Aprovecho para postear este artículo que tuve que mandar a Estados Unidos para que lo puedan usar los que no leen en español.

Following Clayton Christensen´s “disruptive innovation” perspective (“The Innovator´s Solution”) and Michael Raynor´s book, “The Strategy Paradox”, I am trying to add the following points of view using the Betamax case described by Raynor. My goal is to introduce the uncertainty angles that should be solved to improve the function of Strategic Intelligence in the process of Competitive Strategy Formulation and Execution. As always, my approach is strongly influenced by my background I Cognitive Sciences and in Systems Theory. Although it looks as an academic approach, the experience of sharing these concepts and applying them in real practice was extremely positive.

The demand (market) side

A market segment

The demand is the expected bundle of benefits desired by Claudia (“someone”) to satisfy a need.
These benefits can be of any kind, tangible or intangible.
A market segment is composed by all those buyers, consumers, customers or users who share a common set of benefits sought, (regardless of their age, sex, psychographic or any other “hard descriptor”) and who share the same order of weight and priority among them.

When Masura Ibuka and Akio Morita founded Sony Corporation in 1946, focusing on audio electronics, the company added video to the mix in late 1960s as it sought to create a mass-market version of Ampex Corporation’s video recorder for television broadcasting.

To understand the market means to detect and “know” this different “structure of benefits” that different groups of individuals expect.

Like many other companies working to extend Ampex’s technology, Sony needed to satisfy the structure of benefits composed by attributes such as picture quality, price, convenience, and ease of use.

(We will initially suppose that these sets are stable in time). This is the first source of high uncertainty if we realize that the state of the art in Market Research and sampling technology cannot provide this information for a large amount of individuals with an acceptable confidence.

To describe a segment structure means to detect the attributes, their order and their priority rank expected by each individual and to have a reliable law to consider that two or more individuals expect “the same ideal structure” and that, therefore, as they share the same structure, they can be considered as a market segment (of two individuals up to this point). It is extremely difficult to achieve this goal with the present analytical tools. It is also very difficult to determine why and how this ideal structure is formed in the mind architecture of each individual. Our hypothesis is that this process is a result of an extremely complex field of forces and that the result is a “systemic emergence”

This means that companies like Sony or Matsushita do not “segment” a market. Sony and Matsushita need to discover the segments that constitute that market in a given point in time. This is an opposite approach to the traditional concept of segmentation.
Here is where I think could be very important to introduce de difference between “niche” and “foothold” (Michael E. Raynor and Horward S. Weinberg, “Beyond Segmentation”, Marketing Management, Nov/Dec 2004, American Marketing Association )

A brand

A brand of a product or service (or anything else like a corporate identity or a presidential candidate) is a “set of perceived elements” that Claudia (“someone”) associates to a name. The perceptual contact with the name Betamax retrieves in Claudia’s mind a (fuzzy?) set of elements that Claudia “enacts” as Betamax “(in this point in time). This is hard to determine with a single individual and, therefore, it is impossible to state with acceptable confidence that a group shares that set of enacted elements. This would be a “discovered” market segment, differentiated from other segments. I will use the verb “perceived” as a synonym of “enacted”. It is technically different but it is more employed in strategy literature and methodology.

Sony sought to avoid a format war by cooperating with Matsushita, a much larger Japanese electronic firm.

Matsushita proved unable to mass-produce Sony’s initial design. Allowing Matsushita to participate demanded several technical compromises, including wider tape, a larger casserre, and a bulkier housing. The resulting devise, called the U-Matic, was too expensive and ungainly for home use.

Palo Alto-based Cartridge Television, Inc. (CTI) was the first to offer a consumer-oriented VCR devise, the Cartrivision.
- Distribution primarily through Sears
- Sold as a TV/VCR bundle
- Designed as both a recording and movie-playing devise
- Deal with Columbia Pictures
- Small number of movies available
- Cartridge Rental Network
- Agreement with third-party retailers
- Rental shops carried no inventory (cost of tapes/uncertainty of the market)
- Customers required to order at a retail location
- Rewound only by the distributor
- Multiple times, multiple tickets
- 114 minute recording time
- Relatively expensive
- Low-quality video reproduction
- Limited and inconvenient movie viewing
- Required replacing one’s television
- Technically unreliable

How would one know which of the above elements improve first, and by how much, in order to realize a more positive outcome? The quality level that Claudia assigns to Betamax is the match of her “expected benefits structure” (EBS), her ideal video equipment, with the “set of perceived elements” (SPE) in Betamax.

In figure 1 this match is represented by the intersection of both concepts in field “b”.

