This chapter is based on early research and collaboration between Ansoff and two of his German friends, Werner Kirsch, and Peter Roventa. Kirsch and Roventa’s idea was that the concept of weak signals, which Ansoff developed for analyzing issues in highly turbulent environments, needs to be applied to strategic portfolio analysis . This chapter is based on the paper which resulted from this exciting collaboration [HIA].
The Original Approach to Portfolio Positioning
As discussed in Chapter 9, SBA positioning proceeds through typical steps. The first step is to identify the strategic business areas : product-market-technology combinations which subdivide the firm’s environment into distinct areas of opportunity, threats, trends, and turbulence.
Next, the SBAs are positioned within the two-dimensional matrix. Determination of the SBA’s future prospects is based on forecasts, scenarios, environmental modeling, etc. The future competitive position of the firm is estimated through analysis of trends in the competitive structure, success variables, market shares, client groups, etc.
The sources of data are publications, statistics, etc., but also purely subjective estimates of reality. It is only in rare cases that this analytic approach will produce a single unambiguous estimate. The usual case is a range of probable outcomes.
Therefore, as the next step, a group consensus process is used to select a commonly accepted position within this range. As the planner of one firm has stated: ‘At the end of our discussion, there is a good consensus on what’s green, red, or yellow.’
In the language of probability theory, the process is aimed at obtaining the most probable estimate of the SBA position in the matrix through a combination of analysis and subsequent consensus building. Typically, both the analysis and the consensus process are a responsibility of the planning staff and/or of the external consultants. The resulting matrix is presented to top management, which uses it to determine both the desired positions for each SBA and the overall portfolio balance. This obviously does not mean that top management accepts the point positioning presented to it without critical discussion and rearrangement of the matrix. But it does mean that top management does not participate in the positioning exercise and does not contribute its special insight and knowledge to the process.
Because it is built on most probable estimates which produce a point in the matrix, we shall now refer to this prevalent approach to portfolio analysis as point-positioning.
Criticism of Point Positioning
- 1.
The process forces evaluation to converge on a single, most probable point in the matrix, thus creating an appearance of certainty about the future which may be totally misleading.
In highly predictable environments, the most probable estimate has a high probability of occurring, and the range of alternatives is relatively narrow. This means that the firm cannot be far wrong in accepting the probable estimate as the basis for action.
Furthermore, since the signals are strong (see the preceding chapter), the action alternatives and their consequences are clear, and management can make a strong response to the most probable position.
In high turbulence environments, the range of possible alternatives is wide, and the probability distribution tends to be flat, which means that the probability of the most probable alternative is not significantly higher than the probabilities of other alternatives. This means that the firm can go far wrong if it bases its strategy on the most probable case.
Furthermore, above turbulence level 4.5, signals become weak. Which means that, at decision time, the field of future alternatives may not be clear, or information about them is inadequate to make possible a strong unambiguous response.
When information is too vague to permit an unambiguous decision, management reaction must be accordingly cautious and tentative. The alternatives are: delaying the decision, hedging against several different possibilities, starting with weak responses, and making them progressively stronger as information improves.
Thus, the first criticism of the point positioning approach is that it does not provide the information necessary for strategic decisions in highly turbulent environments.
- 2.
Positioning is frequently treated as a preparatory ‘staff’ process which does not involve the key decision makers. As a consequence, when the results are presented, the decision makers lack an understanding of the positioning process, of the assumptions underlying it, and of the model of reality which had been employed.
In stable and low turbulence environments, the planners ’ estimates can be relied upon and are likely to be accepted, because they are based on a well understood and shared model of the future. But in the high turbulence transitional 2000s, predictions based on models developed from historical experience became suspect.
Paradoxically, as discussed in Chapter 1 when planners create novel models, their predictions are also likely to be rejected by managers as impractical and irrelevant. A frequent result has been vividly summarized in a comment made to this author by a famous American consultant when he said: ‘We pride ourselves in giving our clients good professional advice. But why don’t the bastards follow it?’
Thus, in highly turbulent environments, exclusion of key managers from the process of position analysis is highly likely to lead to rejection or neglect of the staff’s advice.
