Business Strategy

The McKinsey 7 S framework or model for strategic fit was developed over thirty years ago by strategy consultants McKinsey and in particular Tom Peters and Robert Waterman, co-authors of the classic book “In Search of Excellence” to help implement strategies.

What Is The McKinsey 7 S Framework?

It was originally thought that to implement strategy you needed to align strategy with structure (and vice-versa).

This wasn’t enough and McKinsey developed the 7-S model to show that a softer set of issues also needed to be considered when implementing strategy.

The 7 S’s are:

• Strategy – how the business intends to create a competitive advantage and achieve its overall goals.
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• Structure – the hierarchy of responsibility and accountability within the organisation and how the business is organised functionally, geographically or by product-market.
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• Systems – the way activities and processes get the work of the business done effectively and efficiently.
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• Style – the culture of the business and the way the leaders behave towards customers, employees and other stakeholders. What’s said is much less important than what’s done.
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• Staff – the personnel within the business and their individual skills, abilities and attitudes. Different people are right for different organisations.
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• Skills – specialist skills that the business has access to through the combination of systems and staff – think core competences or distinctive capabilities.
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• Shared values or subordinate goals depending on which version you read – the core values and beliefs of the business.

The “hard elements” are strategy, structure and systems.

The “soft elements” are style, staff, skills and shared values.

The idea is that all these seven elements are interlinked and you need to consider how any changes impact on and can be impacted by the other elements of the McKinsey 7 s framework.

Personally I’d have liked explicit focus on the role of performance measures (it could fit into the 7-S alliteration as Scorecard) because I believe “what gets measured gets done.” Techniques like the Balanced Scorecard are important additional strategy implementation tools.

The Classic McKinsey 7 S Framework Diagram

As well as being an important contribution to the “implementation gap” and a clever alliteration, the 7-S’ model also had this neat diagram. Notice that all the S’s are connected but the Subordinate Goals or Shared Values are what bind the organisation together.

How To Use The McKinsey 7 S Framework

You’ll find the 7S framework more useful for asking the right questions than coming up with the answers but that’s a great start in a strategic change programme.

The 7S model is very flexible and you can use it in several ways.

First, if there is a performance issue where things aren’t as they should be, you can use the 7 S framework as a diagnostic tool.

The problems lie in some kind of inconsistency between the 7 S’s.

If the strategy is right, then perhaps the problem lies in the structure of the business or in its systems. Or perhaps its at odds with the core shared values of the business or the personal style of the owner or CEO.

Second, if you’re implementing strategic change you can audit the organisation through the 7 S framework in terms of “as-is” and then think through your strategy and how the 7 S model should be.

This will highlight differences which need to be resolved. it may even be that the strategy you want to implement is out of reach for the business as it is and you need to make smaller incremental steps.

The third way to use the McKinsey 7 S framework is to look back at a strategic change that hasn’t worked as well as expected and to look for gaps or overlooked areas in the implementation plan through the lens of the 7 S model. While it’s too late, it is a powerful learning exercise when you appreciate how one factor can stop a strategy from working.

Criticism Of The McKinsey 7S Framework

The 7 S model is about achieving strategic fit across the organisation. Richard D’Aveni in his book Hypercompetition argues that this consistency makes the business predictable and therefore easier for a competitor following an aggressive strategy to anticipate and beat.

It’s an interesting idea and a case of “your strength becomes your weakness”. With the 7 S Model, your chances of implementing strategy increase but competitors can guess what you’re trying to do. Without the consistency embedded in the 7 S model, the strategy has little chance to be turned from a plan into reality.

Richard D’Aveni developed a New 7 S Model to compete effectively in hyper-competitive markets.

Models Like The 7-S Are Important

While using a model like the McKinsey 7 S framework can seem cumbersome, it is a very useful aide-memoire to make sure that you’re not overlooking an important issue and it’s helpful to focus discussions on implementation issues and to bring assumptions and unsaid expectations to the surface.

The McKinsey 7-S Framework is included in my summary of Strategic Planning Models.

Have You Used the McKinsey 7 S Model?

If you’ve used the McKinsey 7 S model I’d like to know how you found it.

Did it help you to succeed or focus on strategy implementation issues that you may have otherwise overlooked?

The Ansoff Growth Matrix is also known as the Ansoff Product-Market Growth matrix or the Four Ways To Grow A Business model.

This is not to be confused with the Three Ways To Grow A Business model from marketing consultant Jay Abraham which is another, more tactical way to think through business growth issues. It has its strategic uses when thinking about your business model and how you can generate profit from the opportunity.

What is the Ansoff Growth Matrix?

It first appeared in the Harvard Business Review in 1957 and was created by strategist Igor Ansoff to help management teams to focus on the options for business growth.

In common with other popular strategy models, it is build around a two by two matrix.