Figure 1

Field “a” represents the expected attributes that Claudia desires but those not perceive in Betamax promise.
Field “c” represents the elements that Claudia perceives in Betamax but that she doesn’t value. We must take into consideration that it is possible that Betamax does not really “have” these elements. We must also consider that perhaps Claudia does not understand their meaning or benefit.
Field “b” is the Focus or quality that Claudia assigned to Betamax.

Claudia is one of many individuals of the segment. These three fields could be different for other individual. (More uncertainty).
The uncertainty level grows exponentially as the number of individuals increases. Market/Statistic research state of the art methodologies are not enough to mitigate this uncertainty. This uncertainty is higher if the product or service is new.

In Figure 2 is represented the structure of perceived elements (SPE) that Claudia has subjectively (of course) built of Betamax, what she thinks that Betamax offers, and the structure of perceived elements that Claudia has built of VHS, what she thinks is VHS’s offer or promise. Here the game starts again but with VHS.

Figure 2

Field 4 are expected benefits of Claudia that she does not perceive either in Betamax or in VHS, even though one or both brands could “really” “have” one or more of those expectations.

Field 5 are elements perceived in Betamax, but with no satisfying value for Claudia in this point of time.

Field 6 is the same for VHS.

Field 7 is the same for both brands.

Field 2 is common benefits of both brands for Claudia in this moment, but they are competitively neutralized, canceled, in this area Betamax and VHS are only commodities for Claudia’s mind architecture.

Field 1 are (or is) Unique Value Propositions, or differential or competitive advantages of Betamax for Claudia in this moment. This is Betamax’s brand positioning in Claudia and in this point in time.

-Sony pursued VCR technology on its own under the Betamax brand.
- Higher picture quality (demanded more expensive parts and faster-moving tape served to increase costs and reduce recording times). Sony historical enfhasis on technical excellence gave it an edge on various dimensions of quality. “Always lead, never follow”

Field 3 is the same for VHS. Much to Sony’s shock, Matsushita proved able to develop a VCR on its own. Matsushita had a long-standing tradition of driving down cost by optimizing its designs for manufacturability and exploiting economies of scale as a natural cost leader

Positioning is done by Claudia when giving meaning to the brand perceived competitive advantage. Positioning is not a controllable variable for Betamax. It depends not only on what Betamax tries to communicate (commitment) but also on Claudia interpretive process. This is semiotic uncertainty

We have defined quality as Focus, this is, the attributes contained in fields 1 and 2 for Betamax and in field 2 and 3 for VHS. We will call “Dominance” to the preference that Claudia has comparing field 1 against field 3. We can expect that Claudia will select the brand to which she has assigned dominance. It is important to notice that all this seems highly theoretical, but it is the easiest way to explain human choice. The level of uncertainty is extremely high and we have considered only one individual, only two brands and only a static perspective of an existing product.

We can expect that Sony will aggressively commit to support Betamax competitive advantages of field 1, even this high degree of uncertainty, and that Matsushita will do the same with VHS competitive advantages of field 3.

Introducing competitive dynamics

In figure 3, Betamax can try to incorporate the attributes of field 4 in field 1 to increase or renew its competitive advantage (if Claudia is a target customer because this segment creates shareholders value independently or through synergy with other segments, which presents another source of uncertainty in our analytical framework). Attributes of field 4 are incorporated in field 1 as competitive advantages if Betamax did not have them in the “real” product or improving the brand communication with Claudia if the product had them.

Figure 3

Betamax has to try to convince Claudia that attributes in field 1, its competitive advantages are a better choice for her that VHS’s competitive advantages in field 3.

Sony was able to maintain its commitment to quality, but at the expence of manufacturing capacity, marketing budget, and distribution. Sony would be able to scale up its own production organically and capture wholesale margins.

Betamax can also try to demonstrate Claudia the advantages of understanding, accepting and value the perceived elements in field 5. This increases Betamax’s commitment and exposure to uncertainty.

Betamax can imitate VHS’s competitive advantages of field 3, eroding and neutralizing its competitive power, but, again, increasing its commitment and its exposure to uncertainty.

Betamax can also try to prove Claudia that VHS’s competitive advantages in field 3 are not worthy, moving these attributes from field 3 to field 6.

Betamax has to innovate incorporating new attributes that Claudia could consider competitive advantages.

Consistent with it’s strategy of differentiation,
First to introduce new features such as remote control, pause, and visible-picture
scanning.

Matsushita focused a higher proportion of R&D resources on manufacturability, the VHS was cheaper and, due to its larger cassette and lower tape speed, it had the two-hour recording capability required for taping movies broadcast on television.

