STRATEGIC MANAGEMENT

CONTENT
CHAPTER 1 INTRODUCTION - THE STRATEGIC MANAGEMENT
PROCESS
Chapter Overview
Learning Objectives
Teaching Outine
A! What is Strategy?
"! Critici#$# %& '%r$a Panning
C! Pit&a# in Strategic Deci#i%n Ma(ing
D! Techni)ue# &%r I$pr%ving Deci#i%n $a(ing
E! Strategic Managers and Strategic Leadership
Su$$ar*
CHAPTER + E,TERNA- ANA-.SIS/ THE IDENTI'ICATION O'
INDUSTR. OPPORTUNITIES AND THREATS
Chapter Overview
Teaching Outine
A Ana*0ing the In1u#tr* Envir%n$ent
B Strategic Gr!"ps #ithin Ind"stries
C ! Li$itati!ns !% the &ive &!rces and Strategic
Gr!"p M!de's
D C!$petitive Changes d"ring Ind"stry
E G'!ba'i(ati!n and Ind"stry Str"ct"re
SUMMAR.
1
CHAPTER 2 INTERNA- ANA-.SIS/ DISTINCTI3E COMPETENCIES4
COMPETITI3E AD3ANTAGE AND PRO'ITA"I-IT.
Chapter Overvie#
Learning Objectives
Teaching O"t'ine
A Intr!d"cti!n
) C!$petitive Advantage*L!# C!st and +i%%erentiati!n
C C!$petitive Advantage, Res!"rces- Capabi'ities- and
C!$petencies

. The Generic )"i'ding )'!c/s !% C!$petitive Advantage
0 +istinctive C!$petencies- Res!"rces- and Capabi'ities
1 The +"rabi'ity !% C!$petitive Advantage
2 Why +! C!$panies &ai'?
3 Av!iding &ai'"re and S"staining C!$petitive Advantage
CHAPTER 5 "UI-DING COMPETITI3E AD3ANTAGE THROUGH
'UNCTIONA- -E3E- STRATEG.
Chapter Overview
2
Learning Objectives
Teaching O"t'ine
A! Intr!d"cti!n
"! The 4a'"e Chain
C! Achieving S"peri!r E%%iciency
D! Achieving S"peri!r 5"a'ity
E! Achieving S"peri!r Inn!vati!n
CHAPTER 6 "UI-DING COMPETITI3E AD3ANTAGE THROUGH
"USINESS -E3E- STRATEG.
Chapter Overview
Teaching O"t'ine
A! Intr%1ucti%n
"! '%un1ati%n# %& "u#ine##--eve Strateg*
C! Ch%%#ing a Generic C%$petitive Strateg* at the "u#ine## -eve
Strateg* in Acti%n 7In 1889#
D! Strateg* in Acti%n &%r Data Pr%ce##ing an1 S*#te$ Manage$ent
E! Ch%%#ing an Inve#t$ent Strateg* at the "u#ine## -eve
Su$$ar*
CHAPTER : COMPETITI3E STRATEG. AND THE INDUSTR.
EN3IRONMENT
A! Intr%1ucti%n
"! Strateg* in 'rag$ente1 In1u#trie#
C! Strateg* in E$;r*%nic an1 Gr%wth In1u#trie#
D! Strateg* in Mature In1u#trie#
3
E! Strategie# t% Deter Entr* in Mature In1u#trie#
'! Strategie# t% Manage Rivar* in Mature In1u#trie#
G! Supp* an1 Di#tri;uti%n Strateg* in Mature In1u#trie#
H! Strateg* in Decining In1u#trie#
Rea1 Strateg* in Acti%n
SUMMMAR.
C6A7TER 8 STRATEG9 IN 6IG6:TEC6 IN+;STRIES
Intr!d"cti!n
Learning Objectives
Teaching !"t'ine
A! Intr!d"cti!n
"! Strategies %!r Winning a &!r$at War
C C!sts in 6igh Techn!'!gy Ind"stries
D Managing Inte''ect"a' 7r!perty Rights
E! Capturing 'ir#t-M%ver A1vantage#
'! Techn!'!gica' 7aradig$ Shi%ts
S"$$ary
C6A7TER < STRATEG9 IN T6E GLO)AL EN4IRONMENT
INTRO+;CTION
-EARNING O"<ECTI3ES
4
TEAC6ING O;TLINE
A Intr!d"cti!n
"! Pr%&iting &r%$ G%;a E=pan#i%n
Read Strategy in Acti!n
C! 7ress"res %!r C!st Red"cti!ns and L!ca' Resp!nsiveness
+ Strategic Ch!ice
E The Ch!ice !% Entry M!de
GLO)AL STRATEGIC ALLIANCES
G Ma/ing Strategic A''iances W!r/
S;MMAR9
CHAPTER 8 CORPORATE STRATEG./ HORI>ONTA- INTEGRATION4
3ERTICA- INTEGRATION AND STRATEGIC
OUTSOURCING
Intr!d"cti!n
Learning Objectives
Teaching O"t'ine
a Intr!d"cti!n
b 4ertica' integrati!n
c Strategic a''iances as an a'ternative t! vertica' integrati!n
d Strategic !"ts!"rcing
S"$$ary
C6A7TER .= COR7ORATE STRATEG9, +I4ERSI&ICATION-
AC5;ISITIONS- AN+ INTERNAL NEW 4ENT;RES
5
Intr!d"cti!n
Teaching O"t'ine
A Intr!d"cti!n
"! Strategic Aiance# a# an Aternative t% Diver#i&icati%n
C Ac>"isiti!ns and Interna' Ne# 4ent"res as Entry Strategies
+ Ac>"isiti!n 7it%a''s and G"ide'ines %!r S"ccess
E Entry Strategy, ?!int 4ent"res
& Restr"ct"ring
S"$$ary
C6A7TER .. COR7ORATE 7ER&ORMANCE- GO4ERNANCE- AN+
);SINESS ET6ICS
Intr!d"cti!n
Learning Objectives
Teaching O"t'ine
A The Ca"ses !% 7!!r 7er%!r$ance
) Sta/eh!'ders and C!rp!rate 7er%!r$ance
C 4isi!n and Maj!r G!a's
+ C!rp!rate 7hi'!s!phy
E C%rp%rate Sta(eh%1er#
& C!rp!rate G!vernance and Strategy
G Strategy and Ethics
S"$$ary
C6A7TER .0 IM7LEMENTING STRATEG9 IN COM7ANIES T6AT
COM7ETE IN A SINGLE IN+;STR9
6
Intr!d"cti!n
Learning Objective
O"t'ine
A I$p'e$enting Strategy thr!"gh Organi(ati!na' Str"ct"re- C!ntr!'-
and C"'t"re
) )"i'ding )'!c/s !% Organi(ati!na' Str"ct"re
C! Strategic C%ntr% S*#te$#
D! T*pe# %& C%ntr%
E! I$pe$enting Strateg* in a Singe In1u#tr*
Su$$ar*
CHAPTER 12 IMP-EMENTING STRATEGIES IN COMPANIES THAT
COMPETE ACROSS INDUSTRIES AND COUNTRIES
Intr%1ucti%n
Learning !bjectives
O"t'ine
a Managing c!rp!rate strategy thr!"gh the $"'tidivisi!na' str"ct"re
b Advantage !% $"'tidivisi!na' strategy
c 7r!b'e$ in i$p'e$enting a $"'tidivisi!na' str"ct"re
d Str"ct"re- c!ntr!'- c"'t"re- and c!rp!rate 'eve' strategy
S"$$ary
7
C!"rse +escripti!n,
Thi# i# a cap#t%ne c%ur#e in which the appie1 ;ehavi%ra a#pect# an1 the i$pact %& the
c%ntinu%u# change# a&&ecting p%#t-in1u#triai0e1 #%ciet* are in(e1 t% the (e* %rgani0ati%na
&uncti%n (n%wn a# 1eci#i%n-$a(ing! The c%ur#e integrate# previ%u# c%ur#e# w%r(! '%cu# i# given
t% e&&ective 1eci#i%n #trategie#4 en#uring 1eci#i%n )uait*4 1i&&erence# ;etween gr%up an1 in1ivi1ua
1eci#i%n-$a(ing4 an1 a variet* %& c%n#traint# &acing 1eci#i%n $a(er#! Utii0ing ca#e appr%ach t%
integrate earier c%ur#ew%r(4 the c%ur#e enhance# 1eci#i%n $a(ing #(i ;* pr%vi1ing #tu1ent# the
%pp%rtunit* t% ana*0e the e&&ect# %& vari%u# 1eci#i%n #trategie# %n %rgani0ati%na %utc%$e#!
C!"rse Objective,
1! T% hep the Stu1ent un1er#tan1 an1 app* a c%$$%n* accepte1 $eth%1%%g* &%r
ana*0ing ca#e pr%;e$# an1 $a(ing $anage$ent 1eci#i%n#4 a #(i which i# appica;e t%
rea i&e #ituati%n#!
+! T% gain an in#ight int% panning4 #trateg*4 an1 p%ic* $a(ing %& %rgani0ati%n#!
2! T% gain an appreciati%n %& the inter1epen1ence an1 interreati%n#hip# %& pr%;e$#4
#%uti%n#4 p%icie#4 an1 pan# %& 1i&&erent a#pect# %& an %rgani0ati%n?# %perati%n#!
5! T% give #tu1ent# the %pp%rtunit* t% integrate what the* have earne1 in earier c%ur#e# %&
&inance4 $ar(eting an1 $anage$ent an1 (n%w when t% app* c%ncept# an1 techni)ue# in
actua #ituati%n#!
6! T% i$pr%ve 1eci#i%n-$a(ing an1 pr%;e$ #%ving #(i# ;* $a(ing rec%$$en1ati%n# t%
#%ve the rea i&e i##ue# c%n&r%nting c%nte$p%rar* %rgani0ati%n#!
8
Chapter .
INTRO+;CTION : T6E STRATEGIC MANAGEMENT 7ROCESS
Chapter Overvie#
Thi# i# an intr%1uct%r* chapter! It# purp%#e i# t% 1e&ine critica c%ncept# an1
intr%1uce the $ain c%$p%nent# %& the #trategic $anage$ent pr%ce##! The chapter
#erve# t% e#ta;i#h the c%nte=t within which #u;#e)uent chapter# &it! A per#i#tent the$e
running thr%ugh the chapter i# a c%$pari#%n %& the rati%na@1eter$ini#tic view %& the
#trategic $anage$ent pr%ce## with a $%re ;ehavi%ra view!
The chapter ;egin# with a 1i#cu##i%n %& the c%ncept %& #trateg*! The tra1iti%na
c%ncept %& #trateg* a# the %utc%$e %& a rati%na@1eter$ini#tic pr%ce## that i#
%rche#trate1 ;* #eni%r $anager# i# c%ntra#te1 with Mint0;ergA# view that #trateg*
can e$erge &r%$ 1eep within an %rgani0ati%n in the a;#ence %& an* &%r$a
intenti%n#! The e=a$pe %& H%n1aA# entr* int% the U!S! $%t%rc*ce $ar(et i# u#e1 t%
iu#trate the 1i&&erence ;etween the tw% per#pective#! The p%int #tre##e1 i# that
#trateg* inv%ve# $%re than Bu#t panning a c%ur#e %& acti%n! It a#% inv%ve# the
rec%gniti%n that #ucce##&u #trategie# can ari#e &r%$ within an %rgani0ati%n with%ut
;eing &%r$a* panne1! The tric( &%r #trategic $anager# i# t% rec%gni0e the pr%ce##
%& e$ergence4 nurturing g%%1 e$ergent #trategie# an1 (iing %&& ;a1 %ne#!
Ne=t the chapter 1e#cri;e# the $ain c%$p%nent# %& the #trategic $anage$ent
pr%ce##! Thi# #ecti%n #erve# t% iu#trate h%w #u;#e)uent chapter# in the te=t &it
t%gether within the %vera &ra$ew%r( %& the #trategic $anage$ent pr%ce##! A#
#uch4 it i# %& centra i$p%rtance t% un1er#tan1ing the wh%e ;%%(! The #ecti%n
intr%1uce# the rea1er t% the c%rp%rate $i##i%n4 e=terna ana*#i#4 interna ana*#i#4
#trategic ch%ice4 ;u#ine##-eve an1 c%rp%rate-eve #trategie#4 %rgani0ati%na
#tructure4 %rgani0ati%na c%ntr%#4 the #trateg*-#tructure &it4 an1 the i$p%rtance %&
c%n&ict4 p%itic#4 an1 %rgani0ati%na change! In #u;#e)uent chapter#4 each %& the#e
t%pic# i# 1i#cu##e1 in 1etai! In Chapter 14 the %;Bective i# t% iu#trate h%w the
vari%u# t%pic# &it t%gether!
9
The chapter $%ve# %n t% a 1etaie1 1i#cu##i%n %& h%w #trategic panning #*#te$#
w%r( in practice! In the%r*4 &ir$# that g% thr%ugh a the &%r$a #tage# %& the #trategic
$anage$ent pr%ce## in a rati%na &a#hi%n #h%u1 ;e characteri0e1 ;* #uperi%r
per&%r$ance! In practice4 #trategie# %&ten &ai 1ue t% inappr%priate panning #*#te$# C&%r
in#tance4 t%p-1%wn iv%r* t%wer panningD an1@%r p%%r #trategic 1eci#i%n-$a(ing! Severa
pit&a# in panning #*#te$# an1 wa*# %& av%i1ing the#e pit&a# are c%n#i1ere1! A#%
1i#cu##e1 are vari%u# c%gnitive ;ia#e# an1 %ther p#*ch%%gica phen%$ena4 #uch a#
gr%upthin(4 that can re#ut in p%%r #trategic 1eci#i%n $a(ing! DeviA# a1v%cac* an1
1iaectic in)uir* are intr%1uce1 a# 1eci#i%n-$a(ing techni)ue# that hep guar1 again#t
the#e ha0ar1#!
A 1i#cu##i%n %& the r%e# %& #trategic $anager# an1 the &uncti%n %& #trategic
ea1er#hip in an %rgani0ati%n are a#% c%vere1 in the chapter! The chapter e=a$ine# the
r%e# an1 re#p%n#i;iitie# %& #trategic $anager# at three $ain eve# within an
%rgani0ati%n/ the c%rp%rate4 ;u#ine##4 an1 &uncti%na eve! It a#% p%int# %ut the attri;ute#
%& g%%1 #trategic ea1er#hip!
Learning Objectives
In thi# #ecti%n4 *%u wi ;e a;e t% earn un1er#tan1 the &%%wing/
1! The c%ncept %& #trateg*!
+! C%ntra#t the tra1iti%na view %& #trateg* with Mint0;ergA# revi#i%n %& the c%ncept!
2! Outine the $ain c%$p%nent# %& the #trategic $anage$ent pr%ce## c%vere1 in
#u;#e)uent chapter# an1 #h%w h%w the* &it t%gether!
5! E=pain h%w inappr%priate panning #*#te$# can re#ut in p%%r #trategic panning!
6! I1enti&* wa*# %& av%i1ing #%$e %& the c%$$%n pit&a# a##%ciate1 with #trategic
panning!
:! E=pain h%w p#*ch%%gica phen%$ena #uch a# c%gnitive ;ia#e# an1 gr%upthin(
can c%rrupt the #trategic $anage$ent pr%ce##4 re#uting in #u;-%pti$a #trategic
1eci#i%n#!
E! I1enti&* techni)ue# &%r i$pr%ving #trategic 1eci#i%n-$a(ing!
10
F! I1enti&* the r%e# an1 re#p%n#i;iitie# %& #trategic $anager# at 1i&&erent eve# within
the %rgani0ati%n!
8! I1enti&* the attri;ute# a##%ciate1 with #uperi%r #trategic ea1er#hip!
The %pening ca#e De C%$puter4 te# *%u %& the #ucce## #t%r* %& the &%un1er
Michae De wh% #tarte1 in 18F5 when he wa# an un1ergra1uate #tu1ent an1 h%w he ha#
;ec%$e the w%r1?# arge#t pr%1ucer %& c%$puter #*#te$#! Such an1 $an* %ther #t%rie#
1% n%t Bu#t happen ;* acci1ent!
Teaching O"t'ine
A! Intr%1ucti%n/
1! Gh* 1% #%$e %rgani0ati%n# #uccee1 an1 %ther# &aiH An an#wer can ;e &%un1 in
the #u;Bect $atter %& thi# c%ur#e! Thi# c%ur#e i# a;%ut #trategic $anage$ent an1
the a1vantage# that accrue t% %rgani0ati%n# that thin( #trategica*!
+! The te=t;%%( e=pain# h%w the #ucce## %& a c%$pan* 1epen1# %n three ;r%a1
&act%r#/ the in1u#tr* in which a c%$pan* i# ;a#e14 the c%untr* C%r c%untrie#D in
which it i# %cate14 an1 it# %wn re#%urce#4 capa;iitie#4 an1 #trategie#!
2! Un1er#tan1ing the r%%t# %& #ucce## an1 &aiure i# n%t an e$pt* aca1e$ic
e=erci#e! Thr%ugh #uch un1er#tan1ing c%$e# a ;etter appreciati%n &%r the
#trategie# that $u#t ;e pur#ue1 t% increa#e the pr%;a;iit* %& #ucce## an1 re1uce
the pr%;a;iit* %& &aiure!
5! Strategic $anage$ent i# reevant t% $an* 1i&&erent (in1# %& %rgani0ati%n#4 &r%$
arge $uti-;u#ine## %rgani0ati%n# t% #$a %ne-per#%n enterpri#e# an1 &r%$
pu;ic* he1 pr%&it-#ee(ing c%rp%rati%n# t% n%t-&%r-pr%&it %rgani0ati%n#! CEven a
#$a n%t-&%r-pr%&it %rgani0ati%n4 #uch a# a church charit*4 ha# t% $a(e 1eci#i%n#
a;%ut h%w ;e#t t% generate revenue#4 given the nature %& the envir%n$ent in which
it %perate#!D
A What is Strategy?
1! The rati%na panning the$e i# an i$p%rtant c%$p%nent %& $%#t tra1iti%na 1e&ini -
ti%n# %& #trateg*! '%r e=a$pe4 Guec( 1e&ine# #trateg* a# Ia uni&ie14
c%$prehen#ive4 an1 integrate1 pan 1e#igne1 t% en#ure that the ;a#ic %;Bective# %&
11
the enterpri#e are achieve1!I
+! Rea1 the ca#e# in Strateg* Acti%n 1!14 1!+4 an1 1!2 in the te=t;%%( t% have an
un1er#tan1ing %& the i$p%rtance %& panning in the rea w%r1 #ituati%n! The#e are
g%%1 e=a$pe# %& h%w #trategic panning w%r(# an1 h%w #uperi%r panning can
re#ut in a c%$petitive a1vantage! Du(e?# #cenari%-;a#e1 panning #*#te$ a%w#
the c%$pan* t% e=p%re what $ight %ccur in vari%u# &uture #cenari%#! The
techni)ue repre#ent# a u#e&u t%% &%r getting $anager# t% thin( #trategica* a;%ut
the interreati%n#hip %& envir%n$enta change# an1 the c%$pan*A# per&%r$ance!
The generati%n %& #cenari%# a#% ai1# $anager# in the pr%ce## %& i1enti&*ing the
(in1# %& #trategie# that the* #h%u1 ;e pur#uing! Thu# the #cenari%-;a#e1 panning
e=erci#e# at Du(e hepe1 the c%$pan* i1enti&* a nu$;er %& 1i&&erent wa*# %&
$eeting the 1i&&erent #ituati%n# #h%u1 the* %ccur!
2! Acc%r1ing t% Mint0;erg4 the tra1iti%na appr%ach inc%rrect* a##u$e# that an
%rgani0ati%n #trateg* i# the %utc%$e %& a rati%na panning pr%ce##! In practice4
#trateg* can e$erge &r%$ 1eep within an %rgani0ati%n with%ut an* pri%r pan!
5! Gith thi# in $in14 Mint0;erg ha# 1e&ine1 #trateg* a# a pattern in a #trea$ %&
1eci#i%n %r acti%n#! The pattern i# a pr%1uct %& whatever a#pect# %& an
%rgani0ati%n?# inten1e1 Cpanne1D #trateg* are actua* reai0e1 an1 %& it#
e$ergent Cunpanne1D #trateg*! E$ergent #trategie# are %&ten #ucce##&u an1
$a* ;e $%re appr%priate than an %rgani0ati%n?# inten1e1 #trateg* Can e=a$pe i#
H%n1a?# entr* int% the US $%t%r c*ce $ar(etD
6! In practice4 the #trategie# %& $an* &ir$# are a $i= %& the inten1e1 an1 the
e$ergent! The tric( &%r $anager# i# t% rec%gni0e the pr%ce## %& e$ergence an1
t% intervene #eective*4 (iing %&& ;a1 e$ergent #trategie# ;ut nurturing g%%1
%ne#!
12
M!de' !% the Strategic Manage$ent 7r!cess
13
Functional Level Strategy
Chapter 4
Business Level Strategy
Chapters 5, 6, and 7
Global Strategy
Chapter 8
or!orate Level Strategy
Chapter 9 and 10
"nternal #nalysis$
Strengt%s an&
'ea(nesses
Chapter 3
)*ternal #nalysis$
+!!ortunities
an& ,%reats
Chapter 2
S'+,
Strategic
%oice
-ission an&
Goals
Chapter 1
or!orate .er/or0ance1
Governance1 an& )t%ics
Chapter 11
"0!le0enting
Strategy in a
Single "n&ustry
Chapter 12
I$pe$enting Strateg*
acr%## In1u#trie# an1
C%untrie#
Chapter 13
STRATEGY FOR!"AT#O$
STRATEGY #%"EE$TAT#O$

F
)
)
2
B
#

3

L
+
+
.
14 The #trategic $anage$ent pr%ce## can ;e ;r%(en 1%wn int% a nu$;er %&
c%$p%nent#! Each c%$p%nent &%r$# a #ecti%n %& thi# c%ur#e! Thu# it i# i$p%rtant
t% un1er#tan1 h%w the 1i&&erent c%$p%nent# &it t%gether!
24 The c%$p%nent# incu1e the #eecti%n %& the c%rp%rate $i##i%n an1 $aB%r g%a#4
ana*#i# %& the e=terna envir%n$ent an1 interna %perati%n# %& the &ir$4 the #eecti%n %&
appr%priate ;u#ine##- an1@%r c%rp%rate-eve #trategie#4 an1 the 1e#igning %&
%rgani0ati%na #tructure# %r c%ntr% #*#te$# t% i$pe$ent the %rgani0ati%nA# ch%#en
#trateg*!
34 The $issi!n state$ent 1e&ine# the ;u#ine## %& the %rgani0ati%n an1 #tate# ;a#ic
g%a# an1 gui1ing phi%#%phie#! It# purp%#e i# t% e#ta;i#h the %rgani0ati%na c%nte=t
within which #trategie# are &%r$uate1!
44 &!r$"'ating the Missi!n state$ent An i$p%rtant &ir#t #tep in the pr%ce## %&
&%r$uating a $i##i%n #tate$ent i# t% c%$e up with a 1e&initi%n %& the %rgani0ati%n?#
;u#ine##! E##entia*4 the 1e&initi%n an#wer# the#e )ue#ti%n#/ JGhat i# %ur ;u#ine##H
Ghat wi it ;eH Ghat #h%u1 it ;eHK The re#p%n#e# gui1e the &%r$uati%n %& a $i##i%n
#tate$ent! T% an#wer the#e )ue#ti%n#4 Dere( A;e4 a #inge-;u#ine## c%$pan* ha#
#ugge#te1 that a c%$pan* #h%u1 1e&ine it# ;u#ine## in ter$# %& three 1i$en#i%n#!
a4 Gh% i# ;eing #ati#&ie1H
b4 Ghat i# ;eing #ati#&ie1H
c4 H%w are cu#t%$er nee1# ;eing #ati#&ie1H
A;e?# appr%ach #tre##e# the nee1 &%r a cu#t%$er-%riente1 rather than a pr%1uct-%riente1
;u#ine## 1e&initi%n!
54 The ta#( %& ana*0ing the %rgani0ati%nA# e=terna envir%n$ent an1 interna %pera-
ti%n#4 an1 then #eecting a #trateg*4 i# re&erre1 t% a# #trateg* &%r$uati%n!
64 The ta#( %& 1e#igning appr%priate %rgani0ati%na #tructure# an1 c%ntr% #*#te$# i#
re&erre1 t% a# #trateg* i$pe$entati%n!
74 The tra1iti%na appr%ach #tre##e# that each %& the c%$p%nent# c%n#titute# a
#e)uentia #tep in the #trategic $anage$ent pr%ce##! Each #trateg*-$a(ing c*ce
14
;egin# with 1e&ining the $i##i%n an1 the g%a#4 which i# &%%we1 ;* #trateg*
&%r$uati%n an1 then #trateg* i$pe$entati%n!
84 H%wever e$ergent #trategie# ari#e &r%$ within the %rgani0ati%n with%ut g%ing
thr%ugh the #tep# iu#trate1 in 'igure 1!2 in a #e)uentia &a#hi%n!
94 Neverthee##4 t%p $anage$ent #ti ha# t% evauate the w%rth %& e$ergent #trategie#
an1 1eter$ine whether each %ne &it# the %rgani0ati%nA# nee1# an1 capa;iitie#! Thi#
inv%ve# ana*0ing the %rgani0ati%nA# e=terna envir%n$ent an1 interna %perati%n#!
