Topic 2

“Strategy”
Structure follows strategy
 Chandler (1962) stated the fundamental relation in his now

famous dictum, “structure follows strategy.” That is, given a

strategy, there are some organizational structures which can

implement that strategy better than others. Strategy is the

end; structure is the means. Strategy is the operationalization

of the firm’s goals of efficiency and/or effectiveness; and the

structure is the means to achieve them.

 A firm’s strategy reflects management’s assessment of the
firm’s situation and its choice of how to pursue the firm’s
goals. Strategy can be described in a number of ways. For
example, strategy can be described in terms of five forces
of the firm’s economic situation (Porter, 1985): suppliers,
buyers, substitutes, potential entrants, and the rivalry
among existing competitors. These five forces yield three
possible strategies: cost leader, product differentiator, or
niche player.
 In marketing, strategy can be described as the choice of the
four Ps: product, price, promotion, and place: that is, which
product the firm should produce; what its price is; how it
should be promoted and advertised; and how it should be
distributed (Kottler, 2000). On the input side of the firm,
operations strategy is the choice of the firm’s supply chain
including the chain management and outsourcing. This involves
the choice and management of the resources and capabilities
(Makadok, 2001). Your choice of a strategy for your firm is
always a question of what the firm should do in its situation to
meet its goals of efficiency and effectiveness.
A simple and powerful way to describe a firm’s strategy is in terms of

the following typology (Miles and Snow, 1978):

(1) reactor,

(2) defender,

(3) prospector, and

(4) analyzer without or with innovation. This typology has proved to be

very robust and is frequently used oday (Hambrick, 2003). (March, 1991).
 ,
 Exploration includes search, variation, risk-taking, and
innovation. Exploration is the process of seeking new
technologies or new ways of doing things.

 Exploitation includes refinement, efficiency, selection, and

implementation (March, 1991). Exploitation is taking advantage
of current or known technologies to do things in a new or novel
way. Originally Exploration and exploitation are dimensions of
strategy that can be used to form the basis for categorization of
a firm’s strategy into one of four types (Ha°konsson et al.,
2005)
 If your firm is a reactor it is low on both exploration and
exploitation; it lacks an intentional strategy toward innovation. It
makes adjustments when forced or when there is an urgent need or
problem.

 If your firm is a defender it is high on exploitation and low on

exploration; it is innovative only in narrow, limited areas. Its
innovation is confined and highly focused.

 If your firm is a prospector it is high on exploration and low on

exploitation; it takes an aggressive approach to innovation,
systematically searching for new opportunities. It experiments
regularly with change.
 Analyzers take a mixed mode approach to innovation.
If your firm is an analyzer without innovation your
strategy is similar to a defender but with more
emphasis on exploration. If your firm is an analyzer
with innovation your strategy is similar to a
prospector but with more emphasis on exploitation.
Reactor
 The reactor is neither an explorer nor an exploiter of the firm’s
opportunities.

 Generally, the reactor strategy is neither efficient nor effective in terms of

 achieving the firm’s goals.

 There is no innovation. The executive does not systematically anticipate,

plan, or project into the future. The organization does not take a deliberate

 position to become efficient or effective.

 Information processing demands are likely to be low on detail and focus, and
at the same time be rather inwards-focused.
 If your firm is a reactor, you make decisions based largely upon bad
news as it becomes known to you, whether this is poor performance
such as decreased profits or earnings, events such as a loss of a major
customer, or internal problems such as conflicts or inappropriate
utilization of resources.

 A reactor strategy is often observed in organizations that are in

transition.

 A good example is a firm after a merger, where the focus is on the

internal reorganization and management power struggles; the interest
in both exploitation and exploration can be lost.
 If the reactor strategy is followed for the long term, your
firm ultimately will be caught with more bad news, most
likely in the form of poor performance in the marketplace
or internal processes that cannot be managed in the
available time.
Defender
 If your firm has a greater focus on exploitation than on exploration, then your strategy is
a defender

 The defender is high on exploiting its resources and situation, but low on exploring
anything new or being innovative.