With many more makers committed to VHS, any lead introduced by Sony rarely lasted more than a few months before either Matsushita or one of its licensees was able to emulate Sony’s innovation-

In addition, because the VCR was easier to manufacture, Matsushita could license its technology

Television and movie producers concern
Television advertising revenues
The movie business would collapse as customers abandoned theatres

This analysis can be carried on with the introduction of BII version of Betamax in 1977, with the video-rental market reborn and with the introduction in 1978 of the Disco-Vision videodisc format, precursor of today’s DVD format.

More competitive dynamics

Claudia is a “flat world” buyer whose demand structure changes faster, stronger, discontinuously, chaotically, all these in an accelerating rate. This presents uncertainty “latitude” of increasing scope, which Betamax has to, at least, match in its strategically viable options range. This is called “Required Variety” and “Available Freedom of Maneuver”, strategic flexibility or “mobility”. Freedom of maneuver is the span of strategic options (variety) in which Betamax could commit its resources in the precise moment, not after and not before (M. Raynor, p. 5).

This is specially important when we consider that a “niche exploits the trade-offs that allow companies to serve different customers differently but a foothold, on the other hand, provides a chance to break those trade-offs, DISRUPTING a market and planting the seeds for future growth”

The supply (product) side

We can easily agree that every segment of any market of any industry has a “potentially
required set of commitments” just to be in a position to compete in that business. This required set of commitments will derive in distinct capacities or Core Competences. In figure 4 we represent this concept in the left side circle and Betamax’s set of commitments by the circle on the right side. Field “A” is the set of commitments that Betamax has not made in this business but that the business could require in this point in time or in the future. Field “C” are Betamax’s commitments in this business which are not potentially required (at least in this moment) but that the company thinks that should be committed. Field “B” “seems to be” the correct strategic commitments.

Figure 4

In figure 5 we show the strategic commitments situation when VHS is included in the analysis of the theatre of operations.

Figure 5

Figures 4 and 5 are static analyses. We have to consider the dynamics of this situation to have a more realistic awareness of the level of uncertainty exposure that a competitive strategy has to undertake and the latitude of strategic flexibility (freedom of action, maneuver, mobility) that a strategy formulation and execution needs.

Putting it all together

One important consideration is that the competitive advantages in figure 2, for example Betamax’s competitive advantages (positioning) of field 1, should be consistently supported by field “A” Betamax’s specialized commitments in figure 5. We can also reason that, to improve competitive sustainability, Betamax should try to install in the consumers preference map those competitive advantages that are generated by its differential commitments. This means that competitive advantages and differential commitments should be dynamically linked in every point of time. This link is represented by the arrow in figure 6.

Figure 6

This analysis should be done for every market segment and in every stage of the competitive situation, including all the players of the theatre of operations, not only direct and substitute products competitors, but also the value chain participants and other members of the business cluster.

Figure 7 is an example of part of the information we would need to cover the strategic situation of every version of every product (Focus and Dominance) in every market segment. This shows the extreme complexity and uncertainty that the strategic decision has to face. It is what I call “The Strategy Intelligence Challenge”.

Figure 7

In “3.1. Going to extremes” (p. 51, Chapter Three) you explain the concept of generic strategies through the contributions of Porter, Treacy and Wiersama, Miles and Snow and James March. You demonstrate in this chapter that among these approaches there are more similarities than differences in the spectrum of the “Production Possibility Frontier” ranging from the end of performance to the end of cost.

In model, I present in this working paper (specially summarized for you), I sustain that cost leadership is always translated to price. If this would not be so, it would mean that the company saves the margin, not transferring the cost advantage to the buyer. The question is: Why would the buyer buy? If cost leadership is transferred to price, what the buyer perceives is price (not cost leadership), and this means that the product is differentiated by price, the brand’s Unique Value Proposition which “leads” the Structure of Perceived Elements (SPE) of the brand, always subjectively built up by the buyer.

Price can be located in the buyers mind architecture in any of the nine fields of figures 2 and 3.

I would like a Mercedes Benz for less of us$ 10.000 (sorry, wrong number) in field 4. If I need pediatric antibiotic at 3 pm for my daughter is highly probable that my price elasticity will be insignificant (fields 5, 6 and 7). Price could be my value proposition (field 1), my competitor’s value proposition (field 3) or the buyer can perceived both prices neutralized or equivalent (field 2). My brand can be the innovator in cost management, already having the cost advantage available to launch it as a price value proposition (new proposition in field 1) or this could be a competitor’s breakthrough competitive advantage (field 3) .

If we are dealing with uncertainty/flexibility, differentiation by price could be the easiest road to immediate imitation (almost every one can eliminate features that increase cost) and, therefore the uncertainty level is higher. Besides, if price is the “Initial Path”, it would be very difficult to “reposition” the brand with a more “performance, design, sophistication, status,…..” brand strategy, increasing risk and reducing flexibility. My point is that there is only one generic strategy: differentiation. And that this only happens in one theatre of operations: the Mind Architecture of the buyer. If you enjoy of the operational and tactical advantage of cost leadership and you translate it as a strategic advantage of price competitive differentiation, you are differentiating through price, being this only one (very risky) of the strategic options.

