Of Chickens & Pigs: A customer-based view of business strategy (Part I)

Harold Star’s Chicken & Pigs:  Business Models & Competitive Strategy (Getzville, Buffalo, NY: EMBA Press, 2007) articulates how business models centered on the right customers are the foundation for well-thought out business strategies.

His theory stands in stark contrast with the traditional, popular views that place position, competition, and core competencies at the center of strategy management.

While most executives spend time thinking about plans, patterns, market position, resources, revenue projections, financial statements, and the like, Star argues that they should spend time winning, managing, retaining and or reacquiring customers.

It is not just about the proverbial “customer comes first” but that and more. What he calls the “strategic DNA” of a business model has the customer as the starting element.

Business people know that they want customers. The problem is that many do not know what to do with the customers when they think about the nature of their businesses and when they develop strategic activities.

Failure to understand who the customer is can lead to misconceived strategies, lack of purpose and sustainability.

The customer is the individual or entity that pays the business directly and that should be the foundation of the business model and the basis of competitive strategy.

To give an idea of the disruptive way in which Star looks at the customer, two quick quotations from the book should suffice:

(1) “A fundamental axiom of competitive strategy is this: a company doesn’t win earnings, it wins customers” (p.48).

 (2) “I believe that business model maximization is best measured in customer terms. Further, I believe the core objective of business model maximization is to increase the number of customers within the pool without compromising the delivery of the value proposition. In order to maximize the latent financial potential within a business model, customers must be acquired” (my emphasis) (p. 100).

Star starts his book with a discussion of the three phases and the two paradigms that have so far marked the relatively young field of strategic management.

The first phase spanned from the 1970s to the early 1980s and was characterized by the discipline’s attempt to find its identity: here Star invokes McGill University’s Henry Mintzberg’s identification of eleven divergent schools of thought about strategic management.

The second phase emerged in the mid-1980s and was dominated by the work of Harvard University Professor Michael Porter with his five-force analysis: intensity of rivalry among industry competitors, new entrants, suppliers, buyers, and substitutes.

This view of strategy focuses on the company’s position vis-à-vis its competitors within its specific industry/market.

The third phase took hold in the mid-1990s and was shaped by the resource-based view (RBV).

This perspective took external analysis into consideration, but it focused more on internal resource types (resources and capabilities) and resource characteristics (inimitability and substitutability) as factors of profitability.

Focus on external forces characterized the first paradigm during the first two phases. The second paradigm focusing on internal elements was the hallmark of the third phase.

In an attempt to define “strategy” (in “strategic management”), Star again invokes Henry Mintzberg’s observation that in the early years of the discipline analysts tended to view it as either plan, position,  perception, or  pattern (within decisions and actions over time).

Businesses that focus on vision, mission, and intent (core values) use strategy as perception. Strategy as position follows Michael Porter’s five forces analysis.  The resource-based-view (RBV) focuses on leveraging competitive advantage, internal resources, core competencies and capabilities. This is strategy as pattern.

Strategy as plan demands a written plan that is often “brief, simple, action-oriented, and with measurable goals” (p. 6). Star notes that strategy is more complex than benchmarks. He argues that the academic world never sees strategy from this perspective.

Perhaps the concept of “strategy” can be best captured by inscribing it in the logic of a business model. The latter is a system that shapes ways in which various pieces work together whereas the former is concerned with strategic activities to deal with the competition.

Strategy is “the means by which business models are implemented and then changed when necessary” (p.11).  Thus, determining a business model necessarily precedes strategy.

A perusal of strategy management textbooks and articles in books and online generates various “business models”. These mostly look like strategies, a reality that reflects the general academic view of business strategy as a means to achieve competitive advantage (p. 7).

In the last decade or so, articles in strategy management journals and books have mostly focused on competition (external forces), resources and capabilities (core competencies), products, and organizational and management issues.

External analysis focuses on Michael Porter’s five forces analysis and on the opportunities and threats aspects of the SWOT (strengths, weaknesses, opportunities and threats).

Internal analysis (RBV) looks at the strengths and weaknesses aspects of the SWOT and the internal strategic resources, resources and capabilities (core competencies) as sources of competitive advantage.

To be continued….

The author is a Professor at the State University of New York College at Buffalo.

The views expressed in this article are of the author.