• current products or new products
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• current markets or new markets

The Four Growth Options Of The Ansoff Growth Matrix

• Market penetration strategy – current products and current markets
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• Product development strategy – new products and current markets
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• Market development strategy – current products and new markets
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• Diversification – new products and new markets

These are best seen in a diagram.

Option 1 In The Ansoff Growth Strategy Matrix – Market Penetration

Market penetration strategy is the preferred route to growth for many businesses because it appears safe.

Focus is on selling more of the existing products to:

1. Existing customers
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2. Customers similar to your existing customers who are buying from your competitors
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3. Customers similar to your existing customers who should be buying buying the product because they have a clear need but aren’t doing so.

The emphasis is on increasing market share through more marketing promotions, more effective marketing and by strengthening the offer by creating more customer value.

This market penetration option within Ansoff’s growth matrix uses existing resources and capabilities and can be thought of as “business as usual but on steroids”.

The downsides of the market penetration strategy are:

1. If you already have a high market share, the opportunities for growth may be limited. Some markets (and customers) naturally limit the share of the leading player because they feature the concentration of market power.
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2. Aggressive market penetration strategies will increase competitive rivalries in the industry and may provoke a price war of similar competitive battle which damages industry profitability. To make significant increases in market share, the business must be willing to drive competitors out of the market.
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3. Increasing exposure to one product-market segment can make the business more vulnerable to future changes in competition because of the “all the eggs in one basket” problem.
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4. The business may become complacent and ignore opportunities and threats from new products and service solutions to the customers’ underlying problems which are made possible through technological advances.

Option 2 In The Ansoff Growth Matrix – Product Development

In product development, businesses continue to focus on the needs of current customers and the wider customer market they represent  but they seek to understand their underlying needs and wants better so they can see opportunities for new products:

1. To replace existing products with something better
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2. To provide complementary products that customers need to buy before, during or after purchase of the main product sold by the business.
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3. To sell other products the customer buys as a way to strengthen or leverage the relationship and to provide added convenience. Think “one stop shop”.

New products in the product development option of the Ansoff Growth Matrix don’t need to be “bleeding edge” new developments to the world although they can be. The business can work with existing supplier businesses with established resources and capabilities and offer them new routes to market.

This option in the Ansoff Growth matrix suits businesses following a customer intimacy strategy in the three value disciplines. It allows a broader definition of the business. Remember marketing myopia and the idea that you can change focus from the railroad industry to the transportation industry as focus remains on the underlying customer need.

The danger lies in its exposure to one type of customer so the business must actively scan the economic environment, look for potential problems and be ready to take proactive steps to respond to any serious risks. Businesses exposed to the property market for example have had a very tough time since the 2008 financial crash.

You may attract new competitors into your market as a respond to you offering the products they traditionally sell. Competition has shifted up a level from coexistence selling your specific products to active competition selling the same broader range.

Option 3 In the Ansoff Growth Strategy Matrix – Market Development

The third option suggested by Ansoff is to take the current products and find new markets for them.

There are different ways to do this

1. Opening up previously excluded market segments through pricing policies e.g. discounts for students and old age pensioners at theatres.
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2. New marketing and distribution channels. Making a product available on the Internet with the necessary search engine optimisation means that anyone looking can find it, rather than rely on your marketing message to reach them by convention means. The supermarkets sell financial services to people who wouldn’t contact a broker or agent.
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3. Entering new geographic markets by moving from local to regional to national and finally international. This may require the business to acquire new capabilities including exporting, understanding different cultures and language skills.

The strength of this option from the Ansoff Growth matrix is that it puts the pressure on the marketing and sales functions of the business and leaves the operations/supply side to concentrate on what it does best.

Some product development may be inevitable as there are few global products that don’t make any concessions to local market needs. Success depends on being able to identify the best markets to develop which offer a genuine opportunity and where you have an effective competitive advantage. It also requires knowing which markets to avoid either because they are too difficult, too different or risk competitive reaction.

Again your action to expand your market may attract the attention of competitors who currently only trade in zones where you don’t.

Option 4 In The Ansoff Growth Matrix – Diversification

This option is the most controversial since diversification involves taking new products to new customers.

There are three levels of diversification:

1. Diversification into related markets – while the customers and products are both new, there is a logic about the move that makes sense to the outside world.
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2. Diversification into unrelated markets using existing resources and capabilities – while the customers and products are different, they all rely on the existing strengths of the business. Metal fabricators and plastic extrusion manufacturers are able to move across markets and produce custom designed products relatively easily because customers are buying access to the core competences.
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3. Diversification into unrelated markets which require new resources and capabilities.

Diversification is the most risky growth strategy in Ansoff’s growth matrix and especially if it requires the development of new resources and capabilities. It has even been referred to as the “suicide cell”.

The big advantage of diversification is that while each move is risky, if it is successful it reduces the overall risk of the business to factors outside of the control of the business like the wider economic environment, climate change etc. It may also make the business much less seasonal – think bikinis and other swimwear for the summer, umbrellas for the spring and autumn and heavy overcoats for the winter.