In Porter’s “Niche” third generic strategy, if the product is targeted to a market niche, it means that the product is extremely and specially differentiated for that niche, being a niche a very specialized Expected Benefits Structure, EBS. In this line of reasoning, we would not talk of “hybrid” or “Stuck in the Middle” strategies, but of “targeted” or “fuzzy” alternatives, where we can only consider as strategy a targeting alternative. Not a fuzzy ambiguous commitment.

In this line of thought, strategy means selected direction of commitments to create value in one or more segments (EBSs), “choosing where on the “Demand Possibility Frontier” you want to get to” In this demand possibility frontier, composed by all the discovered market segments (EBSs), you can select one or more “pure specializations” or “targets”. Some of these segments can be characterized by its high price elasticity. In figures 5 and 6 we show that “strategies are more successful when they have build up a position in the market that competitors cannot readily copy. Those strategies require that commitment over time are the most difficult to emulate (p. 54). “Only commitment ensures that you will create something resistant to opportunistic replication by competitors”.

Targets must be chosen with care and based on an understanding of a company’s capabilities and constrains (p. 55). To maximize one’s probability of success, the best strategy to pursue is an extreme, commitment-intensive one.

In figure 8 we represent the flow of these concepts, putting together both sides of the “Strategic Viability Equation”

 Any shift in emphasis by Sony toward price-based competition would not be done in a vacuum. Matsushita and the VHS consortium had greater scale, greater cumulative volume, and had long emphasized cost control in their designs. Whatever cost reductions Sony might have been able to make, it is all but certain that Matsushita would have responded with even deeper cuts in costs and price. In short, Sony probably did not adapt because it could not adapt. The company likely had no other choice given the commitments it had made to a product-differentiation strategy at the design stage in the early 1970s.

As we can see, the level of uncertainty that the strategic decision really should consider is extremely much complex than the traditional models that the business and academic community is using. Michael Raynor has presented in his book the very strong concept of Strategic Flexibility that should be incorporate in every Risk Analysis and in every investment decision.

Figure 9 is a hierarchical levels flow from Strategy Formulation to Strategy Execution.

Figure 9

The Strategy Paradox arises from the need to make strategic commitments in the face of strategic uncertainty. Strategic uncertainty will derive, first, from our understanding and knowledge of the segment’s structures of expectations, the influence of the cluster /value-chain networks on those segments, the dynamics of segments’ structures fragmentation and concentration when any direct or substitute competitor’s innovation breaks through and, second, will also derive of brands perceptions and brands dominances in those segments. Strategic commitment is dependent on the targeting process in this field of forces. Strategic flexibility is the freedom of action or “maneuver capacity” of sustainable value creation in this competitive field of forces, formulating and executing strategies, understanding that nobody can think about anything and that the future is now.

Conclusion

Strategy is deciding commitments of Value Creation under the uncertainties of Risk Exposure. This Value/Risk strategic formula demands a Dynamic Match among a series of elements that from a simplistic viewpoint we are use to see as opposites but that from an advanced stance we should understand as a system.

The Value/Risk accepted balance needs to align Productivity, which is a result of the company’s core competences in managing tangible and intangible resources, with Positioning, which is a result of the company’s competitive advantages against direct or substitute competition in the different targeted market segments.

The Value/Risk accepted balance has also to align Values, derived from the company’s culture, with Goals that conduct the Administration support. But to achieve this alignment, the Culture component has to promote Invention and Discovery. To Invent is what me commit with our core competences and to Discover is what we commit with our competitive advantages. And to achieve this alignment, the Administration support has to align functions and processes with different market requirements if the company desires the sustainability of it’s competitive advantages. This is to Adapt. But the company has also to Integrate its resources if it desires the sustainability of it’s core competences.

In figure 10 we show the Penta Alignment Model which has to be feed with the contribution of excellent methodologies like The Enterprise Value Map, Strategy Maps and Balanced Scorecards to translate the strategy into operational terms, align the organization to the strategy, make the strategy everyone’s everyday job, make strategy a continual process and mobilize change through executive leadership. The main idea is that intangible assets, through the enablement of business process execution, create value for customers, which in turn creates value for shareholders.

The four stages of Strategic Flexibility – anticipate, formulate, accumulate and operate, provides the step.by.step process for identifying uncertainties and creating strategic options that allow senior management to determine the firm’s overall strategic risk profile in it’s value creation thrust.