Andreas Hart
A Strategy for the Management of Digital Information Products
Customer Integration and Customer Involvement
ISBN-10: 3-8324-9848-6
ISBN-13: 978-3-8324-9848-1
Druck Diplomica® GmbH, Hamburg, 2006
Zugl. Universität Koblenz-Landau, Abt. Koblenz, Koblenz, Deutschland, MA-Thesis /
Master, 2006
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A Strategy for the Management of Digital Information Products iii
Contents
List of Figures ...vi
1 Introduction...1
1.1 Background and Motivation ...2
1.2 Research Question ...4
1.3 Methodology ...5
1.4 Outline of the Thesis ...6
Part I: THEORETICAL FRAMEWORK
2 Strategy ...10
2.1 Some Definitions ...12
2.2 Strategic Options...16
2.3 Hybrid Decisions ...19
3 The Product Lifecycle...21
3.1 The Seven Stages of the Product Lifecycle ...22
3.2 Criticisms of the Concept...24
3.3 Product Lifecycle and Supply Chain Management ...25
4 Information Products ...28
4.1 Common Characteristics ...30
4.2 Experience Goods ...33
4.3 Being Digital or Not...35
4.4 Modularity...38
A Strategy for the Management of Digital Information Products iv
Part II: CUSTOMER ORIENTATION AND THE SUPPLY CHAIN
5 Towards a Customer-Oriented Strategy...43
5.1 Innovate or Adapt?...44
5.2 Corporate Strategy Revisited ...46
5.3 Business Strategies...50
6 Customer Integration ...57
6.1 Customer Integration and End Users ...58
6.2 Integrate the Customer in the Supply Chain ...59
7 Customers and Mass Customization...62
7.1 Product Customization as a Standard Process ...64
7.2 A Customers' Needs Model...66
7.3 Value Experience ...68
Part III: CUSTOMER INVOLVEMENT IN THE PRODUCT LIFECYCLE
8 Customers and New Product Development ...73
8.1 Success Factors of New Product Development ...75
8.2 Open and Closed Innovation...77
8.3 Involve Customers in Early and Late Stages ...81
9 Customers and Product Management ...82
9.1 The Business Unit Lifecycle ...84
9.2 The Source of Incremental Innovation ...88
9.3 Innovate First, Then Adapt, Then Innovate... ...91
10 Product Revitalization...99
10.1 A Reoccurring Decision...100
10.2 Other Revitalization Strategies ...102
A Strategy for the Management of Digital Information Products
v
11 Conclusion ...105
References...116
Abstract ...125
List of Figures vi
List of Figures
Figure 1. The Three Research Objects and Their Interdependencies 6
Figure 2. Organizational Levels of Strategy in a Company 13
Figure 3. The Relationship of Strategy and Plan 14
Figure 4. The Relationship of Vision and Strategy 15
Figure 5. Product-Market Strategies for Business Growth Alternatives 17
Figure 6. The Eight Basic Options for a Competition-Oriented Business Strategy 18
Figure 7. The Seven Stages of the Product Lifecycle 22
Figure 8. Evolution of Information Products and Processes 27
Figure 9. A Model of the Information Product 29
Figure 10. Strategic Orientation Modes of the Business Unit 45
Figure 11. The Vision of Cost Leadership and the Vision of Differentiation 48
Figure 12. One Strategy, Two Visions 49
Figure 13. One Strategy, No Vision 49
Figure 14. The Dynamics of Innovation in Industry 52
Figure 15. The Evolution of Market Segmentation 53
Figure 16. The Vision of Breakthrough Innovation and the Vision of Customer Orientation 55
Figure 17. Factors Affecting Mass Customizing Capability 63
Figure 18. The Objective and Subjective Customers' Needs Model 67
Figure 19. The Mass Customization Experience 69
Figure 20. Factors Affecting the Success of Product-Development Projects 75
Figure 21. An Example Company 83
Figure 22. The Change in Customers as a Technology Matures 84
Figure 23. Evolution of an Exemplary Business Unit 86
Figure 24. Trade-Off Relationship Between Customers' Abilities and Innovativeness 89
Figure 25. A Generic Framework for the Definition of Tactical Plans 93
Figure 26. Tactics for a Customer-Oriented Strategy 95
Figure 27. Starting the Next Growth Cycle 98
Figure 28. The Product Deletion Decision 100
Figure 29. Strategy Shift Requires a Sense of Timing 103
Figure 30. Bottom-Up Implementation vs. Top-Down Observation 106
Figure 31. Implementing a Simultaneous Hybrid Strategy 110
Figure 32. Implementing an Ambiguous/Hybrid Strategy 110
Figure 33. The Triangle of Strategy Implementation 112
Figure 34. A Sociotechnological System of Independent Actors 113
1 Introduction
1
1 Introduction
The first chapter provides an overview of the objective and the structure of this thesis.