- 3.
Beyond prejudging the acceptance of the results, the absence of key managers from the process of portfolio positioning robs the process of the intuitive hunches and visions which experienced managers bring to problem solving.
In an environment of steady turbulence, in which experience is a reliable guide to the future, such ‘soft’ perceptions of reality are frequently less reliable and useful than the analytic ‘hard’ data. But when the turbulence level changes or the complexity of the environment is increasing, novel possibilities must be visualized, new models of reality constructed, new visions formulated. Under such conditions, hard and soft data must be blended in the process of predicting the future. This cannot happen, unless entrepreneurial and creative managers become involved in the strategic positioning process.
- 4.
The fourth criticism, closely related to the preceding, is that by forcing agreement on a single vision of the future, point positioning encourages within the firm a spirit of conformity at a time when divergences should be encouraged.
In summary, point positioning through staff analysis is a useful approach when the turbulence level is low and stable and the future is predictable. It becomes less effective, less useful, and even dangerous in highly turbulent environments. The basic criticisms are two: the inadequacy of the information for subtle and effective responses and the ineffectiveness of the line-staff roles in the process.
Dispersed Positioning
The concept of dispersed portfolio positioning falls into two related parts. The first is the analysis: The information that is generated, the way it is analyzed and presented, and the way it is used in decision making. The second part is the social process: The way managers organize and work together in performing the analysis and arriving at the decisions.
The analysis is based on a combination of both hard and soft data . Hard data are numerical, obtained from measurements and statistical data. They are processed by logical processes (models, estimates, forecasts). Soft data are views and opinions held by qualified individuals. They are qualitative. The conclusions drawn from soft data frequently cannot be supported by logical arguments.
In dispersed positioning , both hard and soft data are used, through a social/analytic process to be described in the following sections, to generate conclusions about the two dimensions in the positioning matrix: the SBA prospects and the firm’s future competitive position in it.
The use of both hard and soft data offers two important and complementary advantages. The first is that it tests the validity of the historical hard data as a basis for making estimates for the future. The second is that it blends the hard and soft data into an overall estimate of the future.
As in point positioning , the future prospects in an SBA and the firm’s future competitive position are estimated using the hard database . But throughout the estimation process, participating managers contribute their expertise, judgments and hunches about the inputs, the estimation process, and the outcomes.
Outcomes of positioning analysis
In less predictable environments, the best consensus that may be produced is on the most probable, high probable, and the low probable outcomes. This is illustrated in the top right of Fig. 10.1. (In statistical decision theory terms, the distance between the high and the low approximates the 2σ range.) Nothing can be said with confidence about the curve that connects the three estimates.
When signals are weak, and soft data dominates, the information shown at the bottom of the figure may be the best that is available: The outcomes will fall between two extremes, but no probabilities can be assigned to the extremes of the range, nor to the intermediate possibilities.
Dispersion positioning
In SBA2, the range of uncertainty about the future prospects is narrow but the range of the future competitive positions is wide.
We shall refer to the rectangle formed by the estimates as the region of uncertainty. The region of uncertainty in SBA3 is large on both dimensions, but in SBA4, while it is certain that the firm’s future competitive position is weak, there is much uncertainty about the firm’s future prospects.
As the figure shows, the shape of the region of uncertainty tells at a glance the relative range of uncertainty in the respective estimates.
Using Dispersed Positioning to Enrich Decision Options
Dispersed positioning adds substantial cost and complexity to competitive analysis . In recent years, faced with growing complexity of management systems, some managers and writers reacted to the growth in complexity of strategic analysis by a call to ‘keep it simple,’ to return to management by experience and intuition.
Experienced managers will agree on the value of simplicity and the need to control costs, but will also warn against simplistic ways of attaining it. They will suggest that simplicity is not a ‘free good’: While making the manager’s job simpler and less taxing, it may cause the firm to lose touch with the complexities of the external realities. As mentioned earlier, for continued success (and survival) in a turbulent environment, there is a requisite level of internal complexity which must be maintained to enable the firm to capture the nuances and variations in external trends, threats, and opportunities.
