Leg 4. From Melbourne to Hong Kong (IV). Stay Focused when stuck in the Doldrums!

eleonoraescalantestrategy 10 Jan 2018 Leave a Comment

Bonjour a Tous again!

“The Doldrums are Painful”. A view from Vestas 11th Racing Team.

For those of you who are new to my blog, the Volvo Ocean Race 2017-2018 is a unique worldwide sailing racing event which started last year, in Alicante, Spain. The race has 11 Legs. I am racing and writing with the seven teams by following their time-schedule and sharing several topics about Strategy. I post on my blog at least 4 times per week. At the moment the sailing teams are in the South Pacific Ocean, racing Leg 4 (From Melbourne to Hong Kong). As you can see in the picture at your left, all the teams are stuck in the Doldrums. The teams are facing a “desperation” day. And here I am also in a calm ocean of knowledge “when at mercy of fickle winds”, trying to finish the topic “Focus Strategies”.

2012.09.14 - chalkboard_text_service Focus Strategies are the last of the three Porter´s generic strategies. According to Porter, companies that use a cost leadership strategy and those which use a differentiation strategy share one important characteristic: both groups try to be attractive to a wide segment of customers in general. Their scope is vast as the ocean. Argentina is pursuing a differentiation strategy with a broad competitive target: “open to the world”. That is why I decided to illustrate the “differentiation strategy” with Argentina´s attraction investments example. When we pursue specific narrow segments of clients, we are formulating strategies which are known as focus strategies.

Focused Strategies seek to serve “NARROW” market segments. By understanding the dynamics of that “specific narrow” market and the unique needs of customers within it, we can develop a uniquely low-cost or well-specified different product for that “specific” market.

A firm can focus on particular customer groups, product lines or geographic markets.
The strategy may be one of either “differentiation focus” where the offerings are differentiated in the narrow market
Or “cost leadership focus” where the firm sells at the low cost in the focused market (within the same group of competitors in the same market).

Eliescalante Leg4 Focus Strategy 2.jpg

Focused cost leadership is the first of two focus strategies. As previously indicated, a focused cost leadership strategy “requires competing based on price to target a narrow market”. A firm that follows this strategy does not necessarily charge the lowest prices in the industry. Instead, it charges low prices relative to other firms that compete within the “same target market”. Another important point is that the nature of the narrow target market. In some cases, the target market is defined by demographics. In other cases, the target market is defined by the sales channel used to reach customers.

Let´s see an example of Cost Focused Strategies: Consider that IKEA would like to initiate operations in Latin America.

IKEA website

IKEA, the Sweden based furniture retailer with last year Retail Sales of 38.3 billion euros (US$45 billion) has just store presence located in the Dominican Republic. Ten years ago, given the low average income in Latin American homes, and the fact that local furniture retailers in our countries offer low-cost prices, IKEA´s management team was challenged with the question: How can we start operations and grow our stores in Latin America? And just for this example illustrative case, let´s imagine IKEA decided, ten years ago, to hire me as their corporate growth advisor after I finished my mandate as the Investments Advisor for the International Finance Corporation El Salvador (World Bank). After signing my advisory contract with IKEA, how to design smart busienss experiments.gif I recommended then, the following solution: “Test your design “low-cost focused prototype” expansion model in El Salvador for 10 years. Execute and adjust the business model to our Salvadoran Reality and after learning everything you wish to know here, roll it out in Latin America”. When rolling out for other countries like Colombia, Perú, Chile or Bolivia… Adjust the sails for each country´s, but first, let´s test the “low-cost focused strategy” in El Salvador. My solution was offered with a long-term vision of at least 4 generations (100 years). Next, after IKEA´s Board of Directors approved my solution, I also recommended to IKEA, to do the testing, undercovered. Using another brand called “Pollito” Brand (Pollito means “baby chick” and it is a representation of a common generic brand name for this example).