M%re%ver4 an %rgani0ati%nA# capa;iit* t% pr%1uce e$ergent #trategie# i# a &uncti%n %&
the (in1 %& cuture &%#tere1 ;* it# #tructure an1 c%ntr% #*#te$#!
104 Thu# the 1i&&erent c%$p%nent# %& the #trategic $anage$ent pr%ce## are Bu#t a#
i$p%rtant &r%$ the per#pective %& e$ergent #trategie# a# the* are &r%$ the per#pec-
tive %& inten1e1 #trategie#! The &%r$uati%n %& inten1e1 #trategie# i# a t%p-1%wn
pr%ce##4 wherea# the &%r$uati%n %& e$ergent #trategie# i# a ;%tt%$-up pr%ce##!
114 The #trategic $anage$ent pr%ce## ;egin# with a 1e&initi%n %& the $i##i%n an1 $aB%r
g%a# %& the %rgani0ati%n! The#e e#ta;i#h the c%nte=t within which inten1e1 #trategie#
are &%r$uate1 an1 #et the criteria &%r evauating e$ergent #trategie#! The $i##i%n
#tate# wh* an %rgani0ati%n e=i#t# an1 what it #h%u1 ;e 1%ing!
124 The %;Bective %& e=terna ana*#i# i# t% i1enti&* #trategic %pp%rtunitie# an1 threat#! Tw%
c%$p%nent# %& the e=terna envir%n$ent are e=a$ine1 at thi# #tage/ the #peci&ic
in1u#tr* envir%n$ent within which the %rgani0ati%n i# ;a#e1 an1 the $acr%-
envir%n$ent!
134 The %;Bective %& interna ana*#i# i# t% i1enti&* the #trength# an1 wea(ne##e# %& the
%rgani0ati%n! Thi# inv%ve# i1enti&*ing the )uantit* an1 )uait* %& an %rgani0ati%nA#
re#%urce#!
144 Strategic ch%ice inv%ve# generating a #erie# %& #trategic aternative#4 given the
$i##i%n an1 g%a# %& the &ir$4 it# interna #trength# an1 wea(ne##e#4 an1 e=terna
%pp%rtunitie# an1 threat#! The %;Bective %& what i# n%r$a* re&erre1 t%4 a# SGOT
ana*#i# i# t% ch%%#e th%#e #trategie# that achieve the ;e#t aign$ent4 %r &it4 ;etween
15
interna #trength# an1 wea(ne##e# an1 e=terna %pp%rtunitie# an1 threat#! The
pr%ce## %& #trategic ch%ice re)uire# the %rgani0ati%n t% i1enti&* the #et %& &uncti%na-
eve4 ;u#ine##-eve4 c%rp%rate-eve4 an1 g%;a #trategie# that ;e#t ena;e it t%
#urvive an1 pr%#per!
154 'uncti%na-eve #trategie# are #trategie# 1irecte1 at i$pr%ving the e&&ectivene## %&
&uncti%na %perati%n# within a c%$pan*4 #uch a# $anu&acturing4 $ar(eting4 $ateria#
$anage$ent4 re#earch an1 1eve%p$ent4 an1 hu$an re#%urce#!
164 The ;u#ine##-eve #trateg* %& a c%$pan* enc%$pa##e# the %vera c%$petitive the$e
that a c%$pan* ch%%#e# t% #tre##4 the wa* it p%#iti%n# it#e& in the $ar(etpace t% gain a
c%$petitive a1vantage4 an1 the 1i&&erent p%#iti%ning #trategie# that can ;e u#e1 in
1i&&erent in1u#tr* #etting#!
174 An %rgani0ati%nA# c%rp%rate-eve #trateg* $u#t an#wer thi# )ue#ti%n/ Ghat ;u#i -
ne##e# #h%u1 we ;e in t% $a=i$i0e the %ng-run pr%&ita;iit* %& the %rgani0ati%nH
The an#wer $a* inv%ve vertica integrati%n4 1iver#i&icati%n4 #trategic aiance#4
ac)ui#iti%n4 new venture#4 %r #%$e c%$;inati%n there%&!
184 M%re an1 $%re4 t% achieve a c%$petitive a1vantage an1 $a=i$i0e per&%r$ance4 a
c%$pan* ha# t% e=pan1 it# %perati%n# %ut#i1e the h%$e c%untr*! Acc%r1ing*4 a
c%$pan* $u#t c%n#i1er the vari%u# #trategie# that it can pur#ue! The#e incu1e &%ur
1i&&erent #trategie# that a c%$pan* can a1%pt t% c%$pete in the g%;a $ar(etpace/ a
$uti1%$e#tic #trateg*4 an internati%na #trateg*4 a g%;a #trateg*4 an1 a tran#nati%na
#trateg*!
194 T% $a(e a #trateg* w%r(4 an %rgani0ati%n nee1# t% a1%pt the c%rrect %rgani0ati%na
#tructure! Thi# inv%ve# 1eci1ing h%w t% a%cate 1eci#i%n-$a(ing auth%rit* within the
&ir$ an1 h%w t% 1ivi1e the %rgani0ati%n int% #u;unit#!
204 Strateg* i$pe$entati%n a#% inv%ve# the #eecti%n %& appr%priate %rgani0ati%na
c%ntr%#! C%ntr%# are nee1e1 ;%th t% a##e## the per&%r$ance an1 c%ntr% the acti%n#
%& in1ivi1ua# %r #u;unit# within the &ir$ an1 t% achieve c%%r1inati%n a$%ng
#u;unit#!
16
214 Strateg* i$pe$entati%n4 then4 re)uire# achieving a &it a$%ng the %rgani0ati%nA#
#trateg*4 #tructure4 an1 c%ntr%#!
224 Ath%ugh in the%r* the #trategic $anage$ent pr%ce## i# characteri0e1 ;* rati%na
1eci#i%n-$a(ing4 in reait* %rgani0ati%na c%n&ict an1 p%itic# pa* a (e* r%e!
Strategic change4 #uch a# that which %ccur# when an %rgani0ati%n a1%pt# a new
#trateg*4 ten1# t% ;ring c%n&ict t% the &%reL ;* 1e&initi%n4 change inv%ve# atering the
e#ta;i#he1 1i#tri;uti%n %& p%wer! T% $anage the pr%ce## %& #trategic change4 #trategic
$anager# $u#t have an un1er#tan1ing %& %rgani0ati%na p%itic#4 c%n&ict4 an1 c%n&ict
$anage$ent!
) Criticis$s !% &!r$a' 7'anning
1! The $%1eL %& the #trategic $anage$ent pr%ce## ea;%rate1 %n in the previ%u#
#ecti%n $ight ;e cae1 a &it $%1e %& #trateg* &%r$uati%n an1 i$pe$entati%n! Thi#
i# ;ecau#e the centra purp%#e %& the $%1e i# t% i1enti&* #trategie# that align, fit, %r
match a c%$pan*A# re#%urce# an1 capa;iitie# t% the 1e$an1# %& the envir%n$ent in
which the c%$pan* %perate#!
+! It i# pertinent t% a#( whether the &it $%1e %& panning actua* w%r(#! On ;aance4
the re#earch evi1ence i# $i=e1! M%re%ver4 in recent *ear# the u#e %& &%r$a panning
#*#te$# a# an ai1 t% #trategic 1eci#i%n-$a(ing ha# ;een increa#ing* )ue#ti%ne1 ;*
in&%r$e1 %;#erver- &r%$ T%$ Peter# t% Henr* Mint0;erg!
2! At ea#t &%ur rea#%n# have ;een given t% e=pain wh* &%r$a #trategic panning
#*#te$# ;a#e1 %n the &it $%1e 1% n%t pr%1uce ;etter re#ut#!
5! 'ir#t4 &%r a vaua;e $anage$ent techni)ue #uch a# &%r$a panning t% ;e a
#%urce %& c%$petitive a1vantage4 #%$e c%$panie# $u#t p%##e## the techni)ue whie
%ther# 1% n%t! In #uch circu$#tance#4 th%#e that p%##e## the techni)ue wi %utper&%r$
th%#e that 1% n%t have it! Once ever*;%1* p%##e##e# the techni)ue4 it eve# the
pa*ing &ie1L the techni)ue can n% %nger ;e the #%urce %& c%$petitive a1vantage!
Ghen that happen#4 we #a* that the techni)ue i# in e)uii;riu$! Thi# $a* n%w ;e the
ca#e with &%r$a panning #*#te$#!
17
6! Sec%n14 in their initia enthu#ia#$ &%r panning techni)ue# 1uring the 18:9# an1
18E9#4 $an* e=ecutive# &%rg%t that the &uture i# inherent* unpre1icta;e! In the rea
w%r14 the %n* c%n#tant i# change! Even the ;e#t-ai1 pan# can &a apart i& un&%re#een
c%nt agencie# %ccur!
:! The rec%gniti%n that in an uncertain w%r1 the &uture cann%t ;e &%reca#te1 with
#u&&icient accurac* e1 Du(e Energ* t% pi%neer the #cenari% appr%ach t% panning 1i#c
i##ue1 in Strateg* in Acti%n!
E! Thir14 a $i#ta(e $a1e ;* $an* c%$panie# in their initia enthu#ia#$ &%r panning
wa# t% treat panning a# an e=cu#ive* c%rp%rate-eve &uncti%n! Thi# iv%r* t%wer
appr%ach can re#ut in #trategic pan# that are %&ten &%r$uate1 in a vacuu$ ;*
panning e=ecutive# wh% have itte un1er#tan1ing %r appreciati%n %& %perating
reaitie# an1 are n%t the %ne# wh% have t% i$pe$ent the pan#! Thi# #eparati%n
;etween thin(ing an1 1%ing can cau#e $%re har$ than g%%1!
F! C%rrecting the iv%r* t%wer appr%ach t% panning inv%ve# rec%gni0ing that4 t%
#uccee14 panning $u#t e$;race a eve# %& the c%rp%rati%n! M%#t %& the panning
can an1 #h%u1 ;e 1%ne ;* %perating $anager#! The* are the %ne# c%#e#t t% the &act#!
The r%e %& c%rp%rate-eve panner# #h%u1 ;e that %& &aciitat%r# wh% hep %perating
$anager# 1% the panning!
8! '%urth4 Prahaa1 an1 Ha$e have argue1 that a1%pting the &it $%1e t% #trateg*
&%r$uati%n ea1# t% a $in1#et in which $anage$ent &%cu#e# t%% $uch up%n the
1egree %& &it ;etween the existing re#%urce# %& a c%$pan* an1 current envir%n$enta
%pp%rtunitie#- -an1 n%t en%ugh %n ;ui1ing new re#%urce# an1 capa;iitie# t% create
an1 exploit future %pp%rtunitie#!
19! Prahaa1 an1 Ha$e n%te that the #ecret %& the #ucce## %& c%$panie# i(e T%*%ta4
Can%n4 an1 M%$at#u i# that the* a ha1 ;%1 a$;iti%n# that %ut#trippe1 their
e=i#ting re#%urce# an1 capa;iitie#! A wante1 t% achieve g%;a ea1er#hip4 an1 the*
#et %ut t% ;ui1 the re#%urce# an1 capa;iitie# that w%u1 ena;e the$ t% attain thi#
g%a! The t%p $anage$ent %& the#e c%$panie# create1 an %;#e##i%n with winning at
a eve# %& the %rgani0ati%n an1 then #u#taine1 that %;#e##i%n %ver a ten- t%
18
twent*-*ear )ue#t &%r g%;a ea1er#hip! Prahaa1 an1 Ha$e re&er t% thi# %;#e##i%n
a# #trategic intent!
C 7it%a''s in Strategic +ecisi!n Ma/ing
14 The ;e#t-1e#igne1 #trategic panning #*#te$# wi &ai t% pr%1uce the 1e#ire1
re#ut# i& #trategic 1eci#i%n $a(er# &ai t% u#e the in&%r$ati%n at their 1i#p%#a
e&&ective*! There i# g%%1 evi1ence that $an* $anager# are p%%r #trategic
1eci#i%n $a(er#! The rea#%n# &%r thi# are 1ue t% tw% reate1 p#*ch%%gica
phen%$ena/ c%gnitive ;ia#e# an1 gr%upthin(!
24 Our rati%nait* a# 1eci#i%n $a(er# i# ;%un1e1 ;* %ur %wn c%gnitive capa;iitie#! Ge
ten1 t% &a ;ac( %n certain rue# %& thu$;4 %r heuri#tic#4 when $a(ing 1eci#i%n#4
an1 #%$eti$e# the* ea1 t% #evere an1 #*#te$atic err%r# in the 1eci#i%n-$a(ing
pr%ce##! The#e #*#te$atic err%r# appear t% ari#e &r%$ a #erie# %& c%gnitive ;ia#e#
in the wa* that hu$an 1eci#i%n $a(er# pr%ce## in&%r$ati%n an1 reach 1eci#i%n#!
'ive c%gnitive ;ia#e# are a# &%%w#/
a! The pri!r hyp!thesis bias re&er# t% the &act that 1eci#i%n $a(er# wh% have
#tr%ng pri%r ;eie&# a;%ut the reati%n#hip ;etween tw% varia;e# ten1 t% $a(e
1eci#i%n# %n the ;a#i# %& the#e ;eie&#4 even when pre#ente1 with evi1ence
that their ;eie&# are wr%ng
;! Esca'ating c!$$it$ent %ccur# when4 having area1* c%$$itte1 #igni&icant
re#%urce# t% a pr%Bect4 1eci#i%n $a(er# c%$$it even $%re re#%urce# i& the*
receive &ee1;ac( that the pr%Bect i# &aiing! Thi# $a* ;e an irrati%na re#p%n#eL
a $%re %gica re#p%n#e $a* ;e t% a;an1%n the pr%Bect an1 $%ve %n4 rather
than e#caate c%$$it$ent!
c! Reas!ning by ana'!gy inv%ve# the u#e %& #i$pe ana%gie# t% $a(e #en#e
%ut %& c%$pe= pr%;e$#! H%wever4 ;ecau#e the* %ver#i$pi&* a c%$pe=
pr%;e$4 #uch ana%gie# can ;e $i#ea1ing!
19
1! Representativeness re&er# t% the ten1enc* %n the part %& $an* 1eci#i%n
$a(er# t% generai0e &r%$ a #$a #a$pe %r even a #inge vivi1 anec1%te!
Generai0ing &r%$ #$a #a$pe# vi%ate# the #tati#tica aw %& arge nu$;er#4
which te# u# that it i# inappr%priate t% generai0e &r%$ a #$a #a$pe4 t%
#a* n%thing %& a #inge ca#e!
e! The i''"si!n !% c!ntr!' i# the ten1enc* %n the part %& 1eci#i%n $a(er# t%
%vere#ti$ate their a;iit* t% c%ntr% event#! T%p-eve $anager# #ee$ t% ;e
particuar* pr%ne t% thi# ;ia#! Having ri#en t% the t%p %& an %rgani0ati%n4 the*
ten1 t% ;e %verc%n&i1ent a;%ut their a;iit* t% #uccee1!
34 An%ther cau#e %& p%%r #trategic 1eci#i%n-$a(ing appear# t% ;e a phen%$en%n
re&erre1 t% a# gr%upthin(! Gr!"pthin/ %ccur# when a gr%up %& 1eci#i%n $a(er#
1eci1e# %n a c%ur#e %& acti%n with%ut )ue#ti%ning un1er*ing a##u$pti%n#!
T*pica*4 a gr%up c%ae#ce# ar%un1 c%$$it$ent t% a per#%n %r p%ic*!
In&%r$ati%n that c%u1 ;e u#e1 t% )ue#ti%n the p%ic* i# ign%re1 %r &itere1 %ut4 whie
the gr%up 1eve%p# a&ter-the-&act rati%nai0ati%n# &%r it# 1eci#i%n! Thu#
c%$$it$ent i# ;a#e1 %n an e$%ti%na rather than an %;Bective a##e##$ent %&
what i# the c%rrect c%ur#e %& acti%n!
+ Techni>"es %!r I$pr!ving +ecisi!n $a/ing
5! The e=i#tence %& c%gnitive ;ia#e# an1 gr%upthin( rai#e# the pr%;e$ %& h%w t%
;ring critica in&%r$ati%n t% ;ear %n the 1eci#i%n $echani#$ t% en#ure that
#trategic 1eci#i%n# $a1e ;* the &ir$ are reai#tic an1 n%t the pr%1uct %&
gr%upthin(! Tw% techni)ue# that have ;een pr%p%#e1 t% guar1 again#t thi#
pr%;e$ are 1eviA# a1v%cac* an1 1iaectic in)uir*!
a! DeviA# a1v%cac* inv%ve# the generati%n %& a pan an1 a critica ana*#i# %& it! A
$e$;er %& the gr%up #h%u1 act a# the 1eviA# a1v%cate4 ;ringing %ut a the
rea#%n# wh* the pr%p%#a #h%u1 n%t ;e a1%pte1! Thu# 1eci#i%n $a(er# can ;e
$a1e aware %& the p%##i;e peri# %& rec%$$en1e1 c%ur#e# %& acti%n!
;! Diaectic in)uir* inv%ve# the generati%n %& a pan an1 a c%unter-pan re&ecting
20
pau#i;e ;ut c%n&icting c%ur#e# %& acti%n! A 1e;ate ;etween a1v%cate# %& the
pan an1 th%#e %& the c%unter-pan #h%u1 ;e c%n#i1ere1 ;* #eni%r #trategic
$anager#! The 1e;ate i# inten1e1 t% revea pr%;e$# with 1e&initi%n#4
rec%$$en1e1 c%ur#e# %& acti%n4 an1 a##u$pti%n#! A# a c%n#e)uence4 c%rp%rate
1eci#i%n $a(er# an1 panner# can &%r$ a new4 $%re enc%$pa##ing &ina pan Ca
#*nthe#i#D!
E Strategic Managers and Strategic Leadership
14 In $%#t $%1ern %rgani0ati%n# %ne &in1# tw% t*pe# %& $anager#/ genera' $anagers
an1 %"ncti!na' $anagers Genera Manager# are in1ivi1ua# wh% ;ear re#p%n#i;iit*
&%r the %vera per&%r$ance %& the %rgani0ati%n %r &%r %ne %& it# $aB%r #e&-c%ntaine1
1ivi#i%n#! Their %verri1ing c%ncern i# &%r the heath %& the total %rgani0ati%n un1er their
1irecti%n! 'uncti%na $anager# ;ear re#p%n#i;iit* &%r #peci&ic ;u#ine## &uncti%n#4
#uch a# hu$an re#%urce#4 purcha#ing4 pr%1ucti%n4 #ae#4 cu#t%$er #ervice4 an1
acc%unt#!
24 A t*pica $uti-;u#ine## c%$pan* ha# three $ain eve# %& $anage$ent/ the c%rp%rate
eve4 the ;u#ine## eve4 an1 the &uncti%na eve C#ee 'igure 1!+D!
Genera Manager# are &%un1 at the &ir#t tw% %& the#e eve# ;ut their #trategic r%e#
1i&&er4 1epen1ing %n their #phere %& re#p%n#i;iit*! 'uncti%na $anager# t%% have a
#trategic r%e4 th%ugh %& a 1i&&erent (in1!
34 The c%rp%rate eve in the $uti;u#ine## &ir$ c%n#i#t# %& the CEO4 ;%ar1 %& 1irect%r#4 an1
c%rp%rate #ta&&! The CEO i# the $ain #trategic $anager at thi# eve! The CEOA# r%e i#
t% %ver#ee the 1eve%p$ent %& #trategie# &%r the t%ta %rgani0ati%n! Thi# inv%ve#
1e&ining the $i##i%n an1 g%a# %& the &ir$4 1eter$ining what ;u#ine##e# the &ir$ #h%u1
;e in4 a%cating re#%urce# t% the 1i&&erent ;u#ine## area# %& the &ir$4 an1 &%r$uating
an1 i$pe$enting #trategie# that #pan in1ivi1ua ;u#ine##e#!
44 The ;u#ine## eve in the $uti;u#ine## &ir$ c%n#i#t# %& the hea1# of the in1ivi1ua
;u#ine## unit# C1ivi#i%n#D an1 their #upp%rt #ta&&! "u#ine## unit C1ivi#i%naD CEO# are the
$ain #trategic $anager# at thi# eve! Their #trategic r%e i# t% tran#ate genera
#tate$ent# %& intent at the c%rp%rate eve int% c%ncrete #trategie# &%r in1ivi1ua
21
;u#ine##e#!
54 The &uncti%na eve c%n#i#t# %& the $anager# %& #peci&ic ;u#ine## &uncti%n#! Their
#trategic re#p%n#i;iit* i# t% 1eve%p &uncti%na #trategie# that hep &u&i the #trategic
%;Bective# #et ;* ;u#ine##- an1 c%rp%rate-eve genera $anager#! M%re%ver4 &unc-
ti%na-eve $anager# pr%vi1e $%#t %& the in&%r$ati%n that $a(e# it p%##i;e &%r
;u#ine## an1 c%rp%rate-eve genera $anager# t% &%r$uate reai#tic an1 attaina;e
#trategie#! In1ee14 ;ecau#e the* are c%#er t% the cu#t%$er than the t*pica genera
$anager4 &uncti%na $anager# $a* the$#eve# generate i$p%rtant #trategic i1ea#4
which #u;#e)uent* ;ec%$e $aB%r #trategie# &%r the c%$pan*! An e)ua* great
re#p%n#i;iit* &%r $anager# at the &uncti%na eve inv%ve# #trateg* i$pe$entati%n
the e=ecuti%n %& c%rp%rate- an1 ;u#ine##-eve 1eci#i%n#!
64 One %& the (e* #trategic r%e# %& an* $anager4 whether genera %r &uncti%na4 i# t%
pr%vi1e #trategic ea1er#hip &%r #u;%r1inate#! Strategic ea1er#hip re&er# t% the a;iit* t%
articuate a #trategic vi#i%n &%r the c%$pan* an1 t% $%tivate %ther# t% ;u* int% that vi#i%n!
Me* characteri#tic# %& Ig%%1 ea1er#4I which have ;een i1enti&ie1 ;* #evera auth%r#4
incu1e the &%%wing/
a! 3i#i%n4 e%)uence4 an1 c%n#i#tenc*! One %& the $ain ta#(# %& ea1er#hip i# t%
give the %rgani0ati%n a #en#e %& 1irecti%n! Str%ng ea1er# #ee$ t% have a
vi#i%n %& where the %rgani0ati%n #h%u1 g%! M%re%ver4 the* are e%)uent
en%ugh t% ;e a;e t% c%$$unicate thi# vi#i%n t% %ther# within the %rgani0ati%n
in ter$# that can energi0e pe%pe4 an1 the* c%n#i#tent* articuate their vi#i%n
unti it ;ec%$e#
part %& the %rgani0ati%nA# cuture!
;! C%$$it$ent! Str%ng ea1er# 1e$%n#trate c%$$it$ent t% their particuar vi#i%n!
O&ten thi# inv%ve# ea1er#hip ;* e=a$pe!
c! "eing we in&%r$e1! G%%1 ea1er# 1eve%p a netw%r( %& &%r$a an1 in&%r$a
#%urce# %& in&%r$ati%n that (eep the$ we appri#e1 %& what i# g%ing %n within
their c%$pan*! The* 1eve%p I;ac(channeI wa*# %& &in1ing %ut what i# g%ing
%n within the %rgani0ati%n #% that the* 1% n%t have t% re* %n &%r$a in&%r$ati%n
22
channe#!
1! Deegati%n an1 e$p%wer$ent! G%%1 ea1er# are #(ie1 1eegat%r#! The* rec-
%gni0e that4 une## the* 1eegate4 the* can )uic(* ;ec%$e %ver%a1e1
with re#p%n#i;iitie#! "e#i1e#4 the* rec%gni0e that e$p%wering #u;%r1inate# t%
$a(e 1eci#i%n# i# an e&&ective $%tivati%na t%%! E$p%wer$ent a#% $a(e#
#en#e when it re#ut# in #hi&ting 1eci#i%n# t% th%#e wh% $u#t i$pe$ent the$!
e 7!'itica' ast"teness G%%1 genera $anager# ten1 t% ;e p%itica* a#tute!
The* pa* the p%wer ga$e with #(i4 pre&erring t% ;ui1 c%n#en#u# &%r their
i1ea# rather than u#e their auth%rit* t% &%rce i1ea# thr%ugh! The* act a#
$e$;er# %r ea1er# %& a c%aiti%n rather than a# 1ictat%r#
S"$$ary,
1! A #trateg* i# an acti%n that a c%$pan* ta(e# t% attain %ne %r $%re %& it# g%a#!
+! The pr%&ita;iit* %& a c%$pan* can ;e $ea#ure1 ;* return that it $a(e# %n the
capita inve#te1 in the enterpri#e! Pr%&ita;iit* i# 1eter$ine1 ;* the #trategie# the
c%$pan* a1%pt#!
2! A c%$pan* ha# a c%$petitive a1vantage %ver it# riva# when it i# $%re pr%&ita;e
than the average &%r a &ir$# in it# in1u#tr*! It ha# a #u#taine1 c%$petitive
a1vantage when it i# a;e t% $aintain an a;%ve average pr%&ita;iit* %ver a nu$;er
%& *ear#!
5! Genera $anager# are re#p%n#i;e &%r the %vera per&%r$ance %& the %rgani0ati%n
%r &%r %ne %& it# $aB%r #e&-c%ntaine1 1ivi#i%n#! Their %verri1ing #trategic c%ncern i#
&%r the heath %& the t%ta %rgani0ati%n un1er their 1irecti%n!