Competitive analysis of turbulent environments
Following strategic segmentation, low turbulence SBAs (levels 1–3) are submitted to the point positioning determination of the SBA prospects and the firm’s competitive position.
Following positioning, the future competitive posture is chosen and implemented.
If the region of uncertainty is small and the urgency is high, immediate commitment is indicated, as in the case of low turbulence SBAs.
If uncertainty is great and urgency is high, immediate commitment is similarly indicated.
If uncertainty is great and urgency low, a gradual commitment course is indicated.
Rather than choose the final competitive position and posture, management makes provisional choices and launches a step-by-step process which is continually monitored and adjusted as the firm evolves toward a final competitive posture .
The preceding discussion shows that dispersed positioning adds a gradual commitment option which is important when the future is uncertain.
Strategic Control
In point positioning , a commitment is made to a strong response. Subsequent events may show that the environment has not developed as anticipated, or the chosen strategy may turn out to be not as successful as planned. Experience shows that once a firm commits to a strong response strategy it tends to stick to it, even in the face of disappointing results. Thus, strategic control is difficult under point positioning .
Through the option of gradual commitment , there is an opportunity for revising the SBA strategy as new data become available. If a strategy turns out to be unpromising, it can be revised or abandoned before major financial and psychological commitments have been made.
The region of uncertainty can be used for strategic control . If the region shrinks quickly with time, management can accelerate and sharpen the response strategy. An expansion of the region may mean mistakes in early estimates, or it may mean emergence of new, previously unperceived dimensions of turbulence, both of which may call for a revision of the response strategy.
Dispersed Positioning as an Instrument of Cultural Change
As discussed in Chapter 9, a firm’s response to environmental change depends on three filters: A surveillance filter which determines what information is made available to the management, and the mentality and power filters which determine the portion of the available information to be used and the portion to be rejected as false or irrelevant (see Chapter 9 and Fig. 9.6).
- 1.
The emphasis on introducing into the firm a faithful image of the environment with all of its uncertainties about the future.
- 2.
The use of managerial judgment and intuition in an equal, and sometimes superior, role to quantitative analysis.
- 3.
The encouragement of dialectic constructive confrontation of differences among managers, and the carryover of these differences into decision making.
- 4.
The involvement of all managers who have relevant knowledge and/or responsibility for strategic action.
And yet, these advantages are easily lost if dispersion analysis is introduced and perceived as just another, even if superior, computational-analytic system for positioning SBAs within the matrix. A detailed discussion of how such misperceptions can be avoided will be presented in Part V.
Using Dispersed Positioning in Small and Medium-Sized Firms
Small and medium-sized firms typically have limited staff resources. The managers responsible for strategic decisions are also the key experts on the future prospects and the firm’s competitive capabilities. Busy managers in such firms are prone to argue that concern with future uncertainties is a luxury which only the large firms can afford, and that small firms must keep things simple.
But the environment has no particular tolerance for small as opposed to large firms, and when the environment is turbulent, the unforeseen ‘slings and arrows’ of change can be much more damaging to small enterprises than they are to large ones. Thus, well managed small/medium enterprises have only two choices: either to stay out of turbulent environments, or to face up squarely to the consequences of uncertainty and turbulence .
- 1.
The key management group sets aside frequent periods (say half a day twice a month) for strategic deliberation and analysis.
- 2.
As a first step this group subdivides the environment of the firm into SBAs.
- 3.
Through discussion and argument, the group draws up a list of key trends, threats, and opportunities which are likely to affect both the future prospects in the SBA and the firm’s competitive position within it.
- 4.
Using an appropriate version of the positioning matrix, the group next positions within it the future prospects of the SBA, and the future position of the firm. A simple procedure is to ask each manager to make a judgment of low probable and high probable positions.
- 5.
The managers next negotiate to determine low, probable, and high positions, each citing reasons and arguments for the positions. The results are plotted in the manner shown in Fig. 10.2.
- 6.
It is of great importance that protocols be made of the views, the arguments, and positions taken by the respective managers. These protocols will be used later for strategic control of the decisions.
- 7.