It may also help the business to move away from industries that are unattractive because they are super-competitive or in long term decline to fast growing, new markets.

How To Use The Ansoff Growth Matrix

There are two ways to use the Ansoff Growth Matrix

1. As a tool for brainstorming to help identify possible strategic options
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2. As a tool for assessing preferred strategic options to check for some kind of balance. there aren’t right or wrong answers but you might be shocked to discover that all six growth strategies you intend to follow fall into the diversification box.

Developments To The Ansoff Growth Matrix

The original matrix developed by Ansoff was the simple 2 x 2 matrix presented above.

Ansoff later refined the matrix into a 3 dimensional version by adding geography.

Others have turned the matrix from 2×2 into 3×3 by introducing middle categories for expanded markets and modified products to give more flexibility to the tool. This allows shading from ” a little different” to “very different”.

Reflections On The Ansoff Matrix

The Ansoff Growth Matrix is a popular and useful strategy model for identifying growth options.

It doesn’t help you to evaluate which opportunities are worth pursuing and which should be rejected. It’s therefore a starting point and not the end.

Yes it can help you to identify opportunities to include in your SWOT Analysis but each needs to be carefully vetted to make sure it’s a potential source of cash and profit and not a drain.

Some opportunities can be quickly rejected but for the possibles, you should look in more detail at the product-market to identify the key success factors. I recommend you use a tool like the SPACE Analysis to check that you are in a strong position which is suitable for an aggressive growth strategy.

The Ansoff Growth Matrix And The Six Step Profit Formula

I use the Six Step Profit Formula to help keep strategic planning focused on what really increases profit in a business.

The Ansoff Growth matrix is useful for helping you to focus on step one, finding the starving crowds. With a hungry market, business is comparatively easy but it gets much more difficult if no one has an urgent need or desire for what you sell.

The new products to the existing market square in the Ansoff matrix also helps you with step 5, persuading your customers to buy more from you more often.

A Video On The Ansoff Growth Matrix

Here is an interesting video on the Ansoff Growth Matrix and the risks involved in the strategy for growing the business by Professor Malcolm McDonald, Professor of Marketing at Cranford University School of Management.
https://youtube.com/watch?v=AORoMxgp428%3F

The Competitive Advantage Matrix (also known as the Advantage Matrix or even the Strategic Environments Matrix) is one of the more interesting generic strategy models and was created by the famous strategy consulting firm, the Boston Consulting Group (BCG).

The Two Dimensions Of the Competitive Advantage Matrix

This is a two-by-two matrix which looks at two factors:

• The number of different approaches to competitive advantage available

• The potential size of the competitive advantage

The Four Categories In The Competitive Advantage Matrix

The competitive advantage matrix therefore has four boxes

• Few advantages – and those that exist are small – Stalemate.
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• Few advantages – but those that exist are large – Volume.
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• Many advantages – but those that exist are small – Fragmented.
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• Many advantages – and they can be large – Specialised.

Since most of the possible advantages will refer to differentiation, the Competitive Advantage Matrix can also be thought of as a Differentiation Advantage Matrix.

The Origins Of The Competitive Advantage Matrix

The Boston Consulting Group had developed and popularised the ideas of managing to achieve scale economies and learning curve economies and developed the famous Growth Share matrix (this split businesses into stars, cash cows, question marks and dogs based on the growth of the industry and the relative market share of the business.)

The Competitive Advantage Matrix helped to bring out the key assumptions which made the ideas behind scale, learning and the Growth Share Matrix and explains why they worked well in some strategic environments (volume) and didn’t work so well in others.

A More Detailed Look At the Competitive Advantage Matrix Categories

Volume businesses benefit from large scale which helps them to lower production and service costs by spreading out a cost over a larger number of units. A great example is software – initial costs are enormous to develop a software program but incremental costs for the next copy are tiny. In this environment average unit costs fall quickly as volume increases.

Volume businesses also benefit from being able to spread their marketing and brand building costs over numerous sales. This is the advantage that Coca-Cola has over Pepsi. It costs each the same to create advertisements and to buy the time on TV but because Coke has approximately twice the market share, its unit costs are about half – giving Coca-Cola the choice of taking the cost advantage or spending twice as much on promotion.

Volume businesses thrive where customer needs are very similar and get into trouble as customer needs disperse across many customer value attributes.

Stalemate businesses – where there are few competitive advantages and those that could exist are small – are often trapped into thinking determined by standard industry recipes – “That’s the way this industry works, it always has done and always will do.”

As technology changes, these industries can be shaken up and the old approach made to look foolish. Think of Amazon versus music CD stores.

The Fragmented and Specialised sections are where most small businesses should be positioned, and they deserve their own special posts focusing on the opportunities. If you think that you’re trapped in a stalemate industry, you need to listen to my mp3s on the 7 big questions of business success.