6! 'uncti%na $anager# are re#p%n#i;e &%r a particuar ;u#ine## &uncti%n %r
%perati%n! Ath%ugh the* ac( genera $anage$ent re#p%n#i;iitie#4 the* pa* a
ver* i$p%rtant #trategic r%e!
:! '%r$a #trategic panning $%1e# #tre## that an %rgani0ati%n?# #trateg* i# the
%utc%$e %& a rati%na panning pr%ce##!
E! The $aB%r c%$p%nent# %& the #trategic $anage$ent pr%ce## are 1e&ining the
$i##i%n an1 $aB%r g%a# %& the %rgani0ati%nL ana*0ing the e=terna an1 interna
23
envir%n$ent# %& the %rgani0ati%nL ch%%#ing a ;u#ine## $%1e an1 #trategie# that
aign %r &it an %rgani0ati%n?# #trength# an1 wea(ne##e# with e=terna envir%n$enta
%pp%rtunitie# an1 threat#L an1 a1%pting %rgani0ati%na #tructure# an1 c%ntr%
#*#te$# t% i$pe$ent the %rgani0ati%n?# ch%#en #trateg*!
F! A revi#i%n %& the c%ncept #ugge#t that #trateg* can e$erge &r%$ 1eep within an
%rgani0ati%n in the a;#ence %& &%r$a pan# a# %wer-eve $anager# re#p%n1 t%
unpre1icte1 #ituati%n#!
8! Strategic panning %&ten &ai# ;ecau#e e=ecutive# 1% n%t pan &%r uncertaint* an1
;ecau#e iv%r* t%wer panner# %#e t%uch with %perating reaitie#!
19! The &it appr%ach t% #trategic panning ha# ;een critici0e1 &%r &%cu#ing t%% $uch %n
the 1egree %& &it an1 n%t en%ugh %n ;ui1ing new re#%urce# an1 capa;iitie# t%
create an1 e=p%it &uture %pp%rtunitie#!
11! Strategic intent re&er# t% an %;#e##i%n with achieving an %;Bective that #tretche#
the c%$pan* an1 re)uire# it t% ;ui1 new re#%urce# an1 capa;iitie#!
1+! G%%1 ea1er# %& the #trateg*-$a(ing pr%ce## have a nu$;er %& (e* attri;ute#/
vi#i%n4 e%)uence4 an1 c%n#i#tenc*L c%$$it$entL ;eing we in&%r$e1L a
wiingne## t% 1eegate an1 e$p%werL p%itica a#tutene##L an1 e$%ti%na
inteigence!
12! In #pite %& #*#te$atic panning4 c%$panie# $a* a1%pt p%%r #trategie# i& their
1eci#i%n-$a(ing pr%ce## i# vunera;e t% gr%upthin( an1 i& in1ivi1ua c%gnitive
;ia#e# are a%we1 t% intru1e int% the 1eci#i%n-$a(ing pr%ce##!
15! Devi?# a1v%cac* an1 1iaectic in)uir* are techni)ue# &%r enhancing the
e&&ectivene## %& #trategic 1eci#i%n-$a(ing!
24
C6A7TER 0
Chapter Overvie#
The purp%#e %& thi# chapter i# t% &a$iiari0e *%u with the &%rce# that #hape
c%$petiti%n in a c%$pan*A# e=terna envir%n$ent an1 t% 1i#cu## techni)ue# &%r
i1enti&*ing #trategic %pp%rtunitie# an1 threat#! The chapter %%(# at the in1u#tr*
envir%n$ent4 the $acr% envir%n$ent4 an1 the g%;a envir%n$ent! Thi# chapter 1raw#
pri$ari* %n P%rterA# interpretati%n %& the iterature %n the ec%n%$ic# %& the in1u#tria
%rgani0ati%n t% i1enti&* c%$petitive &%rce#! The centra the$e i# that4 i& it i# t% #urvive an1
pr%#per4 a c%$pan* $u#t un1er#tan1 the i$picati%n# that envir%n$enta &%rce# have &%r
#trategic %pp%rtunitie# an1 threat#!
The chapter &ir#t %&&er# a 1etaie1 %%( at the &%rce# that #hape c%$petiti%n in a
c%$pan*A# in1u#tr* envir%n$ent4 u#ing P%rterA# &ive &%rce# $%1e a# an %vera &ra$ew%r(!
The &%rce %& p%tentia c%$petiti%n i# 1i#cu##e14 with particuar attenti%n pai1 t% the
1eter$inant# %& ;arrier# t% entr*! Ne=t the r%e %& in1u#tr* c%$petitive #tructure4 1e$an1
c%n1iti%n#4 an1 e=it ;arrier# a# 1eter$inant# %& the 1egree %& rivar* ;etween e#ta;i#he1
&ir$# i# highighte1! Then the e=tent t% which p%wer&u ;u*er# an1 #uppier# can #)uee0e
pr%&it# %ut %& an in1u#tr* i# a##e##e14 &%%we1 ;* a %%( at h%w the c%#ene## %&
#u;#titute pr%1uct# can a&&ect an in1u#tr*A# pr%&it# Thi# #ecti%n en1# with a review %& the
#igni&icance that change# in the $acr%-envir%n$ent have &%r #trategic %pp%rtunitie# an1
threat#! The 1i#cu##i%n at thi# #tage c%ver# the i$picati%n# %& change# in the
$acr%ec%n%$ic envir%n$ent4 the techn%%gica envir%n$ent4 the #%cia envir%n$ent4 the
1e$%graphic envir%n$ent4 the p%itica@ega envir%n$ent4 an1 the g%;a envir%n$ent
The chapter $%ve# %n t% e=p%re the c%ncept# %& #trategic gr%up# an1 $%;iit*
;arrier#4 e$pha#i0ing the i$picati%n# %& the#e c%ncept# &%r the inten#it* %& c%$petiti%n in
an in1u#tr* an1 &%r a c%$pan*A# c%$petitive #trateg*!
Ne=t the chapter c%n#i1er# #%$e %& the i$itati%n# inherent in the &ive &%rce# an1
#trategic gr%up $%1e# %& in1u#tr* c%$petiti%n p%puari0e1 ;* P%rter! The centra the$e in
25
thi# #ecti%n i# that the#e $%1e# are #tatic4 an1 ign%re the r%e %& inn%vati%n in
rev%uti%ni0ing in1u#tr* an1 #trategic gr%up #tructure %ver ti$e!
The c%$petitive change# that ta(e pace 1uring the ev%uti%n %& an in1u#tr* are
then e=a$ine1! The chapter intr%1uce1 *%u t% the (e* c%$petitive characteri#tic# %&
e$;r*%nic4 gr%wth4 #ha(e%ut4 $ature4 an1 1ecining in1u#tr* envir%n$ent#! The
change# that P%rterA# &ive &%rce# un1erg% a# an in1u#tr* ev%ve# are highighte1!
The penuti$ate #ecti%n %& the chapter 1ea# with the tren1 t%war1 g%;ai0ati%n
that ha# %ccurre1 in $an* in1u#trie# in recent *ear#! The &%cu# i# %n the &act%r# that have
cau#e1 the g%;ai0ati%n %& pr%1ucti%n an1 $ar(et#4 an1 %n the i$picati%n# %&
g%;ai0ati%n &%r c%$petiti%n within an in1u#tr*!
'ina*4 the chapter c%n#i1er# the in( ;etween nati%na c%nte=t an1 c%$petitive
#tructure! Thi# #ecti%n %& the chapter ;ui1# %n P%rterA# recent w%r(4 The Competitive
Advantage of Nations. The centra %;Bective here i# t% 1e$%n#trate h%w the nati%na c%nte=t
within which a c%$pan* i# ;a#e1 can i$pact that c%$pan*A# c%$petitive p%#iti%n an1
per&%r$ance in the g%;a $ar(etpace!
Learning Objectives: A%ter reading this chapter- y!" sh!"'d be ab'e t!,
14 Un1er#tan1 the &%rce# that #hape c%$petiti%n in a c%$pan*A# e=terna envir%n$ent!
24 Iu#trate h%w change in the e=terna envir%n$ent give# ri#e t% #trategic %pp%rtunitie#
an1 threat#!
34 Di#cu## the #trategic i$p%rtance %& ;arrier# t% new entr* in i$iting c%$petiti%n within
an in1u#tr*!
44 Un1er#tan1 the i$p%rtance %& in1u#tr* c%$petitive #tructure4 1e$an1 c%n1iti%n# an1
e=it ;arrier# a# 1eter$inant# %& the 1egree %& rivar* a$%ng e#ta;i#he1 c%$panie#
within an in1u#tr*!
54 De#cri;e the 1eter$inant# %& p%wer&u ;u*er# an1 #uppier# within an in1u#tr*!
14Un1er#tan1 the c%$petitive &%rce %& #u;#titute pr%1uct#!
64 Di#cu## the 1i&&erent &%rce# in the wi1er $acr% envir%n$ent that give ri#e t% #trategic
26
%pp%rtunitie# an1 threat#!
74 De#cri;e the c%ncept# %& #trategic gr%up# an1 $%;iit* ;arrier#4 an1 their
c%$petitive i$picati%n#!
84 Di#cu## the i$itati%n# %& the &ive &%rce# an1 #trategic gr%up $%1e#4 an1 the
r%e %& inn%vati%n in rev%uti%ni0ing in1u#tr* #tructure!
94 Di#cu## the 1i&&erent #tage# %& in1u#tr* ev%uti%n!
104 I1enti&* the &%rce# that have re#ute1 in the g%;ai0ati%n %& pr%1ucti%n an1 $ar(et#4
an1 i1enti&* the c%$petitive i$picati%n# %& g%;ai0ati%n!
114 Un1er#tan1 the in( ;etween nati%na c%nte=t an1 c%$petitive a1vantage!
TEAC6ING O;TLINE
Intr!d"cti!n
1! '%r a c%$pan* t% #uccee14 it# #trateg* $u#t either &it the in1u#tr* envir%n$ent in
which it %perate#4 %r the c%$pan* $u#t ;e a;e t% re#hape the in1u#tr*
envir%n$ent in which it %perate# t% it# a1vantage thr%ugh it# ch%ice %& #trateg*!
C%$panie# t*pica* &ai when their #trateg* n% %nger &it# the envir%n$ent in
which the* %perate!
+! T% achieve a g%%1 &it4 $anager# $u#t un1er#tan1 the &%rce# that #hape
c%$petiti%n in their e=terna envir%n$ent! Thi# ena;e# the$ t% i1enti&* #trategic
%pp%rtunitie# an1 threat#!
A Ana'y(ing the Ind"stry Envir!n$ent
An in1u#tr* can ;e 1e&ine1 a# a gr%up %& c%$panie# %&&ering pr%1uct# %r #ervice# that
are c%#e #u;#titute# &%r each %ther C'!se s"bstit"tes are pr!d"cts !r services that
satis%y the sa$e basic need
1! A $%1e 1evi#e1 ;* Michae P%rter &%cu#e# %n &ive &%rce# #hape c%$petiti%n
within an in1u#tr*! A c%$pan* that un1er#tan1# h%w each %& the#e &ive &%rce#
w%r(# i# in a g%%1 p%#iti%n t% i1enti&* #trategic %pp%rtunitie# an1 threat#! The &ive
&%rce# are/
27
a The ris/ !% ne# entry by p!tentia' c!$petit!rs
b The degree !% riva'ry a$!ng estab'ished c!$panies
c The bargaining p!#er !% s"pp'iers
d The bargaining p!#er b"yers
e The c!$petitive %!rces !% s"bstit"te pr!d"cts
2! The #tr%nger each %& the &%rce# i# the $%re are the e#ta;i#he1 c%$panie# i$ite1
in their a;iit* t% rai#e price# an1 earn greater pr%&it#! A #tr%ng c%$petitive &%rce the
i# threat ;ecau#e it 1epre##e# pr%&it#! A wea( c%$petitive &%rce i# an %pp%rtunit*
;ecau#e it a%w# the c%$pan* t% earn greater pr%&it#
5! Potential competitors. P%tentia c%$petit%r# are c%$panie# that are current* n%t
c%$peting in the in1u#tr* ;ut have the capa;iit* t% 1% #%!
6! Ne# entr* int% an in1u#tr* e=pan1# #upp*! Thi# in turn 1epre##e1 price# an1
pr%&it#! Thu# a high ri#( %& new entr* c%n#titute# a #trategic threat! Other thing#
;eing e)ua4 a %w ri#( %& new entr* a%w# e#ta;i#he1 c%$panie# t% rai#e their
price#4 #% it c%n#titute# an %pp%rtunit*!
:! The ri#( %& entr* ;* p%tentia c%$petit%r# i# a &uncti%n %& the height %& ;arrier# t%
entr*! The height %& ;arrier# t% entr* i# 1eter$ine1 ;* the &%%wing/
a! The e=tent t% which e#ta;i#he1 c%$panie# have ;ran %*at*!
;! The e=tent t% which e#ta;i#he1 c%$panie# enB%* an a;#%ute c%#t
a1vantage %ver p%tentia entrant#!
c! The e=tent t% which e#ta;i#he1 c%$panie# have ec%n%$ie# %& #cae!
E! Rivalry among established companies. Str%ng rivar* c%n#titute# a threat t%
e#ta;i#he1 c%$panie#4 wherea# wea( rivar* c%n#titute# an %pp%rtunit* t% rai#e
price# an1 earn greater return#!
F! The e=tent %& rivar* a$%ng e#ta;i#he1 &ir$# 1epen1# %n/
a! In1u#tr* c%$petitive #tructure!
;! De$an1 c%n1iti%n#!
c! E=it ;arrier#
8! C%$petitive #tructure re&er# t% the nu$;er an1 #i0e 1i#tri;uti%n %& c%$panie#
within an in1u#tr*! Di&&erent c%$petitive #tructure# have 1i&&erent i$picati%n# &%r
28
rivar*! Structure# var* &r%$ &rag$ente1 t% c%n#%i1ate1 c%$panie#!
19! Man* &rag$ente1 in1u#trie# are characteri0e1 ;* %w entr* ;arrier#4 an1
c%$$%1it*-t*pe- pr%1uct# that are har1 t% 1i&&erentiate! The c%$;inati%n %&
the#e characteri#tic# ten1# t% re#ut in ;%%$-an1 ;u#t c*ce#!
11! -%w entr* ;arrier# i$p* that whenever 1e$an1 i# #tr%ng an1 pr%&it# are high
there wi ;e a &%%1 %& new entrant# h%ping t% ca#h in %n the ;%%$! The &%%1
%& new entrant# int% a ;%%$ing &rag$ente1 in1u#tr* wi create e=ce## capacit*!
Once e=ce## capacit* 1eve%p#4 c%$panie# ;egin t% #tart cutting price# in
%r1er t% utii0e their #pare capacit*! The 1i&&icut* c%$panie# &ace when
tr*ing t% 1i&&erentiate their pr%1uct# &r%$ th%#e %& c%$petit%r# can e=acer;ate
thi# ten1enc*! The re#ut i# a price war4 which wi 1epre## in1u#tr* pr%&it#4 &%rce
#%$e c%$panie# %ut %& ;u#ine##4 an1 1eter an* $%re new entrant#!
1+! The $%re c%$$%1it*-i(e an in1u#tr*A# pr%1uct4 the $%re vici%u# wi ;e the
price war! Thi# I;u#tI part %& the c*ce wi c%ntinue unti %vera in1u#tr*
capacit* i# ;r%ught int% ine with 1e$an1 Cthr%ugh ;an(ruptcie#D4 at which
p%int price# $a* #ta;ii0e again!
12! The (e* characteri#tic %& c%n#%i1ate1 in1u#trie# i# inter1epen1ence! Thi# $ean#
that the c%$petitive acti%n# %& %ne c%$pan* 1irect* a&&ect the pr%&ita;iit* %&
%ther# in the in1u#tr*4 %&ten &%rcing a re#p%n#e &r%$ the$!
15!The c%n#e)uence %& inter1epen1ence in c%n#%i1ate1 in1u#trie# can ;e price
war# Ci(e th%#e the airine in1u#tr* ha# e=perience1D! Thu# inter1epen1ence
i# a $aB%r threat! Thi# threat can ;e re1uce1 when tacit price-ea1er#hip
agree$ent# e=i#t within the in1u#tr* an1 when c%$panie# are #ucce##&u in
e$pha#i0ing n%n-price c%$petiti%n!
16! De$an1 c%n1iti%n# a#% 1eter$ine the inten#it* %& rivar* a$%ng e#ta;i#he1
c%$panie#! Gr%wing 1e$an1 $%1erate# c%$petiti%n ;* pr%vi1ing r%%$ &%r
e=pan#i%n! Decining 1e$an1 re#ut# in $%re c%$petiti%n a# c%$panie#
&ight t% $aintain revenue# an1 $ar(et #hare!
1:! E=it ;arrier# are a #eri%u# c%$petitive threat when 1e$an1 i# 1ecining! There
are ec%n%$ic4 #trategic4 an1 e$%ti%na &act%r# that (eep c%$panie#
c%$peting in an in1u#tr* even when return# are %w! Thi# in turn ea1# t%
e=ce## capacit* an1 price war#!
29
1E! E=it ;arrier# incu1e
a! Inve#t$ent# in #peciai0e1 a##et#!
;! High &i=e1 c%#t# %& e=it C#everance pa*D!
c! E$%ti%na attach$ent# t% an in1u#tr*!
1! Strategic reati%n#hip# ;etween ;u#ine## unit#!
e! 1epen1ence %n an in1u#tr*
18& )argaining p!#er !% b"yers "u*er# can ;e viewe1 a# a c%$petitive threat
when they &%rce 1%wn price# %r when the* 1e$an1 higher )uait* an1 ;etter
#ervice! The a;iit* %& ;u*er# t% $a(e 1e$an1# %n a c%$pan* 1epen1# %n their
p%wer reative t% that %& the c%$pan*!
19& )argaining p!#er !% s"pp'iers! Suppier# can ;e viewe1 a# a threat
when the* are a;e t% &%rce up the price the c%$pan* $u#t pa* &%r input#
%r t% re1uce the )uait* %& g%%1# #uppie1! The a;iit* %& #uppier# t% $a(e
1e$an1# %n a c%$pan* 1epen1# %n their p%wer reative t% that %& the
c%$pan*!
20& S"bstit"te pr!d"cts Su;#titute pr%1uct# i$it the price that c%$panie#
in an in1u#tr* can charge with%ut %#ing their cu#t%$er# t% $a(er# %&
#u;#titute#! The c%#er the #u;#titute#4 the greater the threat the* p%#e!
21& The r!'e !% the $acr! envir!n$ent The $acr% envir%n$ent re&er# t%
the ;r%a1er ec%n%$ic4 techn%%gica4 1e$%graphic4 #%cia4 an1 p%itica
envir%n$ent within which an in1u#tr* i# e$;e11e1 C#ee 'igure +!ED! It i#
apparent that change# in thi# $acr% envir%n$ent can have a 1irect
i$pact %n an* %ne %& the &ive &%rce# in P%rterA# $%1e4 there;* atering the
reative #trength %& the#e &%rce# an1 with it4 the attractivene## %& an
in1u#tr*!
22& The $acr%ec%n%$ic envir%n$ent! In the $acr%ec%n%$ic envir%n$ent4
change# in the gr%wth rate %& the ec%n%$*4 intere#t rate#4 currenc* e=change
rate#4 an1 in&ati%n rate# are a $aB%r 1eter$inant# %& the %vera eve %&
1e$an1! A1ver#e change# in an* %& the#e can threaten pr%&ita;iit* in an
in1u#tr*!
23& The techn!'!gica' envir!n$ent In the p%#t-G%r1 Gar II peri%14 the
pace %& techn%%gica change ha# acceerate14 unea#hing a perennia
30
gae %& creative 1e#tructi%n Techn%%gica change can $a(e e#ta;i#he1
pr%1uct# %;#%e#cent %vernight4 ;ut at the #a$e ti$e4 it can create new
pr%1uct# an1 pr%ce##e#! Thu# techn%%gica change i# ;%th an %pp%rtunit*
an1 a threatL it i# creative an1 1e#tructive! T% #urvive in #uch a tur;uent
envir%n$ent4 a c%$pan* $u#t ;e aert an1 perceptive!
24& The s!cia' envir!n$ent New #%cia $%ve$ent# a#% create
%pp%rtunitie# an1 threat#! '%r e=a$pe4 the i$pact %& the tren1 t%war1
greater heath c%n#ci%u#ne## ha# ;eerL i$$en#e! Th%#e c%$panie# that
rec%gni0e the %pp%rtunitie# can reap #u;#tantia gain#!
25& The de$!graphic envir!n$ent Changing 1e$%graphic# create
%pp%rtunitie# an1 threat#! '%r e=a$pe4 the pa##ing %& the ;a;* ;%%$
thr%ugh the p%puati%n an1 the genera aging %& the U!S! p%puati%n are
#pawning new in1u#trie#!
26& The p!'itica'@'ega' envir!n$ent P%itica an1 ega &act%r# can have a
$aB%r i$pact %n the eve %& %pp%rtunitie# an1 threat# in a c%$pan*A#
envir%n$ent! '%r e=a$pe4 ;* re$%ving ega re#tricti%n#4 1ereguati%n
ha# %pene1 up a nu$;er %& in1u#trie# t% inten#e c%$petiti%n!
) Strategic Gr!"ps #ithin Ind"stries
A #trategic gr%up i# a gr%up %& c%$panie# within an in1u#tr* that are pur#uing the
#a$e ;a#ic #trateg*! C%$panie# in 1i&&erent #trategic gr%up# pur#ue 1i&&erent
#trategie#! N%r$a*4 a i$ite1 nu$;er %& #trategic gr%up# capture the e##ence %&
#trategic 1i&&erence# a$%ng c%$panie# within an in1u#tr*!
14 A c%$pan*?# i$$e1iate c%$petit%r# are th%#e in it# #trategic gr%up!
"ecau#e a c%$panie# in a #trategic gr%up are pur#uing #i$iar
#trategie#4 c%n#u$er# ten1 t% view the pr%1uct# %& #uch enterpri#e# a#
1irect #u;#titute# &%r each %ther!
24 Di&&erent #trategic gr%up# can have a 1i&&erent #tan1ing with re#pect t%
each %& P%rterA# &ive c%$petitive &%rce#!
34 S%$e #trategic gr%up# are $%re 1e#ira;e than %ther#4 in#%&ar a# the*
31
are characteri0e1 ;* a %wer eve %& threat# an1@%r ;* greater
%pp%rtunitie#!
44 Ath%ugh $%ving int% an%ther #trategic gr%up $a* ;e 1e#ira;e4 it can
rare* ;e 1%ne with%ut c%#t# ;ecau#e %& $%;iit* ;arrier#! M%;iit*
;arrier# are &act%r# that inhi;it $%ve$ent ;etween gr%up#! The* are
ana%g%u# t% in1u#tr* entr* ;arrier# an1 are ;a#e1 %n the #a$e &act%r#/
;ran1 %*at*4 a;#%ute c%#t a1vantage#4 an1 ec%n%$ie#
%& #cae!
54 M%;iit* ;arrier# i$p* that c%$panie# within a given gr%up are pr%tecte1 t%
a greater %r e##er e=tent &r%$ the threat %& entr* ;* c%$panie# ;a#e1 in %ther
gr%up#
C Li$itati!ns !% the &ive &!rces and Strategic Gr!"p M!de's
1! The &ive &%rce# an1 #trategic gr%up $%1e# c%n#titute ver* u#e&u wa*# %&
thin(ing a;%ut an1 ana*0ing the nature %& c%$petiti%n within an in1u#tr*!
H%wever4 there are tw% $ain pr%;e$# with ;%th %& the#e $%1e#/ the* pre#ent
a #tatic picture %& c%$petiti%n that 1e-e$pha#i0e# the r%e %& inn%vati%nL an1
the* 1e-e$pha#i0e the i$p%rtance %& in1ivi1ua c%$pan* 1i&&erence# an1
%vere$pha#i0e the i$p%rtance %& in1u#tr* an1 #trategic gr%up #tructure a#
1eter$inant# %& c%$pan* pr%&it rate#!
+! The r!'e !% inn!vati!n Over an* rea#%na;e ength %& ti$e4 in $an*
in1u#trie# c%$petiti%n can ;e viewe1 a# a pr%ce## 1riven ;* inn%vati%n!
C%$panie# that pi%neer new pr%1uct#4 pr%ce##e#4 %r #trategie# can %&ten earn
en%r$%u# pr%&it#! Thi# give# c%$panie# a #tr%ng incentive t% #ee( inn%vative
pr%1uct#4 pr%ce##e#4 an1 #trategie#!
2! Succe##&u inn%vati%n can rev%uti%ni0e in1u#tr* #tructure! In recent 1eca1e#
%ne %& the $%#t c%$$%n c%n#e)uence# %& inn%vati%n ha# ;een t% %wer the
&i=e1 c%#t# %& pr%1ucti%n4 there;* re1ucing ;arrier# t% entr* an1 a%wing new4
#$aer enterpri#e# t% c%$pete with arge4 e#ta;i#he1 %rgani0ati%n#!
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5! P%rter n%w ta(# %& inn%vati%n# a# Iun&ree0ingI an1 Ire#hapingI in1u#tr*
#tructure! Hi# view #ee$# t% ;e that a&ter a peri%1 %& tur;uence triggere1 ;*
inn%vati%n the #tructure %& an in1u#tr* %nce $%re #ette# 1%wn int% a &air* #ta;e
pattern! Ghen the in1u#tr* #ta;ii0e# in it# new c%n&igurati%n4 the &ive &%rce#
an1 #trategic gr%up c%ncept# can again ;e appie1! Thi# view %& the ev%uti%n
%& in1u#tr* #tructure i# %&ten re&erre1 t% a# punctuated equilibrium. The
punctuate1 e)uii;riu$ view h%1# that %ng peri%1# %& e)uii;riu$4 when an
in1u#tr*A# #tructure i# #ta;e4 are punctuate1 ;* peri%1# %& rapi1 change4 when
in1u#tr* #tructure i# rev%uti%ni0e1 ;* inn%vati%n!
