D/2007/6482/07

Vlerick Leuven Gent Working Paper Series 2007/05

TOWARD AN INTEGRATIVE FRAMEWORK OF STRATEGIES THAT WORK

KURT VERWEIRE

Kurt.Verweire@vlerick.be

TAMELA FERGUSON

MARION DEBRUYNE

Marion.Debruyne@vlerick.be

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TOWARD AN INTEGRATIVE FRAMEWORK OF STRATEGIES THAT WORK

KURT VERWEIRE

Vlerick Leuven Gent Management School

TAMELA FERGUSON

University of Louisiana at Lafayette

MARION DEBRUYNE

Vlerick Leuven Gent Management School

Contact:

Kurt Verweire

Vlerick Leuven Gent Management School

Tel: +32 09 210 98 90

Fax: +32 09 210 97 00

Email: Kurt.Verweire@vlerick.be

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Kurt Verweire is Associate Professor in strategic management at Vlerick Leuven Gent

Management School. He also teaches strategic management at the International School of

Management (ISM) at St. Petersburg (Russia). His main topics of interest are strategic issues

for the financial services industry, such as financial conglomeration and financial

convergence. He currently focuses on business unit strategy formulation and implementation.

He was editor and contributor to Integrated Performance Management: A Guide to Strategy

Implementation (Sage Publications, London, 2004).

Tamela Ferguson is the State Farm Professor of Insurance and Risk Management at the

University of Louisiana, Lafayette, Louisiana, USA. She specializes in strategic development

and change processes, elements of configurations, and international market entry issues,

especially those related to regulatory structures. Her publications include articles in the

Strategic Management Journal, Human Resource Planning, Journal of Insurance Issues, Risk

Management & Insurance Review, Journal of Business & Management, and Journal of

Management History.

Marion Debruyne is Associate Professor in marketing at Vlerick Leuven Gent

Managementschool. Her interests lie at the intersection of marketing strategy, innovation and

competition. Her work has been published in Marketing Science and The Journal of Product

Innovation Management, among others.

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ABSTRACT

Competitive strategy is at the heart of the field of strategic management. But despite years of

academic research, there is a lot of debate about what constitutes competitive strategy and

how effective competitive strategies lead to superior performance. In this article, we argue

that strategy is about making clear choices (“focus”) and about being different

(“differentiation”) on four strategic dimensions, including: Whom do we serve?, What do we

provide?, What is our value proposition?, and How do we realize all this? Although recent

work has pointed to these conclusions, this paper goes one step further by providing more

concrete ideas as to what focus and differentiation really mean for each of the various

dimensions and why they matter. As such, we provide managers a framework that can be used

to test the extent to which their strategies have the potential to be effective.

5

INTRODUCTION

Most companies have strategies, but few may actually have strategies that work. We

all agree that a superior strategy is critical to the success of an organization. But after more

than 40 years of research, there is still little agreement among academics, or professionals for

that matter, as to what the content of strategy really is, and what constitutes great strategies.

Furthermore, the concept of strategic planning and process of strategy formulation are often

viewed as cumbersome and difficult to understand. Many have touted strategic

implementation and execution as the way to detect how to make strategy work. However,

strategy implementation isn’t so important if the preceding underlying strategy is unspecified

and underdeveloped, often-identified major problems for many organizations.

Managers often get lost in the woods of strategic management. While strategy

consultants and academicians have developed a huge arsenal of interesting strategy

frameworks, as well as top-down and bottom-up mapping and planning approaches,1 they have

been less successful in providing an overall guiding and integrated framework on what

constitutes great strategies. That’s why many managers often turn their attention to the hype

of the moment - whether it is TQM, strategic human resources or stakeholder management -

and infuse their strategies with many related sexy slogans. To add to the confusion, the term

strategy is sometimes used in such various contexts that it can mean anything that an

executive wants it to mean, and does not always reflect the necessary integrated plan that

delineates how organizational objectives are to be achieved.2 All of this quite often occurs

without significant contribution to how organizational work is done or to the firm’s financial

performance. Similarly, managers often make decisions to implement quick fixes or changes,

and by doing so, avoid assessing the real issue of the fit of strategically important activities

and the greater organizational design and related issues, often resulting in poor

organization/strategy fit.3 Regardless of source, lack of clarity seems rampant in many facets

of strategy.

Nevertheless, developing a competitive strategy that works does make a difference. In

a groundbreaking five-year, large-scale study, researchers found that devising and maintaining

a clearly stated and narrowly focused strategy is one of four primary management practices

essential for sustained business success.4 And it is obvious why. Without a focused strategy,

time and resources are wasted on fragmented, disparate activities in different parts of the

organization. Furthermore, sending unclear messages about the organization’s strategic

approach is confusing to various stakeholders.

6

Numerous local optima almost always undermine the global optimum.5 Strategic

decisions should result in a transparent, focused strategy that is cosmopolitan to the

organization as a whole, and not local to certain organizational units. Furthermore,

organizations with innovative, unique strategies that their competitors find hard to imitate

generally outperform those competitors across bull/bear market cycles, as such strategies

produced lower cost structures, as well as the ability to charge premium prices.6

In this paper we show how central the concepts of differentiation and focus are for

developing effective strategies. Using the cornerstones of differentiation and focus, we present

a framework to help managers address the core dimensions of competitive strategy, including

the nature of the customers served and the products provided, as well as the value proposition

relative to delivery of benefit bundles, and ultimately the appropriate business model to

achieve organizational strategic goals. We conclude by offering managerial insight into the

effects of developing a competitive strategy that works.

