Saturday, February 18, 2012

The Process of Strategic Change – Product-Market Combination Change

Strategic change or change in product-market combination is not an instantaneous decision or an event, but a process that takes time and consumes other resources.

Strategic Change

Igor Ansoff [1] defined strategic change as a shift in the product or services mix produced by the firm and/or the markets to which it is offered. This definition of strategy is further enriched by Michael Porter when he came out with ideas on competitive advantage. Selection of an attractive product market position is strategy in which presently there is no competition and for the future an entry barrier can be created is a sought after strategic position. The top management of a firm has to search and find out this position. This search function is described by Ansoff.

Strategic change or change in product-market combination is initiated by the discovery of a product-market idea. To convert an idea into a commercial product of the product-market portfolio of the firm, a process involving number of steps is used by the firm’s top managers.  Proof needs to be obtained for the profitability of the idea. Before that there needs to be proof that there are potential customers in sizeable number for it. Organizational competence must be developed for designing, manufacturing, marketing and distributing the product. Thus strategic change is not an instantaneous decision or an event, but a process that takes time and consumes other resources.

Strategic Change Process

Discovery of a novel and profitable product-market idea is a creative act. The idea may be the discovered by the research and development departments or marketing department. Or the idea could be sourced or purchased from outside agencies that specialize in creating and selling product-market ideas. The process of discovery is costly and time consuming. The process of discovery is termed as search process (or research process).Management has to provide guidance and coordination for the firm’s search for opportunities as there is consumption of resources in this activity and also it is of strategic importance. Thus management’s involvement in strategic change process starts from setting up research and development capabilities on product side as well as market side. The issues which the top management has to answer at this stage are:

(i) How much of the firm’s resources should be committed to known opportunities, how much to search, and how much held in reserve?
(ii) How specific can and should be management guidance of an essentially creative process?

The scope of the search process is defined to a large extent by the need for affinity for the existing product-market portfolio and the new product-market choices. This gives rise to synergy in the sense there is a positive spin off from the new product choice on existing portfolio or the new product choice can be more efficiently and more effectively implemented by the company in relation to other competitors because of its existing portfolio. Overemphasis on synergy can unduly restrict the field of opportunities and suppress the creativity of the search process and due to these reasons company may miss out on promising opportunities. Ansoff highlights striking of a balance between the two extremes of synergy or relatedness and totally unrelated choice as a central management problem in formulation of strategy.

An idea discovered in the search process needs to be investigated for its commercial feasibility and profitability. This process includes preparation of prototypes, construction of pilot production line, conducting a pilot marketing test. As each activity in this step is undertaken, the confidence in the project increases as more detailed information on expected revenues and costs becomes available. But each activity consumers resources and hence investment in the strategic change idea keeps on increasing.

In preparing prototypes, producing through pilot plans, and test marketing efforts, some skills and capabilities required by the new product are developed. But the primary emphasis during pilot activities is information and proof of ideas and capability development is not the focus. Hence, if the management decides to go for the product-market opportunity, major emphasis at this stage shifts to capability development. In this stage production, marketing and logistic capabilities are developed. Ansoff named this step or period in the life of a strategic change as capability development step. During this period, manufacturing plants and supply chains are built, market and distribution channels are established, new management systems or structures are introduced, training of personnel in various functions is undertaken, and raw materials are acquired and stockpiled.

The capability development period as a part of strategic change program comes to a formal stop with the commencement of commercial production and sale.

The strategic change program related to a product-market combination comes to an end when at the end of the product life cycle, the combination is divested.

During the life cycle of the product, efforts to increase the market share, efforts to introduce new improve variants of the products and efforts to introduce the product to more market segments or markets are possible strategic efforts. Top management needs to get involved in these decisions and make plans for it. These efforts may take place even without involvement of top management, but they will not be optimal and they will not be coordinated. The growth efforts may call for licensing, franchising, joint ventures and acquisitions and mergers. In all these decision the participation of top management may be crucial to initiate and complete the linkages with external parties.


H.  Igor Ansoff, “Towards a Strategic Theory of the Firm”, Economies et Societes, Vol. 2, No. 3, 1968, Reprinted in Business Strategy, H.  Igor Ansoff (Ed.), Penguin Education, Harmondsworth, England, 1969.
Originally posted on Knol the-process-of-strategic-change-product-market-combination-change
Knol No. 75
Knol portfolio rank 64


No comments:

Post a Comment