In this thesis, a sequential hybrid strategy for the management of digital information
products will be developed. Information products are rented or sold by information
companies. Farther on, information companies can be described as socio-
technological, targeted and open systems [Ferstl and Sinz, 1998, pp. 59-66] with at
least one strategic business unit (SBU) that sells or rents (digital) information
products.
Societal, technological, and organizational changes offer new opportunities for
these information companies, but also lead to the question how companies can find an
appropriate strategy to maintain competitiveness in a changing environment. These
companies need clear strategies for the strategic business units (SBUs) that manage
the production of goods and services along the supply chain on the one hand, and the
evolution of goods and services throughout their lifecycle on the other hand.
The objective of this thesis is to unite findings from the different research
fields of media management (MM), product lifecycle management (PLM) and supply
chain management (SCM) under the common roof of a sound, customer-oriented
strategy to test the first hypothesis that a customer-oriented strategy fits best for
business units that sell or rent digital information products.
The second hypothesis puts into words that the involvement of customers at
the different stages of the product lifecycle benefits the company as a whole by
fostering innovation and competitiveness. Science and technology combined offer
many interesting approaches to include "the voice of the customer" [e.g. Cooper,
2001, p. 87; Gorchels, 2003, p. 13] in new or existing information products.
1 Introduction
2
1.1 Background and Motivation
At the beginning of the 21
st
century, the individual customer plays a more important
role in the mass market for information products than ever before. Traditional mass
markets like the media market are divided into smaller fragments, as individualization
in the society and increased mobility lead to changing product usage behavior and
individualization of demand, which again influences customers' product preferences.
These societal changes can be observed globally, and not only information
products are affected. In the USA, for example, the consumption of dairy products
dropped from 585,8 pounds in 1994 to 575,6 pounds per inhabitant in 1995. As the
figures constantly dropped further the following years, milk producers investigated
and found out people were consuming less dairy because they spend less and less time
at home the place where 80% of milk was traditionally consumed. One company
solved the problem by introducing new, resealable packaging so that milk could be
consumed on the move [Edwards, 1998]. This rather simple innovation was not only
sufficient to increase sales in 1998 by more than 200 percent for the Chicago area
alone, but had also the potential to revitalize a mature market in the long term
[LaSalle and Britton, 2003, pp. 62-63].
Besides societal changes, technological advances in the area of information
and communication technology (ICT) facilitate the cost-efficient digital production
and distribution of information products without change of representation from digital
to analog or vice versa. New and interactive media like Internet and mobile networks
exist today, where digital information can be distributed to end customers in their
pure, virtual form, saving costs for physical handling and shipping. From there it is
understandable that new media already compete with traditional media like television,
radio and printed products, even if up to now the "core of electronic commerce"
[Choi, Stahl and Whinston, 1997, pp. 16-20] business transactions in a digital
marketplace, combined with the exchange of digital information products, between
digital agents is still a vision that is only partly realized, as too many potential
customers remain locked out.
While production technology has made amazing progress, the digital
distribution of information products at least in the area of business-to-consumers
(B2C) still remains problematic, as the resources for physical distribution have to be
1 Introduction
3
maintained simultaneously. In order to come closer to the core of electronic
commerce, broadband network access on the consumer side is one essential factor.
Besides availability of mobile networks, broadband Internet access can be seen as an
enabler for innovative digital products or services, especially when they depend on
high bandwidth. According to a recent study by the Organization for Economic
Cooperation and Development (OECD), broadband diffusion is steadily increasing in
the 30 OECD member states, but the average broadband penetration throughout the
member states has only reached 11,8 subscribers per 100 inhabitants up to June 2005.
Korea maintains the highest penetration at 25,5 percent [OECD, 2005].
Organizational changes are a third factor influencing the core business of
information companies. A trend towards smaller organizations that act in loose,
cooperative networks can be observed [e.g. Hagel, 1996, pp. 5-6; Schary and Skjøtt-
Larsen, 2001, pp. 21-22; Picot, Reichwald and Wigand, 2003, pp. 6-7]. The ongoing
modularization of organizations as well as products strongly interacts with the
strategy of companies. For example, Microsoft recently announced the restructuring
of the enterprise into the three business units Platform products & services, Business
division and Entertainment & devices [Microsoft, 2005]. This restructuring can be
seen as a reaction to the diminishing importance of base technology and increasing
importance of business services and media content that are provided online over
digital networks, on top of a common, invisible infrastructure.
The progressing integration of the European market and increasing global
competition in general, together with shortening product lifecycles provide further
challenges for information companies. Schary and Skjøtt-Larsen describe the
phenomenon in their book as follows:
"The world now faces global competition, focusing on rapid response to customer
needs at low cost, accompanied by market access and rapid deployment of
technology. A significant shift is taking place from mass production with
standardized products and services towards meeting individual customer
requirements for both products and services."
1
This shift from pushing products to the market, based on demand forecast, to
market pull, driven by real-time customer demand, offers new opportunities for
1
[Schary and Skjøtt-Larsen, 2001, p. 22].
