Session 7

1. Session 7 STRATEGY AND CULTURE

2. Major companies based their success on mass marketing. • Small business theory evolved from large firm theories and sector specific, small firm practices. • Business strategies tend to be a merger of marketing and RBV theory. • Small firms usually adopt a niche-based strategy. • Company culture reflects attitudes, values and beliefs within an organisation. • Strategy implementation is influenced by prevailing company culture. • Leadership style has a significant influence on company culture. • Team orientated culture is a more appropriate environment for sustaining innovation. Session 7

3. Mass Marketing • Early foundations of marketing theory evolved from the practices of major branded goods companies. • The success of major brands was attributed to the use of a mass marketing strategy. • This involves offering standard products, exploiting economies of scale and re-investing profits in large-scale advertising campaigns. • Many consumer brands are produced using standard low-technology processes. Session 7

4. Achieving market leadership necessitates creating a perceived differentiation accompanied by widespread distribution via major national chains. • Although sometimes criticised by academics, mass marketing is still effective and in use across the world. • Problem arises as products move into the maturity phase of the product life cycle. • No further growth from new customers, hence brands seek to steal share from the competition. • This can lead to erosion in profits, as the cost of attacking and defending continues to rise over time. Session 7

5. Scenarios such as the Apple PC provide examples where an entrepreneur may have intuitively perceived new opportunity. • Although an entrepreneur needs innovation competence, success is not dependent on evolving internal operational competencies superior to large firm incumbents. • This has led to a more balanced view that entrepreneurial orientation may be more important than focus on an RBV-type strategy. • However, it is also accepted that in mature, highly-stable markets, a more effective strategy may be based on exploiting superior internal competence. Session 7

6. Theory Merger • Brand wars tend to cause marketers to focus on beating the competition, and may lead to less attention to consumer needs. • Such myopia may permit a more entrepreneurial firm to successfully enter the market. • The concept of ‘market challenging’ provided the basis for justifying a move away from mass marketing to a resource-based view (RBV) of firm strategy. • The success of firms like Microsoft raises questions about the validity of RBV theory. Session 7

7. Challenging Conventions • Sam Walton, founder of Wal-Mart, provides an example of entrepreneurial success based on challenging sector conventions. • In the 1960s, US consumers were exhibiting greater interest in lower retail prices. • This led to the emergence of discount chains such as K-Mart located in or near major cities. • Sam held the view that the conventional focus on large cities ignored opportunities in smaller cities/towns across the US heartland. Session 7

8. He opened his first Wal-Mart, offering broad range of goods in a no-frills setting, in 1962. • Major chains’ conventional strategy was economies of scale in procurement, heavy promotional spending and focus on superior in-store merchandising. • Sam’s view was that the large chains’ poor supply chain management caused out-of-stocks, required huge distribution warehouses and long order-to-delivery cycles. • Wal-Mart entrepreneurial focus was on superior logistics and use of electronic communications technology. • They introduced processes such as the immediate cross-docking of supplier shipments on the dock without placing goods into warehouse, and suppliers managing store level stocking activities. Session 7

9. Massive savings and location in cheaper small town locations permitted Wal-Mart to offer lower prices. • By 1977, it owned 190 stores which rose to 800 by 1985. • A key aspect of expansion was investment in communications technology to manage logistics operations. • Wal-Mart’s fleet of 2,000 trucks were managed by the world’s first non-military satellite tracking system. • Sam continued to innovate, launching new concepts such as discount warehouse clubs. • Since his death, some have questioned whether Wal-Mart remains as entrepreneurial as it was. Session 7

10. Small Firm Theory • Two dominant sources of small firm theory: • Transfer of theory from large firm sector • Observation of sector-specific small firm practices • Some academics tend to be dogmatic about the best method or strategy to be used by entrepreneurs. • Some academics stress the importance of adopting market orientation. • Other academics posit the importance of developing superior performance by exploiting specific core competence. • Anderson and Atkins concluded small firm entrepreneurs actually use a diversity of approaches to evolve an effective strategy. Session 7