 The executives inside a defender firm are focused on keeping the organization’s position
in the market.

 There is less emphasis on developing new ideas, products or services. Instead, there is an
emphasis on maintaining a competitive position, which may be measured in terms of
market share or profitability.

 Sales forecasting, as an extrapolation of the past, is a frequent tool used to support the
defender strategy; that is, the past is projected as the future
 The defender usually has very competitive prices or a product
niche that it works hard to keep others from penetrating.

 To remain competitive, a defender strategy requires detailed and

focused information to enable continuous refinement (rather than
innovation) of current products and production methods.

 The defender maintains its position by being efficient in the

utilization of resources. This strategy keeps the defender
invulnerable to less efficient competitors.
 A high capital requirement is often a barrier to entry in the
defender’s industry. Thus there is a steady strategy of
repeatedly doing the same thing efficiently. The emphasis on
quality may be high as a means to prevent new entrants from
coming into the market or to prevent existing competitors from
taking over the firm’s market share.

 A defender is slow to make significant change. When buyers

stop purchasing its products, the defender is not in a good
position to develop new products or new markets. Slowness to
change, combined with a high focus on efficiency makes the
defender vulnerable in the long run.
 defender strategy example is Coca-Cola, Inc., which has been defending its
Coke brand fiercely, investing more resources in defensive moves than in new
product development.
Prospector
 The prospector is high on exploration of its opportunities but low on exploiting its
current situation.

 Thus if you have a very high focus on exploration but a very low focus on exploitation,
then your firm’s strategy is a prospector.

 The prospector focuses on innovation of new things to the detriment of being efficient
and exploitative of existing opportunities. It searches continually for new market
opportunities and experiments regularly with new ideas, new technology, and new
processes.

 The prospector firm is the creator of change, and so other firms must adjust to its
actions. But the prospector is not much concerned with exploiting its situation or
developing efficiencies in its use of resources. Prospector strategies require continuous
scanning of the external environment and dealing with a lot of new, varied information.
 The prospector maintains its competitive position by being
new and making changes to the competitive situation that
others must adjust to.

 The prospector constantly questions the status quo, and

this puts it in its own niche and allows it to enjoy first-
mover advantages.

 The prospector’s efficiency is low, but due to the

competitive situation it may survive with a higher cost
structure by demanding high prices.
 The prospector firm is change-oriented, preferring the new over the status quo.
Quality is not the primary concern, nor is being price competitive. Instead, these
issues are subsumed by the novelty of new products or services.

 Of course, quality and price will become important to the customer, especially when
other firms enter to match the prospector’s latest innovation.

 This strategy is risky. On the upside, a new product or service may have enormous
payoffs. On the downside, the prospector firm can quickly exhaust its resources since
usually it operates within a limited time frame for success; in other words, new
product (or service) development life cycles must be relatively short.

 The prospector can do well for a long time. Its vulnerability comes when it fails to
innovate and provide new products and services to the market within life cycle
demands.
 Many start-up ventures, for example, in the biotechnology industry
today can be categorized as prospectors. 3M is often cited as having
a prospector strategy with its constant development of new and
innovative products.

 Google is taking a similar tack with its continual innovation of new

Internet-based information services. Most firms in biotech are
prospectors focusing on innovation.
Analyzer without innovation
 If you have a strong focus on exploitation and weak focus on exploration,
then your strategy is an analyzer without innovation.

 The analyzer without innovation is very similar to the defender except that it
does have a passive innovation strategy or a copy strategy.

 The analyzer without innovation looks to what other firms are doing that is
successful and then imitates with similar products or services to meet
customer needs.

 The analyzer without innovation is high on exploitation of its resources and

situation but very moderate on exploration while copying innovations of
others.
 Similar to the defender, the analyzer without innovation is focused on
keeping the organization’s position in the market; meanwhile, it is
attentive to what others are doing.