1 Introduction
4
information companies to provide more variety and customized information products,
products that can be adjusted to the preferences and needs of the individual customer
prior or during usage.
Mass customization is one possible answer to these changes. In a study about
mass-customized watches, Franke and Piller actually found out that end users
willingness to pay (WTP) could be increased by an average of approximately 100
percent when offering individual products, and that the user acceptance of this
offering was high [Franke and Piller, 2004]. Thus, are customized products a solution
to get closer to individual customers?
The personal computer (PC) is a good example for a highly customizable
product on both hardware and software side. Despite of many advantages, this device
still needs some expert knowledge for maintenance and operation, and it is hard to use
for most inexperienced novices, especially in the case of failures. Even in the midst of
what some people call "digital revolution" [WSIS, 2004; Brack, 2003, p. 9], there is
still much room for improvements concerning user-friendliness, adaptability and
usability of information products, and who knows better about possible improvements
than the customers themselves?
1.2 Research Question
Companies that sell or rent (digital) information products, namely media/enter-
tainment/advertising/software companies and online service providers, often struggle
with the new volatile environment. These information companies need clear strategies
for the strategic business units (SBUs) that manage the production of goods and
services along the supply chain on the one hand, and the evolution of goods and
services throughout their lifecycle on the other hand. Therefore, the main question in
this thesis is:
Question: Which strategy is right to ensure competitiveness and
continuous success of a business unit selling or renting digital
information products?
If a business strategy can be recommended, it would also be interesting what
the implications of this strategy are and, first of all, how to implement it. So strategy
as well as implementation aspects are important to come to a sound recommendation.
1 Introduction
5
1.3 Methodology
This thesis is based on literature research at the University of Koblenz and the
Copenhagen Business School (CBS) in Denmark. A literature review to identify the
key pieces of existing relevant research has been undertaken, and the synthesis of
findings from different sources to answer the research question is the objective.
At first, the two expressions `information products' and `strategy' need to be
defined to be able to answer the question exactly. The concept of the product lifecycle
and the considerably better known concept of the supply chain have been chosen to
serve as a frame while further approaching the question. To continue from there, two
hypotheses have been formulated which could be useful to clarify later details.
Berthon, Hulbert and Pitt summarize the ongoing debate in the field of
strategic management. The two guiding templates for a business strategy being
discussed are customer orientation and innovation orientation [Berthon, Hulbert and
Pitt, 1999, p. 37]. Hypothesis 1 picks up this common idea and reads as follows:
Hypothesis 1: A customer-oriented strategy suits best for business units
selling or renting digital information products.
As Govindarajan and Gupta state, competitive advantage is not only a function
of how well the company plays the existing rules of a game, but also depends on the
ability of a company to radically change the rules of the game [Govindarajan and
Gupta, 2001]. The ability to innovate therefore seems to have a positive effect on
competitiveness. Hypothesis 2 is concerned with the effect of customer involvement
on innovation and therefore also on competitiveness:
Hypothesis 2: The involvement of customers at different stages of the
product lifecycle benefits the whole company by fostering innovation.
Examining the question and the hypotheses, three main research objects can be
identified, which are depicted in figure 1. The intersection of all three research objects
is of special interest. Therefore, Part III of the thesis is dedicated to customer
orientation and involvement in the product lifecycle of information products. The
character of information products together with definitions of strategy and theory
about product lifecycle and supply chain are described in Part I. Customer orientation
and customer integration in the supply chain is the main topic of Part II.
1 Introduction
6
Product Lifecycle
Information
Products
Customer
Orientation
Figure 1. The Three Research Objects and Their Interdependencies
1.4 Outline of the Thesis
After this introduction, chapter 2 starts with the definition of central strategic terms.
Then, the options for business strategies and hybrid strategies in the context of
information companies are sketched.
Chapter 3 essentially describes the theory of the product lifecycle, which can
be compressed to the three main stages new product development (NPD), product
management (PM) and revitalization/retirement of products. Retirement and
revitalization stages respectively play an exceptional role at the end of a product
lifecycle. The chapter ends with a critical observation of the concept and managerial
application of the lifecycle view in combination with the supply chain concept.
In chapter 4, first the general characteristics of information products are
illustrated. For example, production of information goods is usually closely connected
with high fixed costs, which contrasts with rather low variable cost for reproduction
and possible marginal costs near zero for digital distribution. Information products are
also experience goods. Their value can only be determined after consumption.
Different actions can be undertaken to increase customers' trust in a new product's
quality prior to purchase. The degree of digitalization and modularization are further,
but not necessary properties of information products, even if these properties can
increase utility for both customers and producers.
Chapters 5 till 7 cover the subject of customer orientation from a supply chain
management (SCM) perspective. Chapter 5 paves the way towards a customer-
oriented strategy. Based on the preceding chapters and against the background of
hybrid strategies, Porter's corporate strategy types of cost leadership and
1 Introduction
7
differentiation are reviewed. Business strategy between innovation and customer
orientation is the next topic of this central chapter that provides a generic framework
for business strategy in the end. Applying Berthon, Hulbert and Pitt's strategy matrix
approach, four basic strategic orientation modes of a business unit are elaborated and
discussed. The customer orientation mode is further analyzed in the following
chapters.