6! The punctuate1 e)uii;riu$ $%1e %& in1u#tr* ev%uti%n $a(e# a g%%1 1ea %&
#en#e! It i$pie# that the &ive &%rce# an1 #trategic gr%up# $%1e# are
appica;e whie the in1u#tr* i# in a #tea1* #tate4 ;ut n%t whie it i# un1erg%ing
ra1ica re#tructuring 1ue t% inn%vati%n %r #%$e %ther 1i#c%ntinuit*!
:! H%wever4 there are th%#e wh% )ue#ti%n the vai1it* %& the punctuate1
e)uii;riu$ appr%ach! '%r e=a$pe4 Richar1 DAAvani ha# argue1 that $an*
in1u#trie# are hyperc!$petitive H*perc%$petitive in1u#trie# are
characteri0e1 ;* per$anent an1 %ng%ing inn%vati%n! In #uch in1u#trie#4
in1u#tr* #tructure i# constantly ;eing rev%uti%ni0e1 ;* inn%vati%nL there are n%
peri%1# %& e)uii;riu$!
E! Ind"stry str"ct"re and c!$pany di%%erences A #ec%n1 critici#$ %& the &ive
&%rce# an1 #trategic gr%up $%1e# i# that the* %vere$pha#i0e the i$p%rtance
%& in1u#tr* #tructure a# a 1eter$inant %& c%$pan* per&%r$ance an1
un1ere$pha#i0e the i$p%rtance %& 1i&&erence# a$%ng c%$panie# within an
in1u#tr* %r #trategic gr%up!
F! Aca1e$ic #tu1ie# #ugge#t that there can ;e en%r$%u# variance in the pr%&it
rate# %& in1ivi1ua c%$panie# within an in1u#tr*4 with in1u#tr* e&&ect#
acc%unting &%r %n* 19 t% +9 percent %& the variance in c%$pan* pr%&it rate#!
C%ective*4 the#e #tu1ie# #ugge#t that the in1ivi1ua re#%urce# an1
capa;iitie# %& a c%$pan* are &ar $%re i$p%rtant 1eter$inant# %& that
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c%$pan*A# pr%&ita;iit* than the in1u#tr* %r the
#trategic gr%up %& which the c%$pan* i# a $e$;er!
8! Ath%ugh thi# does not $ean that the &ive &%rce# an1 #trategic gr%up
$%1e# are irreevant4 it 1%e# in1icate that their u#e&une## i# i$ite1! A
c%$pan* wi n%t ;e pr%&ita;e Bu#t ;ecau#e it i# ;a#e1 in an attractive in1u#tr*
%r #trategic gr%upL $uch $%re i#- re)uire1!
+ C!$petitive Changes d"ring Ind"stry
Over ti$e4 in1u#trie# pa## thr%ugh a #erie# %& we-1e&ine1 #tage#/ initia gr%wth4
$aturit*4 an1 eventua 1ecine! The#e 1i&&erent #tage# have 1i&&erent i$picati%n# &%r
the nature %& c%$petiti%n! The inten#it* %& each %& the &ive $ain c%$petitive &%rce#
change a# an in1u#tr* ev%ve#!
14 'ive 1e&erent in1u#tr* envir%n$ent# can ;e i1enti&ie14 each %& which i#
&%un1 at a 1i&&ere1 #tage in an in1u#tr*A# ev%uti%n! An in1u#tr* $a* ;e
an* %ne %& the &%%wing
a! An e$;r*%nic in1u#tr*!
;! A gr%wth in1u#tr*
c! An in1u#tr* g%ing thr%ugh a #ha(e%ut!
1! A $ature in1u#tr*
e! A 1ecining in1u#tr*!
34 An e$;r*%nic in1u#tr* i# %ne that i# Bu#t ;eginning t% 1eve%p!
Gr%wth i# #%w ;ecau#e %& ;u*er un&a$iiarit* with the in1u#tr*A# pr%1uct#4 p%%r
1i#tri;uti%n channe#4 an1 high price# #te$$ing &r%$ the ina;iit* %& c%$panie#
t% reap ec%n%$ie# %& #cae!
44 "arrier# t% entr* at thi# #tage in an in1u#tr*A# ev%uti%n ten1 t% ;e
;a#e1 %n acce## t% (e* techn%%gica (n%w-h%w4 rather than c%#t ec%n%$ie# %r
;ran1 %*at*! Rivar* in e$;r*%nic in1u#trie# i# ;a#e1 n%t #% $uch %n price a#
%n e1ucating cu#t%$er#4 %pening up 1i#tri;uti%n channe#4 an1 per&ecting the
34
1e#ign %& the pr%1uct!
54 A gr!#th ind"stry i# %ne where &ir#t-ti$e 1e$an1 i# e=pan1ing
rapi1* a# new c%n#u$er# enter the $ar(etpace! T*pica*4 1e$an1 ta(e#
%&& when c%n#u$er# ;ec%$e &a$iiar with the pr%1uct4 price# &a with the
attain$ent %& ec%n%$ie# %& #cae4 an1 1i#tri;uti%n channe# 1eve%p!
64 During an in1u#tr*A# gr%wth #tage4 there ten1# t% ;e itte rivar*!
Rapi1 gr%wth in 1e$an1 ena;e# c%$panie# t% e=pan1 their revenue# an1
pr%&it# with%ut ta(ing $ar(et #hare awa* &r%$ c%$petit%r#!
74 An in1u#tr* sha/e!"t %ccur# when the rate %& in1u#tr* gr%wth
#%w# 1%wn a# 1e$an1 appr%ache# #aturati%n eve#! A #aturate1 $ar(et i# %ne
where there are &ew &ir#t-ti$e ;u*er# e&t! M%#t %& the 1e$an1 i# i$ite1 t%
repace$ent 1e$an1!
84 A# an in1u#tr* enter# the #ha(e%ut #tage4 rivar* ;etween
c%$panie# ;ec%$e# inten#e! C%$panie# that have ;ec%$e accu#t%$e1 t%
rapi1 gr%wth 1uring an In1u#tr*A# gr%wth pha#e c%ntinue t% a11 capacit* at
rate# c%n#i#tent with pa#t gr%wth! Manager# u#e hi#t%ric gr%wth rate# t%
&%reca#t &uture gr%wth rate# an1 pan e=pan#i%n# in pr%1uctive capacit*
acc%r1ing*!
94 A mature industry i# %ne where the $ar(et i# t%ta* #aturate1 an1
1e$an1 i# i$ite1 t% repace$ent 1e$an1! During thi# #tage4 gr%wth i# %w %r
0er%! Ghat itte gr%wth there i# c%$e# &r%$ p%puati%n e=pan#i%n ;ringing new
c%n#u$er# int% the $ar(et! A# an in1u#tr* enter# $aturit*4 ;arrier# t% entr*
increa#e an1 the threat %& entr* &r%$ p%tentia c%$petit%r?# 1ecrea#e#! A#
gr%wth #%w# 1uring the #ha(e%ut4 c%$panie# can n% %nger $aintain hi#t%ric
gr%wth rate# $ere* ;* h%1ing %n t% their $ar(et #hare C%$petiti%n &%r $ar(et
#hare can 1eve%p4 1riving 1%wn price#!
104 A# a re#ut %& the #ha(e%ut4 ;* $aturit* $%#t in1u#trie# have
c%n#%i1ate1 an1 ;ec%$e %ig%p%ie#! In $ature in1u#trie#4 c%$panie# ten1 t%
35
rec%gni0e their inter1epen1ence an1 tr* t% av%i1 price war# i& p%##i;e! Sta;e
1e$an1 give# the$ the %pp%rtunit* t% enter int% price-ea1er#hip agree$ent#!
The net e&&ect i# t% re1uce the threat %& inten#e rivar* a$%ng e#ta;i#he1
c%$panie#4 there;* a%wing greater pr%&ita;iit*! H%wever4 the #ta;iit* %& a
$ature in1u#tr* i# awa*# threatene1 ;* &urther price war#! A genera #u$p in
ec%n%$ic activit* can 1epre## in1u#tr* 1e$an1! A# c%$panie# &ight t%
$aintain their revenue# in the &ace %& 1ecining 1e$an14 price-ea1er#hip
agree$ent# ;rea( 1%wn4 rivar* increa#e#4 an1 price# an1 pr%&it# &a!
114 In the 1ecine #tage4 gr%wth ;ec%$e# negative &%r a variet* %&
rea#%n#4 incu1ing techn%%gica #u;#tituti%n4 #%cia change#4 1e$%graphic#4
an1 internati%na c%$petiti%n within a 1ecining in1u#tr*4 the 1egree %& rivar*
a$%ng e#ta;i#he1 c%$panie# u#ua* increa#e#! Depen1ing %n the #pee1 %&
the 1ecine an1 the height %& e=it ;arrier#4 c%$petitive pre##ure# can ;ec%$e
a# &ierce a# in the #ha(e%ut #tage!
124 The $ain pr%;e$ in a 1ecining in1u#tr* i# that &aing 1e$an1
ea1# t% the e$ergence %& e=ce## capacit*! In an atte$pt t% utii0e thi# capacit*4
c%$panie# ;egin t% cut price#4 thu# #par(ing a price war! E=it ;arrier# pa* a
part in a1Bu#ting e=ce## capacit*! The greater the e=it ;arrier#4 the har1er it i# &%r
c%$panie# t% re1uce capacit* an1 the greater i# the threat %& #evere price
c%$petiti%n!
E G'!ba'i(ati!n and Ind"stry Str"ct"re
14 Ge #ee$ #% ;e witne##ing the g%;ai0ati%n %& pr%1ucti%n an1 %& $ar(et#!
The ter$ global slut' ha# ;een c%ine1 ;* %ne auth%r t% capture the e##ence %&
the change!
24 Gith regar1 t% the g'!ba'i(ati!n !% pr!d"cti!n- it ha# ;een %;#erve1 that
in1ivi1ua c%$panie# are increa#ing* 1i#per#ing part# %& their pr%1ucti%n
pr%ce## t% 1i&&erent %cati%n# ar%un1 the g%;e t% ta(e a1vantage %& nati%na
1i&&erence# in the c%#t an1 )uait* %& &act%r# %& pr%1ucti%n C&%r e=a$pe4 a;%r4
energ*4 an14 an1 capitaD! The %;Bective here i# ;%th t% %wer c%#t#4 an1 t% a11
vaue!
36
34 A# &%r the g'!ba'i(ati!n %& $ar/ets- it ha# ;een argue1 that we are
$%ving awa* &r%$ an ec%n%$ic #*#te$ in which nati%na $ar(et# are 1i#tinct
entitie#4 i#%ate1 &r%$ each %ther ;* tra1e ;arrier# an1 ;arrier# %& 1i#tance4
ti$e4 an1 cuture4 an1 t%war1 a #*#te$ i n which nati%na $ar(et# are $erging
t%gether int% %ne huge g%;a $ar(etpace! Acc%r1ing t% thi# view4 the ta#te#
an1 pre&erence# %& c%n#u$er# in 1i&&erent nati%n# are ;eginning t% c%nverge
at #%$e g%;a n%r$!
44 Ca"ses !% g'!ba' shi%t Tw% &act%r# un1erie the tren1 t%war1 the increa#ing
g%;ai0ati%n %& $ar(et# an1 %& pr%1ucti%n! The &ir#t i# the 1ecine in ;arrier# t% the
&ree &%w %& g%%1#4 #ervice#4 an1 capita that ha# %ccurre1 #ince the en1 %&
G%r1 Gar II! The #ec%n1 &act%r ha# ;een the 1ra$atic change# in
c%$$unicati%n4 in&%r$ati%n4 an1 tran#p%rtati%n techn%%gie# that we have
#een %ver the #a$e ti$e peri%1Nchange# that have $a1e it p%##i;e t%
$anage ge%graphica* &ar-&ung enterpri#e#!
54 C!nse>"ences !% g'!ba' shi%t The tren1 t%war1 the g%;ai0ati%n %&
pr%1ucti%n an1 the g%;ai0ati%n %& $ar(et# ha# #evera $aB%r i$picati%n# &%r
c%$petiti%n within an in1u#tr*! 'ir#t4 it i# i$p%rtant &%r c%$panie# t% rec%gni0e
that in1u#tr* ;%un1arie# 1% n%t #t%p at nati%na ;%r1er#! Increa#ing*4 $an*
in1u#trie# are g%;a in #c%pe! Acc%r1ing*4 actua an1 p%tentia c%$petit%r#
e=i#t n%t Bu#t in a c%$pan*?# h%$e $ar(etL the* can a#% ;e &%un1 in %ther
nati%na $ar(et#!
64 Sec%n14 the #hi&t &r%$ nati%na t% g%;a $ar(et# that ha# ta(en pace %ver
the a#t twent* *ear# ha# increa#e1 the inten#it* %& c%$petitive rivar* in
in1u#tr* a&ter in1u#tr*! Nati%na $ar(et# that were %nce c%n#%i1ate1
%ig%p%ie#4 1%$inate1 ;* three %r &%ur c%$panie# an1 #u;Becte1 t% reative*
itte &%reign c%$petiti%n4 have ;een tran#&%r$e1 int% #eg$ent# %&
&rag$ente1 g%;a in1u#trie# where a arge nu$;er %& c%$panie# ;atte %ne
an%ther &%r $ar(et #hare in c%untr* a&ter c%untr* ar%un1 the g%;e! In turn4 thi#
ha# 1riven 1%wn pr%&it rate#!
74 Thir14 a# c%$petitive inten#it* ha# increa#e14 #% ha# the rate %&
37
inn%vati%n a# c%$panie# have #%ught t% gain an a1vantage %ver their
c%$petit%r# ;* pi%neering new pr%1uct#4 pr%ce##e#4 an1 wa*# %& 1%ing
;u#ine##! The re#ut ha# ;een t% c%$pre## pr%1uct i&e c*ce# an1 $a(e it a
the $%re i$p%rtant &%r c%$panie# t% #ta* %n the ea1ing e1ge %& techn%%g*!
84 'ina*4 it i# a#% i$p%rtant t% n%te that ath%ugh g%;ai0ati%n ha# increa#e1
;%th the threat %& entr* an1 the inten#it* %& rivar* within $an* &%r$er*
pr%tecte1 nati%na $ar(et#4 it ha# a#% create1 en%r$%u# %pp%rtunitie# &%r
c%$panie# ;a#e1 in th%#e $ar(et#! The #tea1* 1ecine in tra1e ;arrier# ha#
%pene1 up $an* %nce-pr%tecte1 $ar(et# t% c%$panie# ;a#e1 %ut#i1e th%#e
$ar(et#
38
S;MMAR9,
14 An in1u#tr* can ;e 1e&ine1 a# a gr%up %& c%$panie# %&&ering pr%1uct# %r
#ervice# that are c%#e #u;#titute# &%r each %ther! C%#e #u;#titute# are pr%1uct# %r
#ervice# that #ati#&* the #a$e ;a#ic cu#t%$er nee1#!
24 The $ain techni)ue u#e1 t% ana*0e c%$petiti%n in the in1u#tr* envir%n$ent
i# the &ive &%rce# $%1e! The &ive &%rce# are CaD the ri#( %& new entr* ;* p%tentia
c%$petit%r#4 C;D the e=tent# %& rivar* a$%ng e#ta;i#he1 &ir$#4 CcD the ;argaining p%wer %&
;u*er#4 C1D the ;argaining p%wer# %& #uppier# an1 CeD the threat %& #u;#titute pr%1uct#!
The #tr%nger each &%rce i#4 the $%re c%$petive the in1u#tr* an1 the %wer the rate %&
return that can ;e earne1!
34 The ri#( %& entr* ;* p%tentia c%$petit%r# i# a &uncti%na %& the height %&
;arrier# t% entr*! The higher the ;arrier# t% entr* are the pr%&it# that can ;e earne1 in the
in1u#tr*! The higher the ;arrier# t% entr* are4 the %wer i# the ri#( %& entr* an1 the greater
are the pr%&it# that can ;e earne1 in the in1u#tr*!
44 The e=tent %& rivar* a$%ng e#ta;i#he1 c%$panie# i# a &uncti%n %& an
in1u#tr*?# c%$petitive #tructure4 1e$an1 c%n1iti%n#4 an1 ;arrier# t% e=it! Str%ng 1e$an1
c%n1iti%n# $%1erate the c%$petiti%n a$%ng e#ta;i#he1 c%$panie# an1 create
%pp%rtunitie# &%r e=pan#i%n! Ghen 1e$an1 i# wea(4 inten#ive c%$petiti%n can 1eve%p4
particuar* in c%n#%i1ate1 in1u#trie# with high e=it ;arrier#!
54 "u*er# are $%#t p%wer&u when a c%$pan* 1epen1# %n the$ &%r ;u#ine##
;ut the* the$#eve# are n%t 1epen1ent %n the c%$pan*! In #uch circu$#tance#4 ;u*er#
are a threat!
64 Suppier# are $%#t p%wer&u when a c%$pan* 1epen1# %n the$ &%r ;u#ine##
;ut the* the$#eve# are n%t 1epen1ent %n the c%$pan*! In #uch circu$#tance# #uppier#
are a threat!
74 Su;#titute pr%1uct# are the pr%1uct# %& c%$panie# #erving cu#t%$er nee1#
#i$iar t% the nee1# #erve1 ;* the in1u#tr* ;eing ana*0e1! The $%re #i$iar the #u;#titute
pr%1uct# are t% each %ther4 the %wer i# the price that c%$panie# can charge with%ut %#ing
cu#t%$er# t% the #u;#titute#!
39
84 S%$e argue &%r #i=th c%$petitive &%rce %& #%$e #igni&icance/ the p%wer4
vig%r4 an1 c%$petence %& c%$pe$ent%r#! P%wer&u an1 vig%r%u# c%$pe$ent%r# $a*
have a #tr%ng p%#itive i$pact %n 1e$an1 in an in1u#tr*!
94 M%#t In1u#trie# are c%$p%#e1 %& #trategic gr%up#/ gr%up# %& c%$panie#
pur#uing the #a$e %r a #i$iar #trateg*! C%$panie# in 1i&&erent #trategic gr%up# pur#ue
1i&&erent #trategie#!
104 The $e$;er# %& a c%$pan*?# #trategic gr%up c%n#titute it# i$$e1iate
c%$petit%r#! "ecau#e 1i&&erent #trategic gr%up# are characteri0e1 ;* 1i&&erent %pp%rtunitie#
an1 threat#! The &ea#i;iit* %& 1%ing #% i# a &uncti%n %& the height %& $%;iit* ;arrier#!
114 In1u#trie# g% thr%ugh a we-1e&ine1 i&e c*ce/ &r%$ an e$;r*%nic #tage4
thr%ugh gr%wth4 #ha(e%ut4 an1 $aturit* an1 eventua* 1ecine! Each #tage ha# 1i&&erent
i$picati%n# &%r the c%$petitive #tructure %& the in1u#tr*4 an1 each give# ri#e t% it# %wn #et
%& %pp%rtunitie# an1 threat#!
124 The &ive &%rce#4 #trategic gr%up4 an1 in1u#tr* i&e c*ce# $%1e# a have
i$itati%n#! The &ive &%rce# an1 #trategic gr%up $%1e pre#ent a #tatic picture %&
c%$petiti%n that 1ee$pha#i0e# the r%e %& inn%vati%n! Te inn%vati%n can rev%uti%ni0e
in1u#tr* #tructure an1 c%$pete* change the #trength %& 1i&&erent c%$petitive &%rce#! The
&ive &%rce# an1 the #trategic gr%up $%1e# have ;een critici0e1 &%r 1ee$pha#i0ing Othe
i$p%rtance %& in1ivi1ua c%$pan* 1i&&erence#! A c%$pan* wi n%t ;e pr%&ita;e Bu#t
;ecau#e it i# ;a#e1 in an attractive in1u#tr* %r #trategic gr%upL $uch $%re are re)uire1!
The in1u#tr* i&e c*ce a $%1e i# a generai0ati%n that i# n%t awa*# &%%we1 particuar*
when inn%vati%n# rev%uti%ni0e an in1u#tr*!
134 The $acr% envir%n$ent a&&ect# the inten#it* %& rivar* within an in1u#tr*!
Incu1e1 in the $acr% envir%n$ent are the $acr%ec%n%$ic envir%n$ent4 the techn%%gic
envir%n$ent4 the techn%%gica envir%n$ent4 the 1e$%graphic an1 #%cia envir%n$ent4
an1 the p%itica an1 ega envir%n$ent!
144 The g%;a envir%n$ent ha# ;een changing rapi1* in recent *ear#! A
40
&un1a$enta change i# %ccurring in the w%r1 ec%n%$*/ the g%;ai0ati%n %& pr%1ucti%n
an1 %& $ar(et#! The c%n#e)uence# %& thi# change incu1e $%re inten#e rivar* pr%1uct i&e
c*ce#! There i# a in( ;etween the nati%na envir%n$ent an1 the c%$petitive a1vantage
%& a c%$pan* in the g%;a ec%n%$*!
41
Chapter 1
INTERNAL ANAL9SIS, +ISTINCTI4E COM7ETENCIES- COM7ETITI4E A+4ANTAGE AN+
7RO&ITA)ILIT9
C6A7TER O4ER4IEW
The centra )ue#ti%n with which the chapter 1ea# i# wh*4 within a given in1u#tr*4
#%$e c%$panie# 1% ;etter than %ther#H Thi# i# a ver* i$p%rtant chapter ;ecau#e it
intr%1uce# a &ra$ew%r( &%r un1er#tan1ing c%$petitive a1vantage! The %pening ca#e
pr%vi1e# #%$e cue# t% the #%urce# %& c%$petitive a1vantage! The c%ncu#i%n &r%$ it#
1e#cripti%n %& h%w "< %perate# i# that "<?# c%$petitive a1vantage i# 1erive1 &r%$ the
1i#tinctive wa* that it# $anager# have pur#ue1 wh%e #ae cu; ;u#ine## $%1e an1 the
wa* the* have c%$;ine1 #peci&ic #trategie# t% give "< #uperi%r e&&icienc*4 re#p%n#ivene##
t% cu#t%$er#4 an1 inn%vati%n!
The &%ur $ain ;ui1ing ;%c(# %& c%$petitive a1vantage are/ e%%iciency- inn!vati!n-
resp!nsiveness t! c"st!$ers- and >"a'ity !% pr!d"ct !r service rendering
A# #tre##e1 at the ;eginning %& the chapter4 t% gain a c%$petitive a1vantage4 a
c%$pan* $u#t have a %wer c%#t #tructure than it# riva# %r it $u#t ;e a;e t% 1i&&erentiate
it# pr%1uct %&&ering4 it i# argue1 that achieving %w c%#t# an1@%r 1i&&erentiati%n re)uire#
#uperi%rit* in at ea#t %ne %& the &%%wing area#/ e&&icienc*4 )uait*4 inn%vati%n4 an1
cu#t%$er re#p%n#ive-ne##! The#e &%ur &act%r# are re&erre1 t% a# the ;a#ic generic ;ui1ing
;%c(# %& c%$petitive a1vantage!
The chapter e=a$ine# the r%e %& 1i#tinctive c%$petencie#4 re#%urce#4 an1
capa;iitie# in heping t% achieve #uperi%r e&&icienc*4 )uait*4 inn%vati%n4 an1 cu#t%$er
re#p%n#ivene##! It i# argue1 that an %rgani0ati%nA# 1i#tinctive c%$petencie# ari#e &r%$
tw% c%$pe$entar* #%urce#/ it# re#%urce# an1 capa;iitie#! The nature %& re#%urce# an1
capa;iitie# i# 1i#cu##e1 in #%$e 1etai4 a# i# the r%e %& #trateg* an1 uc( in ;ui1ing
vaua;e re#%urce# an1 capa;iitie#!
42
The 1ura;iit* %& c%$petitive a1vantage i# the &%cu# %& the ne=t #ecti%n4 which
argue# that the 1ura;iit* %& a c%$pan*A# c%$petitive a1vantage i# a &uncti%n %& three
&act%r#/ the height %& ;arrier# t% i$itati%n4 the capa;iit* %& c%$petit%r#4 an1 the genera
1*na$i#$ %& the in1u#tr* envir%n$ent! The &act%r# that 1eter$ine the height %& ;arrier#
t% i$itati%n are 1i#cu##e1 in 1etai4 an1 then the chapter tac(e# the )ue#ti%n4 wh* 1%
c%$panie# &aiH
A 1i#cu##i%n %& h%w c%$panie# can av%i1 c%$petitive &aiure an1 #u#tain a
c%$petitive a1vantage c%#e# the chapter! Three &act%r# are $enti%ne1 here/ the nee1 t%
&%cu# %n the &%ur generic ;ui1ing ;%c(# %& c%$petitive a1vantage Ce&&icienc*4 )uait*4
inn%vati%n4 an1 cu#t%$er re#p%n#ivene##DL the nee1 t% i1enti&* an1 a1%pt ;e#t in1u#tria
practiceL an1 the nee1 t% a1%pt #trategie# &%r av%i1ing inertia an1 pr%$%ting
%rgani0ati%na change!
