it costs less to serve loyal customers, (2) loyal customers are willing to pay more for bundled services, and (3) loyal customers provide good word-of-mouth marketing—they evangelize.

Reinartz and Kumar found that the link between loyalty and profit was often tenuous at best. In studies of four industries (grocery, mail order sales, brokerage, and corporate service providers), they found that 15 to 20 percent of a company's typical customers fall into the categories of loyal and unprofitable or highly profitable but not loyal. Their conclusion was that companies spend too much money managing relationships and marketing to customers who are not worth the investment. Figure 6.31 graphically illustrates the relationship between these two factors and the four possible outcomes.

The matrix explores two key dimensions: Customer Profitability and Customer Relationship:

The Four Quadrants. The matrix helps to identify four types of customers based on their profitability and purchasing patterns:

Method. Analysis depends on your ability to measure customer profitability and loyalty. Profitability is driven by many factors, including the costs of informing, transacting, supplying, and servicing customers. Reinhart and Kumar are skeptical of approaches that emphasize recency and total revenue in analyzing customers, because too many Butterflies and Barnacles are included. They have developed a method based on event history modeling that looks at the period of time over which a customer has made purchases and the frequency of those purchases. A simplified version of this method provides a sense of how it might be used:

Reinartz, W., and Kumar, V. "The Mismanaging of Customer Loyalty." Harvard Business Review, July 2002.

Companies are wise to invest in establishing solid, trusted, highly recognizable brands. On occasion, the company itself assumes brand-like characteristics, where customers associate positive attributes to any products they introduce. Companies benefiting from this effect include IBM, Procter & Gamble, and Cisco Systems, to name a few. A company that is not well known and trusted faces a tougher marketing challenge, and this should be factored into plans. Simon Majaro frames the branding and competitive marketing task as a mix of company recognition and the uniqueness of the offering (Figure 6.32).

The Two Dimensions and Their Extremes. The Likelihood to Buy matrix explores two key dimensions: Supplying Company reputation and Product uniqueness:

The Four Quadrants. The combination of the two factors contained in the matrix determines the likelihood of customers to buy and the investment that will be needed in marketing and sales:

Method. Companies can apply this framework in developing the strategic marketing plan for a product or line of business:

Majaro, S. The Essence of Marketing. Upper Saddle River, N.J.: Prentice Hall, 1993.

Businesses need to be profitable if they are to survive. At its simplest, profit is what returns to owners and shareholders after all expenses have been paid, or total revenues minus total costs. The precise definition and measurement of these factors is a subject of great concern to economists and accountants, sometimes leading to confusion, financial crisis, and even scandal.

Arguably, there is no more basic and central business question: Are we trying to increase sales as is reflected in revenues, or do we want to make a profit? By lowering price and increasing marketing, we can boost sales and the business. Or we can raise prices, improving our profit margin per unit, and risk a reduction in overall revenues. The resolution of this dynamic tension resides in the goals and assumptions that underlie the business.

Through most of the twentieth century, growth and profitability were treated as synonymous. Companies were encouraged to win market share, culminating in the type of thinking reflected in the now famous GE strategy of withdrawing from markets where it could not be among the top two or three players. The drive to grow at any cost became more intense through the 1990s as companies competed for dominant positions in the Internet economy where network effects added even more advantage to the traditional economies of scale available to larger companies.

In their book The Profit Zone, Adrian Slywotzky and David Morrison describe how market share ceased to ensure profitability in the mid-1980s. New technologies, global production and market contexts, and more informed and proactive consumers were altering the nature of competition and profit. Profit was increasingly tied to customer value, which was becoming harder to predict and control. Companies needed to build profitability directly into their business models. Growth and market dominance were no longer sufficient; DEC, GM, Kodak, and a host of other companies saw their profitability erode even as they maintained a number one or two position in their industries.

As profit zones shift, companies need to ask themselves, Where will I be allowed to make a profit? and What unique value do we deliver? Slywotzky and Morrison present twenty-two profit models, drawing on the practices of profitability masters like Andy Grove at Intel, Robert Goizueta at Coke, and Nicolas Hayek at Swatch. These leaders focus simultaneously on the customer and on profit. They constantly ask where the profit zone is today and where it will be tomorrow. Their companies accurately identified the shift out of the product era to a market constructed around customers and profit and modified their businesses to avoid being mired in no-profit zones.

The modeling of Revenue and Profit in Figure 6.33 is our own summary of key ideas, offering a starting point to a fuller consideration of the planned pursuit of profitability.^[75] For a detailed exploration of profit modeling, we recommend reading The Profit Zone.