Chapter 6 leads over to customer integration as a possible implementation
method of strategic customer orientation, and chapter 7 introduces the basic ideas of
mass customization, a method to integrate the customer or rather his/her preferences
in the production process along the supply chain. A model for customers' information
needs and implications for the competitiveness of a business unit offering customized
products closes this part.
Chapter 8, 9 and 10 deal with customer orientation from the perspective of
product lifecycle management (PLM). Customer involvement is a method to
implement strategic customer orientation in the product lifecycle. Chapter 8
introduces customer involvement as a possible but debatable success factor of new
product development (NPD). The broader idea of open innovation is introduced next.
Finally, the differing effectiveness of customer involvement in different phases of the
new product development process is discussed.
In chapter 9, the management of information products and the evolution of
information products from market introduction to mature products are discussed.
Here, the question is answered why product management in practice predominantly
deals with incremental product innovation. In chapter 9.3, a new and generic
framework for the development of tactical plans is proposed and demonstrated in the
light of a sequential hybrid business strategy.
Chapter 10 finally deals with the revitalization and retirement decision for
mature products at the end of their lifecycle. The revitalization or retirement of mature
products is as important for a company as the development of new products. The
special role of mass customization and customer-oriented strategies is discussed in
this context.
The thesis ends with the conclusion in chapter 11. Based on the strategy
developed in this thesis, the relationship of sequential and simultaneous strategies is
discussed. The question and the hypotheses from the first chapter then are in the
center of attention at the close of the thesis.
Part I
THEORETICAL
FRAMEWORK
2 Strategy 10
2 Strategy
In various empirical studies, H. Igor Ansoff found that the competitive environment
of companies tends to become more and more dynamic and complex (turbulence)
while companies need more and more time to react (inertia) at the same time [Ansoff,
1979, pp. 31-32; Schneck, 1994, p. 642]. From the evidence provided by these
studies, he concluded a general need for strategic planning, which till this day is the
basis for successful later strategy implementation and strategy control.
Other authors refined this process. Patrick Haertsch [2000, pp. 165-186] for
example proposes a five-step process to develop and implement a strategy for
electronic commerce:
-
Analysis of opportunities and threats (environment analysis)
-
Identification of resources (analysis of strengths and weaknesses)
-
Definition of the strategy
-
Implementation of the strategy
-
Efficiency review
John Stark [2005, p. 195], while developing a strategy for product lifecycle
management (PLM), describes a similar approach with five successive steps
(Collecting information, Identifying possible strategies, Selecting a strategy,
Communicating the selected strategy, Implementing the strategy). As a final example,
Linda Gorchels' planning framework for product managers [Gorchels, 2003, p. 37] is
outlined. The framework comprises 5 steps from Environmental scan, Determining
goals & objectives and Definition of strategy & tactics to Implementation of plans and
Tracking of results.
2 Strategy 11
All these approaches are obviously refined versions of the original process of
strategic planning, implementation and control. Strategic planning starts with a
strategic analysis of the company (inside-out) and its environment (outside-in), with
the goal of defining strategy and implementation plans [Schneck, 1994, pp. 645-646].
Within recent years, as a result of the discussion about advantages and
disadvantages of the market-based (outside-in) and resource-based (inside-out) view
on a company, the SWOT-analysis has been rediscovered as an effective tool to start a
strategic planning cycle. A SWOT-analysis comprises the analysis of strengths and
weaknesses (capabilities) the company possesses, and the analysis of opportunities
and threats (environment states and trends) it faces in its current environment
[Andrews, 1987, p.18; Collier, 1995, p. 53; Haertsch, 2000, pp. 86-87; Stark, 2005,
pp. 212-213]. Capabilities represent an inside-out or resource-based perspective,
while opportunities and threats provide an outside-in or market-based view on the
company
2
.
In accordance with the general contingency theory, an optimal fit between
internal capabilities and external environment is the goal of every successful strategy.
A clear strategy and implementation plans are important for the success of a
company. However, many other factors like the organizational, technological and
societal developments influence the success of a company as well as the choice of a
specific strategy. Vice versa, a specific strategy can surely influence internal as well
as external factors in general. "The foundations of corporate success are unique to
each successful company", states Kay in this context [1993, p. 19], and it is important
to stress that a strategy is not the only success factor for a company.
External information about markets, customers and competition needs to be
collected, and objective internal evaluation of the company's assets and resources
needs to be carried out before a detailed strategy and tactical/operational
implementation plans can be formulated. Developing a strategy requires strategic
thinking, which is broad and deals with long-term objectives. Developing a plan
requires tactical or operational thinking, which is focused and deals rather with short-
term objectives [Gorchels, 2003, p. 109; Stark, 2005, p. 131].