Learning Objectives
A&ter rea1ing thi# chapter4 *%u wi un1er#tan1 the nature %& c%$petitive a1vantage
an1 wh* $anager# nee1 t% per&%r$ interna ana*#i#4 Bu#t a# the* $u#t c%n1uct in1u#tr*
ana*#i#4 t% achieve #uperi%r per&%r$ance an1 pr%&ita;iit*!
Teaching O"t'ine
A Intr!d"cti!n
1! Githin an* given in1u#tr*4 #%$e c%$panie# 1% ;etter in ter$# %& pr%&it than %ther#!
The )ue#ti%n there&%re i# wh*H Ghat i# the ;a#i# %& c%$petitive a1vantageH
0 E%%iciency- >"a'ity- inn!vati!n- an1 c"st!$er resp!nsiveness can ;e regar1e1 a#
the &%ur $ain ;ui1ing ;%c(# %r 1i$en#i%n# %& c%$petitive a1vantage! C%$panie# that
have achieve1 a c%$petitive a1vantage t*pica* e=ce %n at ea#t %ne %& the#e &%ur $ain
1i$en#i%n#!
The )ue#ti%n4 there&%re4 i# wh*4 within a given in1u#tr*4 #%$e c%$panie# 1% ;etter
than %ther#H In %ther w%r1#4 what i# the ;a#i# %& c%$petitive a1vantageH
43
2! The#e 1i$en#i%n# are the pr%1uct %& an %rgani0ati%nA# c%$petencie#4 re#%urce#4 an1
capa;iitie#! Here we e=a$ine h%w an %rgani0ati%n #ee(# t% ;ui1 c%$petitive a1vantage
;* 1eve%ping c%$petencie#4 re#%urce#4 an1 capa;iitie# t% create #uperi%r e&&icienc*4
)uait*4 inn%vati%n4 an1 cu#t%$er re#p%n#ivene##!
5! Ge a#% 1i#cu## three critica )ue#ti%n#! 'ir#t4 %nce c%$petitive a1vantage i# attaine14
what &act%r# in&uence it# 1ura;iit*H Sec%n14 wh* 1% #ucce##&u c%$panie# %#e their
c%$petitive a1vantageH Thir14 h%w can c%$panie# av%i1 c%$petitive &aiure an1 #u#tain
their c%$petitive a1vantage %ver ti$eH
) C!$petitive Advantage*L!# C!st and +i%%erentiati!n
1 Ge #a* that a c%$pan* ha# a c%$petitive a1vantage when it# pr%&it rate i# higher
than the average &%r it# in1u#tr*! Pr%&it rate i# n%r$a* 1e&ine1 a# #%$e rati%4
#uch a# return %n #ae# CROICD %r return %& a##et# CROAD!
+! the $%#t ;a#ic 1eter$inant %& a c%$pan*A# pr%&it rate i# it# gr%## pr%&it $argin CPD
thi# i# #i$p* the 1i&&erence ;etween t%ta revenue# CTRD an1 t%ta c%#t# CTCD4 1ivi1e1
;* t%ta c%#t#!
2 '%r a gr%## pr%&it $argin t% ;e higher than the average &%r the in1u#tr*4 %ne %& the
&%%wing $u#t ;e %ccurring/
a! The c%$pan*A# unit price must be higher than that %& the average c%$pan* an1
it# unit c%#t $u#t ;e e)uivaent t% that %& the average c%$pan*!
;! The c%$pan*A# unit cost must be lower than that %& the average c%$pan* an1
it# unit price $u#t ;e e)uivaent t% that %& the average c%$pan*!
c! The c%$pan* $u#t have both a %wer unit c%#t an1 a higher unit price than
the average c%$pan*!
44 Thu#4 in %r1er t% achieve a c%$petitive a1vantage4 a c%$pan* $u#t $eet either
%r ;%th %& the#e c%n1iti%n#/ have '!#er c!sts than it# c%$petit%r# %r
1i&&erentiate it# pr%1uct in #%$e wa* #% that it can charge a higher price than the
c%$petiti%n!
44
54 P%rter ha# re&erre1 t% '!# c!st and di%%erentiati!n a# generic ;u#ine##-eve
#trategie#! "* thi# he $ean# that the* repre#ent the tw% &un1a$enta wa*# %&
tr*ing t% %;tain a c%$petitive a1vantage in an in1u#tr*! A %w-c%#t #trateg* i# ;a#e1
%n 1%ing ever*thing p%##i;e t% %wer unit c%#t#! A 1i&&erentiati%n #trateg* i# ;a#e1
%n 1%ing ever*thing p%##i;e t% 1i&&erentiate pr%1uct# &r%$ th%#e %&&ere1 ;*
c%$petit%r# in %r1er t% ;e a;e t% charge a pre$iu$ price!
C C!$petitive Advantage, Res!"rces- Capabi'ities- and C!$petencies

. The Generic )"i'ding )'!c/s !% C!$petitive Advantage
aD '%ur &act%r# ;ui1 c%$petitive a1vantage/ e&&icienc*4 )uait*4 inn%vati%n4 an1
cu#t%$er re#p%n#ivene##! The#e &%ur &act%r# are the generic ;ui1ing ;%c(# %& c%$petitive
a1vantage!
;D The* are IgenericI in the #en#e that the* repre#ent &%ur ;a#ic wa*# %&
%wering c%#t# an1 achieving 1i&&erentiati%n that an* c%$pan* can a1%pt4 irre#pective %& it#
in1u#tr* %r the pr%1uct# %r #ervice# it pr%1uce#!
cD Ath%ugh 1i#cu##e1 #eparate*4 the#e &act%r# are a high* interreate1!
Thu#4 &%r e=a$pe4 #uperi%r )uait* can ea1 t% #uperi%r e&&icienc*4 an1 inn%vati%n can
enhance e&&icienc*4 )uait*4 an1 cu#t%$er re#p%n#ivene##!
1D E%%iciency E&&icienc* i# $ea#ure1 ;* the c%#t %& input# re)uire1 t% pr%1uce a
given %utput! The $%re e&&icient a c%$pan*4 the %wer i# the c%#t %& input# re)uire1 t%
pr%1uce a given %utput! Thu# e&&icienc* hep# a c%$pan* attain a %w-c%#t c%$petitive
a1vantage!
eD One %& the (e*# t% achieving high e&&icienc* i# utii0ing input# in the $%#t
pr%1uctive wa* p%##i;e! The $%#t i$p%rtant c%$p%nent %& pr%1uctivit* &%r $%#t c%$panie#
i# e$p%*ee pr%1uctivit*! Thi# i# u#ua* $ea#ure1 ;* %utput per e$p%*ee! The
c%$pan* with the highe#t e$p%*ee pr%1uctivit* in an in1u#tr* wi t*pica* have the
%we#t c%#t# %& pr%1ucti%n!
&D Puait*! Puait* pr%1uct# are g%%1# an1 #ervice# that are reia;e in the
#en#e that the* 1% the B%; the* were 1e#igne1 &%r an1 1% it we!
45
gD Pr%vi1ing high-)uait* pr%1uct# create# a ;ran1 na$e reputati%n &%r a
c%$pan*A# pr%1uct#! In turn4 thi# enhance1 reputati%n a%w# the c%$pan* t% charge a
higher price &%r it# pr%1uct#!
hD Higher pr%1uct )uait* can a#% re#ut in greater e&&icienc* an1 hence %wer unit
c%#t#! Higher pr%1uct )uait* $ean# that e## e$p%*ee ti$e i# wa#te1 $a(ing 1e&ective
pr%1uct# %r pr%vi1ing #u;#tan1ar1 #ervice#4 an1 e## ti$e ha# t% ;e #pent &i=ing
$i#ta(e#! Thi# tran#ate# int% higher e$p%*ee pr%1uctivit*4 which $ean# %wer unit c%#t#!
iD Inn!vati!n Inn%vati%n can ;e 1e&ine1 a# an*thing new %r n%ve a;%ut the
wa* a c%$pan* %perate# %r the pr%1uct# it pr%1uce#! Thu# inn%vati%n incu1e# a1vance#
in the (in1# %& pr%1uct#4 pr%1ucti%n pr%ce##e#4 $anage$ent #*#te$#4 %rgani0ati%na
#tructure#4 an1 #trategie# 1eve%pe1 ;* a c%$pan*!
BD Succe##&u inn%vati%n give# a c%$pan* #%$ething unique that it#
c%$petit%r# ac( Cthat i#4 unti it# c%$petit%r# i$itate the inn%vati%nD! Thi# uni)uene##
$a* a%w a c%$pan* t% 1i&&erentiate it#e& &r%$ it# riva# an1 charge a pre$iu$ price
&%r it# pr%1uct! Aternative*4 it $a* a%w a c%$pan* t% re1uce it# unit c%#t# &ar ;e%w
th%#e %& c%$petit%r#!
(D C"st!$er resp!nsiveness Achieving cu#t%$er re#p%n#ivene## re)uire#
that a c%$pan* give it# cu#t%$er# e=act* what the* want when the* want it! It inv%ve#
1%ing ever*thing p%##i;e t% i1enti&* cu#t%$er nee1# an1 t% #ati#&* th%#e nee1#!
D Achieving #uperi%r cu#t%$er re#p%n#ivene## inv%ve# giving cu#t%$er#
vaue &%r their $%ne*! Step# ta(en t% i$pr%ve the e&&icienc* %& a c%$pan*A# pr%1ucti%n
pr%ce## an1 the )uait* %& it# %utput are c%n#i#tent with thi#! In a11iti%n4 #ati#&*ing
cu#t%$er nee1# $a* we re)uire the 1eve%p$ent %& new pr%1uct# that have &eature#
current* n%t inc%rp%rate1 in e=i#ting pr%1uct#! In %ther w%r1#4 achieving superior
efficiency, quality, and innovation are all part of achieving superior customer responsiveness.
$D An%ther &act%r that #tan1# %ut in an* 1i#cu##i%n %& cu#t%$er
re#p%n#ivene## i# the nee1 t% cu#t%$i0e4 a# $uch a# p%##i;e4 g%%1# an1 #ervice# t%
the uni)ue 1e$an1# %& in1ivi1ua cu#t%$er#!
46
nD 'urther a#pect %& cu#t%$er re#p%n#ivene## that ha# receive1 increa#ing
attenti%n in recent *ear# i# c"st!$er resp!nse ti$e Re#p%n#e ti$e i# the ti$e it ta(e#
&%r a g%%1 t% ;e 1eivere1 %r a #ervice t% ;e per&%r$e1! A $aB%r #%urce %& cu#t%$er
1i##ati#&acti%n i# #%w re#p%n#e!
%D Su$$ar*! Superi%r e&&icienc* ena;e# a c%$pan* t% %wer it# c%#t#L
#uperi%r )uait* ena;e# a c%$pan* ;%th t% charge a higher price an1 t% %wer it# c%#t#L
#uperi%r cu#t%$er re#p%n#ivene## ena;e# a c%$pan* t% charge a higher priceL an1
#uperi%r inn%vati%n can ea1 t% higher price# %r %wer unit c%#t#! T%gether4 the#e &%ur
&act%r# create a %w-c%#t %r 1i&&erentiati%n a1vantage &%r a c%$pan*!
0 +istinctive C!$petencies- Res!"rces- and Capabi'ities
1! A 1i#tinctive c%$petenc* re&er# t% a uni)ue #trength that a%w# a c%$pan* t%
achieve #uperi%r e&&icienc*4 )uait*4 inn%vati%n4 %r cu#t%$er re#p%n#ivene##!
P%##e##i%n %& a 1i#tinctive c%$petenc* can ena;e a c%$pan* t% charge a
pre$iu$ price &%r it# pr%1uct# %r t% achieve #u;#tantia* %wer c%#t# than it#
riva#!
24 The 1i#tinctive c%$petencie# %& an %rgani0ati%n ari#e &r%$ tw% c%$pe$entar*
#%urce#/ a c%$pan*A# re#%urce# an1 it# capa;iitie#!
34 Res!"rces Re#%urce# re&er t% the &inancia4 ph*#ica4 hu$an4 techn%%gica4
an1 %rgani0ati%na re#%urce# %& the c%$pan*! The* can ;e 1ivi1e1 int% tangib'e
res!"rces Can14 ;ui1ing#4 pant4 an1 e)uip$entD an1 intangib'e res!"rces
C;ran1 na$e#4 reputati%n4 patent#4 an1 techn%%gica %r $ar(eting (n%w-h%wD!
44 T% give ri#e t% a 1i#tinctive c%$petenc* a c%$pan*A# re#%urce# $u#t ;e ;%th
unique an1 valuable.
54 Capabi'ities Capa;iitie# re&er t% a c%$pan*A# #(i# at c%%r1inating it# re#%urce# an1
putting the$ t% pr%1uctive u#e! The#e #(i# re#i1e in an %rgani0ati%nA# r%utine#N
that i#4 in the wa* a c%$pan* $a(e# 1eci#i%n# an1 $anage# it# interna pr%ce##e#
47
in %r1er t% achieve %rgani0ati%na %;Bective#!
64 Capa;iitie# are4 ;* 1e&initi%n4 intangi;e! The* re#i1e n%t #% $uch in in1ivi1ua# a# in
the wa* in1ivi1ua# interact4 c%%perate4 an1 $a(e 1eci#i%n# within the c%nte=t %& an
%rgani0ati%n!
74 The 1i#tincti%n ;etween re#%urce# an1 capa;iitie# i# %& the ut$%#t i$p%rtance in
un1er#tan1ing the #%urce %& a 1i#tinctive c%$petenc*! A c%$pan* $a* have uni)ue
an1 vaua;e rec%ur#e#4 ;ut une## it ha# the capa;iitie# t% u#e th%#e rec%ur#e#
e&&ective*4 it $a* n%t ;e a;e t% create %r #u#tain a 1i#tinctive c%$petenc*!
F! Strategy and c!$petitive advantage The pri$ar* %;Bective %& #trateg* i# t%
achieve a c%$petitive a1vantage! T% reach thi# %;Bective4 c%$panie# nee1 t% 1%
tw% thing#! 'ir#t4 the* nee1 t% pur#ue #trategie# that ;ui1 %n the e=i#ting re#%urce#
an1 capa;iitie# %& the c%$pan* Cit# c%$petencie#D! Sec%n14 the* nee1 t% pur#ue
#trategie# that ;ui1 a11iti%na re#%urce# an1 capa;iitie# Cthat 1eve%p new
c%$petencie#D4 there;* enhancing the c%$pan*A# %ng-run c%$petitive p%#iti%n!
1 The +"rabi'ity !% C!$petitive Advantage
1! The )ue#ti%n that nee1# a11re##ing n%w i# h%w %ng wi a c%$petitive a1vantage
a#t4 %nce it ha# ;een create1H In %ther w%r1#4 what i# the 1ura;iit* %& a c%$petitive
a1vantage4 given %ther c%$panie#A e&&%rt# t% 1eve%p 1i#tinctive c%$petencie# that
wi a##ure the$ a c%$petitive a1vantageH The an#wer 1epen1# %n three &act%r#/ the
height %& ;arrier# t% i$itati%n4 the capa;iit* %& c%$petit%r#4 an1 the genera 1*na-
$i#$ %& the in1u#tr* envir%n$ent!
14 "arrier# t% i$itati%n are &act%r# that $a(e it 1i&&icut &%r a c%$petit%r t% c%p* a
c%$pan*A# 1i#tinctive c%$petenc*!
24 The %nger it ta(e# t% i$itate a c%$pan*A# 1i#tinctive c%$petenc*4 the greater i# the
%pp%rtunit* &%r the c%$pan* t% i$pr%ve %n that c%$petenc*4 %r ;ui1 %ther
c%$petencie#4 there;* #ta*ing %ne #tep ahea1 %& the c%$petiti%n!
34 The ea#ie#t 1i#tinctive c%$petencie# &%r c%$petit%r# t% i$itate ten1 t% ;e th%#e
;a#e1 %n p%##e##i%n %& uni)ue an1 vaua;e tangi;e re#%urce# #uch a# ;ui1ing#4
48
pant4 an1 e)uip$ent! Such re#%urce# are vi#i;e t% c%$petit%r# an1 can %&ten ;e
purcha#e1 %n the %pen $ar(et!
44 Intangi;e re#%urce# can ;e $%re 1i&&icut t% i$itate! Thi# i# particuar* true %& ;ran1
na$e#! "ran1 na$e# are i$p%rtant ;ecau#e the* #*$;%i0e a c%$pan*A#
reputati%n! In the heav* earth$%ving e)uip$ent in1u#tr*4 &%r e=a$pe4 the
Caterpiar ;ran1 na$e i# #*n%n*$%u# with high )uait* an1 #uperi%r a&ter-#ae#
#ervice an1 #upp%rt!
54 Intangi;e re#%urce# can ;e $%re 1i&&icut t% i$itate4 thi# i# particuar* true %& ;ran1
na$e#! Ghie c%$petit%r# $ight i(e t% i$itate we-e#ta;i#he1 ;ran1 na$e#4
the aw pr%hi;it# the$ &r%$ 1%ing #%!
64 Mar(eting an1 techn%%gica (n%w-h%w are a#% i$p%rtant intangi;e re#%urce#!
H%wever4 uni(e ;ran1 na$e#4 c%$pan*-#peci&ic $ar(eting an1 techn%%gica
(n%w-h%w c an ;e reative* ea#* t% i$itate! In the ca#e %& $ar(eting (n%w-h%w4 the
$%ve$ent %& #(ie1 $ar(eting per#%nne ;etween c%$panie# $a* &aciitate the
genera 1i&&u#i%n %& (n%w-h%w!
74 Gith regar1 t% techn%%gica (n%w-h%w4 in the%r*4 the patent #*#te$ #h%u1 $a(e
techn%%gica (n%w-h%w reative* i$$une t% i$itati%n! H%wever4 whie it i# rea-
tive* ea#* t% u#e the patent #*#te$ t% pr%tect a che$ica c%$p%un1 &r%$ i$itati%n4
thi# i# n%t true %& $an* %ther inventi%n#! In eectrica an1 c%$puter engineering4 &%r
e=a$pe4 it i# %&ten p%##i;e t% Iinvent ar%un1I patent#!
84 I$itati%n %& a c%$pan*A# capa;iitie# ten1# t% ;e $%re 1i&&icut than i$itati%n %& it#
tangi;e an1 intangi;e re#%urce#! A principa rea#%n &%r thi# i# that a c%$pan*A#
capa;iitie# are %&ten invisible t% %ut#i1er#! Capa;iitie# are ;a#e1 %n the wa* in
which 1eci#i%n# are $a1e an1 pr%ce##e# $anage1 1eep within a c%$pan*! "*
1e&initi%n4 it i# 1i&&icut &%r %ut#i1er# t% 1i#cern the nature %& a c%$pan*A# interna
%perati%n#!
94 M%re%ver4 a c%$pan*A# capa;iitie# rare* re#i1e in a #inge in1ivi1ua! Rather4 the*
are the pr%1uct %& h%w nu$er%u# in1ivi1ua# interact within a uni)ue %rgani0ati%na
#etting! Thu# it i# p%##i;e that n% %ne in1ivi1ua within a c%$pan* $a* ;e &a$iiar
49
with the t%tait* %& a c%$pan*A# interna %perating r%utine# an1 pr%ce1ure#! Ghen
thi# i# the ca#e4 hiring pe%pe awa* &r%$ a #ucce##&u c%$pan* $a* n%t ;e
#u&&icient t% i$itate (e* capa;iitie#!
104 Capabi'ity !% c!$petit!rs A $aB%r 1eter$inant %& the capa;iit* %& c%$petit%r#4 t%
rapi1* i$itate a c%$pan*A# c%$petitive a1vantage i# the nature %& the
c%$petit%r#? pri%r #trategic c%$$it$ent#!
114 Strategic c%$$it$ent# $ean a c%$pan*A# c%$$it$ent t% a particuar wa* %&
1%ing ;u#ine##4 that i#4 t% 1eve%ping a particuar #et %& re#%urce# an1
capa;iitie#!
124 Once a c%$pan* ha# $a1e a #trategic c%$$it$ent4 it wi &in1 it 1i&&icut t% re#p%n1
t% new c%$petiti%n i& 1%ing #% re)uire# a ;rea( with thi# c%$$it$ent! Thu# when
c%$petit%r# area1* have %ng-e#ta;i#he1 c%$$it$ent# t% a particuar wa* %&
1%ing ;u#ine##4 the* $a* ;e #%w t% i$itate an inn%vating c%$pan*A# c%$petitive
a1vantage!
134 Ind"stry dyna$is$ A 1*na$ic in1u#tr* i# %ne that i# changing rapi1*! The $%#t
1*na$ic in1u#trie# ten1 t% ;e th%#e where there i# a ver* high rate %&
pr%1uct inn%vati%n! The rapi1 rate %& inn%vati%n $ean# that pr%1uct i&e c*ce# are
#h%rtening an1 that c%$petitive a1vantage can ;e ver* tran#it%r*! A c%$pan*
that ha# a c%$petitive a1vantage t%1a* $a* &in1 that it# $ar(et p%#iti%n i#
%ut&an(e1 t%$%rr%w ;* a rivaA# inn%vati%n!
144 S"$$ary The 1ura;iit* %& a c%$pan*A# c%$petitive a1vantage 1epen1# %n three
&act%r#/ the height %& ;arrier# t% i$itati%n4 the capa;iit* %& c%$petit%r# t% i$itate it#
inn%vati%n4 an1 the genera eve %& 1*na$i#$ in the in1u#tr* envir%n$ent! Ghen
;arrier# t% i$itati%n are %w4 there are $an* capa;e c%$petit%r#4 an1 the envir%n-
$ent i# ver* 1*na$ic4 with new inn%vati%n# ;eing 1eve%pe1 a the ti$e4 c%$peti tive
a1vantage i# i(e* t% ;e tran#it%r*!
50
2 Why +! C!$panies &ai'?
14 'aiing c%$panie# t*pica* earn %w %r negative pr%&it#! Three reate1 rea#%n#
&%r &aiure are e=p%re1 here/ inertia4 pri%r #trategic c%$$it$ent#4 an1 the Icaru#
para1%=!
24 Inertia The inertia argu$ent i# that c%$panie# &in1 it 1i&&icut t% change their
#trategie# an1 #tructure# in %r1er t% a1apt t% changing c%$petitive c%n1iti%n#!
34 One &act%r that #ee$# t% #tan1 %ut i# the r%e %& an %rgani0ati%nA# capa;iitie# in
cau#ing inertia! Earier we argue1 that %rgani0ati%na capa;iitie# can ;e a #%urce %&
c%$petitive a1vantage! H%wever4 the 1%wn#i1e %& capa;iitie# i# that the* are
1i&&icut t% change!
44 Capa;iitie# are 1i&&icut t% change ;ecau#e a certain 1i#tri;uti%n %& p%wer an1
in&uence i# e$;e11e1 within the e#ta;i#he1 1eci#i%n-$a(ing an1 $anage$ent
pr%ce##e# %& an %rgani0ati%n! Th%#e wh% pa* (e* r%e# in a 1eci#i%n-$a(ing
pr%ce## cear* have $%re p%wer! It &%%w# that changing the e#ta;i#he1
capa;iitie# %& an %rgani0ati%n $ean# changing the e=i#ting 1i#tri;uti%n %& p%wer
an1 in&uence! Acc%r1ing*4 #uch change wi ;e re#i#te1 ;* th%#e wh%#e p%wer
an1 in&uence wi 1i$ini#h a# a re#ut4
54 In %ther w%r1#4 pr%p%#a# &%r change trigger tur& ;atte#! Thu#4 a pri$ar* #%urce %&
inertia i# the p%wer #trugge an1 p%itica re#i#tance a##%ciate1 with tr*ing t% ater
the wa* in which an %rgani0ati%n $a(e# 1eci#i%n# an1 $anage# it# pr%ce##e#!
64 A c%$pan*A# pri%r #trategic c%$$it$ent# 1% $%re than i$it it# a;iit* t% i$itate
riva#L the* $a* a#% ;e a cau#e %& c%$petitive 1i#a1vantage!
74 The Icar"s parad!A Dann* Mier p%#tuate1 that the r%%t# %& c%$petitive &aiure
can ;e &%un1 in what he ter$e1 the Icaru# para1%=! Icaru# i# a &igure in
Gree( $*th%%g* wh% $a1e hi$#e& a pair %& wing# t% e#cape &r%$ an i#an1 where
he wa# ;eing he1 pri#%ner! He &ew #% we that he went higher an1 higher4 ever
c%#er t% the #un4 unti the heat %& the #un $ete1 the wa= that he1 hi# wing#
51
t%gether an1 he punge1 t% hi# 1eath in the Aegean Sea! The para1%= i# that hi#
greate#t a##et4 hi# a;iit* t% &*4 gave ri#e t% hi# 1e$i#e!
84 Acc%r1ing t% Mier4 the #a$e can ;e #ai1 %& $an* %nce #ucce##&u c%$panie#!
MierA# argu$ent i# that $an* c%$panie# ;ec%$e #% 1a00e1 ;* their %wn
initia ear* #ucce## that the* ;eieve that pur#uing the #a$e c%ur#e %& acti%n i#
the wa* t% &uture #ucce##! Thi# attitu1e4 h%wever4 ea1# a c%$pan* t% ;ec%$e
#% #peciai0e1 an1 inner-1irecte1 that it %#e# #ight %& $ar(et reaitie# an1 the
&un1a$enta re)uire$ent# &%r achieving a c%$petitive a1vantage! S%%ner %r ater
&aiure en#ue#!