Once the group has worked through the positioning of the individual SBAs it will be ready to make concrete decisions in each SBA (see Chapter 1).
- 8.
Once a cycle is complete, the management group continues to monitor the development of each SBA, reviews the progress of the decisions and makes control adjustments as necessary.
As can be seen, this approach is economical. It is also highly informal, permitting, and encouraging free expression of views and opinions. It is also an excellent team-building device for the group responsible for the future of the enterprise.
In some situations, it will be found that the power structure and/or presence of strong, dominant personalities will tend to bias the discussion according to personalities and not to facts. In this case, a relatively simple Delphi technique can be used to insulate judgments based on perceptions of facts from interpersonal influences.
As the preceding description shows, this approach to SBA analysis requires a minimum of assistance from either external or internal staff. However, when the system is first put in place, management would do well to seek outside expertise.
Using Dispersed Positioning in Large Firms
Large firms usually have staffs charged with environmental surveillance and analysis. Techniques such as extrapolative forecasts, scenario planning, impact and cross-impact analysis, environmental modeling, competitive analysis , competition modeling will be in use and will provide the hard database for dispersed positioning .
- 1.
The surveillance techniques must match the environmental turbulence (see ‘Strategic information’ in Chapter 9.)
- 2.
The database must capture the future uncertainties (in many firms only single line, most probable projections are used).
- 3.
The surveillance must include weak as well as strong signals.
- 4.
The forecasts, scenarios, etc. must be accompanied by statements of key assumptions, methodology and, particularly, explanation of the sources of the uncertainties.
Another characteristic of large firms is that there are a large number of staff and line managers throughout the firm whose jobs bring them into contact with the outside environment and who have valid intuitions and judgments about the impending changes. Such managers usually work in the ‘interface’ functions such as R&D, marketing, sales, purchasing, planning. This population offers a rich source of expertise which can be mobilized to augment and sometimes (in medium/large firms) replace the sophisticated analytic inputs by the staff.
- 1.
Environmental analysis develops global forecasts of the firm’s environment. (Scenarios are a popular tool. For other alternatives, see ‘Strategic information’ in Chapter 9).
- 2.
SBA segmentation is performed and followed by a classification into two categories: SBAs for point positioning and SBAs for dispersed positioning .
- 3.
Point positioning uses the classical staff-line relationship: Staff performs the analysis and submits the results for decision making to responsible line managers.
- 4.
Dispersed positioning must blend hard and soft data , combine analysis and judgment, and allow for divergences in perceptions and judgments about the future. Because of these requirements, the conventional staff-line division of work is replaced by cooperative teamwork which involves line managers in both analysis and decision making.
A typical team consists of the manager of a strategic business unit, chief functional managers and the planner . The team makes judgments about future prospects, success factors, and the firm’s competitive position. Divergences of judgment arc encouraged but protocols are made of the reasons for the divergences. As its final output, the SBU team selects the optimal competitive posture for SBAs for which the SBU is responsible.
- 5.
The proposed postures are submitted to the corporate management.
- 1.
That the process is cost-effective and no more complex than necessary, and
- 2.
That the ‘noise’ and distortion in the process are not responsible for the majority of the resulting dispersions (see Ansoff et al. 1980-F).
Summary
When environmental turbulence reaches level 4, point positioning matrices (such as BCG, McKinsey) become inadequate for capturing the range of uncertainty in the future environment.
The dispersed positioning technique ‘brackets’ the uncertainty and provides the information which permits management to choose between delaying action, a progressive response, or a forceful strategy.
Dispersed positioning offers a side benefit as a mentality-culture development tool. It is suitable for both small and large firms.
Exercises
- 1.
Develop a procedure and a set of criteria by which the SBAs of a firm should be chosen for dispersed positioning analysis.
- 2.
The senior management of your firm has decided to add dispersed positioning to the present positioning portfolio analysis. But it is apprehensive that the change will be perceived as ‘another form-filling exercise,’ just as the introduction of point positioning had been greeted some years ago. You are given the task of preparing a plan for the introduction of the new technique which will minimize the negative reaction, and at the same time enhance the strategic mentality of the participating managers.