Strategic Management: Structuralist Approach

• Executives usually start corporate strategy by looking at the industry or environmental conditions
• Next, they assess the strengths and weaknesses of competitors
• With industry and competitive analyses, executives aim to make a strategic position to outperform competitors
• A company generally chooses to differentiate for a premium price or pursue low costs to obtain such advantage
• The value chain is aligned accordingly, creating manufacturing, marketing, and human resource strategies
• Financial targets and budget allocations are set based on strategies

Structuralist Approach

• Logic is that a company's strategic options are bounded by the environment
• Structure shapes strategy
• Has roots in the structure-conduct-performance paradigm of industrial organization economics
• It has dominated the practice of strategy for the past 30 years
• Firm's performance depends on its conduct, which depends on structural factors like number of suppliers/buyers and barriers to entry
• It is deterministic, causality flows from external conditions down to corporate decisions that seek to exploit them

Reconstructionist Approach

• In a company's strategies, the industry structure is shaped
• Blue ocean strategy reflects that a company's performance is not necessarily determined by an industry's competitive environment
• Blue ocean strategy framework helps companies systematically reconstruct their industries and reverse the structure-strategy sequence in their favor
• It has roots in the emerging school of economics called endogenous growth
• The central paradigm posits the ideas and actions of individual players can shape the economic and industrial landscape
• Strategy shapes structure

Choosing an Approach

• The first task of an organization's leadership is to choose the best strategic approach according to challenges of organization
• Executives need to make sure organizations are aligned behind it to produce sustainable performance
• Three factors determine the right approach:
  • Structural conditions
  • Resources and capabilities
  • Strategic mind-set

Structural Conditions

• If structural conditions of an industry or environment are attractive and you have resources/capabilities to carve out a viable competitive position, the approach is likely to produce good returns
• Even in a not-so-attractive industry, the approach can work well with resources/capabilities to beat the competition
• In either case, the focus of strategy is to leverage the organization’s core strengths to achieve acceptable risk-adjusted returns in an existing market

Reconstructionist Conditions

• Build a strategy to reshape industry boundaries when conditions are unfavorable and going to work against you
• An organization needs to build a strategy that creates a new market space for itself when existing players are well-entrenched, and an organization does not have the resources and capabilities to go up against them

Strategic Mindset

• Innovative bent and sensitivity to risks of missing future opportunities will be more successful in adopting a reconstructionist approach
• Firms with a bias toward defending current strategic positions and a reluctance to venture outside familiar territory would do better with a structuralist approach

Strategy Propositions

• Success depends on the development and alignment of three propositions, whichever approach is chosen:
  • Value proposition that attracts buyers
  • A profit proposition that enables company to make money
  • A people proposition that motivates those working for the company to execute it

Alignment of Propositions

• The value and profit propositions set out strategy content
• The people proposition determines execution quality
• Strategy propositions correspond to the traditional activity system of an organization:
  • Outputs are value for the buyer and revenue
  • Inputs are the costs to produce them and the people to deliver them
• Strategy: development and alignment of the three propositions to either exploit or reconstruct the industrial and economic environment to operate
• It is unlikely to produce a high-performing and sustainable strategy unless a company creates a complete set of consistent propositions
• Execution Failure is the classic case of strong value and profit propositions, but the people proposition doesn't motivate employees or other constituencies, and the organization experiences temporary but unsustainable success
• Formulation Failure is when an organization offers a motivating people proposition but lacks a strong value/profit proposition and find itself mired in poor performance
• Under the structuralist approach, an organization’s entire system of activities, and strategy propositions, needs to be aligned with either differentiation or low cost
• Under a reconstructionist strategy approach, performace is achieved when all three strategy propositions pursue both differentiation and low cost

Achievement of Blue Ocean Strategy

• Dubai has redefined the role and activities of its government
• They have yielded one of the fastest-growing economies in the world for two decades
• Dubai is the only Arab economy with substantial global economy integration outside the hydrocarbon sector
• It has emerged as a premier tourist and business destination
• The reconstructionist blue ocean strategic move has brought Dubai unprecedented profitable growth in aligning three propositions around differentiation and low cost
• Dubai’s value proposition has targeted foreign investors whose money fuels the state’s economic development
• Its profit proposition has allowed the government to benefit and extract revenues from those investors
• Dubai’s people proposition has motivated its own citizens and its external partners – foreign expatriates – to buy into the country’s value and profit propositions and support its strategy

Dubai's Value Proposition

• At the heart is a value proposition to foreign investors that is unlike other emerging economies
• Value proposition starts with a dozen world-class free zones with unbeatable incentives
• Government allows 100% foreign ownership and free repatriation of capital and profits to achieve differentiation
• Expedited registration processes
• Allows companies to get licensed to conduct business in under a half an hour
• Offers world-class air, port, and shipping services to make the logistics of doing business more efficient

Dubai's Profit Proposition

• Government invested in infrastructure supporting investors' activities
• Government has allowed to directly profit from its unique, low-cost value proposition with these investments
• Government's businesses acquired expertise to build global operations that generate yet more money in serving foreign investors
• Restricting citizenship keeps social liabilities to a minimum, as expatriates always remain expatriates
• Strategic decision to become a part of the United Arab Emirates means Dubai does not need its own military, diplomatic corps, or monetary agency, because Abu Dhabi bears federal government costs

Dubai's People Proposition

• To preserve Arab traditions and foster social tolerance, Dubai has become a cosmopolitan state with over 1 million people
• People propositions created delivered differentiated value and lower costs to foreign citizens
• Generous social security system
• Virtually guaranteed a government job
• Extensive state assistance, greatly improved their quality of life
• Promotes virtual boundaries between citizens and foreigners through measures by the government to preserve Dubai's culture and heritage

Napster and iTunes

• Aligned strategy propositions are a key reason why many market-creating innovations fail to become sustainable businesses
• Napster had more than 80 million registered users due to its value proposition but was forced to shut down
• This was due to the lacking of a profit proposition to benefit from the huge user base
• iTunes offered buyers more than 200,000 songs, with high sound quality
• iTunes built an attractive people proposition, gaining support of top music companies
• Music was downloaded with copyright protection, and companies were paid 65 cents for every song downloaded
• Aligned across iTunes’s value, profit, and people propositions ushered in a new music era and is hard to imitate

Leadership Challenge

• Leaders can no longer afford to follow letting structure drive strategy with an increasing number of businesses, governments, and nonprofits facing unattractive environmental/structural conditions
• Economic challenges underscore the importance of understanding how strategy can shape structure
• A structuralist approach will be better for some units, while a reconstructionist approach will be more appropriate for others
• The challenge for leaders is to ensure a debate takes place on what the right strategic approach for each business should be and then to enter into the spirit of the framework to develop the right strategy for that unit