Why I Like The Competitive Advantage Matrix

I like the Competitive Advantage Matrix for several reasons:

• First it shakes up the idea that big is better. It works in volume businesses but in other businesses, getting too big and expanding outside the niche damages the differentiation that creates success.
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• Second, it’s not that well known. I’ve seen it mentioned in a few books on strategy but they rarely go into much detail and instead prefer to trot out the traditional thinking from the Growth Share Matrix.

What Do You Think About The Competitive Advantage Matrix?

Do you find the insights from the Competitive Advantage Matrix useful?

Is it a self-fulfilling prophecy where businesses who think they are in a stalemate will act as if they are in a stalemate and businesses who think they can specialise will develop significant competitive advantages?

The Competitive Advantage Matrix As A Strategic Planning Model

The Advantage Matrix is one of many strategic planning models which helps you to think through a particular situation, understand the implications and possibly identify the way to improve the position of the business.

One of my favourites which isn’t as well known as it should be is SPACE Analysis which puts the level of competitive advantage into perspective with three other critical dimensions of strategy.

If you are going to implement a differentiation strategy in your business in a way that is valuable to your target market, you need to focus on:

• What you can do;
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• What your target customers want; and
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• What competitors offer

I have a ten step, four stage differentiation strategy process to help you to create the deep strategic differentiation which leads to success.

Beware of zebra marketing, it looks good on its own but is too similar to competitors.

My Differentiation Strategy Process

Stage 1 – Your Strategic Snapshot

The first step is to do a quick but comprehensive review of your business against the five pathways to profit to highlight key issues which need to be focused on and which issues don’t require detailed assessment.

Stage 2 – Your Differentiation Analysis

Steps 2 to 6 involves taking a detailed look at your business, your customers and your competitors and then thinking about how things might change in the future.

Stage 3 – Your Differentiation Options & Strategy

Steps 7 and 8 involve clarifying your potential differentiation options and deciding which to choose. Read about order winners and qualifiers.

Stage 4 – Communicating Your Differentiation Strategy

Steps 9 and 10 involve communicating your new differentiation strategy to your staff and to the market. Your staff need to understand the new priorities while your marketing, from your USP to your detailed copy and sales scripts need to emphasise these key factors of difference.

Small business strategic planning is a cut down version of the strategic planning techniques used by big businesses to help improve competitiveness.

It’s that last word that is the key.

Strategic planning is about helping you to improve the way you win profitable business from customers instead it going to your competitors.

It’s Even More Important For Small Businesses To Compete Effectively

Big businesses can sometimes succeed through sheer brute force marketing. TV advertising is expensive but constant exposure to an advertisement can move you through the Attention Interest Desire process which may lead to a buying Action.

Small businesses don’t have the resources to waste so it’s even more important that they:

1. Only fight competitive battles they stand a good chance of winning.
2. Know how to apply the strengths of the business against the weaknesses of competitors

Small businesses get the same benefits from strategic planning as big businesses.

The Small Business Strategic Planning Process

Small businesses can benefit from the same five steps of strategic planning

The strategic planning process is based on five steps:

1. Strategic analysis – using some famous strategic planning models
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2. Finding new strategic insights  identifying opportunities and threats. Finding new ways to compete more effectively.
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3. Developing a strategic action plan
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4. Taking effective action
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5. Comparing the results with expectations and feeding that back into the strategic learning process since it will either confirm previous analysis or encourage you to find out why things didn’t work as expected.

To this extent, effective strategic planning is the same in a small business as it is in a big business.

Small Business Strategic Planning Is Simpler And More Limited In Scope

Where small business strategic planning differs from that done in big businesses is that it is usually smaller and simpler in scope.

First, there aren’t the resources to do the full strategic analysis work.

Secondly there isn’t the need to do it all based on the particular circumstances of the business. That’s why I take clients through a business health check that I call a Strategic Snapshot.

The Scope Of The Business

First, small businesses often benefit from concentrating on a narrow geographical area.

As a business expands outwards, it gets more complicated, brings into consideration many more customers, potentially with different needs and more competitors.

Second, a small business often works in a tightly defined niche market which again helps to limit strategic issues as well as providing focus and a stronger sense of identify for the business.

The Four Types Of Competition

Economists identify four different types of competition which also impact on the extent of strategic planning needed for a small business:

• Perfect competition – this is where many small firms provide identical products. Businesses can’t make a big profit because the market is self-regulating but through sales and profit performance, it sends a very clear signal to the management of the business.
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• Monopolistic competition – this is where many small businesses sell differentiated products and therefore have some freedom from destructive competitive forces which reduce profitability.
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• Oligopolistic competition – this is where there are only a few sellers of a product which may be a commodity or differentiated but the actions of one competitor directly impact on the other competitors in the market.
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• Monopoly – there is only one supplier the customer can buy from.

