Strategy Dynamics Briefing 22: Generic architectures

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Recent briefings have shown how mapping out, rigorously, the interdependence amongst resources results in a model of the machine that makes the organization function and deliver performance, which we have called its strategic architecture.

After a short break over the summer, read on to find out more about Generic Architectures.

Whilst we have focused for example on performance of one specific airline, Ryanair, the architecture developed is essentially the same for any passenger airline. For less focused airlines than Ryanair or Southwest, the architecture would feature added complexity caused by issues such as multiple customer groups, short-haul versus long-haul services, multiple aircraft types and so on. Nevertheless, it is not the structure of the business system that gives rise to widely differing outward characteristics and performance among companies—it is the choices and policies used to direct the strategy of that structure. Choices include decisions about which customer segments and needs to serve, what exactly to offer, which channels to employ, which activities to undertake within the company and which to outsource and so on.The figures below show summary architectures for two other types of business – a car manufacturer and a magazine producer. The car firm’s sale of vehicles depends on the appeal of its product range, the intensity and effectiveness of its marketing, the number of dealers to reach potential car buyers, and competitive prices offered by its models’ value proposition. It can only sell as many vehicles as it has the capacity and production staff to produce, and these resources are two dominant drivers of cost, in addition, of course, to the cost of raw materials and components.

The magazine producer enjoys revenue both from sale of its editions and from sale of page space to advertizers. It has an advertizing sales force to promote that revenue source, and journalists to produce its content, in addition to other groups of staff not shown. It has to balance the temptation to fill the magazine with advertizing space with the need to ensure a good proportion of content to keep each edition attractive to readers.

The core strategic architecture for car manufacturer

Diagram: core strategic architecture for car manufacturer

Each of these architectures can, like the airline structure, be applied with little modification to many firms in the same industry. Indeed, with little more change, they also apply to closely adjacent industries. A producer of motorcycles, buses, or even earth-moving equipment will not look substantially different from the car manufacturer. A TV channel shares many features of its architecture with that of the magazine, such as the possibility of revenue from advertizers and from viewers and the need to balance content with advertizing. Other common architectures feature throughout the book.

The core strategic architecture for a magazine

Diagram: core strategic architecture for a magazine

It is rare for companies to radically revise the strategic architecture of an industry, and notable when they do. Often such revision involves removing the need for some key resource, such as intermediaries from the system, as illustrated by Dell’s bypassing of retailers and the emergence of direct-to-consumer sale of insurance, banking and other services. Of course, the radical technological change introduced by the Internet has also spawned new business architectures, but even there common structural opportunities have been identified by several companies—eBay is not the only online exchange and Amazon.com is not the only online supplier of books and DVDs. Several enterprises have created systems such as Elance to enable service providers to bid for projects posted by would-be clients for their services (www.elance.com).

Until next time…

 

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How markets emerge

An earlier briefing mentioned the limited value of market forecasts for strategy purpose, except in the most mature industries. The reason such forecasts do not help much is because how markets develop depends as much on what suppliers do as on what customers demand – if no-one had offered the Skype VoIP service, for example, then no-one would be using it, and if the company had successfully offered a charged-for service, rather than the free version, then demand would have developed differently than it has.

The clearest cases of supply-demand concern simple buyer/seller markets, such as that operated by eBay or Alibaba.com in China. This service needs both a population of sellers to provide goods for the marketplace, and another population of buyers to create the demand for those goods. But what determines the rate at which a market might grow? So does the number of buyers drive the rate at which sellers are captured, or does the number of sellers drive the growth of buyers? The answer, of course, is ‘both!’ The more buyers there are, the quicker sellers will be able to sell their goods, and if they tell others, then new sellers are won more quickly. The more sellers there are, the larger and more varied will be the products on offer, so the faster new buyers will be attracted to the service.

Strategic Management Dynamics book coverMutual dependency between supply and demand does not operate only at the level of individual companies, but also determines how entire markets or industries develop. One example concerns MP3 personal music players. As soon as it became clear that the first devices were popular, more firms started producing them. This drove down prices and widened the range of products, which made still more consumers buy the products … which brought more firms into the market, and so on. Eventually, the intense competition hit profitability, driving some firms out of the market, but by then the mutuality between supply and demand had worked its magic.

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