2
Many authors agree on the complementarity of market-based and resource-based view, see e.g.
[Bleicher, 1997, p. 52] or [Haertsch, 2000, p. 147]. Bleicher quotes 3 further external sources, and
Haertsch quotes 6 other authors. The common ground of both views is often seen in the goal of creating
highest-possible value or value proposition for the customer [e.g. Bleicher, 1997, pp. 39-42].
2 Strategy 12
2.1 Some Definitions
In this chapter, various common strategic terms are defined and differentiated from
each other. Additionally, the term `information company' is defined.
Information Company
The term information company, as used in this thesis, refers to a sociotechnological,
targeted and open system [Ferstl and Sinz, 1998, pp. 59-66] with at least one strategic
business unit (SBU) that sells or rents (digital) information products. As nearly every
information product is created with more or less ICT support in the industrial society,
no explicit distinction is further made between digital and non-digital information
products. However, digital and physical distributions of information products need to
be distinguished, as the marginal costs of digital distribution can fall close to zero,
whilst the marginal costs of physical distribution are significantly higher.
Insa Sjurts names the three components of media products as Information,
Entertainment and Advertisement [Sjurts, 2002, p. 7], while Hui and Chau [2002]
classify digital information products into three categories of Tools & utilities
(software), Content-based digital products and Online services; therefore media/enter-
tainment/advertising as well as software companies and online service providers can
be enumerated in the set of information companies.
Mission
The Florida Intl. University defines a mission as "The core purpose of an organization
its reason for existing" [FIU, 2001]. The State University of New York in its current
strategic plan defines that a mission "helps explain the distinctiveness of an institution
and represents assumptions and purposes that guide its planning and activities. It
describes the organization's `reason for being'" [SUNNY Cobleskill, 2004].
Vision
Linda Gorchels states that the strategic vision for a company or a product could be an
example for a long-term goal [Gorchels, 2003, p. 40]. A vision can be defined as "The
long-term desired future state of an organization. Visions should inspire and
motivate" [FIU, 2001]. As quoted by Stark, the Oxford English Dictionary defines a
vision as "A mental concept of a distinct or vivid kind; an object of mental
2 Strategy 13
contemplation, especially of an attractive or fantastic character, a highly imaginative
scheme or anticipation" [Stark, 2005, p. 130]. A vision hence is a future goal or state
that is desirable to be reached.
Goals/Objectives
According to the FIU Millennium Strategic Planning Handbook, goals are "The
desired end results" [FIU, 2001]. Contrary to goals, objectives are "Specific and
measurable means for accomplishing goals" [FIU, 2001]. While objectives should be
measurable, goals do not need to be. Therefore, Gorchels proposes that an objective
should be SMART, i.e. Specific, Measurable, Achievable, Result-oriented and Time-
based [e.g. Gorchels, 2003, p. 40] to allow for later control of the achievement of
objectives.
Strategy
Strategies can be classified according to different criteria, such as direction of growth
(growth strategies, hold strategies, shrink strategies), market behavior (offensive
strategies, defensive strategies), regional scope (local strategies, multinational
strategies, global strategies) or organizational scope (corporate strategies, business
strategies, functional area strategies) [Schneck, 1994, p. 644]. Latter classification is
the most important for strategic planning and is the one applied in the following:
Corporate Strategy
Business Strategy Unit
n
Business Strategy Unit
1
Functional Area
Strategies
(Production, Marketing/
Product Strategy...)
Functional Area
Strategies
(Production, Marketing/
Product Strategy...)
Figure 2. Organizational Levels of Strategy in a Company
[based on Schneck, 1994, p. 644; Becker, 1998, p. 140; Haertsch, 2000, p. 46]
This classification is depicted in figure 2. The corporate strategy is the general
frame for the strategy of subordinated business units (business strategies), while
individual business strategies are anew the frame for detailed functional area
2 Strategy 14
strategies on the rather operational level. This hierarchy combined with decreasing
granularity of objectives towards lower levels of strategy ensures that the overall
objectives on the corporate level can be achieved.
Besides different classifications, various definitions of strategy can be found in
literature. Porter, as a prominent example, defines strategy as "the creation of a unique
and valuable position, involving a different set of activities. If there were only one
ideal position, there would be no need for strategy" [Porter, 1996]. Strategy is creation
of a position. It is connected with activities that are aligned to common objectives.
Porter also stresses that there exists no ideal or single generic strategy that fits to
every situation (contingency theory).
Tactical/Operational Plan
The word `tactics' has its origin in the Greek word `taxis', which describes a military
formation, led by a `strategus'. Once decided, the military strategy directs tactics, the
use of weapons in battle [Stark, 2005, p. 131]. Furthermore, the Oxford English
Dictionary gives two definitions of a plan [Stark, 2005, pp. 130-131]. One roughly is
the description of a map, a graphical display of relations of a set of objects in time,
place etc. The other defines a plan as "A formulated or organised method according to
which something is to be done; a scheme of action, project design, the way in which it
is proposed to carry out some proceedings" [Stark, 2005, pp. 131-132].
