Why strategic control points matter in defensive strategy
Strategic control points are the foundations of defensive business strategy. They are mechanisms that protect the company’s profit streams against erosion from competitors, customer power, and supplier power. When properly executed, they set up an impregnable company position in the market.
With strategic control points (SCPs) in place, a company can bank on a solid platform for sustained performance. Without them, the firm becomes easily vulnerable to attack, functioning like a boat without a rudder, subject to winds and currents, and ultimately going nowhere.
SCPs come in many forms. Examples include having a dominant market position in attractive segments, locking up distribution channels, controlling the value chain, owning a de facto business standard, enjoying the fastest product development lead, and many more. Typically, there are roughly 15 to twenty SCPs in an industry; each varies in relevance. The best-positioned companies have at least two.
Strategic control points are important for three reasons.
1. The more successful your business, the more likely competitors will try to take a piece of the action.
CASE: Nokia
By 2008, Nokia had become the largest vendor of mobile phones and smartphones in the world. Its products were second to none, having surpassed Motorola, Ericsson, Huawei, RIM, and HTC. Its “N” phone series had acquired global brand power. Also, the company’s proprietary Symbian operating system had become the standard platform for European carriers.
Unfortunately, Nokia was not able to hold on to its early success for long. During its growth ascent, the company missed securing the relevant strategic control points in the mobile telephony industry, a strategic error which proved catastrophic and eventually caused near bankruptcy for the firm.
New entrants came into the market in 2007, including Apple, Google, Samsung, LG, among others. Notably, Apple and Google Android gained the relevant strategic control points of the industry, including the following:
Ultimately, Nokia lacked the strategic control points to defend the business and eventually got out by selling the unit to Microsoft in September, 2013.
Exhibit 1. Nokia’s Historical Market Performance
2. Without strategic control points, company growth becomes constrained by competitors who can inflict considerable harm.
CASE: PTC
In 2000, PTC, Autodesk, Dassault Systemes, and Unigraphics were the leading CAD/CAM/CAE software providers. Since then, products have evolved from standalone tools to Product Lifecycle Management (PLM) software. This program is an integrated platform to provide a holistic approach to manage the entire lifecycle of a product from its origin, through engineering design and manufacture, to service and disposal of manufactured products.
PTC grew revenue from $928m in 2000 to $1.16 billion in 2017. Its growth was based on its global product brands and heavy marketing but was stunted significantly by Dassault Systemes and Unigraphics (acquired and rebranded Siemens PLM). These companies steadily secured the strategic control points of the PLM software industry along the way through several acquisitions.
Exhibit 2. Historical Book Value: Dassault Systemes vs. PTC
Like PTC, each firm offers superior global product brands (Dassault Systemes’ CATIA, Solidworks, ENOVIA; Siemens PLM’s PARASOLID, PLM Vis, NX, and Solid Edge). In addition, they own several other relevant strategic control points: dominant share in attractive market segments (Aerospace, Automotive, CPG and Retail, Electronics, Engineering & Construction, Industrial Equipment), largest share of spend with marquee customer accounts (e.g. Lockheed Martin, Boeing, Ford, GM, Exxon Mobil, P&G), and the most massive installed customer base between the two of them (more than 25 million seats and 400,000 customers).
As a result, Dassault Systemes and Siemens PLM have grown to $3.2 billion and $4.4 billion respectively.
Exhibit 3. Comparative Historical Revenue
3. Strategic control points offer a measure of protection against economic cycles.
领英推荐
CASE: Taiwan Semiconductors Manufacturing Company
The semiconductor industry experiences large swings in demand during economic cycles. During the 2009 recession, while semiconductor manufacturers reduced cost and managed cash flow to weather the storm, Taiwanese semiconductor manufacturer Taiwan Semiconductor Manufacturing Company (TSMC) took a different approach and invested heavily in manufacturing equipment and facilities. The company owned extensive cash reserves, allowing it to make significant capital expenditures.
Exhibit 4. Comparative Net Change in PPE
The strategy was to exit the recession ahead of the competition in a strong position to deliver products as demand would rise. The plan paid off. TSMC was able to outperform its competitors and has since become the world's largest dedicated independent semiconductor foundry. In 2017, its market capitalization surpassed Intel for the first time at $226 billion vs. $216 billion.
TSMC’s success is due in part to owning several strategic control points in the semiconductor manufacturing industry. These include the following:
Exhibit 5. Comparative Stock Performance of Semiconductor Companies
Securing strategic control points is an explicit pursuit
Growth strategy and defensive strategy are separate pursuits that require different actions. Growth initiatives aim at expanding a business. Examples include developing new products, moving into new markets, accessing new channels, gaining a greater portion of customer spend, growing in size to reap economies of scale.
Unfortunately, these initiatives don’t offer the protection needed when your business comes under attack. Moving into new markets won’t protect your home market. Finding new customers won’t ensure retention of current ones. Expanding your product line can make you more vulnerable if spread thin on too many fronts. Growing in size can make the organization less agile in responding to the market.
A defensive strategy demands securing relevant strategic control points.
Making moves that matter
Gaining strategic control points requires informed planning and execution. Winning companies use the following approach:
Companies should focus on securing strategic control points. They provide a defensible platform to sustain profit growth and to launch new strategic initiatives.
______________________________________________________________________
How do you protect your business profit streams? Do you own strategic control points? Have you seen these affect your company? Comment below.
ABOUT THE AUTHOR
Luca Ottinetti is the Managing Director of Great Prairie Group, a management consulting firm that specializes in strategy and execution. The firm assists corporations and private equity funds facing complex issues related to growth and defensive strategy.
To find out more about how we help, click here or send a message or personalized connection request mentioning this article. For more information or insights, just click the ‘follow’ button at the top of the page or click here to sign up for our newsletter.