DIFFERENTIATION AND FOCUS AS CENTRAL CONCEPTS FOR EFFECTIVE

STRATEGIES

Despite differing opinions concerning what factors make firms successful,

differentiation and focus are two generally accepted principles that underlie effective

strategies and many strategy frameworks. A closer look at the core of strategy provides insight

into how differentiation and focus might be manifested in winning strategies. Porter espouses

that the essence of competitive strategy is about creating a unique and valuable position,

involving a different set of activities. Firms must perform strategically significant activities

that are different from those of rivals, or perform strategically significant similar activities in

different ways.7

Parallel to the former, the strategy itself may induce differentiation through

introduction of radical initiatives, requiring a redefinition of the competitive space. Chan Kim

and Renée Mauborgne’s Blue Ocean Strategy8 explores value innovation, or how companies

break free from the pack by staking out fundamentally new, uncontested market space – that

is, by creating products or services for which there are no direct competitors, firms are able to

craft “blue oceans” of uncontested market space. This is in comparison to “red oceans,” which

represent competitive spaces where previously defined industry boundaries and competitive

nuances are well known amongst the many competitors.

7

When firms can successfully create and capture demand in these uncontested blue

ocean spaces, competition becomes irrelevant and firms are then free to exploit and protect

their blue ocean. Managers are encouraged to think past traditional industry and geography

borders in search of new opportunities through a reassessment of organizational dominant

logic. This process can help remove “blinders” that prevent value creation and successful

attempts at new prospects, especially on the competitive periphery.9 For many, the essence of

strategy can be viewed as about developing radically new business concepts, thereby changing

the bases of competition within an industry.10

Apart from being different, effective competitive strategies should be focused. As

Porter so aptly espoused, “the essence of strategy is choosing what not to do” (1996: 70). A

strategy can only work if it sets boundaries for what activities the organization does and does

not perform. Attempting to be everything to everyone is a recipe for strategic mediocrity-

that’s why clear and explicit decisions must be made. If the strategy doesn’t specify

boundaries, the organization drifts in many different directions and likely provides

inconsistent guidance to organizational members, as well as inefficient deployment of scarce

organizational resources. Simply put, a sustainable strategic position requires trade-offs and

choices in the deployment of available resource bundles, which must be solely utilized in

support of achieving specific strategic goals.

In this paper we will demonstrate how focus and uniqueness work, and how they help

to create a competitive advantage. We will use the case of ING DIRECT USA, one of the

most successful (savings) banks in the United States, to illustrate our points. In just five years,

ING DIRECT has become the largest Internet-based bank in the United States - passing

E*Trade Bank - and one of the thirty largest banks of any sort in the country. The company

adds an astonishing 100,000 customers and $1 billion in deposits every month, and in 2005

(its fifth year of operations) generated a profit of $360 million. And above all, 90 percent of

the ING DIRECT customers believe it provides a much better service than the competitors.

Their success in the US banking industry can be attributed to a very focused and unique

strategy.

ING DIRECT is a direct-to-the-customer operation, an Internet-based savings bank –

although customers can also bank by mail or telephone. There are no branches, no ATMs, just

a couple of cafés in big cities where the bank sells coffee and mountain bikes in addition to a

limited number of product offerings, such as savings accounts, a few certificates of deposit,

home mortgages, home equity lines, and a handful of mutual funds.

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The bank does not offer traditional paper-based checking accounts – that costs too

much. For these accounts, ING DIRECT points customers back to their local bank. ING

DIRECT charges no fees and there are no minimum deposits for savings accounts.

With the help of a new strategy framework, we will examine how ING DIRECT USA

has developed an effective strategy – a strategy that works – based on the concepts of focus

and uniqueness. A strategy that is focused and unique successfully exploits certain target

markets (whom do we serve), with specific product/service offerings (what do we provide)

that offer a particular bundle of benefits (what is our value proposition), and identifies a

business model to guide these efforts (how do we realize this). Clearly defining what

competitive strategy is all about and specifying the core dimensions of strategy are of critical

importance to every organization, and precursors to managerial ability to set the basis for a

sustained competitive advantage.

THE CORE DIMENSIONS OF COMPETITIVE STRATEGY

A strategy consists of an integrated set of choices.11 Since strategy is a multi-

dimensional construct, firms need to make choices on a variety of different strategic

dimensions.12 Some recent research espouses that companies should decide where to be active,

how to win in the market place, and how to obtain returns as key components of a competitive

strategy.13 Here, we expand on this, as Figure 1 introduces our Strategy Development

Framework consisting of four basic strategic questions:

• Whom do we serve? That is: Who will be our targeted customers and who not?

• What do we provide? That is: What products and services will we offer, and what

not?

• What is our value proposition? What do we promise to our customers?

• How do we realize this? What activities will we develop and how will we obtain

our returns?

