Stage 4

Strategy

Overview and benefits of this stage

This stage represents the heart of the category management process and some would argue its very purpose. Each of the three stages preceding this stage have been building up to this point in time. A ‘good’ strategy is predicated on diligent research and critical analysis, and without the necessary prior investment in these areas, you cannot expect to develop an effective category strategy.

The kind of strategy we are talking about here refers to a long-term plan to manage the spend within any given category; it is obviously not referring to a short-term plan to source a new supplier! This may sound somewhat patronising, but it is a distinction that strikes at the heart of many of the current operational issues within category management (i.e. the confusion that some procurement people seem to have between ‘strategy’ and ‘sourcing’). We need to reemphasise that sourcing and category management are different processes with different outcomes; the two are far from synonymous.

Sourcing refers to the gathering of requirements, researching a supply market and obtaining competitive bids from a range of capable suppliers so that contracts can be placed with the best overall providers. It is relatively short term and involves competitive bidding from the supply market. Category management may sound similar, but it is far broader than this. One of the outputs of a category strategy could be the sourcing of a new contract with a supplier – but this would be just one initiative amongst a range of others, which over time map out a strategic plan to manage the category spend.

A category strategy could therefore result in a wide range of solutions – not just sourcing. Some of these potential solutions might include:

• renegotiation of existing/new deals;
• outsourcing/insourcing;
• offshoring/reshoring;
• joint ventures with others;
• supplier relationship management;
• new product development;
• process improvement;
• demand management;
• product substitution;
• business process reengineering;
• vertical integration;
• supply-chain disintermediation;
• supply-base rationalisation;
• automation, and so on.

There are many options and solutions available, and these are explored further when we discuss the category strategy cube next. For now, we simply want to make it clear that the outcome of a category strategy is not just sourcing; it should be far broader than this narrow procurement-oriented focus. It should also be obvious that category management processes that automatically build in sourcing activities (e.g. the current CIPS category management process and others) are flawed and short-sighted. Members of the category management team must not limit themselves in their thinking during the strategy stage. The category strategy should consider all possible solutions and then pull together a long-term plan for the overall spend within the category.

This long-term plan might contain a series of initiatives over time to manage the category spend. A simplified example is shown in Figure 4.1.

Figure 4.1 Example category strategy plan

Extra explanation and theory

The simplified example of a series of category-based initiatives helps demonstrate the nature of category strategy – that is that it is wider than sourcing alone, it is long term (typically three to five years), it contains several progressive initiatives and it delivers a number of business requirements (not just cost reduction). On top of this, it really should be flexible and have the ability to adapt to organisational and environmental changes around it.

This leads us to consider what we mean by a category strategy. ‘Strategy’ is an overused term in business and the source of much academic debate, some of which is unnecessary and valueless for the business world. In category management we are simply referring to a cross-functional, long-term plan to manage the category spend and achieve targeted business requirements. No doubt there will be some academic critics of this simple definition, but it is pragmatic and effective for category management.

Category management adopts a ‘logical incrementalism’ approach towards developing strategy (i.e. a planned approach to strategy making in a series of incremental steps), which gets reviewed and refined in subsequent iterations.

One of the popular modern-day approaches to strategy development is the PCA model (Johnson et al. 2014) outlined in Figure 4.2, now referred to as the ‘exploring strategy model’. This is a dynamic and evolving model that considers three interdependent sets of activity in order to create and execute a strategy. The strategic positioning (P) activities can be likened to the research and analysis stages of category management, while the strategic choices (C) and strategic action (A) activities are similar to the strategy and implementation stages of category management.

Figure 4.2 PCA strategy-development model

Source: adapted from Johnson et al. (2014)

So, what are the dimensions of an effective category strategy? Here are some of the key features that category managers should be aiming for. A ‘good’ category strategy:

• is customer focused;
• has a long-term orientation (three to five years);
• is fully cross-functional/pan-enterprise;
• delivers ‘breakthrough’ business value;
• focuses on multiple deliverables (not just cost savings);
• is based on facts, data and research;
• is agreed by all stakeholders;
• is adaptable to change.

This checklist gives the category team an idea of what they should be aiming for when developing a category strategy. Ideally the targets that were set during Stage 1 (Initiation) should have been stretching so that the category team feels sufficient pressure to seek innovative ideas and solutions beyond the obvious.