Strategy
Tactical Plan t
n
Operational
Plan o
m
Tactical Plan t
1
Operational
Plan o
1
Figure 3. The Relationship of Strategy and Plan
Based on the general characteristics of strategic, tactical and operational
planning [e.g. Schneck, 1994, p. 643], two types of plans are differentiated here: the
tactical plan and the operational plan. The operational plan is more detailed than a
tactical plan, its granularity is lower, or its complexity, its account of the details is
2 Strategy 15
higher than those of a tactical plan. Finally, the relationship of strategy and plan is
depicted in figure 3. Every single `broad-brush' strategy can encompass several
focused tactical plans [e.g. Gorchels, 2003, pp. 41-45], and tactical implementation
plans can encompass several detailed operational plans.
The Relationships between the Single Terms (Master Plan)
Stark gives a good overview of how the last five terms are related to each other. The
order proposed here is mission>vision>objectives>strategy>plan>implementation.
Stark's overview is quoted in the following:
"The mission is at the highest level. It's the special task or purpose of a company. It
describes the purpose of a company but doesn't say what has to be achieved to carry
out this task is or how it will be achieved. The objectives are closely linked to the
mission. They express at a high level what must be achieved to carry out the mission.
The strategy describes the way to achieve the objectives. It defines how resources
will be organised. It defines the policies that will apply for the management and use
of resources. After the strategy comes the plan. Once the strategy has been defined,
it's possible to start planning detailed activities and resources. After the plan comes
the implementation."
3
Finally, the relationship between vision and strategy needs to be clarified (see
figure 4). In Stark's words again, "A vision describes the future state of something, so
it's very different from a strategy which describes the way to achieve objectives".
[Stark, 2005, p. 130]. In an abstract sense, a strategy can therefore be seen as the top-
level activity, while a vision is the target state that is to be reached with the strategy.
With the objectives suitable for reaching the target state, implementation plans are
elaborated and carried out.
State
Transition
Vision
Strategy
Figure 4. The Relationship of Vision and Strategy
3
[Stark, 2005, pp. 132-133]; Stark proposed the order mission>objectives>vision>strategy>plan
2 Strategy 16
2.2 Strategic Options
The goal of corporate strategy is a balanced portfolio of independent strategic
business units to achieve sustainable competitive advantage [Brack, 2003, p. 61].
"Corporate strategy is what makes the corporate whole add up to more than the sum
of its business unit parts", states Porter in his article From competitive advantage to
corporate strategy [1988].
Corporate Strategy Options
In the 1980s, Porter formulated the widely regarded generic options for corporate
strategies in arbitrary industries. Based on the preliminary analysis of structure and
competition in a specific industry, the strategic options are namely cost leadership,
differentiation and niche focus.
The strategy of cost leadership has the objective of sustaining the lowest cost
structure in the industry, whereas a differentiation strategy focuses on unique or
additional value creation for the customer [Haertsch, 2000, pp. 75-76; Porter, 1980].
To avoid price competition, this value needs to be significantly different from the
value competitors provide. Then, differentiators usually are able to charge higher
prices for their products. While there can only be one cost leader at one point in time
in a certain industry, there can be several differentiators concurrently in one industry.
Cost leaders and differentiators both target the core or mass market. A third option
identified by Porter is the niche strategy, e.g. focusing a regional or product niche. A
company pursuing a niche strategy, either based on cost leadership or differentiation,
targets smaller parts of a core market, to serve the customers in these niches better or
cheaper than competitors that have a broader market focus.
These four options are the basic options for corporate strategy. The classical
assumption by Porter is that the strategies are exclusive, e.g. that a company cannot
pursue a cost leadership and differentiation strategy at the same time without being
stuck in the middle, in a mediocre and less valuable position. In order to sustain a
"unique and valuable position" [Porter, 1996], one of these strategy options needs to
be selected.
The Business Unit
In Porter's definition, a strategy not only is a position, but also involves a "different
set of activities" [Porter, 1996]. The company's core activities are usually carried out
2 Strategy 17
in independent business units, based on tactical and operational plans (see figure 2
and 3). Therefore, the business unit is the most important organizational level for
strategic, tactical and operational considerations, because competitive advantage can
only be achieved on the business unit level [Haertsch, 2000, pp. 45-46]. "Competition
occurs at the business unit level. Diversified companies do not compete; only their
business units do" [Porter, 1988]. The business unit hence is the place where the
`tactics' in its rather original sense as well as resources are led to formation, trained
and improved for the `battle of market share'.
Figure 5. Product-Market Strategies for Business Growth Alternatives [Ansoff, 1958, p. 394]
In his article A Model for Diversification, Ansoff [1958] describes four
product-market strategies for business or market share growth based on the product-
market matrix depicted in figure 5: Market penetration (increase volume of sales to
present or new customers while maintaining original product-market strategy), Market
development (adapt present product line to new market), Product development
(development of new product for present market) and Diversification (new product
line for new market).
