Strategy Typologies

EPPA 6224
Strategic Management Accounting

AP Dr Ruhanita Maelah
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EPPA6224 SMA L3

Objectives
• Introduce strategy typologies used in
Management Accounting research
▫ Porter
▫ Miles and Snow
▫ Cooper
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WHAT IS STRATEGY?
“Competitive strategy is about being different. It
means deliberately choosing a different set of
activities to deliver a unique mix of value.

… the essence of strategy is in the activities --

choosing to perform activities differently or to
perform different activities than rivals. “

Porter, Michael E., “What is Strategy?,” Harvard Business Review, November-

December, 1996.
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Selecting Strategy and Design

• A strategy is a plan for interacting with the
competitive environment
• Managers must select specific strategy design
• Models exist to aid in formulating strategy:
▫ Porter’s Strategic Positioning

▫ Miles and Snow’s Strategy Typology

▫ Cooper Confrontation Strategy

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Porter’s
Porter’s Strategic
Strategic Positions
Positions
 Cost leadership
 Product or service
differentiation
 Focus on market
niche
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Business Unit Strategies: Cost Leadership

An organization attempts to gain competitive advantage by
reducing its costs below the costs of competing firms.

• Increases in efficiency & cutting of costs, then

passing savings to consumer
• Assumes price elasticity in demand for products
or services is high
• Assumes that customers are more price sensitive
than brand loyal
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Business Unit Strategies: Differentiation

An organization seeks to distinguish itself from competitors
through the quality of its products or services.

• In order to demand a premium price from

consumers
▫ Attempting to distinguish organizational products
or services from other competitors or creating of
difference
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Business Unit Strategies: Focus

An organization concentrates on a specific regional market,
product line, or group of buyers.

• Business attempts to satisfy needs of only a

particular group or narrow market segment
• Strategic intent is to gain consumer loyalty of
neglected groups of consumers.
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Porter’s Competitive Strategies

Differentiation strategy – to distinguish

products or services from others in the industry

Low-Cost Leadership – increase market share

by keeping costs low compared to competitors

Organizations may choose to focus broad or

narrow in reaching multiple markets.
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Porter’s Competitive Strategies

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DEVELOPING COMPETITIVE ADVANTAGE

Differentiation
Superior Differentiation
Advantage with Cost
Advantage

Relative
Differentiation
Focus
Position
Stuck-in-the Low
Middle Cost
Inferior Advantage

Inferior Superior

Relative Cost Position

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Porter’s Competitive Strategies

Competitive Competitive
Scope Advantage Strategy Example
Low-Cost
Broad Low Cost Leadership Dell Computer
Starbucks
Broad Uniqueness Differentiation Coffee Co.
Focused Low-Cost Enterprise
Narrow Low Cost Leadership Rent-a- Car
Focused Edward Jones
Narrow Uniqueness Differentiation Investments

EPPA6223 SMA L2

1-12
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Implementing Business-Level Strategies

(cont’d)
• Implementing Porter’s Generic Strategies
▫ Differentiation
 Marketing and sales must emphasize high-quality, high-value
image of the organization’s products or services.
▫ Overall Cost Leadership
 Marketing and sales focus on simple product attributes and
how these product attributes meet customer needs in a low-
cost and effective manner.
▫ Focus
 Either differentiation or cost leadership, depending on which
one is the proper basis for competing in or for a specific market
segment, product category, or group buyers.
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Porter’s Generic Strategies

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Miles and Snow’s Strategy Typology

• Prospector
▫ Encourage creativity to seek out new market opportunities and to take
risks.
▫ Develop the flexibility to meet changing market conditions by
decentralizing its organizational structure.
▫ Strong capability in research
▫ Values creativity, risk-taking, and innovation

• Defender
▫ Focus on defending its current markets by lowering its costs
and/or improving the performance of current products.
▫ Efficiency orientation; centralized authority and tight cost control
▫ Emphasis on production efficiency, low overhead
 Close supervision; little employee empowerment

Source: Based on Michael Treacy and Fred Wiersema, “How Market Leaders Keep Their Edge,” Fortune February 6 1995, 88-98; Michael Hitt, R. Duane Ireland, and
Robert E. Hoskisson, Strategic Management (St. Paul, Minn.: West, 1995), 100-113; and Raymond E. Miles, Charles c. Snow, Alan D. Meyer, and Henry L. Coleman, Jr.,
“Organizational Strategy, Structure, and Process,”Academy of Management Review 3 (1978), 546-562.
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Miles and Snow’s Strategy Typology

• Analyzer
▫ Incorporate elements of both the prospector and the defender
strategies maintain business and to be somewhat innovative.
▫ Balances efficiency and learning; tight cost control with
flexibility and adaptability
▫ Efficient production for stable product lines; emphasis on
creativity, research, risk-taking for innovation

• Reactor
▫ No clear organizational approach; design characteristics may
shift abruptly depending on current needs

Source: Based on Michael Treacy and Fred Wiersema, “How Market Leaders Keep Their Edge,” Fortune February 6 1995, 88-98; Michael Hitt, R. Duane
Ireland, and Robert E. Hoskisson, Strategic Management (St. Paul, Minn.: West, 1995), 100-113; and Raymond E. Miles, Charles c. Snow, Alan D. Meyer,
and Henry L. Coleman, Jr., “Organizational Strategy, Structure, and Process,”Academy of Management Review 3 (1978), 546-562
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The Miles and Snow Typology

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Approach to strategy
• Historically it was common for organizations
to take a one-dimensional approach to
strategy.

