Topic 5: Positioning School

Lecture 5: Week 5
Aims and Objectives of Lecture
To discuss and understand:

The origin of the Positioning School

The premises of the Positioning School
The 3 waves of the Positioning School
Various important concepts of Strategic
Management were proposed in the 3
waves of the Positioning School.
 1.0 Introduction
Positioning school defines strategy as
“analytical process” and exerted its
influence in the 1980s.
Its parent discipline is Economics.
Positioning school accepted most premises
of planning and design schools.
Emphasised the importance of strategies,
not just process in which they were
formulated.
 Introduction
Focussed on content of strategy, opened
up prescriptive side of the Strategic
Management field.
Michael Porter’s “Competitive Strategy” in
1980 was the main contribution to this
school.
Porter focussed on strategy content rather
than strategy process.
 Origins of the Positioning School:
Although the positioning school accepted most of the
premises that underlay the planning and design schools
of strategy formation, as well as their fundamental
model, it added content, in two ways:
a) Emphasizing the importance of strategies themselves,
not just the process by which they were to be
formulated.

b) Added substance - the positioning school, focused on

the content of strategies and opened up the prescriptive
side of the field to substantial the investigation.
 Origin of Positioning School
The field of "Strategic Management" emerged in the
early 1980s has a result of this “shift”.
The 1980 publication of “Competitive Strategy” by
Michael Porter; acted as a stimulant to draw together a
good deal of the disenchantment with the design and
planning schools, as well as the felt need for substance
of strategies.
Porter took his lead from industrial organization, a
field of economics that had long addressed related
issues, albeit with a focus on how industries, rather
than individual firms, behave.
 Origin of Positioning School

There were also the earlier writers on

military strategy who for centuries had
analysed the strategic advantages and
constraints of forces and terrain during the
periods of war.
Premises of Positioning School
Positioning School did not radically depart from the
premises of the planning and design school.

Key difference between three schools – Positioning

School identified only a few key strategies as
positions in the market place that can be defended
against existing and future competitors.

Both the ‘Design and Planning Schools’ did not put

limits on possible strategies in any given situations.
Premises of Positioning School

Strategies are generic, specifically common,

identifiable positions in the market place.

Market place (in this context) is economic and

competitive.

Strategy formation process is therefore one of

selection of these generic positions based on
analytical calculation.
Premises of Positioning School

Analyst play major role in this process, feeding the

result of their calculations to managers who officially
control choices.

Strategies thus come out from this process full blown

and are than articulated and implemented; in effect,
market structure drives deliberate positional strategies
that drive organizational structure.
 Three Waves of Positioning School

This part of the lecture covers three different waves

of the positioning school: (a) the early military
writings, (b) the consulting imperatives of the 1970’s,
and (c) the recent work on empirical propositions,
especially of the 1980s. The later wave is critical.
The 3 waves of Positioning School includes:
1. The Early Military Writings
2. The Consulting Imperatives of the 1970s
3. The recent work on empirical propositions, especially
of the 1980s.
 1st Wave: Origins in the Military
Maxim
If the positioning school is truly to focus on the
selection of specific strategies, as tangible positions
in competitive contexts, then it must be recognized as
older than the design and planning schools.

The school is by far the oldest school of strategy

formation, dates back to 400BC.

This set of writing dealt with selection of optimal

strategy of literal position in the context of military.
1st Wave: Origins in the Military Maxim
These writing codified and expressed common
sense wisdom covering the ideal conditions for
attacking and defending one’s position.
The two most notable oldest writing is Sun
Tzu – 400BC and Von Clausewitz (19th
Century).
Sun-Tzu’s “The Art of War (1971)” has been
particularly influential in East Asia.
Chinese saying “marketplace is battlefield”.
 1st Wave continue…
 In a way, these writers did what today's writers of this
school do: they outlined different types of strategies
and matched them to the conditions that deemed most
suitable.
 Sun Tzu: Much as this school places emphasis on the
study of the industry in which the company operates,
so too did Sun Tzu emphasize the importance of being
informed about the enemy and the place of battle.
Some general sayings of Sun Tzu include:
“Generally, he who occupies the field of battle first and
awaits his enemy is at ease; he who comes later to the
scene and rushes into fight is weary”.
 1st Wave: Von Clausewitz