Diversification and product development depend directly on (product)
innovation, and market penetration and market development depend on marketing
innovation or more generally adaption (to customer's needs, to the market). "In effect,
Ansoff's growth vectors are determined by the two basic forces of supply and
demand, or technology and customers" [Baker and Hart, 1999, p. 27]. A reduction of
Ansoff's original decision matrix to a decision between adaption and innovation leads
to a model of the eight basic options for a competition-oriented business strategy.
2 Strategy 18
Options for a Competition-Oriented Business Strategy
The model depicted in figure 6 is clearly a synthesis of Porter's and Ansoff's
approaches to business strategy. This model visualizes the basic strategic options for a
business unit. Steinmann and Schreyögg [1990] identified three binary attributes of a
competition-oriented business strategy: Focus of competition (f
i
: cost or
differentiation), Location (l
j
: niche or core market) and Rules (r
k
: adaption or
innovation). The resulting eight basic attribute triples (f
i
, l
j
, r
k
) can serve as general
guidelines for developing a specific business unit strategy. Focus and location may be
roughly determined by a given corporate strategy, but the shaping of competition rules
falls within in the responsibility of each single business unit.
Niche
Core Market
Cost
Differentiation
A
da
pt
io
n
Inn
ov
ati
on
( 1 ) Cost, Niche, Adaption ... ( 8 ) Differentiation, Core Market, Innovation
( 7 )
( 6 )
( 8 )
( 1 )
( 2 )
( 3 )
( 4 )
Location of Comeptition
F
o
c
u
s
o
f
C
o
m
p
e
ti
ti
o
n
R
ule
s o
f C
om
pe
titio
n
Figure 6. The Eight Basic Options for a Competition-Oriented Business Strategy
[Steinmann and Schreyögg, 1990]
4
Finally, some opinions about advantages and disadvantages of business
strategies in the information industry are collected. In their almost classical book
Information Rules, Shapiro and Varian explain that a differentiated product market is
"the most common market structure for information goods; the publishing, film,
television, and some software markets fit this model" [1999, p. 25]. Haertsch [2000,
pp. 133-134] expresses that in the global digital economy, low costs are more and
more a prerequisite of competitiveness. Therefore, in electronic commerce, rather few
4
Taken from [Marr and Picot, 1991, p. 673] and translated from German.
2 Strategy 19
companies pursue a cost leadership strategy. A differentiation strategy is hence
preferred. Haertsch quotes two German and American empirical studies from 1998
that support this opinion. Similarly, based on broad international and US studies,
Cooper concludes in his book Winning at New Product that one strategy namely
differentiation "yields exceptional performance results" [Cooper, 2001, pp. 366-
367]. Similar to Haertsch, Brack questions if for media markets, a strategy of cost
leadership is still appropriate in times of individualization and one-to-one marketing
[Brack, 2003, p. 65]. In the light of Porter's statement that there can only be one cost
leader, but many differentiators in an industry, as e.g. quoted by Haertsch [2000, pp.
75-76; Porter, 1980], these opinions and results are hardly surprising.
In her detailed analysis of German and global media enterprises, Sjurts states
that the media industry is focused on mass markets rather than niches ("mass
preferred to quality") [2002, pp. 14-15]. Her analysis reveals the dominance of
differentiation strategies in this industry [Sjurts, 2002, p. 91, p. 172, p. 236, p. 303, p.
393]. A preference of innovation or adaption is not to be clearly derived from these
results. Sjurts counts 12 companies in the sample with an orientation towards
adaption, against 19 companies with an orientation towards innovation. All 7 global
media enterprises in the sample seem to pursue an overall innovation-oriented
business strategy [2002, p. 393]. However, Sjurts' results are condensed into one
single corporate strategy, single business units within a company may pursue different
strategies. Additionally, some companies in the sample may in reality pursue hybrid
strategies, or no clear strategy at all.
2.3 Hybrid Decisions
A strategy that equally and simultaneously focuses on n aspects of a decision model,
even when some authority recommends a choice out of n strategies to achieve a
competitive advantage, can be named a hybrid competition-oriented strategy.
5
Hybrid Strategies
As a hybrid corporate strategy is pursued, no focus on either cost or differentiation is
set, but both aspects are taken into consideration simultaneously. Hybrid strategies in
5
Roughly based on [CeDiS, 2003]: definition of a hybrid corporate strategy (in German).
2 Strategy 20
general question the basic assumption that n-dimensional strategic options of decision
models like the one depicted in figure 6 are exclusive. Mass customization is often
named as a hybrid strategy [e.g. Piller, 2003, pp. 211-222; CeDiS, 2003].
Especially for digital information products, the simultaneous pursuit of cost
saving and differentiation is possible, as information and communication technology
allows for operational automation while possibly increasing the useful complexity of
the product, i.e. product effectiveness can be increased while process efficiency is
increased simultaneously. However, there is certainly no simple straightforward
relationship like `ICT always saves costs and raises possible differentiation'.