The strategic planning priorities differ:

• In perfect competition, there is little to gain from strategic planning because no advantage can be sustained. While perfect competition is a theoretical rather than practical concept, it’s bad news if the market heads in this direction.
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• In monopolistic competition, the priority is establishing and maintaining differentiation so that the business keeps its own private market space although it will also be concerned with the future prospects of the specialist market.
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• In oligopolistic competition, the focus is on competitors, how you can gain an advantage and how they will react plus what your competitors are trying to do and how you should react.
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• In a monopoly, the focus would be on threats to the monopoly coming from outside the market.

Your situation will depend partly on how you define your market and the barriers between market segments – when you go to buy a new car do you look at everything, a tightly defined price range or a particular category of vehicle?

It also depends on your share of the market. Having a  60% share of the market means you need to monitoring the prospects of the market because your business is so dominant, it will rise and fall with it. Having 0.1% of the market makes you much less dependent on what the overall market does or what other small share competitors do.

Practical Implications of Small Business Strategic Planning

Strategic planning for a small business should be designed around the particular needs of the business.

While I have a differentiation strategy process, it is customised to the business situation.

I want to understand the key success factors and key factors of difference that apply in the market and think about how those are likely to change through the environmental pressures revealed by techniques like PEST analysis.

Consciously or unconsciously we’ll prepare a SWOT analysis to focus on the important things.

The focus of the small business strategic planning work then turns to what will be changed to improve the competitiveness of the business.

Years ago I believed that scenario planning techniques were too complicated and time consuming for many small businesses to focus on.

I saw scenario planning as a strategic planning tool for big companies but small and medium sized businesses were better off-putting together their plan on most likely assumptions and then get on with implementing it.

I was wrong.

While scenario planning still won’t be right for many smaller businesses – what they get out from the exercise won’t be worth the time and effort they put in – for some, using effective scenario planning techniques is the only was to make sure that the strategy is robust enough to cope with alternative future realities.

What Is Scenario Planning?

Scenario planning first appeared in American military planning after World War 2  to understand the possible outcomes.

In business scenario planning techniques were developed in Royal Dutch/Shell to interpret, understand and prepare for alternative versions of the future including the first OPEC oil price shock in 1973. Because the company had thought about what could happen in detail, it was much more prepared to take advantage of opportunities and respond to threats than its competitors (SWOT Analysis).

Scenario planning is a discipline for rediscovering the original entrepreneurial power of creative foresight in contexts of accelerated change, greater complexity, and genuine uncertainty.

Pierre Wack, Royal Dutch/Shell, 1984

Just to be clear, scenario planning isn’t about making a single prediction of the future but about creating alternative realistic versions of the future, each with its own logic and internal consistency.

The image above shows the movement in the price of oil and the expectations for the future oil price which highlights the inherent uncertainty in some situations.

You can see that predictions are strongly influenced by the  recent past:

• when oil prices were stable, they were expected to stay stable
• when oil prices were rising, they were expected to continue to rise
• when oil prices were falling, they were expected to continue to fall

But all the predictions were wrong and in a business where the price of oil determines whether oil wells are profitable or loss making and where exploration costs are large with high risks of failure, viewing strategy under different oil price scenarios made a lot of sense.

Scenario Planning For Small & Medium Sized Businesses Going Forward

I realise that you are almost certainly not in the oil industry but recent years have emphasised the importance of considering the external business environment in more detail.

The Uncertain World Environment

Using scenario planning techniques is a way to make sense of what has been happening and what may happen as a result of shocks to the worldwide economic systems:

• The rise of the BRIC countries in world trade – Brazil, Russia, India and China – and their acquisitions of landmark businesses. For example in the UK, manufacturing giants like British Steel is now part of the Tata group in India or MG Rover is owned by a Chinese group.
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• The development of the Internet, its impact on access to information, the development of long tail global promotions and the impact of retail buying moving from the High Street to online.
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• The credit crunch in 2007 and crisis in 2008 which saw the UK government step in and save RBS, Lloyds TSB and Northern Rock.
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• The recession of 2008/9 and despite huge fiscal and monetary stimuli, the failure to pull out of the recession strongly
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• The national debt crises of 2010/11 in Greece, Ireland and Portugal that risk spreading to other European countries
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• The national government austerity measures necessary to bring annual deficits under control.
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• The Arab spring uprisings and political changes in much of North Africa and the Middle East
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• Rising inflation in commodity prices, fuel and food which risk causing civil unrest as markets have been pumped with cash from quantitative easing. In August in the UK we saw nights of riots and looting in London, Birmingham, Manchester and other towns and cities.

As I write this in September 2011, the following could happen

• The world economy experiences a double dip as austerity measures and reductions in consumer confidence cause demand to weaken further.
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• The Euro-zone could collapse, splitting Europe into two (strong and weak economies) or even back into the individual countries. Alternatively the economic pressures could force progress for fiscal and political union to accelerate rapidly.
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• Debt defaults from Greece and potentially Ireland, Portugal and other at risk European countries will create a huge crisis in the European banking system which will make 2008 look like a picnic in the park. The knock-on effects will be worldwide because financial systems are so interlinked.
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• Inflation and unemployment both shoot up or perhaps even worse, deflation and high unemployment
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• Civil unrest becomes widespread

Business will still go on but not as normal.