Carl Von Clausewitz: In his masterwork

On War, Clausewitz sought to replace the
established view of military strategy with a
set of flexible principles to govern thinking
about the war.
To make strategy happen, it is necessary
to put together an organization with a
formal chain of command in which orders
are executed without question.
 1st Wave: Von Clausewitz
Von Clausewitz (1780-1831), is the most
influential writer in the western thought on
strategy, whose work bears the unmistakable
trademark of German preference for “grand
system” of thought.
Closer to Positioning School, Clausewitz argued
that strategy depends on basic building blocks,
which are attack, defence and manoeuvre.
Strategy making relies on finding and executing
new combinations of these blocks.
 1st Wave: Von Clausewitz
He (Clausewitz) wrote in the aftermath of
Napoleonic Wars. As a Prussian army officer on the
opposing side of battles and at one time taken as a
prisoner by French, Clausewitz experienced
Napoleon’s methods first hand. He was shocked just
as the Americans recently were first shocked by the
onslaught of Japanese manufacturing advance.
 1st Wave: Von Clausewitz
Around the time Clausewitz was writing, war had
settled into a familiar pattern:

Armies in most countries comprised rather unmotivated

recruits, recommended by officers drawn from the
aristocracy.
They followed the same frameworks with armies that
were practically the same in organization and tactics.
The difference between victory and defeat was often
relatively small – one side attacked and the other
retreated.
 1st Wave: Von Clausewitz
At the end of the day the diplomats met and
some territories exchanged hands.
War was then a game of few surprises in
which strategy was a variation on themes
that all sides knew and accepted.
Napoleon sought to change the above
tactics. In the battles he fought, the French
armies under his command destroyed forces
that were numerically superior.
 Conti…
His victories were not only military, they were
also intellectual. Napoleon demonstrated the
obsolescence of traditional ideas about
organization and strategy.
While his predecessors saw strategy as
problem-solving activity, he argued – here more
in the spirit of the design school – that it was
open-ended and creative, due to tensions and
contradictions inherent in a human and social
activity.
 Conti…
Yet he also called for organization in a situation
riddled with chaos and confusion.

Strategy seeks to shape the future, yet intentions are

likely to be frustrated by chance and ignorance – by
what Clausewitz called “friction”.

To make strategy happen, it is necessary to put an

organization with a formal chain of command in
which orders are executed without question. Yet this
organization must tap the initiative of its members.
 Conti…
On War contains chapters on attack and
defense, manoeuvring, intelligence gathering,
and night operations.
Closer to the positioning school,
Clausewitz argued that strategy depends
on basic building blocks, which are attack,
defense and manoeuvre. Strategy making
relies on finding and executing new
combinations of these blocks.
 Conti…
Clausewitz’s work has been updated by the American
Colonel Harry Summers (1981), called On Strategy:
The Vietnam War in Context.
The insights from these two books hold that:
 There is a need for clear deliberate strategy
 The centrality of authority to develop or at least
execute that strategy is recognised
 Strategy should be kept simple
 Strategic management ought to be proactive
 Flexibility is assumed to coexist with these
characteristics.
 Fighting Corporate Battles
Many writers from the positioning school have picked
up the spirit of the military maxims. James (1985:56)
see the similarities “in terms of deterrence, offence,
defense, and alliance” as well as “intelligence,
weaponry, logistics and communications, all designed
for one purpose – to fight”.

Robert Katz (1970:348-350) discussed maxims as

“always lead from strength” and “the basic strategy
for all companies should be to concentrate resources
where the company has (or can readily) a meaningful
competitive advantage”.
 Conti…
In fighting Corporate Battles, he added:
For the large company:
A. Planning is crucial.
B. Give up the crumbs.
C. Preserve company strength and stability.

For the small company:

A. Attack when the enemy retreats.
B. Do not take full advantage of all opportunities.
C. Be as inconspicuous as possible.
D. Respond quickly.
 Conti…
Most sophisticated has been the work of James Brian Quin’s
(1980) when using the military experience in business.