Berthon, Hulbert and Pitt [1999], discussing the classical choice between
business units' orientation towards innovation or adaption, presented an approach that
may be able to clarify the conflict between choice and hybrid strategy using simple
trade-offs. This, together with simultaneous and sequential hybrid strategies is further
discussed in chapter 5.1.
Decision Models
Like every model, the model depicted in figure 6 is an abstraction of reality. The
primary purpose of this model is to provide guidelines for developing a specific
strategy, built on past experience and best practices. Simple models can never explain
the real world in its total complexity, which is inherent to the whole process of model
building. Decision models rather provide guidelines for a purposeful reduction of
complexity, in order to make a decision which otherwise would hardly be possible.
They are not complete, and they will never be, as a complete model would comprise
the complexity of the real word and therefore would be useless for the purpose of
decision-making. There is no such thing like a perfect model, and there will never be
one. However, decision models can be purposeful and useful, especially if they are
built on theoretical or empirical foundations.
The purpose of Porter's, Ansoff's as well as Steinmann and Schreyögg's
models is to enable a business unit to find a clear strategy. For this purpose, they are
useful. However, these models are not intended to explain reality. For example,
companies that don't pursue a clear strategy at all cannot be mapped easily into
Porter's rational model, which in fact they never applied. Decision models are
prescriptive or normative models; therefore they can be used for descriptive purposes
only with caution.
3 The Product Lifecycle 21
3 The Product Lifecycle
The product lifecycle is a well-known concept that arose from both natural sciences
and marketing theory. Stark pictorially compares it with the lifecycle of man: "There
is nothing new in a lifecycle. Shakespeare described a lifecycle hundreds of years ago
when he wrote of the seven ages of man (the infant, schoolboy, the lover, a soldier,
the justice, the lean and slippered pantaloon, second childhood)" [2005, p. 17].
The product lifecycle concept was the subject of considerable research in the
1960s. One of the leading researchers in this field, Robert D. Buzzell, defined the
product lifecycle as "a generalized model of the sales trend for a product class or
category over a period of time, and of related changes in competitive behavior" [1966,
p. 50]. The lifecycle visualizes the need for strategy change, especially product
strategy change on the operational level, at different stages in the life of a product.
Unlike biological life forms, products can be revitalized at the peak of their maturity
by the application of imagination and logic, preventing the decline caused by more
adapted, more innovative competitive products and leading to either an equilibrium
(extended maturity) or even a new growth phase [Baker and Hart, 1999, pp. 19-22].
Much effort has been undertaken to use the lifecycle for predictive purposes,
but the main hindrance is that the length of each stage can only be established a
posteriori [Baker and Hart, 1999, pp. 20-21]. For individual members of a species, the
length of each phase can be estimated, e.g. human beings complete the cycle in
approximately 70-80 years. For new products however, the length of the lifecycle and
each stage may vary between a few months and decades [Ansoff and Stewart, 1968].
The true value of the model hence lies in the clear visualization of the need for
continuous product innovation and marketing activities throughout the lifecycle,
describing the evolution of successful products, product lines or platforms over time.
3 The Product Lifecycle 22
3.1 The Seven Stages of the Product Lifecycle
The classical product lifecycle is a four-stage model of the sales trend, starting with
market launch and ending with the decline and retirement of the then mature products,
showing the typical skewed normal distribution depicted in figure 7. Here, an
extended model is introduced that additionally takes the development of new products
(the pre-launch stages) into account. Before any sales revenues can be generated with
fresh products, high fixed development costs accumulate at these early stages, and
new product success rates are often low
6
.
quantity
time
Imagination
Definition
Realization
Market Launch
Growth
Maturity
Decline
develop
manage
revitalize/retire
Figure 7. The Seven Stages of the Product Lifecycle
[based on Baker and Hart, 1999, p. 22; Cooper, 2001, p. 130; Stark, 2005, p. 17]
However, if a new or improved product makes it to the market launch and is
successful at this stage, it is likely to experience a period of rapid growth, until it
finally reaches maturity with decelerating growth and soon thereafter starts to decline
[Baker and Hart, 1999, p. 19], if no further investments are made. Due to the high
failure rates of new products, these fairly few successful products need to be managed
carefully and revitalized at later stages, if appropriate in the individual case.
6
The rates of successful market launch vary from 100 down to 0 percent for individual companies.
Various studies show different results for new product failure and come to average failure rates
between 35 and 90 percent, depending among others on the industry, on the definition of `failure' and
`new product' and if the large numbers of projects that are aborted in the pre-launch stages are
considered or not [Cooper, 2001, pp.10-12]. For the music industry, Brack states that not more than 25
percent of all projects are successful [2003, p. 23].
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- , 2006, A Strategy for the Management of Digital Information Products, Hamburg, Bedey Media GmbH, https://www.diplom.de/document/224965
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