Does your organization’s corporate strategy based on an environment or your organization creates a strategy that shapes the environment? Does your organization follows “structure-shapes-strategy” approach or “strategy-shapes-structure” approach?
For last 30 years majority of the company follows “structure-shapes-strategy” approach where they develop corporate strategy by analyzing the industry or environmental conditions in which they operate.
They assess the strength and weaknesses of their competitors. They carry out industry and competitive analysis and develops a distinctive strategic position where they can beat their competitors by building a competitive business strategy. In order to differentiate from their competitors they choose a strategy where either they charge premium price or pursue with low costs. In this kind of business strategy there is always a value-cost trade off. Either you provide high value or you charge low cost. There can’t be a situation where organization provides high values to customer at low cost. This kind of business strategy can’t be catered to mass segment because if an organization provides high value services then they charges premium price and this makes them to fix their product to a particular small market segment. This type of organization aligns its value chain accordingly, creating manufacturing, marketing, and human resource strategies in the process and on the basis of these strategies financial targets and budget allocations are set.
This type of corporate strategy put the organization in Migrators category of business. They can survive in this category by continuously beating the competitors either by providing value added services or charging low cost. Competitors continuously battle to gain market share and in this process it reduces their business margin and after some point of time it becomes very difficult for them to survive in this business.
If any organization likes to serve in a migrators category of business for a very long period of time then they have to do some incremental innovation to achieve operational excellence so that they can beat the competitors and maintain required margin.
Merger & Acquisition can also help in a great deal for a business to survive for a long period of time either by expanding existing market or achieving economy of scale. Migrators can survive for a long period if they continuously carry out M & A activity whether it may be acquisition or divestiture.
Underlying logic here is that this kind of strategic options are bounded by the environment i.e. structure shapes strategy. According to it, a firm’s performance depends on its conduct, which in turn depends on basic structural factors such as number of suppliers and buyers and barriers to entry. It is a deterministic worldview in which causality flows from external conditions down to corporate decisions that seek to exploit those conditions.
On the other hand there is another kind of corporate strategy where organization creates a strategy which shapes the environment i.e. “strategy-shapes-structure”. This kind of business strategy is called Blue Ocean strategy that shapes the environment by creating disruption with value innovation. It serves to mass market and breaks the barrier of value-cost trade off by providing high value product at low cost.
In this kind of strategy a company’s performance is not necessarily determined by an industry’s competitive environment. It shapes new environment and industry trend.
We have lot of example of this kind of strategy like. Apple’s i-pod, Ford Model–T, Nintendo, SouthWest Airlines etc.. Organization gets benefited by these kinds of strategy for a very long period of time. The products they serve are called Pioneers. These kinds of products provide majority of company’s revenue for a long period of time. The blue ocean strategy framework can help companies systematically reconstruct their industries and reverse the “structure-shapes-strategy” sequence in their favor.
Blue Ocean strategy growth is called endogenous growth and its central paradigm point is that the idea and actions of individual player can shape the economic and industrial landscape. We called this approach as “Reconstruct Approach”.
The first task of an organization’s leadership is to choose the appropriate strategic approach in light of the challenges the organization faces. Choosing the right approach, however, is not enough. Executives then need to make sure that their organizations are aligned behind it to produce sustainable performance. Most executives understand the mechanics of making the structure approach work however they are not familiar with reconstruct approach.
How to focus and align an organization to deliver high and sustainable performance through reconstruct approach?
There are three factors that determine the right approach: the structural conditions in which an organization operates, its resources and capabilities, and its strategic mind-set. When the structural conditions of an industry or environment are attractive and you have the resources and capabilities to carve out a viable competitive position, the “structure-shapes-strategy” approach is likely to produce good returns. Even in a not so attractive industry, the “structure-shapes-strategy” approach can work well if a company has the resources and capabilities to beat out the competition. In either case, the focus of strategy is to leverage the organization’s core strengths to achieve acceptable risk-adjusted returns in an existing market.
But when conditions are unfavorable and they are going to work against you whatever your resources and capabilities might be, a “structure-shapes-strategy” approach is not a smart option. This often happens in industries characterized by excess supply, cut throat competition, and low profit margins. In these situations, an organization should adopt a reconstruct approach i.e. “strategy-shapes-structure” and build a strategy that will reshape industry boundaries.
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