Trade is essential since none of us as families, as local regions and as countries are self sufficient.

The Simple Choice

You can either put your head in the sand and think that it’s all too difficult, you can’#t control any of it and you’ll react as things happen.

Or you can start thinking about the alternative futures and plan how you can make sure your business is positioned well in all likely scenarios.

How To Put Scenario Planning Techniques Into Practice

Step 1 – form your scenario planning team. You’ll find it easier to do with other people than on your own because one idea sparks another and where there are heated debates, you have a warning that there may be a further split in scenarios.

Step 2 – Gain a shared understanding of the current situation. The future is uncertain but you want to be clear about the present. Agree how far you want to look into the future. For most businesses I’d think in terms of two to three years but some might need to look ten years or more ahead.

Step 3 – Use the common environmental and industry analysis tools like PEST Analysis, Porter’s Five Forces and SKEPTIC to look back to look forward. Identify the trends and any recent or potential turns. As the graph of the oil prices above shows, trends can continue, they can stop or reverse.

Step 4 – Identify either/or situations which will form the basis for your scenario planning. For example it looks like the Euro can’t continue as it is and it will either break up or force political union. The impact of either will create very different scenarios for anyone who trades with Europe.

Step 5 – prune your options by rating each in terms of potential impact and likelihood. Rate each dimension in terms of high, medium and low. One big problem with scenario thinking is that you can create an overwhelming number of options and you lose yourself in all the different possibilities. That goes against the objective of scenario planning which is to provide more clarity to your strategy.

If you don’t find the high, medium, low to give you sufficient clarity, go back and rate the lows as 1 to 3, the mediums as 4 to 6 and the highs as 7 to 10. Some strategists favour going straight in from 1 to 10 but I find it much easier to filter through the high, medium and low first, group like items together and then further refine the ratings.

Go through and eliminate the easy ones – the lower impact or lower likelihood options and steadily move up so you’re left with three main categories to focus:

• high impact, high probability
• high impact, medium probability
• medium impact, high probability

If all the major future changes are highly probable, you have the option of reverting back to the standard strategic planning techniques since you view the future with a lot of certainty.

If you have different high impact, medium probability changes, then you need to continue your scenario planning exercise.

Step 6 – sketch out possible scenarios as combinations of the big issues – try to limit to two or three factors since the matrix of possibilities again grows quickly.

e.g. a 2 x 2 will generate four combinations, 3 x 3 will generate nine.

Again look to eliminate based on lower impact and probability because I want you to focus on three or four scenarios to take forward for more detailed analysis.

e.g. for a luxury goods company which sold high volumes into Europe and had European competitors I’d want to focus my scenario thinking on:

• Euro-zone collapse, banking crisis, five to ten year global depression
• Long term European uncertainty, banking crisis, one to three year global depression
• United States of Europe, no banking crisis, one year global recession
• United States of Europe, no banking crisis, no recession

Step 7 – Flesh out the scenarios into logically consistent stories falling back on PEST analysis and the Five Forces. Think through the impact of the different scenarios on:

• Directly on your business, your employees and suppliers
• On your customers and their customers further upstream in the value chain
• On your competitors and their employees and suppliers

Step 8 – Look at the likely transition from here to there and the likely events and warning signs that will tell you which way the future looks to be moving. It’s always much easier to look backwards and see the route than it is to look forward.

Step 9 – If you already have a strategic plan for the next few years, look at it under your different scenarios to see how robust it is. Where does the plan come under pressure? Where are the fundamental assumptions open to challenge?

Step 10 – Identify how you can change your strategy to work under the different scenarios. What strategic options are there that make sense under the different views of the future? What strategic options make sense regardless of what happens?

You’ll see three types of options emerge:

1. Those that you need to get on and do because they make the business stronger and more competitive under each scenario.
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2. Those that make sense once it is clear that something is happening and which can wait until you get clear signals from the market.
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3. Those that create a winning strategy under one scenario but not the others and may even severely damage the business under the different scenarios but, if you’re going to seize the advantage, they can’t wait until you know the way the future will develop. These are the big bets which can make or break the business. Whether you go ahead depends on your own attitude to risk, the potential rewards and losses and how likely you believe the scenario is. They will either make you look a business genius or a fool but at least with scenario planning, you’re going into the decision with your eyes open.

Step 11 – Start implementing your strategy decisions.

Step 12 – Keep monitoring the external environment for indications that one scenario is becoming more likely and reflect that in your emerging strategy.

Scenario Planning Techniques A Quick Summary

There is a lot to take in when you start thinking about using scenario planning techniques to guide your business strategy development.

