Shazeeye's Blog Thoughts on User Experience, Technology and Business

31Oct/110

Using the Four Actions Framework to Craft a Firm’s Strategy

A firm has to have a clear vision in the form of a strategy to define who it is and where it wants to go. Sometimes somewhere along the way this strategy gets blurred and its customers can't differentiate it from its competitors. The four actions framework asks four questions to sharpen the focus and realign the firm's game plan. The four actions framework can also be used to reconstruct customer value in an industry to identify a gap or find new value. The four questions as seen in the image identify factors that reduce, eliminate, raise and create value.

Let's apply this to a case study- PetSmart vs. Petco. You can read the detailed analysis in my paper here - Petsmart vs Petco - 4 Actions Framework or get the highlights below.

Industry analysis

PetSmart and Petco compete in the Pet Care Industry which includes pet food, clothing, healthcare and other pet services. This is an attractive industry based on Porter's 5 forces analysis (read paper for details) with spending reaching $41 billion/year (number which doubled from a year ago). Americans spend more on pet care than what they spend on movies, video games and music put together.

PetSmart’s strategy was to connect emotionally with pet owners by providing services (services strategy) such as adoption, grooming, training, day care and pet hotels. These luxurious pet services made pet owners feel that their pets were being treated as well as family and thus commanded the higher market share (30%) of the pet care industry. Petco their rival which held 20% market share concentrated on selling a larger variety of pets at a premium price (11% more than PetSmart). As PetSmart was a services strategy it partnered with alliances such as Banfield to help in hospital needs and its stores were located in “power centers” unlike Petco whose stores were “neighborhood pet stores” and much smaller in size.

Recommendations to PetSmart to Refine their Strategy using the Four Actions Framework

Raise: Continue to focus on services and add to these based on trends. For example pet obesity is a big trend hence providing pet diet plans and support will grow the pet food (diet meals for pets) vertical as well as services vertical (customer support), which is recurring revenue and ties into their current strategy. A limitation of this suggestion is that existing diet plans companies can easily enter this market with some modifications to their food to cater to animals.

Create: Provide pet super stores: hotel, grooming and hospital all in one. Owners will be willing to come to pet super stores. Based on maximum revenue based on location super stores that are a one stop shop for all pet owners can attract and even take away from mom and pop stores. Visiting vets from Banfield (PetSmart's already existing pet hospital) can be a part of this super store. This will also increase revenue for other verticals. For example, after the dog is treated at the vet the owner may pamper him or her at the spa and then buy the month’s food supply at the pet supply store. A limitation of this suggestion is that a lot of capital is required to create this and Francis is already working on expanding his pet hotels so this suggestion can probably wait once that is implemented and a detailed cost-benefit analysis of this suggestion is carried out.

Raise: Owners like to be a part of the pet grooming ritual as it fills an emotional need for the owners. Provide see -through rooms where owners can watch pets being groomed or trained while they wait (instead of waiting in waiting rooms). Remember, this is a business that caters to human needs through the pet. Feelings of belonging, care and connections are expressed through pets and sharing in these activities only strengthens the connection. A limitation of this suggestion is that this may be a small market (or not). In today’s busy world few may want to watch their pets being groomed. Again market research and testing will clarify this point.

Eliminate: As only 2% of their revenue comes from selling other pets such as birds and fish, etc evaluate if you still want to keep that business or use the revenue from there to better focus on the lucrative services, supplies and food verticals at PetSmart. A limitation of this suggestion is that this will change or limit the scope to only dogs and cats.

31Oct/110

Growth Strategies and Managing Differences in a Global Economy

As more businesses become global companies face challenges in balancing local conditions with economies of scale. The AAA framework by Pankaj Ghemawat is one way to address this challenge. The three A's stand for Adaptation, Aggregation and Arbitrage. Adaptation boosts revenue and market share by maximizing a firm's local presence such as Mc Donald's in India has adapted its menu to suit Indian tastes by providing the McAloo Tikki burger (spicy potato burger). Aggregation standardizes the firm's product or service offerings by grouping together production processes. Apple manufactures its products in China and markets its products in the US.  Arbitrage exploits the differences between regional markets such as call centers in India, factories in China and retail stores in Western Europe.

A firm can choose one of these strategies or a combination. It can also shift strategies at different points in its evolution. IBM started with the adaptation strategy by setting up mini IBMs in target countries and adapting to local needs. In the 1980s it transformed to a regional dependent organization thus shifting to the aggregation strategy. Most recently it shifted to the arbitrage strategy by exploiting wage differentials in India and increasing its headcount in India.

Which globalization option does a firm choose?

In making this decision managers can use the AAA triangle to make a decision. Firms that do a lot of advertising will need to adapt to the local market and lean more towards the adaptation strategy. Those that do a lot of R&D will use the aggregation strategy and firms that are labor intensive will use the arbitrage strategy. Though firms can use a matrix approach and have two strategies in place employing all three has its constraints in terms of limited managerial capacity and a confused culture. It is important to ensure the strategy is a good organizational fit. A firm could also get external support to integrate across borders. IBM has many vendors and joint ventures to help with its R&D and manufacturing. It is also critical to know when not to integrate as this minimizes points of contact and friction. Choosing to use or not use these strategies can help or hinder a  firm's global growth plans.

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