El Salvador Ranking when Doing Business (World Bank)

El Salvador with the ranking 73/190 in the Doing Business World Bank Ranking, is the best territory to test “prototype business models” for multinational corporations in Latin America. To narrow the market for El Salvador is a strategic generic move: El Salvador is a tiny country and all the demographic variables are easy to identify and understand. El Salvador ranking position is close to the Regional Average (58.66). El Salvador was going to help IKEA to execute the test under our local difficult environment situations.

The World Most Dangerous Cities. El Salvador is the top one. Source. The Economist, March 2017.

Now let´s think Why El Salvador?. This is not because I am from here (coincidentally I am Salvadoran), sadly, but because right now in my country all the worst case scenario conditions apply:

El Salvador high level of violence and lack of opportunities. OSAC Safety & Crime Report 2017

El Salvador is one of the most violent countries in the world; with an ideological political polarization (between the right and left wing political parties) in place since decades ago; Foreign Direct Investments are almost null since the year 2008; our Fitch, Moody´s and Standard and Poor´s credit ratings have been downgraded from BB+ (2003) to SD ( 2017); more than 2 million of Salvadorans have left the country since the 80s because of a civil war and critical economic-social inequalities. On top of that, El Salvador has lost its Temporary Protected Status (TPS) with the United States of America as of this week. More than 250,000 Salvadorans will have to leave American territory unless a God´s miracle happens. It is in this country, struggling with the most difficult economic, political, high crime rates and harsh social conditions, where we can find the most fertile ground for testing, strengthening and learning lessons for the future. In our IKEA imaginary example, the company took the risk to follow my advice and chose El Salvador to learn in reality what to do in all these “worst case scenarios”.

IKEA Cutting Costs, Creating Value.

Why a “low-cost focused” strategy? After we created a Hypothesis, then I recommended and helped them to design the prototype business model for a “low-cost focused” strategy. IKEA narrowed the offer to a specific Latin country with a lower income category. IKEA also learned to deploy a “lower cost” offer competing in our Salvadoran “real” local “furniture retailer” industry. IKEA had the opportunity to measure the impact on financial results building a convenient and adaptable product mix, proving an adequate store layout or format, and also understanding the local customers wants and needs. IKEA was challenged to build a very effective supply chain adapted to El Salvador (product design, product procurement, transportation, best store-warehouse concept). By not using the IKEA name, they were able to test, make mistakes and learn from them, without hurting their investor´s expectations, and they did not reveal their plans to their competitors (local and international). IKEA, secretly covert by a “Pollito” brand” is now well ahead in substantial knowledge about how to operate in the region. IKEA is ready to be successful in bigger and less troubled countries such as Chile, Colombia, Mexico, and Peru. “These are among the first countries IKEA may enter in Latin America”.

“Wind, it means the world to us”. Vestas facing the Doldrums. 9-Jan-2018

In today´s fictional example: The last ten years of IKEA patience by testing their “prototype model” in El Salvador have been as the torture Doldrums for our Volvo Ocean Race Sailors in the South Pacific Ocean. When the winds come again, the fleet will be able to sail speedily and move forward… Sometimes we have to be tested in the “Doldrums”, in order to learn how to test our models, implement our strategies, and be conscious of what to do in “worst case scenarios”. Only then, we can raise our knowledge standards and be ready to sail with success in much better conditions too.

You are still the one Alejandro Guillermo Lozano Artolachipi.

Of course, this is just an example of how to help global companies to be successful in Latin America. I am sure if IKEA would have hired me, they would be ready to sail successfully in their expansion plans for the whole region. With clients as IKEA, I would have enough money and savings to move out of here. I wouldn´t be stuck in El Salvador, but married and raising kids with Alex Guillermo Lozano Artolachipi by now. After 17 years since I met you in Escazú, Costa Rica, Alejandro!

Blessings, this is all for today. See you in my next post with the “Differentiation Focused Strategy”. I will leave you with the feeling of Crossing the Doldrums. Let´s go!