11. Market Opportunities Strategy Competition Entrepreneurial Opportunity Core Competence Industrial Sector Conventions Figure 7.1 Determinants of strategy Session 7

12. Entrepreneurs are usually aware of the need to avoid confrontations with larger firms. • This is especially critical if the entrepreneur’s product or service is only slightly superior to large firms. • The probable response of large firms is to use their superior resource base to outspend the smaller firm or to compete through price cuts. • Hence, most entrepreneurs will seek a strategy that avoids confrontation with a large firm. Session 7

13. Product Same New Challenging leading firms by launching the next generation of products Market domination by established major firms Same Process Challenging the established firms by introducing a new superior process Obsoleting the entire industrial sector by introducing fundamental convention changes New Figure 7.2 Alternative strategic options Session 7

14. Avoiding Confrontation • Jeff Hawkins, developer of the Palm Pilot hand-held electronic organiser, entered the market in mid-1990s. • He recognised Microsoft was the greatest potential threat, and hence adopted a low key approach to market launch. • Hawkins resisted pressure from US Robotics, who acquired the company, to execute high profile launch at thes Las Vegas Electronics Show. • Hawkins directed marketing efforts towards individuals in the IT industry who earned at least $100,000. • He generated 50,000 customers who immediately told their friends about the excellent device. Session 7

15. By Christmas 1996, Palm Pilot was the fastest selling electronic device in the USA. • To avoid suffering the fate of Netscape at the hands of Microsoft, Hawkins positioned the company on the periphery of the IT industry. • Hawkins avoided developing more a complex device, and instead focused on simplicity, elegance and high reliability. • When Microsoft launched their third attempt to enter the hand-held device market, Hawkins launched an upgraded device which was also cheaper to manufacture. Session 7

16. He then launched a product offering Wi-Fi connectivity, and he worked with software firms to utilise the Palm Pilot operating system. • In 1997, US Robotics was acquired 3Com, and the new owners were against the strategy of lowering price to achieve market penetration and of making source code available to developers. • Microsoft launched Palm PC and 3Com wanted Palm Pilot to duplicate the same features. • Hawkins wanted to avoid confrontation by linking Palm Pilot to products such as MP3 players and digital cameras. • Faced with rejection of his ideas, Hawkins resigned and launched Visor, which delivered the proposed linkage and immediately became the product of preference for customers previously loyal to Palm Pilot. Session 7

17. Small Firm Strategy • Some researchers tend to use a small number of case studies to justify why a specific strategy is successful. • Cavanagh and Clifford sought to overcome the potential methodological error of this approach by using a quantitative approach. • Their study permitted identification and validation of strategies commonly used by small firms. • The most successful strategy to achieve initial business growth is one based on innovation. • An innovation strategy at start-up is retained over the long term, although the focus may move towards process innovation. Session 7

18. The study also confirmed the prevailing opinion that success is often achieved by occupying a specialist market niche. • Only rarely are entrepreneurial firms able to expand from a niche to servicing the majority of customers in a market. • The study also confirmed that differentiation is more effective than a strategy based on price competition. • It identified key competences, including knowledge of technology, research expertise and/or high marketing skills. • It also found evidence that the abilities to customise products and move to new niches to sustain growth are also important components of strategy. Session 7

19. Responding to Change • Retailing is characterised by success through adopting a new entrepreneurial philosophy. • Over time, the successful concept may be overtaken by a new entrepreneurial entry. • The pattern is known as ‘the wheel of retailing’. • Although not accepted by some academics, the concept is a useful framework proposing: • Entry by identifying a new, lower-price strategy • Expansion of operation • Problems of maintaining low cost as operation becomes very large • Tendency to expand product line to sustain sales • Subsequent entry of a new, lower-price operation Session 7