• For example, some business firms chose to

compete by being low cost producers.

• Others chose to differentiate their product

through quality or service.
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Strategic triangle
• Most organizations face stiff global competition.

• To keep customers satisfied and meet the

demands of other resource providers,
contemporary firms must compete
simultaneously on three dimensions: quality,
cost, and time.

• These three elements form a strategic triangle.

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Strategic QCT Triangle

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Strategic triangle
• The three elements of the strategic triangle are relevant to all organizations:
business, government, and not-for-profit.
• These organizations face the same demand for low cost, high quality, and
timely delivery of product or services.
• Specific meaning of quality, cost, and time varies by the nature of an
organization or product.

Example:
• Quality of a car means features (comfort of ride, safety, music system, etc.) and
reliability (frequency of repairs).
• Quality of education may be general literacy, job skills, thinking ability,
communication skills.
• Time for a manufacturer of semiconductors may mean being first to market on
the next generation of microprocessors.
• Time for a company such as Federal Express, time means on-time delivery.
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Cooper
• Because of the emergence of the lean enterprise (a Japanese
innovation), the nature of competition has changed.

• Competitive advantages are virtually impossible to sustain; instead

of avoiding competition through creating sustainable competitive
advantage, companies must now confront competition if they are to
remain profitable.

• Cooper describes the confrontation strategy and three product-

related characteristics (cost-price, quality, and functionality) that
are critical to this strategy.

• Firms that adopt a confrontation strategy must develop integrated

quality, functionality, and cost management systems.
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• Robin Cooper uses a three-dimensional space

represented by price (cost), quality, and
functionality to represent competitive strategy.
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Strategy Development
• Robin Cooper uses a three-dimensional space represented by price
(cost), quality, and functionality to represent competitive strategy.
• “Survival triplet” is constantly changing
▫ Must understand the customers’ desires for price, functionality
and quality
 Position the company’s products or services within the survival
zone
Cost/price

Quality Functionality
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Strategy Development
▫ Shape of the survival zone is determined by many
factors
 What determines the minimum and maximum
values for
 Cost
 Price
 Quality
 Functionality
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Confrontation Management

Cost / Price
SURVIVAL
Only the products, acceptable to
customers, with values along all
three of these dimension stand a
chance of being successful.

Functionality Quality

“FPQ”
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Cost / Price
A Customer’s acceptance
Maximum
allowable price tolerance has limits.

Minimum
Minimum feasible price
allowable
functionality
Maximum feasible Minimum
functionality allowable quality
Maximum
feasible quality
Functionality Quality

The survival triplet: a “survival zone” exists between

the three gaps for each product/service.

( Customers react to price. Suppliers react to cost.

The Supplier’s minimum acceptable profit transforms cost to price.)
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Confrontation Management

Price Maximum The “survival zone”

allowable price is the volume-pane
Minimum
feasible price
created by cutting
Minimum across the three
allowable
functionality Minimum
min-max points.
Minimum feasible
functionality allowable quality
Minimum
feasible quality

Functionality Quality

The survival zone is large and safe when the gap difference for
two of the three dimensions is broad.
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Differentiators When the gap difference

Price
becomes sufficiently broad, it
is possible to split the
survival zone into two
Low Cost Leader
discrete zones and firms
must choose:
-- Low Cost Leader?
-- Product/Service
Differentiator?
Functionality Quality

As long as the functionality and quality gaps are large enough to justify the
price gap, harsh competition is muted ---
the participants have staked out their space.
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Price But when Lean Enterprises

compete, survival zones become
very thin and narrow.

All firms offer products that have

high functionality and high quality
at a low price …..which requires
products to be made at a low cost.

Functionality Quality

Therefore competing on product differentiation

is no longer possible !
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Confrontation Management

Price
THE CONFRONTATIONAL
Lean Enterprise SURVIVAL ZONE
competitors
That is, the “maximum feasibles” for
functionality and quality increase, but
the gap differences simultaneously
narrows. It is a thin plane.

Functionality Quality
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Confrontation Management
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Price
Since all Lean Enterprises are
Lean Enterprise evenly matched on all three
competitors dimensions, they are forced to
compete head on --- and must
adopt a confrontational
strategy.

Functionality Quality

Therefore cost management must be

aggressive and pro-active!
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Confrontation Management

• Survival then depends on

information systems that
create intense pressures
to manage & reduce costs
both:
-- throughout the product
life-cycle
-- across the entire supply
value chain
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Accounting in relation to strategic positioning

• Advocates that firms should place more emphasis on particular techniques depending
upon the strategic position they adopt.

• Evidence to suggest that:

1. Business units following a defender strategy place a greater emphasis on the use
of financial measures for rewarding managers.
2. Non-financial measures for determining executives’ bonuses increases with the
extent to which firms follow prospector strategies.
3. Businesses following a build strategy rely more on non-financial measures of
performance for determining managers’ bonuses.

• Advocated that defenders (Miles and Snow) and business units pursuing a low cost
strategy (Porter) should adopt results measures that emphasize cost reductions and
budget achievement.

• Business units competing on the basis of differentiation (Porter) or those prospecting

new markets should require more information than a cost leader about new product
innovations, design cycle times and research and development.
End of Lecture 3
ruhanita@ukm.edu.my