 The analyzer without innovation maintains its position by being

efficient in the utilization of resources and following others; this
maintains a degree of invulnerability to the moves of competitors.

 Usually the analyzer without innovation does not change much, but the
point is that it can change by following others.

 The analyzer without innovation is adept at doing much the same thing
efficiently, but with a few changes from time to time.
 The challenge for the analyzer without innovation is to
select well what to follow. Its vulnerability comes when it
follows the wrong trend or fails to imitate quickly enough,
so that its products or services are no longer desired in
the market.
Analyzer with innovation
 If your firm has a focus on both exploration and exploitation,
then your strategy is an analyzer with innovation.

 The analyzer with innovation is a dual strategy combining

aspects of both a defender and a prospector.

 It exploits its current position of resource utilization and

market position, and at the same time it adopts an active
innovation strategy of developing new products, services, and
their delivery processes.
 It goes beyond just looking at what others do and instead surveys more widely in
technology and markets to look for opportunities that it can develop into new
products and services.

 The firm must emphasize developing new ideas, products, and processes. Success
means producing new products and services on a regular basis. At the same time
there is an emphasis on keeping the firm’s position in terms of market share or
profitability.

 Plans are developed to defend the firm’s position and fend off competitors while at
the same time exploring new frontiers.

 The analyzer with innovation requires the best, most complex of organizational
designs.
 There is a downside to this strategy. The analyzer with
innovation is vulnerable in that it can fail to maintain the
combination of exploration and exploitation needed to
keep its existing markets for short-term economic
performance and innovation in new products to meet
future opportunities.

 The dual goals of efficiency and effectiveness create

conflict that must be cleverly reconciled within a flexible
and robust organizational design.
 Xerox might be categorized as one of the less successful analyzers with
innovation. It had both exploitation and exploration in its strategy, but
these strategies are pursued separately, by different divisions located
very far apart

 Analyzer with innovation with different management structures.

 Despite the fact that Xerox has developed very novel and innovative
products over the years, the firm has rarely managed to successfully
transfer new ideas from development to production to sales. A successful
analyzer with innovation strategy requires both exploitation and
exploration embedded in the whole organization as part of the design
(Gibson and Birkinshaw, 2004).
Diagnostic questions
 1. What is the unit of analysis that you chose in Chapter 1? Use this unit of analysis
as the organization when answering the questions below.
 The questions below will help you locate your organization on the exploration and
the exploitation dimensions. For each item within question 2 and question 3, use a
1 to 5 rating scale to score your chosen organization as follows:
 12345
 very low moderate very high
 2. Exploration:
 a. How innovative are the organization’s products, (1)–(5)? ___
 b. What is the price compared to the value of the product,
 (1)–(5)? ___
 c. What is the price level compared to the quality level,
 (1)–(5)? ___
 d. How frequently does the firm develop new products
 (1)–(5)? ___
 e. How difficult is it for other firms to develop related products
 (1)–(5)? ___
 Now mark the organization’s location on the exploration axis in
 Figure 2.2.2 If the score you gave is greater than 3, then the
 organization is high on exploration. If the score you gave is less than 3,
 then it is low on exploration.
 3. Exploitation:
 a. What is the organization’s degree of process innovation,
 (1)–(5)?___
 b. What are its prices compared to the competition (1)–(5)?___
 c. What is its quality in terms of its standardization and reliability
 (1)–(5)?___
 d. What is the number of products the organization has compared to its
 competitors (1)–(5)?___
 e. What are the barriers to entry in its industry (1)–(5)?___
 Now mark the organization’s location on the exploitation axis in
 Figure 2.2. If the score you gave is greater than 3, then the organization is
 high on exploitation. If the score you gave is less than 3, then it is low
 on exploitation.
 4. Now with these values of exploration and exploitation, locate the
 organization on the graph. What is its strategy?
 Next we want you to examine how your organization’s strategy fits with
 the goals that you chose in Chapter 1.