Insert Figure 1 About Here

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Once the mission and vision of the organization are defined,14 managers should try to

develop a focused and unique answer to each of the four questions, with an integrated set of

answers providing the foundation for strategic development and ultimately strategies that

work best. In many cases, organizations perform well on one dimension of the Strategy

Development Framework, but that often is not sufficient to guarantee superior performance

over a longer term. If competitive advantage is substantially linked to only one dimension,

competitors have a relatively easy task to imitate the successful strategy. However, when

firms are highly focused and unique on three or four dimensions of the framework, the

interaction serves to make the sources of competitive advantage more complex, less

understood by competitors and accordingly more difficult to copy. Thus, it is the combination

of strategic choices into a well-balanced system that is important, not the individual choices.15

Individual elements cannot be viewed in isolation. Strategy is a set of choices, whose

outcome is dependent on each other.16 For example: investments in machines for a complex

product line are more valuable if the sales force is trained to present these types of products to

customers. Thus, the value of each individual part of a strategy is dependent on the choices

made on other parts. This means that one should aim at optimizing the combined choice set,

not the individual components. Changing just one element in an organizational system is not

effective because it creates an organization that is not consistent (there is no fit between

individual elements).17 Other elements need to be adapted at the same time. This view of

strategy as a set of decisions whose usefulness is interdependent indicates that the whole is

stronger than the sum of individual parts. The relationship and coordination amongst

individual elements create a configuration that is difficult to imitate. This means that the

source of competitive advantage resides in the integration of the entire system, or

configuration.18

Insert Figure 2 About Here

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Figure 2 exhibits how the four various strategy elements are linked to each other.

Figure 2 combines both an inside-out and an outside-in perspective, and asserts that

competitive advantage grows out of a distinctive resource base and value chain and a unique

position that a firm occupies in a particular market. This means that a manager should pay

attention to all the resources and capabilities the organization should develop to deliver the

right products/services to the right customers and with the right value proposition. The more

firms rely on unique resources and capabilities, the more sustainable the competitive

advantage. Proponents of the resource-based view also stress the inimitability of the resources

and capabilities for sustained success. If competitors are able to copy a skill base and/or

operations easily, advantage will erode quickly. That is why it is important to consider the

management processes and systems too, since these are often unique and less visible. In this

way, these underlying resources and capabilities are the true source of sustainable competitive

advantage.

Resources and capabilities constitute, however, only part of the firm’s competitive

strategy. Ultimately, resources and capabilities are used to create products and services for

customers. The products and services the company offers determine the firm’s positioning in

the market. But marketers agree that effective positioning occurs only when it results in

perceived superiority along dimensions that are valued by customers.19 The focus of

marketing researchers has been more on the customers, as well as on the ‘market offering’.20

This latter concept emphasizes more than the products and services offered, as it also includes

a set of augmenting services, programs, and systems. As such, a value proposition is a bundle

of benefits offered by the company, and being bought and sought by the customer. The nature

of the customers is the final element of our strategy framework. The marketing literature has

brought us relevant insights on how to address the customer. It is only by addressing those

various elements simultaneously that we develop a competitive strategy that works.

WHOM DO WE SERVE?

In a competitive market, managers should think carefully about whom to serve and

whom not to serve. Market-driven firms have a clear vision on what their target segment is

and understand what it is that customers in this segment value. Marketers use segmentation,

targeting, and positioning (STP) to create a difference between a company’s offering and that

of its competitors.

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Such an approach helps identify appropriate market segments to target, as well as

develop a unique selling proposition (USP) for the target segment using the four Ps of the

marketing mix – price, place, product, and promotion. But some marketers argue that market

segmentation is not enough: a firm should focus on one strategic segment for which it

provides more tailored products and solutions than any of its competitors, thereby using the

entire value chain to make a difference.21

For example, ING DIRECT USA focuses on one particular strategic segment, “the

average American,” sensitive to price and convenience, and its mission is to be a servant of

the average American. This strategic segment is somewhat neglected by many banks that

often focus their attention on high net worth individuals, who have more money to spend on

financial services, from traditional banking products to insurance and private banking. Rather

than getting people to spend more as traditional banks do, ING DIRECT USA’s approach is to

get customers to save more – to return to the values of thrift, self-reliance, and building a nest

egg. In order to serve their target segment better (than any other competitor), they have

reorganized their entire front and back office, as well as drastically changed the product

development process. What is more – unlike traditional banks – ING DIRECT USA recruits

massively from the retailing sector. In all the bank does, this creates a feeling of “unbank-

ness”, helping the company to differentiate itself from the rest. ING DIRECT USA’s focus on

the strategic segment of the average American is the starting point for its competitive

strategy.22

Companies focusing on one strategic segment have an advantage over companies that

attempt to address various marketing segments simultaneously. For instance, European

easyJet targets those customers who pay from their own pockets, while traditional airline

companies, such as KLM and British Airways, have business travelers as most valued

customers. When British Airways wanted to attack the low-cost carrier market, it set up GO to

compete with easyJet and Ryanair, while retaining its traditional business traveler focus for

the primary SBU. However, when GO was part of British Airways the temptation was to

constantly seek synergies in the value chain. But the so-called synergies exploited in various

parts of the value chain were neither optimized for the low costs necessary for GO, nor for the

full service necessary for British Airways. For them, addressing various strategic segments

involved significant compromise costs, which can be high when focused competitors operate

in the market.23

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Companies can even build a stronger competitive position by identifying potential new

customers that may have been previously considered uninterested non-customers. This occurs

when firms “create” uncontested market space in completely new industries, as Europe’s

Accor Formule 1 hotels did by focusing on the truck driving segment. Formule 1 provided a

good bed, with an easy check-in and check-out, and enough parking space for their trucks, at

the price of a 1-star hotel. Formule 1 became a big success, and the customer segment

extended to those other than truck drivers. Such a new market space with new value offerings

is often attractive to large numbers of customers, rapidly generating economies of scale

(which can serve as an effective barrier to new entrants), as well as network externalities

(which can serve to retard customer exit.) More commonly, the boundaries of an existing

industry are altered,24 providing opportunity to address customers their competitors don’t

serve. Being able to recognize opportunities afforded the organization by such scenarios is

paramount to breaking away from the competition. The more successful the organization is at

creating a monopoly position for a strategically attractive segment, the more likely it is to

extract profits from that segment. The need is great for organizations to be very specific and

focused in the identification, development and management of their target market. Likewise,

organizations should be cognizant that moving away from the competitive pack can allow the

opportunity to carve out and cultivate a differentiated competitive space, especially when

dealing with unserved or underserved customer groups.