Quin notes that “effective strategy develops around a few key

concepts and thrusts, which give them cohesion, balance, and
focus” and also a “sense of positioning against an intelligent
opponent”. Such a strategy “first probes and withdraws to
determine opponents’ strengths, forces opponents to stretch
their commitments, then concentrates resources, attacks a clear
exposure, overwhelms a selected market segment, builds a
bridgehead in that market, and then regroups and expands
from the base to dominate a wider field...”
 2nd Wave: The Search for Consulting
Imperatives
The positioning school has been tailor-made for
consultants. They can arrive cold, with no particular
knowledge of a business, analyse the data, juggle a set of
generic strategies (basic building blocks) on a chart,
write a report, drop an involves, and leave.
Consulting companies in the 1960, 1970s and 1980s
contributed much to the Positioning School.
This trend began in the 1960s but accelerated in the
1970s and 1980s.
 2nd Wave: The Search for Consulting
Imperatives
Companies that made a big name for themselves in the
area of strategy included: the Boston Consulting Group
(BCG) with its two dominant techniques of the growth-
share matrix and the experience curve. And PIMS came
along with its data base for sale. In both case, the base
was empirical but the bias was imperative: to find the one
“best way”.
Prior to this two companies, little consulting in strategy
per se was promoted. McKinsey and Company focussed
mainly on top management orientation, and firms like
SRI promoted planning techniques only.
 2nd Wave: Boston Consulting Group
BCG – Growth Share Matrix

The growth share matrix was part of “portfolio planning:,

which discussed the question of how to allocate funds to
different businesses of a diversified company.

Before this technique was introduced, most corporations

depend on capital budgeting and like to assess ROI of
different proposals. The growth-share matrix sought to
embed these choices in a systematic framework.
 Conti…
Bruce Henderson built the BCG technique of which its
core components are:

Rationale: To be successful, a company should have

portfolio of products with different growth rates and
different market shares. The portfolio composition is a
function of the balance between cash flows. High-growth
products require cash inputs to grow. Low-growth
products should generate excess cash. Both kinds are
needed simultaneously.
 Conti…
Four (4) rules determine the cash flow of a product:

 Margins and cash generated are a function of market share. High

margins and high market share go together.
 Growth require cash input to finance added assets. The added cash
required to hold share is a function of growth rates.
 High market share must be earned or bought. Buying market share
requires additional investment.
 No product market can grow indefinitely. The payoff from growth
must come when growth slows, or it will not come at all. The
payoff is cash that cannot be reinvested in that product.
The diagram below shows the BCG Growth-
Share Matrix.
 Explanation of the Diagram
Products with high market share and slow growth are
“cash cow”. Characteristically, they generate large
amounts of cash, in excess of the reinvestment required to
maintain share. This excess need not, and should not be
reinvested in those products. In fact, if the rate of return
exceeds growth rate, the cash cannot be reinvested
indefinitely, except by depressing returns.
Products with low market share and slow growth are
“dogs”. They may show an accounting profit, but the
profit must be reinvested to maintain share, leaving no
cash throw off. The product is essentially worthless,
except in liquidation. All products eventually become
either a “cash cow” or “a dog”.
 BCG Growth Share Matrix
Low-market share, high-growth products are the
“questions” or “problem children”. They always require
far more cash than they can generate. If cash is not
provided they fall behind and die. The low-market share,
high-growth product is a liability unless it becomes a
leader.
The high-share, high-growth product is the “star”. It
nearly always shows reported profits, but it may or may
not generate all of its own cash. The star if it becomes a
leader eventually becomes a cash cow – providing high
volume, high margin, high stability, security – and cash
throw off for reinvestment elsewhere.
 Conti…
The need for a portfolio of business becomes obvious.
Every company needs products in which to invest cash.
Every company needs products that generate cash. And
every product should eventually be a cash generator;
otherwise it is worthless.

Only a diversified company with a balanced portfolio can

use its strengths to truly capitalise on its growth
opportunities. Thus the balanced portfolio has:
 Conti…
 “stars”, whose high share and high growth assure the
future.
“cash cows”, that supply funds for that future growth.
“ Question or problem children”, to be converted into
“stars” with the added funds.
“dogs” are not necessary; they are evidence of failure
either to obtain a leadership position during the growth
phase, or to get out and cut the loses.

The model above has been criticised for its reductionist

nature, which is simpler than a cookbook
 BCG: Exploiting Experience
The experience curve dates back to some research done in
1936 (Yelle 1979) that suggested that as the cumulative
production of a product line doubles, the cost of
producing it seems to decrease by a constant percentage
(generally 10-30%).