The Two Dimensions and Their Extremes. Businesses have two primary measures of financial performance: top-line revenues and bottom-line profits. Application of the terms varies, and there is considerable debate as to the most valid and useful form of measurement and reporting. Purpose, strategy, and law influence whether EBITDA (earnings before interest, taxes, depreciation and amortization), free cash, or retained earnings is the profit measure of choice in a given situation. The financial manipulations and irregularities leading to the demise of companies like Enron and Arthur Andersen in 2002 tested the elasticity of permissible practices and definitions, pointing to a need for standards and oversight.

Figure 6.33. Revenue and Profitability Matrix

The Four Quadrants. The relationship between Revenues and Profitability can be viewed from three useful perspectives:

The Revenue and Profitability matrix describes four primary types of relationship between the two dimensions:

Example: Three Paths: General Electric, Apple Computers, and Intel. Three well-known company histories illustrate the explanatory power of the Revenue and Profitability matrix. Each of these companies has faced challenges and achieved success by pursuing profitability in its own way (Figure 6.34):

Rather than take the Apple operating system and graphical user interface public, Apple chose to restrict use to its own products, and it enjoyed many profitable years (the lower right quadrant). The decision differentiated Apple computers from the more clunky PC types, drawing a devoted following of designers and students. But the decision not to pursue a more open licensing strategy has been questioned by many over the years, as the bulk of the computing world has moved to standardize around the Microsoft and Intel platform.

Context. Modeling of Revenue and Profit is relevant for both steady-state and new business planning. It is useful at the start of business cycles for forecasting capital needs and expectation setting and at the end of cycles to evaluate success. As a portfolio planning aid, the framework is helpful in ensuring there are adequate initiatives in each of the target quadrants.

Method. The focus of this matrix is on profitability, providing a mechanism to make goals and critical factors more explicit. As a result, performance monitoring, intervention, and decision making become easier. Two primary applications are outlined below.

Here are the steps for profitability tracking in a single business:

These are the steps for portfolio modeling:

Slywotzky, A., and Morrison, D. The Profit Zone: How Strategic Business Design Will Lead You to Tomorrow's Profit. New York: Times Business, 1997.

Mention "2 × 2 matrix" to someone in a business context, and more often than not, that person will think of the BCG Grid. The names of the four quadrants—Dogs, Stars, Problem Children, and Cash Cows—have become standard popular terms and a convenient shorthand in strategic discussions. What has made the framework so powerful and enduring is its amazing breadth; not only is it a method for structuring strategic priority-setting discussions, it also represents a business typology, making it possible for planners to think about a portfolio of holdings from an investment perspective.

BCG founder Bruce Hendersen created the Product Portfolio matrix (Figure 6.35) in the early 1970s to assist conglomerate organizations to analyze the relative worth of their different business units, subsidiaries, and products. Not only did it help to establish BCG as a leader in the strategy consulting domain, it played an important role in defining and legitimizing strategy as a management discipline practiced by professionals and consultants.

Figure 6.35. BCG Product Portfolio Matrix

The Two Dimensions and Their Extremes. The framework combines quantitative and intuitive features to produce an accurate and consensual picture of the investment worthiness of different business holdings. Each business unit is assessed with respect to its market (Market Growth) and then compared to the other business units owned by the conglomerate firm (Relative Market Share). Relative Market Share and Market Growth form the basis for analysis:

The Four Quadrants. The portfolio approach brings rationality to the business investment process. Business units and markets proceed through a predictable cycle of maturation, which needs to be factored into decision making:

Example: Dow versus Monsanto. "In the 1960s and early 1970s," write George Stalk and Thomas Hout, "a classic portfolio battle was waged by Dow Chemical against Monsanto. In this battle, Dow actively managed its portfolio for advantage, and Monsanto did not."^[78]

Firms that reinvest based on profitability alone risk overspending on mature business lines while under-funding those in early stages of growth. It was not uncommon in the 1960s, however, for large multi-business companies to approach the market with a profit center orientation that did exactly this. Companies like GE and Westinghouse were leading practitioners of the strategy, promoting business unit accountability and rewarding financial results with independence and growth capital. During this period, Dow approached the market with the portfolio strategy reflected by the BCG Grid, while rival Monsanto pursued the prevailing profit center approach (Figure 6.36).

Monsanto began the period with the stronger portfolio. Seven of its businesses were facing growth in demand greater than 20 percent, as compared with Dow, which had only two businesses in this position. Following a course of reinvesting based principally on proven success and profitability, Monsanto overlooked emerging trends and opportunities. Of fourteen businesses growing at an annual rate of 15 percent or greater, it expanded only three of those businesses faster than demand. It lost ground to competitors in eleven of fourteen growing areas. Dow, in contrast, pursued strategic growth in the portfolio-based manner, investing boldly according to plan. Of the twenty-three growing businesses in its portfolio, twenty of them were expanding faster than demand. Confident in its business direction, Dow borrowed to grow, secure in the belief that well-planned debt constituted less risk than underinvestment. Dow's debt-to-equity ratio stood at 1.1:1 as compared with the much smaller 0.46:1 ratio at Monsanto.

