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A Competitive Strategy Model        (printable version)


Decisions generate action that produces results.  Organizational results are the consequences of the decisions made by its leaders. The framework that guides and focuses these decisions is strategy. The framework that guides competitive positioning decisions is called competitive strategy. 
The purpose of its competitive strategy is to build a sustainable competitive advantage over the organization’s rivals.  It defines the fundamental decisions that guide the organization’s marketing, financial management and operating strategies.

A competitive strategy answers the following questions.

  • How do we define our business today and how will we define it tomorrow?

  • In what industries or markets will we compete?  The intensity of competition in an industry determines its profit potential and competitive attractiveness.

  • How will we respond to the competitive forces in these industries or markets (from suppliers, rivals, new entrants, substitute products, customers)?

  • What will be our fundamental approach to attaining competitive advantage (low price, differentiation, niche)?

  • What size or market position do we plan to achieve?

  • What will be our focus and method for growth (sales or profit margins, internally or by acquisition)?

The key to strategy formulation lies in understanding and overcoming the system barriers that obstruct the attainment of organizational goals.  An effective strategy recognizes these barriers and develops decisions and choices that circumvent them.

 STRATEGIC APPROACHES

Three basic strategic approaches are possible

  • Offensive strategy - overcoming the barriers to goal achievement by changing the systemic relationships creating them.  This strategy often requires significant capital investment and includes the following options.

o       Changing or altering the competitive structure or environment in your industry (forward or backward integration, acquiring competitors, etc.).

o       Anticipating industry competitive structural change and positioning your organization to exploit this change before others recognize it (developing substitute products, changing the mode of sale or distribution, etc.).

o       Diversifying into more attractive markets.

  • Defensive strategy – accepting the industry competitive forces as a given and positioning your organization to best defend against them.

o       This could include harvesting and selling the business before competitive conditions cause its value to drop.

  • Guerilla or niche strategy – minimizing or neutralizing barriers by reducing the size of the playing field and taking an offensive or defensive position in a smaller, more attractive market segment.  

Every business has a competitive strategy.  However many strategies are implicit, having evolved over time, rather than explicitly formulated from a thinking and planning process.  Implicit strategies lack focus. produce inconsistent decisions, and unknowingly become obsolete.  Without a well-defined strategy, organizations will be driven by current operational issues rather than by a planned future vision.    This model provides a process to make your competitive strategy explicit so it can be examined for focus, consistency, and comprehensiveness.


DEFINING YOUR COMPETITIVE STRATEGY  

Your answers to the following fundamental strategic questions will help you define your competitive strategy.

DEFINE YOUR BUSINESS:
“The answer to the question, ‘What is our business?’ is the first responsibility of top management. A business is defined by the want a customer satisfies when he buys a product or service.”  Peter Drucker, Management- Tasks- Responsibilities- Practices.

1.  What is the purpose of your business?

  • Purpose defines why your organization exists.
    “To know what a business is we have to start with its purpose.  Its purpose must lie outside of the business itself.  For in fact, it must lie in society since business enterprise is an organ of society.  There is only one valid definition of business purpose: to create a customer.”  Peter Drucker, Management.

2.  What results are you trying to achieve to fulfill your purpose and how will you measure success?

  • Your response describes your organizational vision.

3.  What value does your business create for its customers? 

  • Who are your customers and where are they located?

  • What products and/or services do you provide those customers?

  • What customer need or problem do your products and/or services satisfy or solve?

  • Why do your customers purchase your products and services rather than a competitor's?

4.  What is your business today?

  • Use your previous responses to define your business.  Your answer will provide the focus needed to make your current operations effective.

Note: For more insight on defining your business read Theodore Levitt’s classic article entitled “Marketing Myopia”, Harvard Business Review, July-August 1960. 

YOUR SKILLS AND COMPETENCIES:

5.  What are your core competencies?
Core competencies are points of leverage for gaining competitive advantage.  They are organizational competencies that are unique to your organization or are performed better than your competitors and make a significant contribution to customer perceived value or create a significant cost advantage. 

  • Organizational competencies are functional capabilities and experience a firm possesses by virtue of the way it integrates and blends the individual skills of its employees and achieves results.  Examples of organizational competencies are: 

    • Experience in design, fabrication, and testing miniaturized solid-state electronic components.

    • Experience in cutting, upsetting, and welding high carbon steel.

    • Experience in set up and programming computer controlled cutting machines.

    • Experience in planning, budgeting, and controlling costs.

    • Experience in attracting, developing, and retaining a highly competent workforce.

    • Experience in meeting challenging customer delivery schedules.

  • Business organizations need many competencies covering a range of functional activities (production, marketing, distribution, etc.).

For a more thorough presentation on core competencies read Competing for the Future by Gary Hamel and C.K. Prahalad.

Identifying your core competencies.

List the organizational competencies you have that enable you to provide your products and/or services and compete in your industry?

  • Which of these competencies are unique to you or do you perform better than your competitors?

  • Which of these competencies create customer perceived value throughout your product line or give you a significant cost advantage over your competitors?

    • Include the organizational competencies that provide the product characteristics, service attributes, and intangible features that convince your customers' to purchase your product or service rather than a competitor's. 

Competencies listed in these last two categories are your present core competencies and can be your focal point for attaining competitive advantage.

6.  What should your business be tomorrow?

  • Use your core competencies and assumptions about the future to answer this question.  Your answer will provide the direction needed to prepare your organization for the future.

Notes: This website provides a model to help you think through your business theory and examine the assumptions upon which it is based.  See Examine Your Business Theory.