Hence the idea was that, all other things equal or ceteris
parabis, the first firm in a new market can rev up its
volume quickly to gain a cost advantage over its
competitors
 BCG: Exploiting Experience.
Of course, the essence of strategy is that all other things
are rarely equal. In fact, the widespread application of the
experience curve often leads an emphasis on volume as
an end in itself. Scale became important: firms were
encouraged to manage experience directly - for example
cutting prices to grab market share early, so as to ride
down the experience curve ahead of everyone else.

As a result of the popularity of this technique as well as

the growth share matrix, being the market leader became
an obsession in American business for a long time.
 PIMS: from data to data
PIMS stands for Profit Impact of Market Strategies. Developed in
1972 for General Electric, later became a stand-alone data base for
sale, the PIMS model identified a number of strategy variables –
such as investment intensity, market position, and quality of
products and service – and used them to estimate expected return on
investment, market share, and profits.

PIMS developed a data base for several thousand businesses that

paid in, provided data, and in return could compare their positions
with samples of others.

This technique was biased towards larger firms which had the
money to buy into the data bases and pay the consulting contracts.
This technique from BCG did not survive the test of times.
 Positioning School

Part II: The Third Wave

The Third Wave: The Development of
Empirical Propositions

The third wave of the positioning school, which

began as a trickle in the mid-1970s, exploded into
prominence after 1980, dominating the whole
literature and practice of strategic management.

This wave consisted of the systematic empirical

search for relationships between external conditions
and internal strategies. It was believed that systematic
study could uncover the ideal strategies to be pursued
under given sets of conditions.
3rd Wave of Positioning School
Porter’s Competitive Strategy, published in 1980, really
set this work on its course. Porter did his doctorate in
economics and an MBA and teaches at the Harvard
Business School.

Most prominent from Porter’s work are his concepts

and models of:
Competitive analysis
Set of generic strategies
Notion of value chain
Porter’s Model of Competitive Analysis

Porter's model of competitive analysis

identifies five forces in an organization's
environment that influence competition.
These are described below and shown
with their elements in Figure 4-3.
 Porter’s Model of Competitive Analysis
This model identifies 5 forces in an organization’s
environment that influence competition:
Threat of New Entrant. An industry like club in
which firms gain admittance by overcoming certain
“barriers of entry”, such as economics of scale, basic
capital requirements, and customer loyalty to established
brands. High barriers encourage a cozy club in which
competition is friendly; low barriers lead to a highly
competitive group in which little can be taken for
granted.
 Conti…
Bargaining power of firm’s Suppliers. Since suppliers wish to
charge the highest price for their products, a power struggle
naturally arises between firms and their suppliers. The advantage
goes to the side which has more choices as well as less lose if the
relationship ends – for example, the firm that need not sell the bulk
of its output to one customer, or the one that makes a unique product
that has no close substitutes.

Bargaining Power of Firm’s Customers. A firm’s customers which

to get prices down or quality up. Their ability to do depends on how
much they buy, how well informed they are, their willingness to
experiment with alternatives, and so on.
 Conti…

Threat of Substitute Products. There is an old

saying that “nobody is irreplaceable”.
Competition depends on the extent to which
products in one industry are replaceable by ones
from another. Postal services which compete
courier services, which compete which fax
machines, which compete with electronic mail,
and so on. When one industry innovates, another
can suffer.
 Conti…
Intensity of Rival Among Competing Firms. All of the
previous factors coverage on RIVALRY, which
according to Porter is a cross between active warfare and
peaceful diplomacy. Firms jockey for position. They
may attack each other, or tactically agree to coexist,
perhaps even form strategic alliances. This depends on
the other factors discussed already above, e.g. the threat
of substitutes may drive firms to band together, while
severe competition may erupt in industries where buyers
and suppliers are of relatively equal power.
 FIGURE 4.3
ELEMENTS OF INDUSTRY STRUCTURE
Porter’s Model of Competitive Analysis in
Summary