Here’s a quick summary:

1. Use PEST analysis and the five forces to identify what may happen in the foreseeable future.
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2. Focus attention on two or three key variables.
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3. Develop logically consistent scenarios
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4. Design a winning strategy under each – compare and contrast to identify things to do now, future options and big bets

When Should A Smaller Business Use Scenario Planning Techniques?

If you’re responsible for strategy in a business employing thousands, then I believe scenario planning should be part of your annual strategic planning process.

If you employ 50 to 250 people – what is classified in the UK as a medium sized company – then you should use the scenario planning techniques I’ve explained only when you believe you’re facing major uncertainty in the wider business environment.

You’ll have realised that scenario planning is time consuming and can take you throw more darkness before you find clarity. It can get scary looking into the future and the options can appear overwhelming as you start using scenario planning.

You’ll also find that some of your managers cope with talking through the uncertainties much better than others. Some people find it much easier to think conceptually and imagine different situations while others are much more practical and grounded in what’s happening in the real world.

These people present a challenge since if you don’t involve them in building up the scenarios, they will reject the implications. The clearer the drivers of the scenarios are, the easier it will be to gain their support.

If you’re a smaller business, then you’re less likely to have problems applying the scenario planning techniques because of the natural closeness of the management team and perhaps as a business owner, your more powerful position in the team.

But the time required to benefit of scenario planning ratio worsens as the business gets smaller. That’s just because the returns from winning will be smaller.

However scenario planning can still be useful for even the smallest of businesses.

If you’re business is in a town or city dependent on one big business – or even a specialist trade – and that dominant force is under threat then you have two or three clear scenarios:

• Things carry on as they are
• The big business closes its local plant
• The big business closes another plant and moves its production to your local plant

Now imagine you want to grow your retail business and you can do it by increasing the size of your current store, opening up a second store in another part of the town or city or opening up a second store in another town or city.

Scenario planning helps you to make judge each of the options and make a more informed decision about which is the best option.

If you’re the owner of a small or medium sized business and you’re waking up in the middle of the night worrying about what may happen if events play out in certain ways, then it’s clear that your subconscious is wrestling with fundamental uncertainties.

It’s worthwhile committing yourself to thinking through the uncertainties and working your way through the scenario planning techniques. Uncertainty creates stress which causes mental processing difficulties rationally and emotionally.

If You Don’t Want To Use The Scenario Planning Techniques

If you don’t want to use the scenario planning techniques outlined above then you have two choices:

1. To make bold strategic moves effectively on gut-feel or the toss of a coin
2. To keep your strategies focused on the short term, no lose options

Both are a gamble when their is fundamental environmental uncertainty.

In the first option, you may win big or you may lose.

In the second, by playing it safe, you may be condemning your business to a long term struggle against a competitor who has seized the advantage.

Have You Used Scenario Planning?

If you’ve used scenario planning in your strategy development, I’d love to hear about your experiences so please leave a comment.

Did the scenario planning help you to think through the issues more clearly?

Do you have any special tips to share about scenario planning?

I thought this SKEPTIC acronym for environmental planning from Stephen Haines was pretty neat when he mentioned it in an email.

I use PESTER and Michael Porter’s Five Forces but SKEPTIC environmental scanning combines them both if you’re not going to venture into detailed scenario planning.

What is SKEPTIC Environmental Scanning?

SKEPTIC stands for

S = Social Demographic (the S from PESTER)

K = Competition and Substitutes (two of the five forces)

E = Economics and Ecology (the two Es from PESTER)

P = Political/Regulatory (the P and R from PESTER)

T = Technology (the T from PESTER)

I = Industry/Suppliers (supplier power and new entrants from the five forces)

C = Customers and Citizens (the buyer power from the five forces).

Thoughts On SKEPTIC Environmental Scanning

OK SKEPTIC may not introduce much new into environmental scanning (although citizens doesn’t directly translate) but if you’ve used PESTER (or PEST, PESTEL or STEP) and the Five Forces in the past, then using SKEPTIC may freshen things up a bit and get your top team thinking again.

I see some cynicism towards both the five forces and PEST analysis because they are often not used well by management teams working on their strategy.

SKEPTIC Is A Strategic Planning Model

SKEPTIC Environmental Scanning is one of the frameworks included in my Strategic Planning Models guide.

Click the link to find out what other models could help you to develop a winning business strategy.

Have You Used The SKEPTIC Environmental Scanning Strategy Tool?

Have you used SKEPTIC as a way to combine PEST analysis with the five forces or do you know of any other similar tool which combines them both.

I’d like to know so please leave a comment.

The SPACE Matrix or more formally, the Strategic Position and Action Evaluation Matrix recommends one of four basic strategic approaches for a business and today I’m going to focus on the Conservative Strategy dimension.

This is when the business is in a good position in its financial strength and environmental stability but its market offers limited opportunities because it is either unattractive or the business has a competitive disadvantage or both.

The SPACE Matrix

The SPACE  matrix assesses the strategic position of a business along four dimensions – Industry attractiveness, Competitive advantage, Environmental stability and Financial strength.