There is nothing worse than spending three or four months of category research, analysis and strategy development only to end up with a solution that proposes to run an eRFx exercise to source a new supplier. This is not category management (it’s just plain old sourcing), and it is not sufficiently challenging or innovative to add tangible ‘breakthrough’ value for the business. The category team needs to be far more expansive and creative in its idea generation to achieve the business requirements over a three- to five-year time horizon!

Ideas can come from a wide variety of sources, not just so-called brainstorming workshops. There is not a recommended number that you should be aiming for, but it is quite possible to have over 100 initial ideas for a category strategy. Consider asking stakeholders and consulting with the supply market, either informally through networking, or more formally through market-enquiry techniques.

Some ideas will already have been mooted by the category team during Stage 2 (Research) or Stage 3 (Analysis). These need to be recorded and stored for an initial ‘sift’. Before this happens though, you should think carefully about how those initial ideas are received. It is always best to avoid early assessment of someone else’s ideas, in case your rigorous evaluation leaves them unwilling to share more good ideas or, worse still, prevents someone else from sharing his or hers.

Ideas need to be worked on in order to become workable and of value. The task of the category team is to develop and refine the initial ideas by working on their practicality and utility so that they become genuine options to consider. Later in this section you will consider our option appraisal model. The difference between an idea and an option is simply one of operational effectiveness – that is as soon as an idea or concept has been assessed and sufficiently developed so that it can practically deliver the required business benefits, it becomes an option that should be appraised and tested.

As you will see in the Activity 25 (Option appraisal) later, once all options have been evaluated, the best overall option is subsequently put forward as the recommended solution.

This process of innovating and developing the category strategy is dynamic and nonlinear; it is difficult to confine to a project plan or a set of prescribed methods. One successful approach towards generating and refining ideas and options is that of ‘suitability, acceptability and feasibility’, which was developed by Professor Gerry Johnson et al. (2014; the originators of the PCA strategy-development model). Their methodology is based on a series of tests and refinements that take initial ideas and test/develop them first for their suitability (i.e. their ability to meet the original specified requirement). The subsequent tests of acceptability and feasibility then consider the extent to which the ideas will be embraced by stakeholders and the organisation, and ultimately the practicality and business case for such initiatives.

These tests work well in category management idea-generation or solution-development workshops and can be used effectively to develop a meaningful and value-adding category strategy.

The biggest challenge of all, however, relates to the origin of good ideas. Staring at a blank sheet of paper rarely produces valuable solutions, in much the same way as asking someone to create a valuable idea on the spot rarely generates the desired results. One tool that we have found valuable for generating initial ideas and thoughts about potential category solutions is the category strategy cube, shown in Figure 4.3.

This model provides a wonderfully rich stream of potential supply-chain solutions. It can be used in a variety of ways, from a simple checklist approach, to an analytical assessment of individual category strategies. In itself, it does not claim to generate the ‘silver bullet’ of a category solution, but using it within a category team will certainly generate thought-provoking ideas and concepts that will lead to a series of strategic options for the category of spend.

It should be noted that not all of the ideas and concepts within the category strategy cube are original, as there are similar dynamic models within the supply-chain community. The purchasing chessboard is one model that explores the power dynamics between buyers and suppliers to generate 64 different forms of purchasing strategy (see Schuh et al. 2012). While this is an improvement on one-dimensional sourcing strategies, it should be noted that there are serious flaws within the logic of this model (see Cox, 2014). The purchasing chessboard wrongly looks at the power dynamics of a single supplier relationship, when it should really be considering the power dynamics within the supply market as a whole. It is also limited to sourcing and process-improvement strategies, rather than considering broader business strategies for the category spend. For this reason, we consider the category strategy cube to be far more effective in helping category teams generate, discuss and refine their category strategies.

The category strategy cube has two main dimensions: one that relates to disruptive strategies (restructuring, supply-base leverage and product innovation) and one that relates to adaptive strategies (process improvement, supplier management and supply-base collaboration). There is a clear connection and overlap between some of these related strands, and so users should not get overly hung up on which strategic initiative belongs to which facet of the model.

Figure 4.3 Category strategy cube

The concept of disruptive strategy is a recognition that the status quo will be changed. This is likely to result in new operating models, business reorganisation and new upstream or downstream business relationships. Adaptive strategies, however, tend to build on the existing foundations and structures within an organisation and its supply chains.

Within the category strategy cube, there are three further features: those that create value (through new products and supply chains), those that deliver value (by changing the nature of relationships and supply chains) and those that improve value (from existing relationships and supply chains). The two dimensions and three features of the category strategy cube work together to form a proactive and dynamic framework for generating value-adding category strategies that look far beyond the normal remit of the procurement community.