3 Av!iding &ai'"re and S"staining C!$petitive Advantage
14 Maintaining a c%$petitive a1vantage re)uire# a c%$pan* t% c%ntinue
&%cu#ing %n the &%ur generic ;ui1ing ;%c(# %& c%$petitive a1vantageN
e&&icienc*4 )uait*4 inn%vati%n4 an1 cu#t%$er re#p%n#ivene##Nan1 t% 1%
whatever i# nece##ar* t% 1eve%p 1i#tinctive c%$petencie# that c%ntri;ute
t%war1 #uperi%r per&%r$ance in the#e area#!
24 One %& the ;e#t wa*# t% 1eve%p 1i#tinctive c%$petencie# that c%ntri;ute
t%war1 #uperi%r e&&icienc*4 )uait*4 inn%vati%n4 an1 cu#t%$er re#p%n#ivene##
i# t% i1enti&* best ind"stria' practice an1 t% a1%pt it! On* ;* 1%ing #% wi a
c%$pan* ;e a;e t% ;ui1 an1 $aintain the re#%urce# an1 capa;iitie# that
un1erpin e=ceence in pr%1uctivit*4 )uait*4 inn%vati%n4 an1 cu#t%$er
re#p%n#ivene##!
34 A &urther rea#%n &%r &aiure i# an ina;iit* t% a1apt t% changing c%n1iti%n# 1ue
t% %rgani0ati%n inertia! It &%%w# that ;eing a;e t% %verc%$e the ;arrier# t%
change within an %rgani0ati%n i# %ne %& the (e* re)uire$ent# &%r c%ntinuing
t% $aintain a c%$petitive a1vantage!
52
Chapter 2
);IL+ING COM7ETITI4E A+4ANTAGE T6RO;G6 &;NCTIONAL:LE4EL STRATEGIES
Chapter Overvie#
Thi# chapter ;ui1# 1irect* %n the c%ncept# intr%1uce1 in Chapter 2! It# pri$ar* g%a i# t%
e=pain h%w &uncti%na-eve #trategie# can hep a c%$pan* achieve #uperi%r e&&icienc*4
)uait*4 inn%vati%n4 an1 cu#t%$er re#p%n#ivene##!
The 1i#cu##i%n %& the vaue chain4 with which the chapter ;egin#4 ai$# t% #h%w #tu1ent#
#h%w the 1i&&erent vaue-creati%n activitie# %& a c%$pan* &it t%gether! A p%int #tr%ng* e$pha-
#i0e1 here i# that achieving #uperi%r e&&icienc*4 )uait*4 inn%vati%n4 an1 cu#t%$er re#p%n#ive-
ne## re)uire# #trategie# that e$;race #evera 1i#tinct vaue-creati%n activitie#!
'uncti%na #trategie# c%n#i#tent with attaining #uperi%r e&&icienc* are c%n#i1ere1 ne=t! Thi#
#ecti%n review# the c%ntri;uti%n# that each %& the 1i&&erent &uncti%na area# %& a c%$pan* can
$a(e t%war1 increa#ing e&&icienc*! A$%ng the t%pic# 1i#cu##e1 with regar1 t% their i$pact
%n e&&icienc* are ec%n%$ie# %& #cae4 earning e&&ect#4 the e=perience curve4 &e=i;e $anu&ac-
turing techn%%gie#4 cu#t%$er 1e&ecti%n rate#4 Bu#t-in-ti$e #*#te$#4 1e#ign &%r
$anu&acturing4 pr%ce## inn%vati%n#4 e$p%*ee training4 #e&-$anaging w%r( tea$#4
per&%r$ance-;a#e1 pa* #*#te$#4 an1 t%p $anage$ent ea1er#hip!
It i# i$p%rtant t% (eep in $in1 the reati%n#hip# %& &uncti%na #trategie#4 1i#tinctive
c%$petencie#4 1i&&erentiati%n4 %w c%#t4 vaue creati%n an1 pr%&ita;iit* C#ee &igure 5!1D!
In the ne=t #ecti%n4 the &%cu# #hi&t# t% the $ean# %& achieving #uperi%r inn%vati%n! A
1i#cu##i%n %& the rea#%n# &%r the high &aiure rate %& inn%vati%n# i# &%%we1 ;* a 1etaie1
e=a$inati%n %& the wa*# in which a c%$pan* can ;ui1 a 1i#tinctive c%$petenc* in
inn%vati%n!
The &ina #ecti%n %& the chapter c%ncentrate# %n cu#t%$er re#p%n#ivene##! It i# argue1
that achieving #uperi%r cu#t%$er re#p%n#ivene## re)uire# #uperi%r e&&icienc*4 )uait*4 an1
53
inn%vati%n! In a11iti%n t% the#e &act%r#4 #tep# that c%$panie# can ta(e t% i$pr%ve their
cu#t%$er &%cu# an1 ;etter #ati#&* cu#t%$er nee1# are 1i#cu##e1 in #%$e 1etai!
The %pening ca#e iu#trate# #%$e %& the#e reati%n#hip#! CS,4 a arge rai r%a1 %perat%r4
pur#ue1 &uncti%na eve #trateg* t% i$pr%ve the e&&icienc*4 reia;iit* C)uait*D4 an1 cu#t%$er
re#p%n#ivene## t% it# #ervice! "* i$pr%ving #a&et*4 an1 re$%ving c%nge#ti%n at ter$ina#4
CS, wa# a;e t% get it# train# t% run %n ti$e! Gith $%re %& it# a##et#4 caring g%%1#4 rather
than #etting in ter$ina# %r %n #i1ing# waiting &%r trac(# t% ;e repaire14 pr%1uctivit* went up4
c%#t went 1%wn4 an1 #ervice )uait* i$pr%ve1!
Learning Objectives
A%ter reading this chapter- y!" #i'' be ab'e t!,
14 Di#cu## h%w a c%$pan* can ;ui1 an1 $aintain a c%$petitive a1vantage thr%ugh
it#
ch%ice %& &uncti%na #trategie#!
24 'a$iiari0e *%ur#e& with the c%ncept %& the vaue chain4 an1 h%w the 1i&&erent vaue
creati%n activitie# %& a c%$pan* &it t%gether!
34 I1enti&* the 1i&&erent #tep# that can ;e ta(en at the &uncti%na eve t% i$pr%ve a
c%$pan*A# e&&icienc*!
44 I1enti&* the 1i&&erent #tep# that can ;e ta(en at the &uncti%na eve t% i$pr%ve the
)uait* %& the c%$pan*A# pr%1uct!
54 I1enti&* the 1i&&erent #tep# that can ;e ta(en at the &uncti%na eve t% i$pr%ve a
c%$pan*A# a;iit* t% inn%vate!
64 I1enti&* the 1i&&erent #tep# that can ;e ta(en at the &uncti%na eve t% i$pr%ve a
c%$pan*A# re#p%n#ivene## t% it# cu#t%$er#!
74 Un1er#tan1 h%w cr%##-&uncti%na integrati%n i# re)uire1 t% achieve #uperi%r e&&icienc*4
)uait*4 inn%vati%n4 an1 cu#t%$er re#p%n#ivene##!
84 Un1er#tan1 the i$p%rtant r%e pa*e1 ;* t%p $anage$ent in &aciitating cr%##-
&uncti%na integrati%n an1 in giving 1irecti%n t% a c%$pan*A# e&&%rt# t% increa#e it#
e&&icienc*4 )uait*4 inn%vati%n4 an1 cu#t%$er re#p%n#ivene##!
54
TEAC6ING O;TLINE
A Intr!d"cti!n
14 Ge have previ%u#*4 c%n#i1ere1 the centra r%e pa*e1 ;* e&&icienc*4 )uait*4
inn%vati%n4 an1 cu#t%$er re#p%n#ivene## in ;ui1ing an1 $aintaining a c%$petitive
a1vantage! N%w we turn t% the r%e that &uncti%na-eve #trategie# pa* in achieving
e&&icienc*4 )uait*4 inn%vati%n4 an1 cu#t%$er re#p%n#ivene##!
24 'uncti%na-eve #trategie# are #trategie# 1irecte1 at i$pr%ving the e&&ectivene## %&
&uncti%na %perati%n# within a c%$pan*4 #uch a# $anu&acturing4 $ar(eting4
$ateria# $anage$ent4 re#earch an1 1eve%p$ent4 an1 hu$an re#%urce#! The
ter$ a#% e$;race# #trategie# that cut acr%## tw% %r $%re &uncti%n# t% attain a
c%$$%n g%a!
) The 4a'"e Chain
14 The vaue a c%$pan* create# i# $ea#ure1 ;* the a$%unt that ;u*er# are wiing t%
pa* &%r a pr%1uct %r #ervice! A c%$pan* i# pr%&ita;e i& the vaue it create# e=cee1#
the c%#t %& per&%r$ing vaue-creati%n &uncti%n#4 #uch a# pr%cure$ent4 $anu&actur-
ing4 an1 $ar(eting! T% gain a c%$petitive a1vantage4 a c%$pan* $u#t either per&%r$
vaue-creati%n &uncti%n# at a %wer c%#t than it# riva# %r per&%r$ the$ in a wa* that
ea1# t% 1i&&erentiati%n an1 a pre$iu$ price!
24 The vaue-creati%n pr%ce## can ;e iu#trate1 ;* re&erring t% a c%ncept cae1 the vaue
chain! The vaue chain i# 1ivi1e1 ;etween pri$ar* activitie# an1 #upp%rt activitie#!
34 Pri$ar* activitie# are th%#e inv%ve1 in the ph*#ica creati%n %& the pr%1uct4 it#
$ar(eting an1 1eiver* t% c%n#u$er#4 an1 a&ter- #ae# #ervice an1 #upp%rt Cthat i# t%
#a*4 $anu&acturing an1 $ar(etingD!
44 Supp%rt activitie# are th%#e that pr%vi1e the input# that a%w the pri$ar* activitie#
t% ta(e pace! The* incu1e $ateria# $anage$ent4 re#earch an1 1eve%p$ent4
hu$an re#%urce#4 in&%r$ati%n #*#te$#4 an1 c%$pan* in&ra#tructure!
54 Achieving #uperi%r e&&icienc*4 )uait*4 inn%vati%n4 an1 cu#t%$er re#p%n#ivene##
re)uire# #trategie# that e$;race #evera 1i#tinct vaue-creati%n activitie#! In1ee14
in a #en#e4 achieving #uperi%r e&&icienc*4 )uait*4 inn%vati%n4 an1 cu#t%$er
55
re#p%n#iveness can be regarded as g!a's that c"t acr!ss the di%%erent va'"e:
creati!n %"ncti!ns !% a c%$pan*! The* are g%a# wh%#e attain$ent re)uire#
#u;#tantia cr%##-&uncti%na integrati%n!
C Achieving S"peri!r E%%iciency
1! E&&icienc* i# $ea#ure1 ;* the c%#t %& input# re)uire1 t% pr%1uce a given %utput!
The
$%re e&&icient a c%$pan*4 the %wer i# the c%#t %& input# re)uire1 t% pr%1uce a given
C%utput! Put an%ther wa*4 an e&&icient c%$pan* ha# higher pr!d"ctivity than it# riva#4
an1 there&%re4 %wer c%#t#!
+! "e&%re $%ving %n4 h%wever4 %ne (e* p%int $u#t ;e #tre##e1/ achieving superior quality
plays a maor role in achieving superior efficiency. Ge 1ea* 1i#cu##i%n %& h%w t%
achieve #uperi%r )uait* unti the ne=t #ecti%n!
2! Ec!n!$ies !% sca'e Ec%n%$ie# %& #cae re&er t% unit-c%#t re1ucti%n# a##%ciate1
with a arge #cae %& %utput! One #%urce %& ec%n%$ie# %& #cae i# the a;iit* t% #prea1
&i=e1 c%#t# %ver a arge pr%1ucti%n v%u$e! An%ther #%urce i# the a;iit* %&
c%$panie# pr%1ucing in arge v%u$e# t% achieve a greater 1ivi#i%n %& a;%r an1
#peciai0ati%n! In turn4 #peciai0ati%n ha# a &av%ra;e i$pact %n e$p%*ee
pr%1uctivit*4 pri$ari* ;ecau#e it ena;e# in1ivi1ua# t% ;ec%$e ver* #(ie1 at
per&%r$ing a particuar ta#(!
5! Pr%1ucti%n ec%n%$ie# %& #cae 1% n%t c%ntinue in1e&inite*! T*pica*4 a&ter a certain
$ini$"$ e%%icient sca'e BMESC %& %utput i# reache14 there are &ew4 i& an*4 a11iti%na
#cae ec%n%$ie# t% ;e ha1 &r%$ e=pan1ing v%u$e!
3 Learning e%%ects -earning e&&ect# re&er t% c%#t #aving# that c%$e &r%$ earning
;* 1%ing! -a;%r4 &%r e=a$pe4 earn# ;* repetiti%n h%w ;e#t t% carr* %ut a ta#(! -a;%r
pr%1uctivit* increa#e# %ver ti$e4 an1 unit c%#t# &a4 a# in1ivi1ua# earn the $%#t
e&&icient wa* t% per&%r$ a particuar ta#(! E)ua* i$p%rtant4 in new $anu&acturing
&aciitie# $anage$ent t*pica* earn# h%w ;e#t t% run the new %perati%n! Hence
56
pr%1ucti%n c%#t# 1ecine 1ue t% increa#ing a;%r pr%1uctivit* an1 $anage$ent
e&&icienc*!
D H%wever4 earning e&&ect# are rea* i$p%rtant %n* 1uring the #tart-up peri%1 %& a
new pr%ce## an1 ten1 t% cea#e a&ter tw% %r three *ear#!
8 The eAperience c"rve The e=perience curve re&er# t% #*#te$atic unit-c%#t
re1ucti%n# that have ;een %;#erve1 t% %ccur %ver the i&e %& a pr%1uct!
Acc%r1ing t% the e=perience-curve c%ncept4 unit $anu&acturing c%#t# &%r a pr%1uct
t*pica* 1ecine ;* #%$e characteri#tic a$%unt each ti$e-accu$uate1 %utput %&
the pr%1uct i# 1%u;e1!
< Ec%n%$ie# %& #cae an1 earning e&&ect# un1erie the e=perience-curve
phen%$en%n! A# a c%$pan* increa#e# the accu$uate1 v%u$e %& it# %utput %ver
ti$e4 it i# a;e t% reai0e ;%th ec%n%$ie# %& #cae Ca# v%u$e increa#e#D an1
earning e&&ect#! A# a c%n#e)uence4 unit c%#t# &a with increa#e# in accu$uate1
%utput!
E The e=perience curve #ugge#t# that increa#ing a c%$pan*A# pr%1uct v%u$e an1
$ar(et #hare wi ;ring c%#t a1vantage# %ver the c%$petiti%n! The c%ncept i# perhap#
$%#t i$p%rtant in th%#e in1u#trie# where the pr%1ucti%n pr%ce## inv%ve# the $a##
pr%1ucti%n %& a #tan1ar1i0e1 %utput C&%r in#tance4 the $anu&acture %& #e$i-c%n1uct%r
chip#D
.=! I& a c%$pan* wi#he# t% attain a %w-c%#t p%#iti%n4 it $u#t ri1e 1%wn the e=perience
curve a# )uic(* a# p%##i;e! Thi# inv%ve# ;ui1ing an e&&icient #cae pant ahea1 %&
1e$an1 an1 aggre##ive* pur#uing earning e&&ect#! It a#% inv%ve# aggre##ive price
cutting an1 $ar(eting in %r1er t% e=pan1 #ae# an1 get 1%wn the e=perience curve
ahea1 %& c%$petit%r#!
57
.. H%wever4 the c%$panie# &urthe#t 1%wn the e=perience curve $u#t n%t ;ec%$e
c%$-pacent a;%ut it# p%#iti%nN&%r three rea#%n#!
1+ 'ir#t4 ;ecau#e neither earning e&&ect# n%r ec%n%$ie# %& #cae g% %n &%rever4
the e=perience curve ;%tt%$# %ut at #%$e p%int4 a&ter which &urther c%#t re1ucti%n#
are 1i&&icut t% c%$e ;*! Thi# i$pie# that %ther c%$panie# can catch up with the c%#t
ea1er! I& a nu$;er %& c%$panie#4 a %& which have c%#t parit*4 can get t% the ;%tt%$
%& the e=perience curve4 e#ta;i#hing a #u#taina;e c%$petitive a1vantage $u#t
nece##ari* inv%ve #trategie# an1 the $ini$i0ing %& pr%1ucti%n c%#t#!
12 Sec%n14 c%$pacenc* #h%u1 ;e av%i1e1 ;ecau#e c%#t a1vantage# gaine1
&r%$ e=perience e&&ect# can ;e $a1e %;#%ete ;* the 1eve%p$ent %& new techn%%gie#
that re)uire new $eth%1# %& pr%1ucti%n!
.2! Thir14 ath%ugh the e=perience curve #ugge#t# that high v%u$e give# a c%$pan*
a c%#t a1vantage4 thi# 1%e# n%t awa*# happen! In #%$e in1u#trie#4 there are tw% %r
$%re 1i&&erent pr%1ucti%n techn%%gie#! One $a* ;e c%#t-e&&icient at high v%u$e#4
an1 the %ther at %w v%u$e#! U#ing %w-v%u$e techn%%g*4 a c%$pan* $a* ;e a;e
t% %perate with a c%#t #tructure #i$iar t% that %& c%$panie# u#ing a high-v%u$e
techn%%g*!
.3 &'eAib'e $an"%act"ring and 'ean pr!d"cti!n Centra t% the c%ncept %&
ec%n%$ie# %& #cae i# the i1ea that the ;e#t wa* t% achieve high e&&icienc*4 an1 hence
%w unit c%#t#4 i# thr%ugh the $a## pr%1ucti%n %& a #tan1ar1i0e1 %utput! The tra1e%&&
i$picit in thi# i1ea i# %ne ;etween unit c%#t# an1 pr%1uct variet*! Pr%1ucing greater
pr%1uct variet* &r%$ a &act%r* i$pie# #h%rter pr%1ucti%n run#4 which in turn i$pie#
an ina;iit* t% reai0e ec%n%$ie# %& #cae!
.D Thi# view %& $anu&acturing e&&icienc* ha# ;een chaenge1 ;* the recent ri#e %&
&e=i;e $anu&acturing techn%%gie#!
58
.8! 'e=i;e $anu&acturing techn%%gie# c%ver a range %& $anu&acturing techn%%gie#
that are 1e#igne1 t%
a! re1uce #etup ti$e# &%r c%$pe= e)uip$ent!
;! increa#e the utii0ati%n %& in1ivi1ua $achine# thr%ugh ;etter #che1uing!
c! i$pr%ve )uait* c%ntr% at a #tage# %& the $anu&acturing pr%ce##!
1F! 'e=i;e $anu&acturing techn%%gie# a%w the c%$pan* t% pr%1uce a wi1er
variet* %& en1 pr%1uct# at a unit c%#t that at %ne ti$e c%u1 %n* ;e achieve1
thr%ugh the $a## pr%1ucti%n %& a #tan1ar1i0e1 %utput
18! Mar(eting #trateg* an1 e&&icienc*! Mar(eting #trateg* can pa* a $aB%r
r%e in ;%%#ting the e&&icienc* %& a c%$pan*! '%r e=a$pe4 aggre##ive
pricing4 pr%$%ti%n# an1 a1verti#ingNa %& which are the ta#( %& the
$ar(eting &uncti%n4 can &aciitate ri1ing 1%wn the e=perience curve t% gain a
%w -c%#t p%#iti%n! There are %ther a#pect# %& $ar(eting #trateg* that
have a e## %;vi%u# ;ut n% e## i$p%rtant i$pact %n e&&icienc*N&%r
e=a$pe4 re1ucing cu#t%$er 1e&ecti%n rate#!
+9! Cu#t%$er 1e&ecti%n rate# re&er t% the percentage %& a c%$pan*A#
cu#t%$er# that 1e&ect ever* *ear t% c%$petit%r#! De&ecti%n rate# are
1eter$ine1 ;* cu#t%$er %*at*4 which i# a &uncti%n %& the a;iit* %& a
c%$pan* t% #ati#&* it# cu#t%$er#!
+9! There i# a 1irect reati%n#hip ;etween 1e&ecti%n rate# an1 c%#t#!
Ac)uiring a new cu#t%$er entai# %ne-ti$e &i=e1 c%#t# &%r a1verti#ing4
pr%$%ti%n#4 an1 the i(e! The %nger a c%$pan* retain# a cu#t%$er4 the
greater i# the v%u$e %& cu#t%$er-generate1 unit #ae# that can ;e #et
again#t the#e &i=e1 c%#t# an1 the %wer i# the average unit c%#t %& each
#ae! "* 1ecrea#ing cu#t%$er 1e&ecti%n rate#4 a c%$pan* can achieve
#u;#tantia c%#t ec%n%$ie#!
++! Materia# $anage$ent an1 e&&icienc*! Materia# $anage$ent
59
enc%$pa##e# the activitie# nece##ar* t% get $ateria# t% a pr%1ucti%n
&aciit*4 thr%ugh the pr%1ucti%n pr%ce##4 an1 %ut thr%ugh a 1i#tri;uti%n
#*#te$ t% the en1 u#er!
234 I$pr%ving the e&&icienc* %& the $ateria# $anage$ent &uncti%n t*pica*
re)uire# the a1%pti%n %& Bu#t-in-ti$e C<ITD invent%r* #*#te$#! The
phi%#%ph* ;ehin1 <IT i# t% ec%n%$i0e %n invent%r*-h%1ing c%#t# ;*
having $ateria# arrive at a $anu&acturing pant Bu#t in ti$e t% enter the
pr%1ucti%n pr%ce##4 an1 n%t ;e&%re! The $aB%r c%#t #aving c%$e# &r%$
increa#ing invent%r* turn%ver4 which re1uce# invent%r*-h%1ing c%#t#4 #uch
a# wareh%u#ing an1 #t%rage c%#t#!
+5!The 1raw;ac( %& <IT #*#te$# i# that the* eave a &ir$ with%ut a
;u&&er #t%c( %& invent%r*! Ath%ugh ;u&&er #t%c(# %& invent%r* are e=pen#ive
t% #t%re4 the* can hep ti1e a &ir$ %ver #h%rtage# %n input# ;r%ught a;%ut
;* 1i#rupti%n a$%ng #uppier#
+6!RQD #trateg* an1 e&&icienc*! The RQD &uncti%n can ;%%#t e&&icienc* ;*
1e#igning pr%1uct# that are ea#* t% $anu&acture! "* cutting 1%wn %n the
nu$;er %& part# that $a(e up a pr%1uct4 RQD can 1ra$atica* re1uce the
re)uire1 a##e$;* ti$e4 which tran#ate# int% higher e$p%*ee pr%1uctivit*
an1 %wer unit c%#t#!
27& The RQD &uncti%n can hep a c%$pan* achieve greater e&&icienc* ;*
pi%neering pr%ce## inn%vati%n#! Pr%ce## inn%vati%n# have %&ten ;een a
$aB%r #%urce %& c%$petitive a1vantage! '%r e=a$pe4 in the aut%$%;ie
in1u#tr*4 the c%$petitive a1vantage %& T%*%ta i# ;a#e1 in part %n the
c%$pan*A# inventi%n %& new4 &e=i;e $anu&acturing pr%ce##e#4 which
1ra$atica* re1uce1 #etup ti$e#! Hu$an re#%urce# #trateg* an1
e&&icienc*! E$p%*ee pr%1uctivit* i# %ne %& the (e* 1eter$inant# %& an
enterpri#eA# e&&icienc* an1 c%#t #tructure! The $%re pr%1uctive e$p%*ee#
are4 the %wer wi unit c%#t# ;e!
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28& A c%$pan* that e$p%*# $%re-#(ie1 in1ivi1ua# i# i(e* t% ;e $%re
e&&icient than %ne that e$p%*# e##-#(ie1 per#%nne! S(ie1 in1ivi1ua#
can per&%r$ ta#(# $%re )uic(* an1 $%re accurate* an1 are $%re i(e* t%
;e a;e t% earn the c%$pe= ta#(# a##%ciate1 with $an* $%1ern
pr%1ucti%n $eth%1# than e##-#(ie1 in1ivi1ua#! A c%$pan* can upgra1e
the #(i eve %& it# e$p%*ee# thr%ugh training!
29& Se&-$anaging tea$# are an%ther #%urce %& e&&icienc* gain! The t*pica tea$
c%n#i#t# %& &ive t% &i&teen e$p%*ee# wh% pr%1uce an entire pr%1uct %r
#u;a##e$;*! Tea$ $e$;er# earn a tea$ ta#(# an1 r%tate &r%$ B%; t%
B%;! A $%re &e=i;e w%r( &%rce i# %ne re#ut! Tea$ $e$;er# can &i in &%r
a;#ent c%w%r(er#! Tea$# a#% ta(e %ver $anageria 1utie#4 #uch a# w%r(
an1 vacati%n #che1uing4 %r1ering $ateria#4 an1 hiring new $e$;er#!
The greater re#p%n#i;iit* that i# thru#t %n tea$ $e$;er# an1 the
e$p%wer$ent that it i$pie# are #een a# $%tivat%r#! Pe%pe %&ten re#p%n1
we t% ;eing given greater aut%n%$* an1 re#p%n#i;iit*! Per&%r$ance
;%nu#e# in(e1 t% tea$ pr%1ucti%n an1 )uait* target# act a# a11iti%na
$%tivat%r#!
+ Achieving S"peri!r 5"a'ity
. Achieving Superi%r )uait* give# c%$pan* tw% a1vantage#! 'ir#t4 the* enhance
reputati%n &%r )uait* a%w# the c%$pan* t% charge a pre$iu$ pri0e &r% each
pr%1uct! Sec%n14 ;* ei$inati%n 1e&ect# &r%$ the $anu&acturing pr%ce##4 #uperi%r
)uait* can re#ut in greater e&&icienc* an1 hence %wer c%#t!