The SPACE matrix recommends four broad strategic directions depending on the assessment of each dimension:

• Aggressive strategy
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• Defensive strategy
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• Conservative strategy
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• Competitive strategy

Conservative Strategy In The SPACE Matrix

The business is trapped into a weak position in an unexciting market – this is the dog position in the Growth Share Matrix characterised by low market share and low (perhaps negative) market growth.

The company has a choice:

1. To improve its current competitive position by developing competitive advantages or focusing on the more attractive niches of the overall market.
2. Looking outside the current market for profitable opportunities, either building on existing resources and capabilities or diversifying into a new area.

Which approach makes sense depends on how badly it rates on the Industry Attractiveness / Competitive Advantage matrix.

Combined the individual assessments are negative but this may be:

• IA and CA are both weak
• IA is OK but CA is weak
• IA is weak but CA is OK

If the industry looks bad and the business has significant competitive advantages, then any remaining profitability is under major threat and the business can become a cash drain which will reduce financial strength to diversify elsewhere.

The business should look to trim costs and any loss making customers and products wherever it can to buy more time to find attractive diversification opportunities. It should also cut back on capacity so that it shrinks to fit the future market expectations.

Otherwise, the business may be able to improve its position through a determined strategy to improve its competitive advantages.

Businesses new to strategic management and customer value strategies may find they can make major gains through focused action and even find overlooked assets and opportunities. The business should be careful it doesn’t over-invest since upside is weak because the market isn’t considered to be attractive. The business may identify niches where it does have advantages or can quickly develop advantages that are not appreciated in the wider market.

The nice thing about the conservative strategy in the SPACE matrix is that the business is not under major threats from the environment and because of its financial strength, it has time to consider its options.

The SPACE Matrix or more formally, the Strategic Position and Action Evaluation Matrix recommends one of four basic strategic approaches for a business and today I’m going to focus on the Competitive Strategy dimension.

This is when the business is in a good position in its marketplace but its financial strength is insufficient to compensate for environmental instability.

What Is The SPACE Matrix

The SPACE  matrix assesses the strategic position of a business along four dimensions:

• Industry attractiveness
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• Competitive advantage
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• Environmental stability
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• Financial strength

Combining these four dimensions provides four broad strategic directions:

• Aggressive strategy
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• Defensive strategy
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• Conservative strategy
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• Competitive strategy

Competitive Strategy In The SPACE Matrix

When Does The SPACE Matrix Recommend Following A Competitive Strategy?

The competitive strategy approach is recommended when:

The business scores well on the Industry Attractiveness / Competitive Advantage  (IA/CA) axis of the SPACE matrix but unfavourably on the Financial Strength /  Environmental Stability (FS/ES) axis.

The high IA/CA score can be when:

• The industry is considered attractive and the company has competitive advantages over its rivals, a very strong position.
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• The industry is considered attractive and the business is neutral on competitive advantage.
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• The industry is reasonable but the business has a strong competitive advantage.

The low FS/ES score can be when:

• The environment is unstable and the company is weak financially.
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• The environment is considered to be unstable and the business has modest financial resources.
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• The business is weak financially but environmental stability is reasonable.

What Does A Competitive Strategy In The SPACE Matrix Involve?

The key strategic imperative is to  acquire financial strength to compensate for the environmental instability so that the business can then follow an aggressive strategy.

The business needs to split its attention between strengthening the balance sheet and improving the underlying profitability of its sales.

To strengthen the balance and to provide the funds for expansion, it can:

• Raise extra share capital or even long term loans. A private business can turn to private equity in terms of business angels or venture capital firms to provide cash although this will dilute the interest of the current shareholders.
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• Merge with a cash rich company who is looking for opportunities to expand.
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• Form alliances to gain access to tangible and intangible assets without having to incur high investment costs.
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• Improving profitability will also lead to strengthening the balance sheet provided the gains aren’t withdrawn by the owners. This will take time to build up cash and equity.

To improve profitability of the business and take advantage of its strong combined position on the industry attractiveness /  competitive advantage axis, the business should:

• Reduce its fixed and variable costs provided it doesn’t damage the competitive advantage. Innovate to improve productivity.
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• Emphasise the differentiation competitive advantages, make sure they are communicated well to the market and increase prices to improve margins. This action will depend on where the business is on the customer value map.
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• Expand into new markets and products where the business is confident it will be profitable  – see the Ansoff Growth matrix.

What To Look Out For Following A Competitive Strategy

The intention of the competitive strategy is to boost profitability and balance sheet strength so that it can move into an aggressive strategy.

The business must make sure that its hard-nosed emphasis on profitability does not undermine its competitive advantage. Businesses are often poor at cutting costs strategically since it involves hard decisions to save some areas – perhaps even increasing investment – while cutting back in others. The 10% off all costs is easier to manage and looks fairer to employees in particular but it risks undermining key capabilities and driving away essential staff who want to move to more secure employment.