20. Example of US retailer Levitz Furniture which, in the 1960s, opened warehouse outlets offering immediate delivery of inexpensive furniture. • The firm expanded rapidly but, in so doing, the firm’s entrepreneurial orientation declined. • It failed to recognise that rising incomes were causing a shift in consumer demand. • The problem was compounded by a huge debt burden created by a leveraged buy-out in 1980s. • By late the 1990s, its poor financial position forced the company to file for Chapter 11 status of US bankruptcy code. Session 7

21. The 1990s saw new entrepreneurs entering the US retail market and occupying specialist niche segments. • One example was Zany Brainy, a multimedia educational toy store. • Each outlet offered 25,000 items in approximately 12,000 feet of retail space divided into sections, each aimed at different a age group. • Staff were trained to interact with parents and children. • Rapid expansion led to 187 outlets being opened and annual sales of $400 million. • Toys-R-Us responded by moving into educational toys; concurrently Zany Brainy was slow to recognise the threat of on-line retailing. • In 2001, Zany Brainy filed for Chapter 11 of the US bankruptcy code. Session 7

22. Sustained Innovation • Even in price-orientated markets, small firms that focus on offering superior propositions can command premium prices. • A superior proposition often linked to maintaining close relationships with customers and the provision of added services to achieve benefit customisation. • Vernon Krieble in the USA discovered anaerobic resins which can harden and create durable bonds more effectively than conventional sealants and adhesives. • In 1953, he founded American Sealants, later to be re-named the Loctite Corporation. Session 7

23. Working with his son, Robert, also a chemist, within 4 years he increased sales to $1 million. • Their marketing focus was to work closely with each potential customer to utilise Loctite to bond specific materials. • Company culture was to form collaborative partnerships and be willing to solve customers’ specific manufacturing problems. • They entered the consumer market with their super glue product in 1968. • Early in the life of the company they expanded expansion using distributors or subsidiaries. • The German Henkel Corporation mounted hostile takeover in 1996, and subsequently Loctite has gradually become a conventional multi-national corporation. Session 7

24. Culture • Identifying the strategy to be adopted by a firm is a relatively trouble-free process. • The activity which tends to be more opaque to employees is how the strategy is to be implemented. • One of the key factors impacting successful implementation is the need for an appropriate culture. • Some academics become fixated on a specific culture (e.g. the importance of empowerment). • Reality would suggest there is no single superior culture; instead the focus should be on ensuring the strategy is compatible with the prevailing culture. Session 7

25. Lotus Corporation • Small firm culture usually reflects the leadership style of the company founder. • A change to a new CEO may cause problems in sustaining a suitable culture. • Mitch Kapor, the founder of Lotus Corporation who created the Lotus spreadsheet, was famous for his informal style. • As the company grew, investors became concerned with what they perceived to be a chaotic business. • An ex-McKinsey consultant was appointed as CEO who preferred a rigid organisational structure and tight control. • Many software developers left, the company was unable to respond to the growing threat from Microsoft, and eventually the business was bought by IBM. Session 7

26. Dr. Schneider concluded that a common culture should prevail across an organisation. • This includes compatibility between leaders and management. • Four culture types exist: • Control culture, orientated towards predictability and order with authoritative leadership • Collaborative culture, favouring close external/internal relationships with leadership supportive of employee participation • Competence culture, focusing on innovation and excellence with leadership providing vision • Cultivation culture, favouring life enrichment for employees with leadership being charismatic and inspirational Session 7

27. Focus On Product and Process Innovation High Performance Analyzer Prospector Reactive Response Proactive Response Defender Reactor Focus On Sustaining/Improving Existing Products And Processes Figure 7.3 Strategic options Session 7

28. A study of UK manufacturing firms provided insights into link between strategy and culture. • ‘Prospectors’ are first-to-market, with leadership focused on proactive innovation. • ‘Defenders’ tend to favour location and occupation of a defendable niche in a stable market sector, with focus on quality and minimal innovation. • ‘Analysers’ exhibit prospecting and defending capability, but leadership make decisions after careful analysis. • ‘Reactors’ shift priorities as leaders perceive emergence of new market threats. Session 7