WHAT DO WE PROVIDE?

A strategy should not only specify which customers to target but also specify the

products and services it is going to offer. What to offer is closely related to the business

definition of the company. The answer to this question should be as specific as possible – and

for strategies to work, the answer should also be focused and unique. Unfortunately, the

strategy literature has not provided us with clear guidelines how to address that question.

Strategy researchers have extensively analyzed a company’s scope, and addressed whether a

company should focus on a single ‘product/market’, or whether it makes sense to operate in

multiple ‘product/markets’.25 But the strategy literature has not provided us with answers on

the optimal product scope within a particular product/market.26

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We believe that the question ‘What do we provide’ involves two major dimensions

(see Figure 3). The first dimension deals with the product scope: should you be a generalist in

the market or should you aim for a specialist profile? The second dimension relates to the

nature of your products in the mind of the customer: should you trade-up or trade down?

Insert Figure 3 About Here

The scope of a product mix, or product line width, refers to how many different

product lines the company carries. The depth of a product mix refers to how many variants are

offered of each product in the line.27 Companies that choose to develop a competitive

advantage significantly based on the product/services dimension of “what do we provide”

must decide whether they will consistently have the deepest selection of products in a

particular product line, or the broadest assortment of product lines. Again, it is very important

to make clear decisions and to focus on one of the two extremes. Only then will you be able to

conquer a favorite place in the customers’ mind.

Marketing research has shown that the effect of product line width on market

performance is twofold. On the one hand, a broader product line enables more customers to

find their preference within the firm’s offering. Customers and distributors may also attach

added value to the availability of a complete line by a manufacturer. For distributors, reasons

for this may include transaction costs associated with developing new supplier relationships to

fill up their product line, learning costs associated with familiarizing sales and service

employees with a new line, etc. End-customers may prefer the availability of a complete

product line to avoid shopping and switching costs (e.g., the cost of incompatibility, the

reduced cost of being able to concentrate purchases, the time required to meet with multiple

sales people, uncertainty about quality, etc.).

On the other hand, there are significant negative effects of product line width to

consider.28 A wider product line not only increases complexity and costs, and does not

necessarily lead to increased market share and customer loyalty. Line extensions dilute the

strength of a brand, especially when the line extension is perceived to be inconsistent with the

brand image of the existing product line.29 This clearly indicates that firms benefit from focus

within their product line. This does not preclude them from offering a variety of products, as

long as these products convey a consistent image and all fit within one clearly defined value

proposition.

14

The argument in favor of focus within the product offering can also be made with

respect to the optimal use of a firm’s limited resources. Product line expansion diverts

resources from existing to new activities and stretches the firm’s resources too thin.30 The

negative effect can be felt across the entire product line.

Managers also need to make clear and explicit decisions on the nature of their products

and services. Do you want to offer the best products – innovative and made to exact

specification? Or do you want to provide good enough products? McKinsey and Company as

well as Boston Consulting Group (BCG) profile themselves at the high-end spectrum of the

consulting industry, while Porsche and Ferrari are examples of best products in the car

industry. IKEA, on the other hand, offers a wide range of well-designed functional home

furnishing products, at prices so low that many people can afford them. Again, it is very

important to decide at what side of the spectrum you want to compete.

Marketers provide great insight into the nuances of consumer market bifurcation.

Consumers are trading up for products that meet their aspiration needs and trading down for

products which they perceive as commodities – like the customer who stays in a five-star

hotel but travels with a budget air carrier. BCG has analyzed why consumers seek value at the

top and the bottom of the markets, and generally concluded that the middle market is in

horrible decline.31 This reinforces our message for focus. In this context, it means choosing

between high quality, emotionally rich, high-margin goods/services or basic, low-cost and

margin goods/services.

Where possible, companies should offer products or services of value to customers

that are unique in the marketplace. Differentiation through product innovation can help build a

competitive advantage, whether the innovations are incremental or the standards for the next-

generation of products or services. The literature on product innovation is vast, indicating the

potential product innovation has as a foundation for competitive advantage.32 Questions that

are raised here are: What new product features to add? How to improve the performance of

our products/services? Should we change the product’s design, look and feel to the buyer?

When answering those questions, managers should not only focus on just their products or

services, but should look at the customer’s entire experience. By looking to the entire

consumption chain, managers can uncover opportunities to position their offerings in totally

new ways.33 The traditional business of a bookstore had been defined as selling books. Barnes

& Noble thought more broadly about the total experience people seek when they buy books.

People like to search for books, if you provide the right environment.