0 The $ain $anage$ent techni)ue that c%$panie# are utii0ing t% i$pr%ve )uait* i#
t%ta )uait* $anage$ent TPMD! TPM i# a $anage$ent phi%#%ph* that ta(e# a#
it# centra &%cu# the nee1 t% rai#e the )uait* %& a c%$panie# pr%1uct an1 #ervice!
It a#% $aintain# that a %& the c%$panie# %perati%n# #h%u1 ;e %riente1 t%war1#
61
thi# en1!
1 &!c"sing !n the c"st!$er TPM practiti%ner# #ee a &%cu# %n the cu#t%$er a#
the #tarting p%int %& the wh%e )uait* phi%#%ph*! The $ar(eting &uncti%n4 ;ecau#e
it pr%vi1e# the pri$ar* p%int %& c%ntact with the cu#t%$er4 #h%u1 pa* a $aB%r
r%e here! The r%e %& $ar(eting i# &%ur&%1/ t% i1enti&* what it i# that the cu#t%$er#
want &r%$ the g%%1 %r #ervice that the c%$pan* pr%vi1e#L t% i1enti&* what it i#
that the c%$pan* actua* pr%vi1e# t% cu#t%$er#L t% i1enti&* the )uait* gap that
e=i#t# ;etween what cu#t%$er# want an1 what the* actua* getL an1 in
c%nBuncti%n with the %ther &uncti%n# %& the c%$pan*4 t% &%r$uate a pan &%r c%#ing
the )uait* gap!
2 &inding wa*# t! $eas"re >"a'ity A &urther crucia ee$ent %& an* TPM pr%gra$
i# t% create #%$e $etric that can ;e u#e1 t% $ea#ure )uait*! Thi# re)uire# i1enti&ica-
ti%n %& what )uait* $ean# &r%$ a cu#t%$erA# per#pective an1 1evi#e a $etric that
capture# thi#! T%p $anage$ent #h%u1 ta(e pri$ar* re#p%n#i;iit* &%r &%r$uating
1i&&erent $etric# t% $ea#ure )uait*4 ath%ugh it can %n* 1% #% #ucce##&u* i& it
receive# input &r%$ the vari%u# &uncti%n# %& the c%$pan*!
3 Setting g!a's and creating incentives Once a $etric ha# ;een 1evi#e14 the ne=t
#tep i# t% #et a chaenging )uait* g%a an1 t% create incentive# &%r reaching it! The
ta#( %& #etting g%a# an1 creating incentive# i# %ne %& the (e* ta#(# %& t%p
$anage$ent!
D S!'iciting inp"t %r!$ e$p'!yees E$p%*ee# can ;e a $aB%r #%urce %& in&%r$ati%n
regar1ing the #%urce# %& p%%r )uait*! There&%re4 #%$e &ra$ew%r( $u#t ;e e#ta;-
i#he1 &%r #%iciting e$p%*ee #ugge#ti%n# a# t% the i$pr%ve$ent# that can ;e $a1e
C&%r e=a$pe4 )uait* circe#D!
8 Identi%ying de%ects an1 tracing the$ t% the #%urce! A $aB%r #%urce %& pr%1uct
1e&ect# i# the pr%1ucti%n pr%ce##! TPM preache# the nee1 t% i1enti&* 1e&ect# in the
w%r( pr%ce##4 trace the$ t% the #%urce4 &in1 %ut wh* the* %ccurre14 an1 $a(e
appr%priate c%rrecti%n#! Manu&acturing an1 $ateria# $anage$ent t*pica* have
pri$ar* re#p%n#i;iit* &%r thi# ta#(!
62
< S"pp'ier re'ati!ns P%%r-)uait* c%$p%nent part# are a $aB%r #%urce %& p%%r-)uait*-
&ini#he1 g%%1#! In %r1er t% re1uce pr%1uct 1e&ect#4 a c%$pan* nee1# t% w%r( with
it# #uppier# t% i$pr%ve the )uait* %& the part# the* #upp*! The pri$ar* re#p%n#i -
;iit* &%r 1%ing thi# &a# %n the $ateria# $anage$ent &uncti%n #ince thi# i# the
&uncti%n that inter&ace# with #uppier#!
E +esign %!r ease !% $an"%act"re The $%re a##e$;* #tep# a pr%1uct inv%ve#
the $%re %pp%rtunitie# there are &%r $a(ing a $i#ta(e! De#igning pr%1uct# that
have &ewer part# #h%u1 $a(e a##e$;* ea#ier an1 1ecrea#e the nu$;er %&
1e&ect#! "%th RQD an1 $anu&acturing nee1 t% ;e inv%ve1 in 1e#igning pr%1uct#
that are ea#* t% $anu&acture!
.= )rea/ing d!#n barriers a$!ng &uncti%n#! I$pe$enting TPM re)uire# %rgani0a-
ti%n wi1e c%$$it$ent an1 #u;#tantia c%%perati%n a$%ng &uncti%n#! RQD ha# t%
c%%perate with $anu&acturing t% 1e#ign pr%1uct# that are ea#* t% $anu&acture4
$ar(eting ha# t% c%%perate with $anu&acturing an1 RQD #% that cu#t%$er pr%;e$
i1enti&ie1 ;* $ar(eting can ;e acte1 %n!
E Achieving S"peri!r Inn!vati!n
1 In $an* wa*#4 inn%vati%n i# the #inge $%#t i$p%rtant ;ui1ing ;%c( %& c%$petitive
a1vantage! Succe##&u inn%vati%n %& pr%1uct# %r pr%ce##e# give# a c%$pan*
#%$ething uni)ueN#%$ething that it# c%$petit%r# ac(! Thi# uni)uene## $a*
a%w a c%$pan* t% charge a pre$iu$ price %r t% %wer it# c%#t #tructure ;e%w
that %& it# riva#
24 High %ai'"re rate !% inn!vati!ns Inve#t$ent in RQD i# a high-ri#(4 high-return
#trateg*! The high ri#( c%$e# &r%$ the high &aiure rate %& $%#t new-pr%1uct
inn%vati%n#! The high return c%$e# &r%$ the )ua#i-$%n%p%* revenue# that a
#ucce##&u inn%vati%n can earn &%r a c%$pan*!
34 '%ur rea#%n# have ;een a1vance1 t% e=pain wh* F9 t% FF percent %& new
pr%1uct#
&ai t% generate an ec%n%$ic return! The &ir#t rea#%n i# uncertaint*! Deve%ping new
pr%1uct# i# a ver* ri#(* ;u#ine##! N% %ne can rea* pre1ict what the &uture
63
1e$an1
&%r a new pr%1uct wi ;e! Ath%ugh g%%1 $ar(et re#earch can re1uce the ri#(# %&
&aiure4 it cann%t era1icate the$ at%gether!
44 P%%r c%$$erciai0ati%n i# a #ec%n1 rea#%n &%r &aiure! Thi# %ccur# when there i# an
intrin#ic 1e$an1 &%r a new techn%%g*4 ;ut the techn%%g* i# n%t we a1apte1 t%
c%n#u$er nee1#!
54 A thir1 rea#%n &%r &aiure i# that c%$panie# %&ten $a(e the $i#ta(e %& $ar(eting a
techn%%g* &%r which there i# n%t en%ugh 1e$an1 t% $a(e it &ea#i;e!
64 A &%urth rea#%n i# that $an* c%$panie# are #%w t% get their pr%1uct# t% $ar(et! The
%nger the ti$e ;etween initia 1eve%p$ent an1 &ina $ar(eting4 the $%re i(e* it
i# that #%$e%ne e#e wi ;eat *%u t% $ar(et an1 gain a &ir#t-$%ver a1vantage!
74 )"i'ding c!$petencies in inn!vati!n De#pite the high &aiure rate %& new
pr%1uct#4 a nu$;er %& c%$panie# have $anage1 t% e#ta;i#h an un1i#pute1
1i#tinctive c%$petenc* in inn%vati%n! T% #uccee1 with inn%vati%n4 &%ur #tep# are
%& the ut$%#t i$p%rtance4 an1 we 1i#cu## the$ ne=t!
84 S/i''s in basic and app'ied research "ui1ing the#e #(i# re)uire# the e$p%*$ent
%& re#earch #cienti#t# an1 engineer# an1 the e#ta;i#h$ent %& a w%r( envir%n$ent
that &%#ter# creativit*! A nu$;er %& t%p c%$panie# tr* t% achieve thi# ;* #etting up
univer#it*-#t*e re#earch &aciitie#4 where #cienti#t# an1 engineer# are given ti$e t%
w%r( %n their %wn re#earch pr%Bect#4 in a11iti%n t% pr%Bect# that are in(e1 1irect*
t% %ng%ing c%$pan* re#earch!
E Integrating RF+ and $ar/eting A c%$pan*A# cu#t%$er# can ;e %ne %& it# pri$ar*
#%urce# %& new-pr%1uct i1ea# I1enti&icati%n %& cu#t%$er nee1#4 an1 particuar*
un$et nee1#4 can #et the c%nte=t within which #ucce##&u pr%1uct inn%vati%n ta(e#
pace! M%re%ver4 integrati%n %& RQD an1 $ar(eting i# crucia i& a new pr%1uct i# t% ;e
pr%per* c%$$erciai0e1! Gith%ut #uch integrati%n4 a c%$pan* run# the ri#( %&
1eve%ping pr%1uct# &%r which there i# itte %r n% 1e$an1!
19! Integrating $an"%act"ring and RF+ Succe##&u inn%vati%n a#% re)uire# integra-
64
ti%n %& $anu&acturing an1 RQD! The critica ta#( i# t% 1e#ign pr%1uct# that are ea#*
t% $anu&acture! The ea#ier pr%1uct# are t% $anu&acture4 the %wer are the
$anu&acturing c%#t# an1 the e## r%%$ there i# &%r $a(ing $i#ta(e#! Thu#
1e#igning &%r $anu&acturing can %wer c%#t# an1 increa#e pr%1uct )uait*!
114 'urther$%re4 integrating RQD an1 $anu&acturing can hep re1uce the nee1 &%r
1e#ign change# t% i$pr%ve $anu&actura;iit*! Hence it can %wer 1eve%p$ent c%#t#
an1 #pee1 pr%1uct# t% $ar(et! Acc%r1ing t% e#ti$ate#4 having t% $a(e 1e#ign
change# 1uring pr%1uct panning can increa#e %vera 1eve%p$ent c%#t# ;* 69
percent an1 a11 +6 percent t% the ti$e it ta(e# t% ;ring the pr%1uct t% $ar(et!
124 7r!ject $anage$ent Pr%Bect $anage$ent re&er# t% the %vera $anage$ent %& the
inn%vati%n pr%ce##4 &r%$ generati%n %& the %rigina c%ncept thr%ugh 1eve%p$ent
an1 int% &ina pr%1ucti%n an1 #hipping! Pr%Bect $anage$ent re)uire# three i$p%r-
tant #(i#/
a The a;iit* t% enc%urage a# $uch i1ea generati%n a# p%##i;e!
;! The a;iit* t% #eect a$%ng c%$peting pr%Bect# at an ear* #tage %&
1eve%p$ent #% that the $%#t pr%$i#ing receive &un1ing an1 p%tentia
c%#t* &aiure# are (ie1 %&&!
c The a;iit* t% $ini$i0e ti$e t% $ar(et!
12! Cu#t%$i0ati%n inv%ve# var*ing the &eature# %& a g%%1 %r #ervice t% tai%r it t% the
uni)ue nee1# %& gr%up# %& cu#t%$er#4 %r in the e=tre$e ca#e4 in1ivi1ua
cu#t%$er#! It u#e1 t% ;e th%ught that cu#t%$i0ati%n rai#e1 c%#t#! H%wever4 with
the ri#e %& &e=i;e $anu&acturing techn%%gie#4 it i# n%w p%##i;e t% pr%1uce a
&ar greater variet* %& pr%1uct# than previ%u#* with%ut #u&&ering an* #u;#tantia
c%#t penat*!
15! Giving cu#t%$er# what the* want when the* want it re)uire# #pee1 %& re#p%n#e
t% cu#t%$er 1e$an1#! T% gain a c%$petitive a1vantage a c%$pan* %&ten nee1#
t% ;e &a#t at re#p%n1ing t% c%n#u$er 1e$an1#! Increa#e1 #pee1 a%w# a
65
c%$pan* t% charge a #igni&icant pre$iu$!
16! Re1ucing re#p%n#e ti$e re)uire#
CaD A $ar(eting &uncti%n that can )uic(* c%$$unicate cu#t%$er re)ue#t# t%
$anu&acturingL
C;D Manu&acturing an1 $ateria# $anage$ent &uncti%n# that can )uic(* a1Bu#t
pr%1ucti%n #che1ue# in re#p%n#e t% unanticipate1 cu#t%$er 1e$an1#L an1
CcD In&%r$ati%n #*#te$# that can hep $anu&acturing an1 $ar(eting in thi# pr%ce##!
66
C6A7TER 3
);IL+ING COM7ETITI4E A+4ANTAGE T6RO;G6 );SINESS:LE4EL STRATEG9
Chapter Overvie#
A# the Opening Ca#e #ugge#t#4 thi# chapter 1i#cu##e# the vari%u# ;u#ine##-eve
#trategie# that a c%$pan* can u#e t% c%$pete e&&ective* in a $ar(et %r in1u#tr* an1
#crutini0e# the p%tentia #trategie# &%r $a=i$i0ing c%$petitive a1vantage an1 pr%&ita;iit*! It
&%cu#e# %n the $%#t i$p%rtant eve %& #trateg* $a(ing that g%e# t% $a(e a c%$pan*?#
;u#ine## $%1e/ what pr%1uct# t% %&&er4 what $ar(et #eg$ent# t% #erve4 an1 what 1i#tinctive
c%$petencie# t% pur#ue!
The generic c%$petitive #trategie# %& c%#t ea1er#hip4 1i&&erentiati%n4 an1 &%cu# are
1i#cu##e14 an1 it i# argue1 that each repre#ent# a 1i&&erent #et %& ch%ice# c%ncerning
pr%1uct#4 $ar(et#4 an1 1i#tinctive c%$petencie#! Pur#uing a particuar ;u#ine##-eve
#trateg* inv%ve# c%$;ining the#e ch%ice# #ucce##&u*! A great 1ea %& attenti%n i# pai1 t%
1eve%ping the a1vantage# an1 1i#a1vantage# %& each #trateg*4 an1 there are #ecti%n#
1ev%te1 t% h%w t% pur#ue a #i$utane%u# %w-c%#t an1 1i&&erentiati%n #trateg* an1 t% ;eing
I#tuc( in the $i11e!I The generic Strategie# are in(e1 #peci&ica* t% the in1u#tr*
envir%n$ent!
-earning O;Bective#/ A&ter rea1ing thi# chapter4 *%u wi ;e a;e t%/
1! I1enti&* an1 1i#tingui#h a$%ng the principa t*pe# %& ;u#ine## 7eve #trategie# u#e1
;* $anager#!
+! Un1er#tan1 wh* ch%%#e t% pur#ue a particuar #trateg* a# the appr%ach t% create
vaue an1 pr%&it thr%ugh their ;u#ine## $%1e!
67
TEAC6ING O;TLINE
A Intr!d"cti!n
14 A&ter ana*0ing the #%urce %& envir%n$enta %pp%rtunitie# an1 threat# an1 c%$pan*
#trength# an1 wea(ne##e# CSGOT#D in the a#t tw% chapter#4 we are n%w in a p%#iti%n
t% e=a$ine the i##ue %& h%w a c%$pan* can c%$pete e&&ective* in an in1u#tr*! In
thi#4 we &%cu# %n vari%u# #trategie# a c%$pan* can a1%pt at the ;u#ine## eve
t% $a=i$i0e it# c%$petitive a1vantage an1 pr%&ita;iit*!
24 In %r1er t% 1% #%4 we nee1 t% c%n#i1er h%w a c%$pan*A# ;u#ine##-eve #trateg*
i# 1erive1 &r%$ the 1e&initi%n %& it# ;u#ine##!
) &!"ndati!ns !% )"siness:Leve' Strategy
1! A# we #aw in 1i#cu##ing the A;eR 'ra$ew%r(4 ;u#ine## 1e&initi%n i# the
re#ut %& three 1eci#i%n#/
a! Cu#t%$er nee1#4 %r what i# ;eing #ati#&ie1!
;! Cu#t%$er gr%up#4 %r wh% i# ;eing #ati#&ie1!
c! Di#tinctive c%$petencie#4 %r h%w cu#t%$er nee1# are t% ;e #ati#&ie1
+! C"st!$er needs and pr!d"ct di%%erentiati!n Cu#t%$er nee1# are an* nee1#
that can ;e #ati#&ie1 thr%ugh the characteri#tic# %& a pr%1uct %r #ervice! Pr%1uct
1i&&erentiati%n i# the pr%ce## %& creating a c%$petitive a1vantage ;* 1e#igning
pr%1uct
characteri#tic# t% #ati#&* cu#t%$er nee1#! A c%$panie# $u#t 1i&&erentiate their
pr%1uct# t% #ati#&* #%$e cu#t%$er nee1#4 ;ut #%$e c%$panie# 1% thi# t% a $uch
greater 1egree than %ther#!
2! '%r e=a$pe4 #%$e c%$panie# ai$ t% #ati#&* cu#t%$er nee1# ;* %&&ering a %w-price1
pr%1uctL the* 1% n%t engage in $uch pr%1uct 1i&&erentiati%n! Other c%$panie# #ee(
t% create #%$ething uni)ue a;%ut their pr%1uct# t% #ati#&* nee1# in wa*# in which
%ther c%$panie# cann%t! Uni)uene## $a* reate t% the &%%wing/
a Ph*#ica characteri#tic# %& the pr%1uct4 #uch a# )uait* %r reia;iit*
68
; Appea t% a p#*ch%%gica nee1 %& cu#t%$er#4 #uch a# #tatu# %r pre#tige
c! The nu$;er %& $%1e# in c%$pan*A# pr%1uct range
1! The 1eve%p$ent %& a 1i#tinctive c%$petenc*4 #uch a# #ervice
5! Cu#t%$er gr!"ps and $ar/et seg$entati!n The #ec%n1 a#pect %& ;u#ine##
1e&initi%n c%ncern# $ar(et #eg$entati%n4 the wa* the c%$pan* gr%up# it#
cu#t%$er# acc%r1ing t% i$p%rtant 1i&&erence# in cu#t%$er nee1# %r
pre&erence# t% gain a
c%$petitive a1vantage! In genera4 there are three #trategie# the c%$pan* can
a1%pt/
a4 N%t rec%gni0e that there are 1i&&erent #eg$ent# an1 #i$p* #erve the
average cu#t%$er
b4 Seg$ent the $ar(et int% 1i&&erent gr%up# an1 1eve%p a pr%1uct t% #uit
each gr%up
c4 Serve %n* %ne %r a &ew $ar(et #eg$ent#
The#e are part %& 1eve%ping a $ar(eting c%$petence4 a# n%te1 in the a#t ecture!
54 A c%$pan* $ight want t% $a(e $%re c%$pe= pr%1uct@$ar(et ch%ice#! It $a* want
t% pr%1uce a 1i&&erent pr%1uct tai%re1 t% each $ar(et #eg$ent ;ecau#e thi#
increa#e#
the 1e$an1 &%r the c%$pan*A# pr%1uct# ;* attracting 1i&&erent (in1# %& cu#t%$er#!
Genera M%t%r# ver#u# '%r1 i# a g%%1 e=a$pe!
64 +istinctive c!$petencies The thir1 i##ue in ch%%#ing a ;u#ine##-eve #trateg* i#
t% 1eci1e what t*pe %& 1i#tinctive c%$petenc* t% pur#ue t% #ati#&* cu#t%$er nee1#
an1 gr%up# in %r1er t% gain a c%$petitive a1vantage! S%$e c%$panie# u#e their
pr%1ucti%n techn%%g* t% 1eve%p a $anu&acturing 1i#tinctive c%$petenc*4 %ther#
#trive &%r a techn%%gica 1i#tinctive c%$petenc*4 an1 #ti %ther# #ee( t% e#ta;i#h a
#ae# an1 $ar(eting c%$petenc*
74 The i##ue at the ;u#ine## eve i# that the c%$pan* $u#t 1eci1e h%w t% %rgani0e
an1 c%$;ine it# 1i#tinctive c%$petencie# t% gain a c%$petitive a1vantage! A
pr%1uct@$ar(et@1i#tinctive-c%$petenc* per#pective pr%vi1e# a &ra$ew%r( &%r
69
un1er #tan1ing the &%un1ati%n# %& ;u#ine##-eve #trateg*! N%w we can c%n#i1er
h%w 1i&&erent c%$petitive #trategie# are the re#ut %& $a(ing 1i&&erent
pr%1uct@$ar(et@1i#tinctive-c%$petenc* 1eci#i%n#!
C Ch!!sing a Generic C!$petitive Strategy at the
)"siness Leve'
1! The purp%#e %& pur#uing a ;u#ine##-eve #trateg* i# t% give the c%$pan* a
c%$petitive a1vantage that wi a%w it t% %utper&%r$ it# c%$petit%r# an1 earn
a;%ve-average return#! There are three ;a#ic #trategie# a c%$pan* can a1%pt/
c%#t ea1er#hip4 1i&&erentiati%n4 an1 &%cu#
0 C!st:'eadership strategy A c%$pan*A# g%a in pur#uing c%#t ea1er#hip i# t% %ut-
per&%r$ c%$petit%r# ;* pr%1ucing g%%1# an1 #ervice# at a %wer c%#t! Thi# #trateg*
ha# tw% a1vantage#! 'ir#t4 when a c%$panie# in the in1u#tr* charge the #a$e
price &%r their pr%1uct#4 the c%#t ea1er $a(e# higher pr%&it# ;ecau#e it# c%#t# are
%wer! Sec%n14 i& price war# 1eve%p an1 c%$petiti%n increa#e#4 then high-c%#t
c%$panie# wi ;e 1riven %ut %& the in1u#tr* ;e&%re the c%#t ea1er! Thu# the c%#t
ea1er wi earn a;%ve-average return#! T% ;ec%$e the c%#t ea1er4 h%wever4 the
c%$pan* $u#t $a(e particuar pr%1uct@$ar(et@1i#tinctive-c%$petenc* ch%ice#!
34 The c%#t ea1er ch%%#e# %w pr%1uct 1i&&erentiati%n4 ;ecau#e 1i&&erentiati%n i# e=pen-
#ive! The c%$pan* that 1eve%p# uni)ue pr%1uct# increa#e# it# c%#t#! The c%#t
ea1er ai$# &%r a eve %& pr%1uct 1i&&erentiati%n %;taina;e at %w c%#t!
44 The c%#t ea1er ch%%#e# t% #erve the nee1# %& the average cu#t%$er! Again4 thi#
av%i1#
the high c%#t# %& #erving 1i&&erent $ar(et #eg$ent#! Perhap# n% %ne i# wh%*
#ati#&ie1 with the pr%1uct4 ;ut ;ecau#e it# price i# %wer4 #%$e cu#t%$er# ch%%#e it!
54 On the 1i#tinctive-c%$petenc* 1i$en#i%n4 the 1eve%p$ent %& a c%$petenc* in
$anu&acturing i# $%#t i$p%rtant! The c%$pan* $u#t ri1e 1%wn the e=perience
curve t% %wer it# c%#t#! Materia# $anage$ent i# a#% ver* i$p%rtant! C%n#e)uent*4
the %ther &uncti%n# tai%r their 1i#tinctive c%$petencie# t% $eet the nee1# %& $anu-
70
&acturing! RQD c%ncentrate# %n pr%ce## techn%%g*4 an1 #ae# &%cu#e# %n getting
;ig cu#t%$er acc%unt#! The c%#t ea1erA# #trateg* i# geare1 t% #)uee0ing %ut
ever* cent %& c%#t #aving# ;* $a(ing c%n#i#tent pr%1uct@$ar(et@1i#tinctive-
c%$petenc* ch%ice#!
64 Advantages and disadvantages. The a1vantage# %& c%#t ea1er#hip can ;e
1i#cu##e1 in ter$# %& P%rterA# &ive &%rce# $%1e/
a4 C%$petit%r#! The c%#t ea1er i# pr%tecte1 ;* it# c%#t a1vantage!
b4 P%wer&u #uppier#! -%wer c%#t# $ean that the c%#t ea1er wi ;e e##
a&&ecte1 than c%$petit%r#!
c4 P%wer&u cu#t%$er#! The c%#t ea1er i# e## a&&ecte1 ;* ;u*er#A a;iit* t%
#)uee0e 1%wn price#!
&4 P%tentia entrant#! C%#t a1vantage i# a ;arrier t% entr* ;ecau#e %ther
c%$panie#
are una;e t% enter at a %wer c%#t!
e4 Su;#titute pr%1uct#! The c%#t ea1er i# ;etter a;e than it# c%$petit%r# t%
re1uce it# price in %r1er t% c%$pete!
E A c%#t-ea1er#hip appr%ach ha# three principa 1anger#/
a! C%$petit%r# $a* &in1 wa*# %& pr%1ucing the pr%1uct at %wer c%#t4 perhap#
;ecau#e %& techn%%gica 1eve%p$ent# %r ;ecau#e %& c%#t #aving#4 #uch a# th%#e
&%reign c%$petit%r# can #%$eti$e# achieve!