29. O’Reagan and Ghobadian concluded most entrepreneurial firms are prospectors. • They are orientated towards creativity, close relationships with customers, high level of interdepartmental co-operation and employees granted freedom to make decisions. • Researchers also concluded that an interaction exists between strategy and the 3 variables of: • Company culture • Customer culture • Leadership style • Leaders who promote transformation, welcome change and flexibility tend to have a more entrepreneurial organisation. Session 7

30. Company Culture Strategy Leadership Customer Culture Figure 7.4 Strategy influencing variables Session 7

31. Polaroid • Edwin Land had a deep faith in science but little belief in market research for generating understanding. • He invented the instant camera and founded Polaroid Corporation. • He insisted on a research-based, technological research culture. • He developed expertise in silver halide chemistry, optics and electronics to achieve global leadership in instant photography. • To avoid confrontation with specialist outlets, he distributed his Polaroid cameras through major mass market retailers. Session 7

32. He had a strong belief in the ‘razor blade’ business model of selling cameras at a low price and making a high profit on the film. • Land embedded the culture that success comes from innovation based on research. • 1972 saw the launch of the SX-70 camera which ejected the picture, which then developed as consumer watched. • Bill McCune was appointed as Land’s successor who committed company to research on combining digital imaging and instant photography. • He also placed resources behind ‘Helios’, a high resolution alternative to x-ray photographs. Session 7

33. Senior managers believed digital photography could fit their razor blade business model. • The research team identified a company competence weakness in low cost electronics, manufacturing and fast product development. • Senior management rejected these concerns and - more importantly – the view that digital cameras would not fit the razor blade model. • Management felt consumers still wanted instant pictures and then need to store images on a computer. • Polaroid launched its first digital camera in 1996, by which time 40 firms were already in market. • Another problem was that, at $1,000, Polaroid’s camera had to be marketed through specialist retailers. Session 7

34. Polaroid’s marketing operation only had expertise in mass market, price-based retailers, so entering a new retail channel proved problematic. • The product failed to gain significant market share. • Helios also was a failure, and eventually the business was sold off. • In 1996, the company brought in outsider Gary Dicammillo as new CEO, who slashed R&D budgets and directed funds into advertising. • The new philosophy was to only develop improved versions of existing products. • Polaroid failed to compete with the digital camera giants (e.g. Sony, Hitachi), its instant camera business rapidly died, and in 2001 Polaroid filed for bankruptcy. Session 7

35. Team Orientation • Owner/managers have the reputation of retaining tight control over operations. • In part, this reflects that, in many cases, the owner/manager is risking their personal assets to obtain bank funding. • Small qualitative, studies suggest entrepreneurs favour the orientation of delegation and a team-based approach to innovation management. • Large-scale studies have subsequently validated the benefits of this orientation. • Positive impact on creating competitive advantage, new product development and organisational productivity. Session 7

36. Black Diamond in Salt Lake City markets trendy rock climbing equipment. • This is a highly-competitive niche market, and hence unique positioning is vital. • Company is positioned as being more committed and passionate about climbing than competition. • They only hire rock climbing enthusiasts who have a team orientation. • Customers are able to share experiences with staff, and this interchange permits employees to spot new product opportunities. Session 7

37. Team Approach • Entering the US retail ice cream business is a difficult proposition in the face of national chains (e.g. Baskin Robbins) and numerous independent outlets. • Amy Millar’s solution was to position her outlets as team-based operations providing a place of fun and entertainment. • Employees act as performers, wearing different outfits and persuading customers to participate in entertainment. • Potential new employees are given a plain paper bag, do anything with it and come back in a week. • Company went from $0 to over $2 million in just a few years. Session 7