15

And this is what B&N did: it created superstores with a huge selection of books, it

hired knowledgeable staff, it extended the range of store hours, and created a wholly new

reading environment. Of course opportunities are useless unless the organization possesses

capacity to take advantage of the prospective break. Capacity issues of importance would

include possessing the knowledge, skills, ability, technology and marketing finesse required

for successful competitive action – and can we consistently provide for both anticipated and

unanticipated demand.34

ING DIRECT USA uses differentiation in product innovation to help build a

competitive advantage despite offering only a limited range of financial products, such as a

simple high-return savings account and a limited number of mutual funds. The bulk of bank

assets (nearly 90%) consist of simple residential mortgages, with the rest consisting of home

equity lines of credit and customer loans. ING DIRECT does not offer a checking account, a

primary differentiator from traditional banks where, first and foremost, it’s about payment

services. Once traditional bank customers have payment services – such as checking, face-to-

face teller services, and ATMs (Automatic Teller Machines) – they are “owned” by the bank.

But Arkadi Kuhlmann’s strategy is different. The last thing he wants is to take your traditional

demand deposit account (i.e. your checking account). These accounts typically have a large

number of transactions per month and require a physical branch and a great deal of internal

labor to process them. All this is too costly. Rather, ING DIRECT wants to be “your other

bank,” and customers are encouraged to shift money back and forth between their ING

DIRECT savings account and their checking accounts with their existing bank. Thus, succinct,

tailored product offerings are key to competitive success for ING DIRECT.

WHAT IS OUR VALUE PROPOSITION?

Companies produce products and services, but customers buy benefits. The desired

composition of these bundles may change, with customer buying decisions usually resting

entirely on the value proposition that a company offers. We define a value proposition as a

particular bundle of benefits offered by the company, and being sought and bought by the

customer. The value proposition communicates why customers should buy a company’s

products and/or services over that of the competitors. The value proposition is different than

the products and services offered by the company in that it considers the user’s total

consumption system. Kotler defines this as the way the user performs the tasks of getting and

using products and related services.35

16

Companies with an effective strategy generally have a compelling value proposition.

These companies have made up-front, deliberate choices concerning which benefits they are

going to offer (and which not to offer). In contrast many companies suffer from across-the-

board superiority, trying simultaneously to outperform competitors on too broad an array of

benefits, such as lower price, better service, nicer design, better accessibility, and so on.36

Crawford and Mathews developed a very interesting framework to check how focused a

company’s value proposition really is. Their basic assumption is that every business

transaction can be broken down to five major value attributes:

• Price: Cost of goods and/or services

• Product: Goods and/or services purchased

• Access: How consumers obtain goods

• Service: How consumers feel about the supplier as a result of a commercial

transaction

• Experience: How consumers feel about themselves as a result of goods and/or

services.

Companies with a great strategy never try to be the best at everything. They overcome

the constant temptation to strive for universal excellence, and rather decide to dominate on

one primary attribute. In addition, they often select a secondary attribute that serves as a

strong complement and helps further differentiate from the competitors. Companies with a

great value proposition also realize that they cannot fall below industry par on the other three

attributes previously identified in our framework, including targeted customers, products and

services, and the business model. Again, the key message is simple: only through focus do

consumer-relevant issues create a meaningful image in the customers’ mind.

Great companies do not only focus, but simultaneously look for unique value

dimensions in their value proposition. The value curve concept illustrates value dimensions

useful as a company differentiates itself from competitors.37 High-growth companies tend to

look for totally new value dimensions and underinvest in or reduce value dimensions that

consumers don’t value. Critical to value innovation is managerial focus on creating value

dimensions that an industry has never offered. For instance, Cirque du Soleil has combined

value dimensions from the circus industry and the theatre industry, to come up with a totally

new form of entertainment, and has been very successful with this “blue ocean strategy.”

17

Again ING DIRECT USA is a perfect example of focus and uniqueness relative to the

value proposition. ING DIRECT sells its products with the simple slogan: “Great rates, no

fees, no minimums.” Their Orange Savings Account generates one of the highest rates in the

market, and their lending rates are generally lowest in the market. Clearly, “price” is the value

attribute where ING DIRECT dominates. ING DIRECT has opted also to compete on

“access” and to make life as easy as possible for their customers. And this translates into the

market offering. Savings accounts can be set up in five minutes online. Mortgages can take

only seven minutes to close. With this value proposition, ING DIRECT occupies a unique

position in the market. While many will agree that dealing with traditional banks is a complex

and cumbersome process, simplicity is really a key word for the organization.

HOW DO WE REALIZE ALL THIS?

The final dimension of our strategy framework refers to the business model dimension.

At the heart of a strategy that works must be a clear idea how profits will be generated.38 This

dimension reveals the underlying logic that explains how to deliver value to the customer at an

appropriate cost. The business model is an integrated set of resources and capabilities leading

to the supply of the product and/or service offering. It includes what the firm owns and what

the firm does, both in operational and managerial terms. For instance, if easyJet’s value

proposition is to offer the lowest price, then the business model dimension should specifically

address how the company can achieve that cost leadership position. It is very important not

only to look at how to configure core operational processes across functional areas, but also to

develop consistent and relevant management processes and control mechanisms within an

appropriately developed organizational culture. Key aspects of managing internal operations

include achieving support for strategy execution by marshalling organizational resources and

instituting appropriate policies and procedures; seeking and adopting best practice through

continuous improvement efforts that utilize information and operating systems; and directly

tying rewards, incentives and motivational tactics to quality strategy execution.39

It is important that an organization decide which activities it will perform and how it

will configure individual activities, but also how activities relate to one another. Strategy is

about combining activities. If firms use activities across the entire value chain to make a

difference, competitive advantage will be more difficult to copy.40

18

That is why firms should not only try to differentiate elements of their marketing and

sales activities, but should adapt production activities, R&D activities, and general

management activities (such as human resources) in order to provide more tailored products

and solutions to their customers than their competitors. A traditional principle of strategic

thinking has been the notion that organizations must choose between being a low-cost leader

or a differentiator, since the approaches require fundamentally different competitive actions

and resource commitments.