Figure 6.36. Dow versus Monsanto Matrix

Through this period, Dow's business grew steadily, while Monsanto's stagnated. In portfolio management terms, Monsanto overspent on nongrowth businesses and failed to invest in launching a robust set of new Stars for future profitability. It wasn't until 1981 and the efforts of CEO Dick Mahoney that Monsanto tackled its portfolio imbalances, leading the company back to a path of strategic growth and more respectable returns on equity.

Context. The BCG matrix is used for analysis and to support strategic decision making. Because of the need for data-based calculations to map the locations of each business onto the 2 × 2 grid, it is seldom used during workshops for brainstorming new ideas and concepts. This is a persuasive tool that can be used to gain group consensus around the findings of an analysis.

Method. The following steps provide a high-level blueprint for conducting Product-Portfolio analysis:

Stalk, G. Jr., and Hout, T. M. Competing Against Time. New York: Free Press, 1990.

Stern, C. W., and Stalk, G. Jr. Perspectives on Strategy. New York: Wiley, 1998.

For the past thirty years, the Impact-Uncertainty matrix (Figure 6.37) has been one of SRI Consulting Business Intelligence's (SRIC-BI) most widely used and effective tools for analyzing the external environment. It is applied in scenario planning, strategy management, issues scanning, and technology planning. The tool's key benefit is that it focuses management's attention on the most important external issues that drive future threats and opportunities.

An Impact-Uncertainty exercise begins by focusing on corporate decisions that may be greatly affected by changes in the external environment. These external forces can include a wide range of shifts and trends in areas such as industry demand and supply, demographics, the natural environment, social attitudes, business practices, and technological innovation. Specific external forces or drivers are identified that could influence the decisions in question. The potential impact of each issue on future threats and opportunities for the organization is assessed, and then the uncertainty of future outcomes for the issue is described.

Figure 6.37. Impact-Uncertainty Matrix

The Two Dimensions and Their Extremes. The Impact-Uncertainty matrix explores two key dimensions: Impact and Uncertainty:

The Four Quadrants. The Impact-Uncertainty matrix quickly sorts factors according to their relative priority:

Example: Petrochemical Industry. Representatives from three oil and petrochemical companies and three consulting firms were brought together by SRIC-BI consultants to identify and discuss issues that affect the future of the world's energy business.^[80] High-level results of the discussion on global warming are displayed in Figure 6.38.

Figure 6.38. World Energy Business Issues Matrix

Subsequent discussion by the participants highlighted a series of key interlocking issues to monitor in the future, including these:

Context. Impact and Uncertainty are relevant to any strategy development, technology planning, or issues management exercise. This framework is ideal for determining which issues to pay attention to and identifying strategic actions.

Method. The following process is suggested for assessing the values of the issues and placing them on the matrix:

SRI Consulting Business Intelligence. [http://www.sric-bi.com].

Often in life, victory belongs not to those who are best at the game, but rather to those who know when to play and when to walk away. Baseball coaches face this classic dilemma many times over with pitchers. Should a fading hurler be pulled even if he is only three strikes away from the end of the game? Should a defensive player be put in the field in the late innings of a big game in order to protect a lead? The coach needs to make these choices based primarily on the abilities of the players, but sometimes other factors are more important, like the match of pitcher to batter or the momentary need for a shake-up. A gambler walks into a casino and has a choice: play an empty table or a hot one. When she is up several thousand dollars, is it time to walk away or play another hand? Making money on the stock market is as much about selling at the right time as it is choosing sound investments.

The Entrance and Exit Strategies framework (Figure 6.39) helps managers confront entrance and exit options in a planned and informed way. It quickly reveals the capabilities and culture of the organization in relation to the competitive landscape of an industry and helps to identify hurdles the strategy must overcome.

Figure 6.39. Entrance and Exit Strategies Matrix

The Two Dimensions and Their Extremes. The Entrance and Exit Strategies matrix explores two key dimensions: Entrance Strategy and Exit Strategy:^[82]

The Four Quadrants. Companies need to choose a strategy that complements their natural strengths and avoid adopting a strategy better suited to a different sort of competitor:

Method. Follow these steps to conduct a high-level Entrance and Exit Strategy analysis:

Hayes, R. H., and Wheelwright, S. C. "The Dynamics of Process-Product Life-Cycles." Harvard Business Review, Mar.-Apr. 1979, pp. 127–136.