Practical hints and tips

1. 1 Idea generation is everyone’s responsibility and involves the full category team, plus wider stakeholders.
2. 2 Maintain an ‘ideas log’ throughout the category management process so that all ideas and thoughts are captured prior to assessment.
3. 3 Do not evaluate ideas too early, and prevent any actions from occurring that could curtail the generation of additional ideas for a category strategy.
4. 4 Use practical tools, such as the category strategy cube, to generate ideas amongst the category team and the wider stakeholder community.
5. 5 Think beyond sourcing; there are many wider business and supply-chain solutions that you could consider that have far greater lasting impact.
6. 6 Seek a diverse range of sources for your ideas so that the ‘boundaries’ of thought and innovation are stretched and challenged.
7. 7 Once you are ready to close down idea generation, undertake an ‘affinity-sorting’ exercise to group together related ideas to see how these can work together and create additional synergy for the category.
8. 8 Rigorously test ideas and options with stakeholders using the well-established suitability, acceptability and feasibility framework.
9. 9 Be prepared to string together a series of initiatives so that a longer-term (but flexible) category plan can be developed.
10. 10 Keep your stakeholders actively engaged throughout all of these strategy-development activities.

Summary of activities

There are six key activities outlined within this stage of the category management process:

1. 1 Dutch windmill – A risk and value-based portfolio approach to the development of market-based sourcing strategies. This model offers a combination of the Kraljic portfolio analysis and supplier preferencing matrices and indicates the relative power positions of suppliers with respect to their customers.
2. 2 Sourcing strategy wheel – In many ways this model is similar to the Dutch windmill, again based on the Kraljic portfolio analysis matrix. This model helps suggest appropriate sourcing strategies.
3. 3 Power/dependency profiling – An analytical model of the structure of power within dyadic buyer-supplier relationships. If used properly, this model helps identify the sources of power (or dependency) within a buyer-supplier relationship and therefore highlights the areas that a category strategy needs to address.
4. 4 Opportunity analysis and quick wins – A simple initial ‘sifting’ model to separate out the higher-yielding ideas. This model can be used as an early evaluation model before ideas are worked up into fully detailed options, and it can also be used to identify ‘quick-win’ opportunities.
5. 5 Option appraisal – This is a more detailed comparative assessment model for strategic options, set against objective criteria of ‘success’ (typically the business requirements) so that the most favourable option for the category can be identified.
6. 6 Category plan – Detailed documentation of the category strategy, together with a plan for its implementation. This often acts as a justification and approval document for the proposed category strategy, together with a record of the research and analysis that has led to the creation of that strategy.

What the gateway needs to consider

The main goal of the gateway approval point at the end of Stage 4 (Strategy) is to make sure that all major stakeholders are satisfied with the category strategy that is being proposed. Arguably, this is the most important gateway of the whole category management process, and we would assert that it should be a clear ‘go/no-go’ stage gate.

There are several key questions that approvers should be asking the category team at this point, and these centre around the previous suitability, acceptability and feasibility framework outlined earlier.

One of the most significant questions is whether the proposed category strategy will deliver the stated business requirements. Asking the category team to place a confidence rating on this will help approvers decide how robust the proposed strategy is.

The following checklist gives some more practical guidance on what the category manager should be preparing for the Stage 4 gateway.

Gateway approval checklist

Stage 4: Strategy

1	Does the category strategy reflect the long-term and short/medium-term business requirements of the organisation?
2	Has a wide range of potential solutions been considered for the category, including supply base leverage/collaboration; restructuring; product innovation; process improvement and supplier management, sourcing, negotiation and SRM options?
3	Have all value levers been exploited for optimum value generation?
4	Does the category strategy take into consideration the competitive appetite and relative power/dependency balance within the supply market?
5	Will the category strategy deliver the agreed targets for the category?
6	Will the category strategy deliver added value while also minimising risk and enhancing the reputation of the organisation?
7	Have all social responsibility, ethical and environmental factors been included within the development of the category strategy?
8	Do we have the required resources, capabilities and investments to deliver the category strategy within an acceptable timescale?
9	Has an initial scan for quick-win opportunities been undertaken?
10	Have all relevant stakeholders been involved in the development of the category strategy?

Signed: ____________________________

Category Manager

________________________________________

Sponsor

© 2018, Andrea Cordell and Ian Thompson, The Category Management Handbook, Routledge.