Determining organizational structures and elemental support necessary for success of

particular strategies has been part of the strategy genre for some time, and several strategy

configurations have been proposed. Built on academic foundations, one configuration in

particular is often used in practice, and seems particularly relevant here. Michael Treacy and

Fred Wiersema have identified three strategic configurations – what they call value

disciplines: operational excellence, customer intimacy, and product leadership.41 By narrowing

their business focus, some companies have attained market leadership positions within their

industry. That is, companies have been successful because their business model has been

focused on one of these three value disciplines.42 Focus helps to align the entire business

model to serve one particular value discipline. It helps companies to stay ahead of the

competitors as it also directs the company’s future investments in new projects. Strategic

decision making is consistently a series of trade offs – there are no “magic bullets”. Less

focused organizations have more difficulties in making such trade-offs, as they have not

clearly specified which competences they need to win in the market. As a result, resources are

wasted on secondary objectives that do not always support the company’s primary strategic

goals. Figure 4 indicates that firms need to develop some management competencies first to

make the step towards one of the value disciplines.

Insert Figure 4 About Here

Companies with great strategies choose to be different. They deliberately choose a

different set of activities to deliver a unique mix of value.43 Developing a radically new

business concept requires that companies create resource bundles that are valuable, rare,

costly to imitate and with few substitutes.44 That is, a company can outperform rivals only if it

can establish a difference that it can preserve. Differentiation is not always easy to achieve,

and new successful business ideas quickly get copied.

19

If the original differentiators can’t rely on a first mover advantage, the new profit pool

is shared with an increasing number of competitors, thereby reducing the bases for sustainable

competitive advantage. Nevertheless, managers should constantly search for differentiation in

their business model because it helps the firm to position itself in the market.

ING DIRECT’s success cannot be fully understood without referring to its business

model, which is best characterized as an operationally excellent model. The company saves

where it can. Their no branches and no ATMs policy give the company a significant cost

advantage over traditional banks. In the operational and management processes, the focus is

also on saving costs, with significant investments information systems to streamline and

coordinate various processes. It also encourages customers to open accounts online or by

using its Interactive Voice Response (IVR) system. The company’s acquisition costs are

estimated to be less than half that of competitors.45 All this requires that ING DIRECT

manage its processes rigorously. All processes are documented, and substantial policies,

guidelines and procedures exist for the core activities within the organization. The company is

constantly looking to simplify financial products and financial transactions, and uses tools

such as Lean Six Sigma to achieve the efficiency of a manufacturing industry.

Apart from its competencies in process management, ING DIRECT has also

established core competences in marketing. The company invests substantially in building a

hip brand projecting a differentiated image of “unbank-ness.” The messages are clear and

simple, communicating the “great rates, no fees, no minimums” slogan in a humorous, anti-

establishment tone. And ING DIRECT does not restrict itself to the more traditional

marketing campaigns. For instance, in Baltimore and Washington DC, ING DIRECT

surprised over 8,000 people with a free movie at Regal Cinemas. Likewise, it offered free gas

in Baltimore to 1,000 drivers at three selected Shell stations, and asked them to put the money

they would have spent on gas into an Orange Savings Account. By the end of the three-hour

promotion campaign cars lined up for more than three kilometers. Another uncommon feature

of the marketing strategy are ING DIRECT’s cafés, each located in a large city – such as New

York, Washington, Philadelphia, Los Angeles. They are not intended to be substitutes for the

branches, but rather introduce the customers to the ING DIRECT brand.

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STRATEGIES THAT WORK AND PERFORMANCE

Developing strategies that work does not automatically lead to a competitive

advantage and superior performance. Strategies must be implemented and actions initiated in

line with the strategy. That is where a great strategy can help. Managers sometimes have the

feeling that “strategy is like desert rain: before the raindrops hit the desert floor, they

evaporate, creating little or no effect below.”46 Companies with effective strategies run fewer

risks that the necessary actions are not undertaken, and that strategy is like desert rain. Here

we show how ING DIRECT USA’s strategy has affected its employees and customers, and

how the company was able to grow significantly, both in terms of both revenues and profits.

Focus is important for employees. Focus helps to set the boundaries within which

employees can develop activities and initiatives. ING DIRECT USA’s focus on a particular

customer segment, on a particular value proposition, and on a particular business model,

makes the strategy clear for employees at different departments. All employees have an idea

about the “big picture” (i.e., how the organization earns money and how it attracts customers),

and this is a very motivating element. In a recent employee survey, 99 percent of the

employees were proud to say that they are part of ING DIRECT. Seeing the big picture helps

to destroy the silo mentality that all too often prohibits companies from making real progress

in strategy implementation, and it specifies what priorities should be set for the company as a

whole. The management team supports this attitude, and forces employees to be involved in

the activities of other departments. Uniqueness is important because it gives the employees

the feeling that they are on a crusade to leave a lasting mark in the banking industry.