Your answers to these previous questions define your organization's mission.

YOUR SIZE AND MARKET STANDING:

7.  How large do you need to be?
Organizations must be large enough to avoid becoming a marginal player in the marketplace and to maintain a reasonable balance among their operating functions.

  • What sales volume and revenue will provide your required profitability?

  • What facilities, equipment, and personnel are needed to provide this volume?

Note: This website provides a model to help you determine your profit requirements.  See A Profit Planning Model.

YOUR GOALS AND BARRIERS:

8 Achieving your vision usually requires accomplishing results in a variety of areas.  Goals provide the mechanism to specify the set of results that will define vision achievement.  In this way goals clarify and focus your vision.  To accomplish this clarity and focus goals need to describe the operating, financial, social, and other conditions you must bring about to achieve your vision. Effective goal setting includes defining how goal achievement will be measured.  This means identifying the indicator or indicators that will be used and the quantitative or qualitative value of these indicators that will define goal achievement.

  • List the goals that describe the results you want to achieve.

    • Goals should encompass all activity that contributes to the attainment of your vision.

  • Identify the indicators you use to measure goal performance.

  • Specify the quantitative or qualitative values of these indicators that will define goal achievement.

Your answers to these questions clarify your organizational vision and define the results you are committed to achieve.

9.  What are the barriers you must overcome to achieve these goals?
Barriers are systems obstacles that impede the attainment of your goals.

  •  Identify the major barriers to achieving each of your goals.

    •  Since barriers describe root causes or system relationships they are relatively few in number.  A single barrier can obstruct multiple goals.

    • The competitive structure of your industry presents significant barriers that must be overcome.  A thorough description of industry competitive structure and competitive forces can be found in Competitive Strategy and Competitive Advantage by Michael Porter.

NOTE- This website provides a model to help you clarify your mission, define your goals and identify barriers to achieving them.  See Making Your Mission Operational.

10.  What strategic approach are you using or will use to overcome these barriers?
Your strategic approach defines how you intend to deal with the barriers to goal achievement.

  •  An offensive strategy will work if some key barriers can be overcome, altered, or neutralized by the application of resources that are available to you.

  • A guerilla strategy will work if key barriers can be circumvented, minimized, or eliminated by narrowing the scope of your operations.

  • A defensive strategy is called for when none of the above conditions are met.

Identify the strategic approach you will use (offensive, defensive, or niche) and the tactics you employ or will employ to achieve competitive advantage.  

The barriers you identified, the strategic approach you selected, and your organizational competencies drive your responses to the following questions.     

YOUR APPROACH TO COMPETITIVE ADVANTAGE:

11.  What is your approach to competitive advantage and the market scope in which you will compete?

  • Does your competitive strategy require lowest price or product differentiation?

    • A focused strategy requires that you choose one of these alternatives since each will produce a distinct marketing strategy.

    • If you chose product differentiation, define the product characteristics and/or service attributes that differentiate your offerings.

    • If you chose lowest price, describe how you will sustain a cost advantage over your rivals.

  • Do you compete in broad markets or focused niches?

    • A focused strategy requires that you choose one of these alternatives since each will require a distinct marketing strategy.

    • Describe the markets or market segments you serve.   

YOUR FOCUS FOR GROWTH:

12.  What is your focus for growth?

  • Do you focus on growth in sales volume or growth in profit margins?

    • A focused strategy requires that you choose one of these alternatives since each will require a unique marketing strategy.

13.  What is your primary method of growth?

  • Do you intend to grow by internal expansion or by acquisition?

    • Each of these choices requires a unique competitive strategy.

    • If you chose acquisition, define your acquisition criteria.

14.  What is the scope of your products, services, and markets?

  • Indicate the primary focus of your marketing strategy by selecting the appropriate cell in the following matrix.  Without focus your marketing efforts will be diluted and their effectiveness decreased.

 

Scope of Products and Services
Offered

 

Market Scope

 

Focus on current markets

Develop new markets

Focus on current products and services

Increase penetration of current markets

Develop new markets for current products and services

Develop new products and services

Develop new products or services for current markets

Develop new products or services and new markets

 

 

 

 

 


Define your product and market focus in the following matrix.

Indicate the current products or services and market segments that are targeted for increased penetration.

Indicate the new market segments that are being developed and the current products or services that are being expanded into them.

Indicate the new products or services that are being developed and the current market segments being targeted.

Indicate the new products or services that are being developed and the new markets that are being developed for them.

15.  What are your product and market priorities?

  • What market segments have the highest priority and what products/services do you offer to these segments?

  • What market segments and/or products receive routine priority?

  • What market segments and/or products receive reduced resources and effort?

  • What market segments and/or products are being abandoned?

  • What market segments and/or products are being developed for the future?

EXAMINE YOUR RESPONSES TO THESE QUESTIONS.

  • If you have difficulty responding to these questions or have not thought through these strategic issues, your competitive strategy is not comprehensive.

  • If your decisions in these areas are not consistent with each other, your strategy lacks focus.

    • Choosing a profitability focus for growth and a cost leadership approach to competitive advantage is an example of inconsistency.  

    • Failing make the growth and competitive advantage choices required indicates lack of focus.

  • If your strategy does not deal with the barriers to goal achievement it may be ineffective.

  • Verify your goals are consistent with your mission and vision.

THREE SIGMA CAN HELP YOU EXAMINE YOUR COMPETITIVE STRATEGY AND CRAFT IT TO MEET CHANGING CONDITIONS.

 

Copyright 2003 Three Sigma, Inc.