The peculiarities of each of these forces may explain

why firms adopt a particular strategy. For example, if the
bargaining power of suppliers is high, a firm may seek to
pursue a strategy of backward vertical integration—to
supply itself. Given the range of possible external forces,
one might imagine that the range of possible strategies is
rather large. But Porter takes the opposite position: only
a few "generic“ strategies survive competition in the long
run. This notion, like Clausewitz's building blocks, is
what really defines the positioning school.
 Porter’s Generic Strategies
Porter argued that there are two “basic type
of competitive advantage a firm can
possess: “low cost or differentiation”,
(1985:11). These combine with the “scope”
of a particular business – the range of
market segments targeted – to produce
“three generic strategies for achieving
above-average performance in an industry:
(cost leadership, differentiation, and focus,
namely narrow scope).
PORTER'S GENERIC STRATEGIES
 The 3 key generic strategies are
described below:
Cost Leadership. This strategy aims at being the low-
cost producer in an industry. The cost leadership strategy
is realised through gaining experience, investing in large
scale production facilities, using economies of scale, and
carefully monitoring overall operating costs (via
programs such as downsizing and total quality
management).
Differentiation. This strategy involves the development
of unique products or services, relying on brand/customer
loyalty. A firm can offer higher quality, better
performance, or unique features, and of which can justify
higher prices.
 Conti…
Focus. This strategy seeks to serve narrow
market segments. A firm can ‘focus’ on
particular customer groups, product lines, or
geographic markets. The strategy may be one of
either “differentiation focus”, whereby the
offerings are differentiated in the focal market,
or “overall cost leadership focus”, whereby the
firm sells at low cost in the focal market. This
allows the firm to concentrate on developing its
knowledge and competencies.
 III. Porter’s Value Chain
This concept was popularised in Porter’s 1985 book on
Competitive Advantage. The value chain suggests that a
firm can be disaggregated into primary and support
activities:
Primary Activities. These are activities in the flow of product to
the customer, and include inbound logistics (receiving sorting
etc.), operations (or transformation), outbound logistics (order
processing, physical distribution, etc.), marketing and sales, and
service (installation, repair, etc.).
Support Activities exists to support primary activities. They
include procurement, technology development, human resource
management, and provision of the firm’s infrastructure (including
finance, accounting, general management, etc.).
 PORTER'S GENERIC VALUE CHAIN
Source: From Porter (1985:3).
 Porter’s Value Chain
Margin on the right side indicates that firm’s
achieve profit margins based on how the value
chain is managed.
Dotted Lines demonstrate that all the support
activities (with one exception) can be associated
with each of the primary activities and also
support the entire chain. The exception is firm
infrastructure, which applies to the complete
chain instead of just to any one part of it.
 Porter’s Value Chain
For Porter, the value chain “provides a
systematic way of examining all the
activities a firm performs and how they
interact” with one and other. The totality of
the value chain must be fully appreciated.
E.g. being best at marketing may not be a
strategic advantage of this is poorly
matched operations.
 CRITIQUE OF THE POSITIONING
SCHOOL
 The positioning school can be critiqued on the
same grounds as the design and planning
schools, since it carries their ideas even further.

1. Concerns about focus: The focus has been

narrow. It is oriented to the economic and
especially the quantifiable as opposed to the
social and the political, or even the non-
quantifiable (qualitative) economic.
 CRITIQUE OF THE POSITIONING
SCHOOL
2. Concerns about Context: The second concern is the
narrow context of the positioning school. There is a bias
toward traditional big business - where market power is
greatest, competition least effective, and the potential for
political manipulation most pronounced.

3. Concerns about Process: The third concern relates to

process. The message of the positioning school is not to
get out there and learn, but to stay home and calculate.
 CRITIQUE OF THE POSITIONING
SCHOOL
 The strategist is supposed to deal in abstractions on paper,
detached from the tangible world of making
products and closing sales.

4. Concerns about Strategies: Finally, strategy itself tends to

have a narrow focus in the positioning school. It is seen as
generic position, not unique perspective.
 The process can reduce to a formula, whereby such a position
is selected from a restricted list of conditions. Or else, in the
case of strategic groups, the company joins one club or
another, which itself dictates the generic portfolio of strategies
to be pursued.
CONTRIBUTION AND CONTEXT OF THE
POSITIONING SCHOOL

The emphasis on analysis and calculation,

the positioning school has reduced its role
from the formulation of strategy to the
conducting of strategic analyses in support
of that process.
 Conclusion

 Positioning School with emphasis on

analysis and calculation, reduced its
role from formulation of strategy to
conducting strategy analysis.

 This school has added content to the

planning school, while shifting the role
of planner to that of analysis.
 The End!

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