Focus and uniqueness also matter for ING DIRECT’s customers. Focus makes explicit

what the company stands for. It sets clear expectations. Customers know they don’t get

complicated financial solutions - they get simple financial products at great rates, in a very

easy way. Many customers like this way of communicating, which is rather atypical for banks.

Uniqueness in terms of customers, products, value proposition, and business model helps to

differentiate the company from competitors. It enhances the image of being different in the

customers’ mind. ING DIRECT actively plays on that: it points out that it is a federally

chartered bank and its savings are FDIC insured in order to guarantee credibility with its

customers. But that is where their self-comparison with typical retail banks stops. And this

seems to work very well.

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ING DIRECT’s clear strategy also gives it a very special position within the ING

Group. ING Group stimulates synergies between different business units, but doesn’t force

ING DIRECT into its Mandates Synergies Program given concerns that such moves would

reduce ING DIRECT’s uniqueness and focus. Thus, the top management team of ING

DIRECT has more degrees of freedom to further develop strategy and action plans than any

other business unit within the ING Group. This may also contribute to the “renegade” bank

image of ING DIRECT USA.

CONCLUSION

Much confusion surrounds questions of what strategy is and how to make it work. We

have argued that one of the major problems with developing an effective competitive strategy

is the lack of clarity and specification in strategy formulation. In this paper, we have used the

strategic cornerstone characteristics of focus and differentiation, and presented a framework to

help managers make their strategy clearer and more specific once mission and vision have

been established. For strategies to work, managers need to formulate a focused and unique

answer on the core dimensions of competitive strategy, specifically,

• Whom do we serve?

• What do we provide?

• What is our value proposition?

• How do we realize this?

We have relied on the strategy and marketing literature to provide arguments as to

why focus and uniqueness matter, and how to make those concepts more operational. When

managers succeed in providing an integrated set of focused and unique answers to all four

questions simultaneously, then strategic actions can be developed that help companies thrive

better in the competitive environment.

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FIGURE 1

Four Dimensions of the Strategy Development Framework

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FIGURE 2

Strategies that work: integrative framework

24

FIGURE 3

Focus on product scope and product nature

25

FIGURE 4

Business model focus

1 See R. S. Kaplan and D.P. Norton, Having trouble with your strategy, then map it, Harvard Business Review September-October, 167-176 (2000) and R. Gunter McGrath and I.C. MacMillan, Discovery driven planning, Harvard Business Review July-August, 44-54 (1995), among other. 2 See D. C. Hambrick & J.W. Fredrickson, Are you sure you have a strategy?, The Academy of Management Executive November 15 (4), 48-59 (2001). 3 M. Beer, S. Voelpel, M. Leibold, and E. Tekie, Strategic management as organizational learning: Developing fit and alignment through a disciplined process, Long Range Planning October 38 (5), 445-465 (2005). 4 W. F. Joyce, N. Nohria, and B. Roberson, What really works: The 4 + 2 formula for sustained business success, HarperCollins Publishers, New York (2003). The authors identified flawless operational execution, the development of a performance-oriented culture, and the building and maintenance of a fast, flexible, and flat organization, as the other three primary management activities. 5 C.C. Markides, What is strategy and how do you know if you have one?, Business Strategy Review 15(2), 5-12 (2004).

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6 T.M. Allesandri and R. A. Bettis, Surviving the bulls and the bears: Robust strategies and shareholder wealth, Long Range Planning 36, 13-35 (2003). 7 M.E. Porter, What is strategy?, Harvard Business Review November-December, 61-78 (1996). 8 C. Kim and R. Mauborgne, Blue ocean strategy: How to create uncontested market space and make the competition irrelevant, Harvard Business School Press, Boston, MA (2005). 9 C.K. Prahalad, The blinders of dominant logic, Long Range Planning 37 (2), 171-179 (2004). 10 G. Hamel, Leading the revolution: How to thrive in turbulent times by making innovation a way of life, Harvard Business School Press, Boston, MA (2000). 11 See D. C. Hambrick & J.W. Fredrickson, Are you sure you have a strategy?, The Academy of Management Executive November 15 (4), 48-59 (2001). 12 See C.C. Markides, What is strategy and how do you know if you have one?, Business Strategy Review 15(2), 5-12 (2004); D. C. Hambrick & J.W. Fredrickson, Are you sure you have a strategy?, The Academy of Management Executive November 15 (4), 48-59 (2001). 13 Hambrick and Fredrickson also include vehicles (how will we get there) and staging (what will be our speed and sequence of moves) as necessary elements of strategy. We acknowledge that these two decisions are very crucial decisions, but we doubt whether these strategy elements can be planned beforehand. For instance, if M&As are utilized as main vehicles to get to your final destination, much depends on what acquisition targets are available on the market. Furthermore, staging is very dependent upon what your competitors do. These are factors that you do not always have under control, and often require episodic decision making. 14 Figure 1 implies that mission and vision are not elements of the competitive strategy. They stand apart, and drive strategy. The mission states organizational purpose and reasons for existence, and also specifies which stakeholders will be addressed and in what particular way. As such, a mission is much broader than a strategy, since the latter explicitly focuses on one stakeholder in particular, the customer. A mission forms a frame of reference for the vision, which describes what the organization wants to be in the future. A vision sets direction, and inspires organizational members to move in the proposed direction. From these bases, strategy specifies how to achieve the organization’s vision. 15 C.C. Markides, What is strategy and how do you know if you have one?, Business Strategy Review 15 (2), 5-12 (2004). 16 J.W. Rivkin, Imitation of complex strategies, Management Science 46 (6) 824-844 (2000). 17 N. Siggelkow, Evolution towards fit, Administrative Science Quarterly, 47, 125-159 (2002). 18 D. Miller, Configurations revisited, Strategic Management Journal July 17 (7), 505-512 (1996).

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19 G.S. Day and R. Wensley, Assessing advantage: a framework for diagnosing competitive superiority, Journal of Marketing April 52 (2), 1-20 (1988). 20 J.C. Anderson, G.S. Carpenter and J.A. Narus, Marketing offerings in business markets, in D. Iacobucci (Ed.) Kellogg on Marketing, Wiley, New York, 330-65 (2001). 21 N. Kumar, Marketing as strategy: Understanding the CEO’s agenda for driving growth and innovation, Harvard Business School Press, Boston, MA (2004). 22 Kuhlmann, Arkadi. Speech delivered May 1, 2006 at ING DIRECT CAFÉ, New York. 23 N. Kumar, Marketing as strategy: Understanding the CEO’s agenda for driving growth and innovation, Harvard Business School Press, Boston, MA (2004). 24 C. Kim, and R. Mauborgne, Blue ocean strategy: How to create uncontested market space and make the competition irrelevant, Harvard Business School Press, Boston, MA (2005). 25 H.I. Ansoff, Corporate strategy, McGraw-Hill, New York, (1965). 26 For instance, Porter’s generic strategy framework has two dimensions: strategic advantage (uniqueness perceived by the customer that leads to differentiation – and low cost position that leads to cost leadership), and strategic target (industry-wide focus or focus on particular segment only). But Porter acknowledges that you can be a successful cost leader, either with an industry-wide perspective, or with a particular customer or product line focus in mind. 27 P. Kotler and G. Armstrong, Principles of marketing (9th Edition), Prentice Hall International Inc., Upper Saddle River, NJ (2001). 28 J.A. Quelch and D. Kenny, Extend profits, not product lines, Harvard Business Review September-October, 153-160 (1994). 29 D. Roedder John, B. Loken and C. Joiner, The negative impact of extensions: Can flagship products be diluted?, Journal of Marketing January 62, 19-32 (1998). 30 P.W. Robertsa and S. McEvily, Product line expansion and resource cannibalization, Journal of Economic Behavior & Organization, May 57 (1),49-70 (2005). 31 Silverstein, Michael, BCG president 32 See, for instance, E. Danneels, The dynamics of product innovation and firm competences, Strategic Management Journal, 23(12), 1095-1121 (2002). 33 I.C. MacMillan and R. Gunther McGrath, Discovering new points of differentiation, Harvard Business Review July-August, 133-145 (1997). 34 T. Brown, The essence of strategy. Management Review April 86(4), 8-13 (1997). 35 P. Kotler, Marketing management (11th Edition), Prentice Hall – Pearson Education, Upper Saddle River, NJ (2003).

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36 F. Crawford and R. Mathews, The myth of excellence: Why great companies never try to be the best at everything, Crown Business, New York (2001). 37 C. Kim, and R. Mauborgne, Charting your company’s future, Harvard Business Review June, 76-83 (2002). 38 See D. C. Hambrick & J.W. Fredrickson, Are you sure you have a strategy?, The Academy of Management Executive November 15 (4), 48-59 (2001). 39 A.A. Thompson and A.J. Strickland. Strategic Management: Concepts and cases (11th Edition), McGraw-Hill, Boston, MA. 40 N. Kumar, Marketing as strategy: Understanding the CEO’s agenda for driving growth and innovation, Harvard Business School Press, Boston, MA (2004). 41 M. Treacy and F. Wiersema, The discipline of market leaders, Perseus Books, Reading, MA (1995). These three value disciplines were also identified and described by Danny Miller [see D. Miller, The structural and environmental correlates of business strategy, Strategic Management Journal January-February, 8 (1), 55-76 (1987)]. 42 Operational excellence focuses on managing processes in a flawless and efficient way. Increasing the efficiency is what drives the organization, putting boundaries to the level of customization and flexibility a company can offer the customer. Customer intimate organizations continually tailor and shape products and services to fit an increasingly fine definition of the customer. Focus is on the customer’s lifetime value, with the sales and service manager’s main task to provide exactly what customers want, with cost of the service or product delivery of secondary importance. The customer intimacy focused firm has good market-sensing capabilities and segments the market to provide even better solutions. Finally, product leaders try to convince customers with state-of-the-art products and services. In order to keep up to the promise, much attention is focused on developing new products and solutions. Creativity is key, and a product leader looks for every possible opportunity to fuel creativity in its organization. But apart from innovation capabilities, product leaders also have great marketing capabilities. They don’t merely try to fine-tune solutions to particular customer segments, rather they try to convince the market of the superiority of their products and services. 43 Porter, What is strategy?, Harvard Business Review November-December, 61-78, (1996) 44 J. Barney, Firm resources and sustainable competitive advantage, Journal of Management 17, 99-120 (1991). 45 The company’s acquisition costs are estimated to be lower than $100. According to Jim Kelly, chief marketing officer of ING DIRECT: “It is not unusual for a banks to have customer acquisition costs of about $300-400.” [See: “Would you like a mortgage wity your mocha?”, FastCompany, Issue 68, March 2003, p. 110.] 46 G. Labovitch and V. Rosansky, The power of alignment: How great companies stay centered and accomplish extraordinary things, John Wiley & Sons, New York (1997).