; C%$petit%r# $a* i$itate the c%#t ea1erA# $eth%1#!
c! I n a #inge-$in1e1 e&&%rt t% re1uce c%#t#4 the c%#t ea1er $a* %#e #ight %& change# in
c%n#u$er ta#te#4
84 T% #u$$ari0e4 c%#t ea1er#hip can ;e a ver* pr%&ita;e #trateg*! Th%ugh a
c%$panie# tr* t% c%ntain their c%#t#4 the c%#t ea1er ta(e# thi# t% an e=tre$e an1
$a(e# a 1eci#i%n# with c%#t c%ntain$ent in $in1! Given increa#e1 c%$petiti%n
&r%$ a;r%a14 thi# appr%ach $a* ;e increa#ing* 1i&&icut t% pur#ue in the &uture! Even
the <apane#e are #u&&ering &r%$ c%$petiti%n &r%$ Taiwan an1 M%rea! C%$panie#
71
are increa#ing* %%(ing t% 1i&&erentiati%n a# a c%$petitive #trateg*!
94 +i%%erentiati!n strategy! The %;Bective %& 1i&&erentiati%n i# t% achieve a
c%$petitive a1vantage ;* creating a pr%1uct %r #ervice that i# perceive1 t% ;e
uni)ue in #%$e wa*! The 1i&&erentiate1 c%$pan*A# a;iit* t% achieve thi# g%a
$ean# that it can charge a pre$iu$ price &%r it# pr%1uct#Nthat i#4 a price higher
than it# c%$petit%r#A price#! It i# the a;iit* t% earn higher pr%&it# thr%ugh increa#e1
revenue# rather than ;* %w c%#t# that a%w# the 1i&&erentiat%r t% %utper&%r$ it#
c%$petit%r#! The pre$iu$ price i# u#ua* #u;#tantia* a;%ve the c%#t ea1erA#
price4 an1 cu#t%$er# pa* it ;ecau#e the* perceive the pr%1uctA# 1i&&erentiate1
)uaitie# t% ;e w%rth it! C%n#e)uent*4 pr%1uct pricing i# 1%ne %n the ;a#i# %& what
the $ar(et wi ;ear!
104 T% ;ec%$e a 1i&&erentiat%r4 the c%$pan* $u#t $a(e certain
pr%1uct@$ar(et@1i#tinctive-c%$petenc* ch%ice#! On the 1i$en#i%n %& pr%1uct
1i&&erentiati%n4 the 1i&&erentiat%r ai$# &%r a ver* high eve %& 1i&&erentiati%n an1
&re)uent* pr%1uce# a wi1e range %& pr%1uct#! A# n%te1 earier4 pr%1uct
1i&&erentiati%n can ;e achieve1 in $an* wa*#L e=a$pe# incu1e the purit* we
are a#(e1 t% a##%ciate with Iv%r* S%ap4 Ma*tagA# reputati%n &%r reia;iit*4 an1
S%n*A# in( with pr%1uct )uait*! I"M an1 'e1era E=pre## have $a1e their
na$e# %n #erviceL #% have Nei$an Marcu# an1 N%r1#tr%$! 'ina*4 "MG an1
R%e= appea t% cu#t%$er#A pre#tige nee1#!
114 Ghen a c%$pan* pur#ue# 1i&&erentiati%n4 it #ee(# t% 1i#tingui#h it#e& a%ng a# $an*
1i$en#i%n# a# p%##i;e! Hence "MG i# n%t Bu#t a pre#tige carL it i# a#% &a#t4 reia;e4
an1 techn%%gica* #%phi#ticate1! A the#e ;a#e# hep t% increa#e #ae#!
124 On the i##ue %& $ar(et #eg$entati%n4 the 1i&&erentiat%r genera* #eg$ent# it# $ar(et
int% $an* niche#! I& it %&&er# pr%1uct# &%r $an* $ar(et niche#4 it i# pur#uing a ;r%a1
1i&&erentiati%n #trateg*! H%wever4 a 1i&&erentiat%r $ight a#% 1eci1e t% &i %n* th%#e
niche# that are reate1 t% it# 1i&&erentiati%n a1vantage an1 ;e $%re narr%w*
&%cu#e1! Hence S%n* %n* &i# high-price T3 niche#4 Bu#t a# "MG an1 Merce1e#
1% in aut%#!
72
134 On the 1i$en#i%n %& 1i#tinctive c%$petenc*4 which &uncti%n i# $%#t i$p%rtant
1epen1# %n the #%urce %& the c%$pan*A# 1i&&erentiati%n a1vantage! I& it #ee(# a
c%$petitive a1vantage ;a#e1 %n inn%vati%n an1 1eve%ping a techn%%gica c%$pe-
tenc*4 the (e* &uncti%n i# RQDL i& cu#t%$er re#p%n#ivene## i# it# g%a4 then a&ter-#ae#
#ervice4 1i#tri;uti%n4 an1 cu#t%$er #ervice &uncti%n# are $%#t critica! Thi# 1%e# n%t
i$p* that $anu&acturing e&&icienc* an1 the c%ntr% %& pr%1ucti%n c%#t# are uni$-
p%rtant! The 1i&&erentiat%r want# t% (eep in #ight %& the c%#t ea1er an1 i# c%ncerne1
with e&&icienc*4 ;ut 1eve%ping 1i#tinctive c%$petencie# i# e=pen#ive4 #% the 1i&&er-
entiat%r ha# higher c%#t#! The %;Bect i# t% c%ntr% c%#t# en%ugh #% that the price
charge1 i# n%t #% high that cu#t%$er# wi n%t pa* it!
104 Advantages and disadvantages. Once again4 P%rterA# $%1e i# u#e&u!
a! P%tentia c%$petit%r# are n%t a threat i& the c%$pan* ha# cutivate1 ;ran1 %*at*
&%r it# pr%1uct# an1 cu#t%$er# want the c%$pan*A# g%%1#!
;! P%wer&u #uppier# are rare* a pr%;e$ ;ecau#e the c%$pan*A# #trateg* i#
geare1 t%war1 the price it can charge rather than t%war1 $ini$i0ing c%#t#!
c! P%wer&u ;u*er# are rare* a pr%;e$ ;ecau#e %n* the c%$pan* can #upp*
the 1i&&erentiate1 pr%1uct!
1! P%tentia entrant# w%u1 ;e &%rce1 t% 1eve%p a uni)ue pr%1uct in %r1er t%
c%$pete! Thi# i# e=pen#ive4 e#pecia* when e=i#ting c%$panie# enB%* #tr%ng
;ran1 %*at*!
e! The threat %& #u;#titute pr%1uct# 1epen1# %n the a;iit* %& c%$petit%r# t% 1eve%p
pr%1uct# that can $eet the #a$e cu#t%$er nee1# a# the 1i&&erentiat%rA#
pr%1uct# an1 ;rea( ;ran1 %*at*!
16! The principa 1anger# rev%ve ar%un1 the c%$pan*A# a;iit* t% $aintain it# perceive
uni)uene## in cu#t%$er#A e*e#! Thi# 1epen1# in part %n h%w )uic(* %ther
c%$panie#I $%ve t% i$itate #ucce##&u 1i&&erentiat%r#! CAut%#4 c%$puter#4 an1
h%$e eectr%nic %&&er g%%1 e=a$pe# %& #uch e&&%rt#!D An%ther threat i# that a
#%urce %& uni)uene## $a* ;e %verri11en ;* change# in c%n#u$er ta#te# an1
73
1e$an1#! A c%$pan* $u#t c%n#tant* %%( %ut &%r wa*# t% $atch it# uni)ue
#trength# t% changing pr%1uct@$ar(et %pp%rtunitie#!
+ Strategy in Acti!n GIn .EE=s
In the 1889# AME,A# tra1iti%na 1i&&erentiati%n #trateg* ;a#e1 %n e=cu#ivit* ha# c%$e
un1 increa#ing attac( &r%$ %ther cre1it car1#4 #uch a# Ma#terCar14 3i#a4 an1 Di#c%ver4 which
a#% 1eve%pe1 a %*a &%%wing! M%re%ver4 $an* ;an(# an1 airine# &%r$e1 aiance# t% give
&ree $ieage t% u#er# %& their cre1it car1# an1 even arge c%$panie# i(e GM4 GE4 an1 ATQT
have i##ue1 car1#! C%n#u$er# n% %nger perceive the A$erican E=pre## car1 a# uni)ue4
an1 it ha# %#t $uch %& it# 1i&&erentiate1 appea!
164 In genera4 when 1i&&erentiati%n i# achieve1 thr%ugh the 1e#ign %& the pr%1uct4
1i&&erentiat%r# are at $%re ri#(! Ghen it 1erive# &r%$ intangi;e )uaitie# #uch a#
pre#tige %r &r%$ a #ervice c%$petenc*4 the c%$pan* i# $%re pr%tecte1 ;ecau#e the
)uaitie# are $%re 1i&&icut t% i$itate!
174 T% #u$$ari0e4 1i&&erentiati%n inv%ve# a 1i&&erent #et %& ch%ice# &r%$ c%#t ea1er#hip!
There are $an* #%urce# %& 1i&&erentiati%n t% e=p%it! Ghen the c%$pan* 1eve%p
uni)ue pr%1uct4 it can charge a pre$iu$ price t% earn high pr%&it#! H%wever4 it $u#t
watch %ut &%r i$itat%r# an1 n%t charge $%re than the $ar(et wi ;ear!
184 "%th c%#t ea1er#hip an1 1i&&erentiati%n! T%1a* it i# p%##i;e t% &%%w ;%th gene
#trategie# #i$utane%u#*! New pr%1ucti%n techn%%gie# i(e &e=i;e $anu&acturing
techni)ue#4 Bu#t-in-ti$e invent%r* #*#te$#4 an1 r%;%tic# have a%we1 c%$panie#
ta(e a1vantage %& the ;ene&it# %& ;%th #trategie#! '%r e=a$pe4 &e=i;e
$anu&acturing #*#te$# ena;e c%$panie# t% $anu&acture $%1e# %& a pr%1uct at
itte %r n% e=tra c%#t than i& the* pr%1uce1 arge ;atche# %& #tan1ar1i0e1
pr%1uct#! The gr%wth %& niche $ar(eting ha# ;een $a1e p%##i;e ;* the#e new
%w-c%#t pr%1ucti%n techni)ue#! Si$iar*4 the 1i&&erentiat%r can re1uce
$ar(eting c%#t# ;* re1ucing the nu$;er %& $%1e# in the pr%1uct range whie
%&&ering pac(age# %& %pti%n#! C'%r e=a$pe4 car $anu&acturer# %&&er a u=ur*
pac(age4 #p%rt# pac(age4 an1 ec%n%$* pac(ageD! Di&&erentiati%n i# #ti &ea#i;e
;ut at %wer c%#t than &%r the pure 1i&&erentiat%r!
74
194 '%cu# #trateg*! The thir1 generic #trateg*4 the &%cu# #trateg*4 1i&&er# &r%$ the
%ther tw% in that it i# 1irecte1 at #erving the nee1# %& a i$ite1 cu#t%$er gr%up %r
#et! It c%ncentrate# %n #erving a particuar $ar(et niche that $a* ;e 1e&ine1 a#
&%%w#/
a4 Ge%graphica*4 ;* regi%n %r %cait*!
b4 "* t*pe %& cu#t%$er4 #uch a# ver* rich %r ver* *%ung!
c4 "* #eg$ent %& the pr%1uct ine4 #uch a# %n* ver* e=pen#ive aut%# %r
1e#igner c%the#
The c%$pan* i# there&%re #peciai0ing in #%$e wa*!
204 A &%cu# #trateg* can ;e pur#ue1 u#ing either a 1i&&erentiati%n %r a %w-c%#t
appr%ach! Ghen a c%$pan* a1%pt# a %w-c%#t appr%ach4 it c%$pete# again#t the
$ar(et ea1er %n* in th%#e #eg$ent# where it ha# n% c%#t 1i#a1vantage! A c%#t
a1vantage $a* a#% ari#e ;ecau#e it i# pr%1ucing c%$pe= %r cu#t%$-;uit
pr%1uct# that 1% n%t en1 the$#eve# t% ec%n%$ie# %& #cae! The &%cu# c%$pan*
#erve# #peciai#t pr%1uct #eg$ent# an1 eave# the arge-v%u$e $ar(et t% the
c%#t ea1er!
214 Ghen it pur#ue# a 1i&&erentiati%n #trateg*4 a the $ean# %& 1i&&erentiati%n %pen t%
the 1i&&erentiat%r are %pen t% the c%#t ea1er! '%cu#e1 c%$panie# can particuar*
e=p%it their (n%we1ge %& a #$a cu#t%$er #et ;ecau#e the* are c%#er t% the
cu#t%$er than a ;r%a1 1i&&erentiat%r!
E Strategy in Acti!n %!r +ata 7r!cessing and Syste$
Manage$ent
EDS an1 I"M are the ea1ing c%$panie# in the %ut#%urcing $ar(et &%r 1ata
pr%ce##ing an1 #*#te$# $anage$ent! H%wever4 $an* #$a &%cu#e1 c%$panie# #urvive
an1 pr%#per ;ecau#e the* &%cu# %n #ati#&*ing the nee1# %& #peci&ic (in1# %& c%$panie# i(e
in#urance agencie# %r %ca g%vern$ent! The#e &%cu#e1 1i&&erentiat%r# 1eve%p #%&tware
#*#te$# #peci&ica* 1e#igne1 t% $anage the nee1# %& the#e c%$panie# an1 win their
;u#ine## ;ecau#e the* are c%#er t% their cu#t%$er# than EDS %r I"M!
++! The Ch%ice# $a1e ;* a &%cu#e1 c%$pan*!
75
a! Pr%1uct 1i&&erentiati%n can ;e high %r %w!
;! Mar(et #eg$entati%n i# %w/ %ne %r a &ew niche#!
c! The ch%ice %& 1i#tinctive c%$petenc* 1epen1# %n the c%$pan*A # #%urce
%& c%$petitive a1vantage! I& it i# 1i&&erentiati%n4 the c%$petenc* c%u1 ;e RQD
%r #erviceL i& it i# %w c%#t4 the c%$petenc* c%u1 ;e %ca $anu&acturing!
The arge nu$;er %& wa*# t% c%$pete e=p ai n# wh* there are #% $an*
#$a c%$panie#! '%cu#e1 c%$panie# can a#% gr%w ;* ta(ing %ver %ther
&%cu#er#!
+2! Advantages and disadvantages. Again we u#e P%rterA# &ive &%rce# $%1e!
a! Riva#! The c%$pan* i# pr%tecte1 t% the e=tent that it can pr%vi1e a pr%1uct
%r #ervice at a price %r )uait* %ther# cann%t %&&er!
;! P%wer&u #uppier#! The#e are a threat ;ecau#e the c%$pan* ;u*# in #uch
#$a v%u$e# that it ha# e## ;argaining p%wer! H%wever4 i& the c%$pan*
can pa## price increa#e# %n4 thi# i# e## %& a pr%;e$!
c! P%wer&u ;u*er#! It# a;iit* t% #ati#&* uni)ue cu#t%$er nee1# give# the
c%$pan* p%wer %ver it# ;u*er#L the* cann%t get the #a$e thing &r%$ %ther
c%$panie#!
1! P%tentia entrant#! The#e have t% %verc%$e the hur1e %& c%n#u$er %*at*4
#% there i# pr%tecti%n here!
e! Su;#titute pr%1uct#! The#e $u#t %verc%$e c%n#u$er ;ran1 %*at*! S%
again pr%tecti%n &r%$ the &ive &%rce# et# &%cu#er# $a(e a;%ve-average
pr%&it#!
244 One 1anger i# that ;ecau#e the &%cu#er pr%1uce# at #$aer v%u$e#4 it#
c%#t# wi ;e higher than th%#e %& the %w-c%#t c%$pan*! 'urther$%re4 i& the
&%cu#erA # niche #u11en* 1i#appear# ;ecau#e %& change# in techn%%g* %r
c%n#u$er ta#te#4 it i# har1 t% #witch t% a new niche )uic(*! A thir1 pr%;e$ i# the
p%##i;iit* that 1i&&erentiat%r# $a * c%$pete &%r the &%cu#erA# niche i& it ;ec%$e# ver*
pr%&ita;e4 a# %ccurre1 in I"MA# &ight with Appe!
76
254 )eing st"c/ in the $idd'e Each %& the generic #trategie# Bu#t 1i#cu##e1
re)uire# that the c%$pan* $a(e c%n#i#tent pr%1uct@$ar(et ch%ice# t% achieve
a &it! Hence a %w-c%#t c%$pan* cann%t g% &%r a high eve %& $ar(et
#eg$entati%n ;ecau#e 1%ing #% w%u1 rai#e c%#t#4 an1 a 1i&&erentiat%r cann%t
1ecrea#e RQD #pen1ing t% re1uce c%#t# ;ecau#e in #% 1%ing it w%u1 %#e it#
1i&&erentiati%n a1vantage! There are $an* e=a$pe# %& c%$panie# that have $a1e
the wr%ng ch%ice#! The* are cae1 #tuc( in the $i11e ;ecau#e the* have ;een
una;e t% %;tain a c%$petitive a1vantage an1 t% earn average %r a;%ve-average
pr%&it#!
a! S%$eti$e# the c%$pan* #tart# %ut ;* pur#uing a generic
#trateg* ;ut %#e# that #trateg* ;ecau#e it $a(e# the wr%ng ch%ice# %r
;ecau#e the envir%n$ent change#!
;! S%$eti$e# a %w-c%#t c%$pan* $a* 1iver#i&* int% new
pr%1uct $ar(et# where it ha# e## e=perti#e %r $a* inve#t in re#earch an1
1eve%p$ent inappr%priate t% it# #trateg*!
c! An%ther path t% &aiure i# that ta(en ;* the #ucce##&u &%cu#er
that trie# t% ;ec%$e a ;r%a1 1i&&erentiat%r an1 en1# up #tuc( in the $i11e!
Pe%pe E=pre## i# a g%%1 e=a$pe!
1! 'ina*4 1i&&erentiat%r# can %#e their #trateg* i& c%$petit%r# enter
the $ar(et an1 chip awa* at their c%$petitive a1vantage! Thi# ha#
happene1 a %t ate* t% aut%$a(er# an1 %ther c%$panie#!
264 T% #u$$ari0e4 $anaging a generic #trateg* re)uire# care&u attenti%n
t% pr%1uct@ techn%%g* @$ar(et ch%ice#! Such ch%ice# $u#t ;e %riente1 t%war1
%ne #trateg*! The envir%n$ent $u#t ;e c %#e * $%ni t%re1 #% that the
c%$pan* can (eep it# #trength# aigne1 t% $ar(et %pp%rtunitie# an1 av%i1
threat#!
274 The 1eve%p$ent %& a generic #trateg* give# the c%$pan* pr%tecti%n
&r%$ the &ive &%rce# an1 can re1uce the eve %& in1u#tr* rivar*! H%wever4
c%$panie# have t% c%ntinue t% inve#t in their generic #trategie#4 %r the* ri#(
%#ing their c%$petitive a1vantage#! Thi# i# the i##ue we turn t% n%w! Ghat
i# the appr%priate inve#t$ent #trateg* t% $atch the c%$pan*A# generic
77
c%$petitive #trateg*H
D! Ch!!sing an Invest$ent Strategy at the )"siness Leve'
14 An inve#t$ent #trateg* re&er# t% the a$%unt an1 t*pe %& re#%urce# that $u#t ;e
inve#te1 t% gain a c%$petitive a1vantage!
24 Generic #trategie# are e=pen#ive t% $aintain an1 1eve%p! Di&&erentiati%n i# $%#t
e=pen#ive ;ecau#e %& the nee1 t% pr%vi1e uni)uene##! C%#t ea1er#hip i# e##
e=pen#ive %nce the initia inve#t$ent in pant an1 e)uip$ent ha# ;een $a1e! '%cu#
i# ea#t e=pen#ive ;ecau#e &ewer re#%urce# are ear$ar(e1 t% #erve %ne $ar(et
#eg$ent rather than the wh%e $ar(et!
34 In 1eci1ing %n an inve#t$ent #trateg*4 the c%$pan* $u#t evauate the return# &r%$
inve#ting in a c%$petitive #trateg* again#t the c%#t %& 1eve%ping the c%$petitive
#trateg*! Tw% &act%r# are i$p%rtant in 1eter$ining the p%tentia return# &r%$ an
inve#t$ent #trateg*/ the #trength %& a c%$pan*A# c%$petitive p%#iti%n an1 the #tage
%& the in1u#tr* i&e c*ce!
44 The #trength %& a c%$pan*A# c%$petitive p%#iti%n i# a &uncti%n %& tw% &act%r#/ CaD it#
$ar(et #hare Carge $ar(et #hare pr%vi1e# the c%$pan* with e=perience-curve
e&&ect# %r #ugge#t# that the c%$pan* ha# ;ran1 %*at*D an1 C;D the #trength %& it#
1i#tinctive c%$petenc* C&%r e=a$pe4 the $%re 1i&&icut i# it# RQD %r #ervice e=perti#e t%
i$itate4 the #tr%nger i# it# p%#iti%nD! The#e &act%r# rein&%rce %ne an%ther4 #% a
c%$pan* with ;%th i# in a ver* #tr%ng p%#iti%n an1 i# pr%;a;* a g%%1 inve#t$ent!
54 The #ec%n1 &act%r in&uencing inve#t$ent attractivene## i# the #tage %& the in1u#tr*
i&e c*ce! The nature %& the %pp%rtunitie# an1 threat# &r%$ the envir%n$ent i#
1i&&erent at each #tage! '%r e=a$pe4 c%$petiti%n i# #tr%nge#t in the #ha(e%ut #tage4
wherea# cu#t%$er 1e$an1 e=pan1# the $%#t in the gr%wth #tage! Thi# a&&ect# the
p%tentia return# &r%$ a c%$petitive #trateg*! which #u$$ari0e# the reati%n#hip
a$%ng #tage# %& the i&e c*ce4 c%$petitive p%#iti%n4 an1 ch%ice %& inve#t$ent #trateg*
at the ;u#ine## eve!
64 Strategy at the embryonic stage. Thi# i# the #tage at which c%$panie# are
78
1eve%ping a 1i#tinctive c%$petenc*4 #% inve#t$ent nee1# are ver* great! Thu# the
appr%priate #trateg* i# a #hare-;ui1ing #trateg*! C%$panie# re)uire arge a$%unt#
%& capita t%L 1eve%p a c%$petitive a1vantage! Much %& thi# $u#t c%$e &r%$
%ut#i1e inve#t%r#!
74 Growth strategy! At the gr%wth #tage4 a c%$pan* $u#t c%n#%i1ate it# p%#iti%n an1
increa#e it# $ar(et #hare t% #urvive the c%$ing #ha(e%ut #tage! Hence the
appr%priate ate inve#t$ent #trateg* i# the gr%wth #trateg*! The c%$pan* $u#t
$aintain it# reative p%#iti%n in a rapi1* e=pan1ing $ar(et4 #% it re)uire# the
in&u#i%n %& arge a$%unt# %& capita! Di&&erentiat%r# engage in $a##ive RQD e&&%rt#4
an1 c%#t ea1er# inve#t in new pant# an1 e)uip$ent t% %wer their c%#t#! A thi# i#
ver* e=pen#ive! At that #tage4 t%%4 c%$panie# in #tr%ng p%#iti%n# #eg$ent their
$ar(et# t% Increa#e $ar(et #hare! Such #eg$entati%n i# a#% e=pen#ive ;ecau#e it
re)uire# inve#t$ent# in $ar(eting an1 #ae#!
84 C%$panie# in a wea( c%$petitive p%#iti%n a1%pt a $ar(et c%ncentrati%n #trateg*!
The* with1raw t% c%ncentrate %n 1eve%ping their c%$petenc* %r niche ;ecau#e
the* ac( the #trength t% ;ec%$e a &u-&e1ge1 1i&&erentiat%r %r %w c%#t c%$pan*!
Thi# appr%ach i# e## e=pen#ive!
94 Sha/e!"t strategy "* the #ha(e%ut #tage4 1e$an1 i# increa#ing $%re #%w*
an1 c%$petiti%n ;* price %r pr%1uct characteri#tic# i# ra$pant! C%$panie# in
#tr%ng c%$petitive p%#iti%n# nee1 t% inve#t in a #hare-increa#ing #trateg* t% attract
cu#t%$er# &r%$ c%$panie# that are e=iting the $ar(et! '%r c%#t ea1er#4
inve#t$ent in c%#t c%ntr% i# crucia! Di&&erentiat%r# atte$pt t% enarge their #hare
in $an* $ar(et #eg$ent#4 %&&er $%re pr%1uct#4 an1 ;ec%$e ;r%a1
1i&&erentiat%r#L that i#4 the* ;ec%$e increa#ing* $ar(eting %riente1!
104 The c%$panie# in a wea( p%#iti%n again turn t% $ar(et c%ncentrati%n %r4 i& ver* wea(4
engage in a harve#t %r i)ui1ati%n #trateg*!
114 Strategies at the $at"rity stage "* the $aturit* #tage4 a #trategic gr%up
#tructure ha# e$erge1 in the in1u#tr*4 an1 c%$panie# have earne1 h%w their
c%$petit%r# wi react t% their c%$petitive $%ve#! C%$panie# are eager t% reap
79
the rewar1# %& their previ%u# inve#t$ent# in a c%$petitive #trateg*! A#%4 the
#%w1%wn in $ar(et gr%wth re1uce# inve#t$ent nee1# #%$ewhat! N%w
c%$panie# in #tr%ng p%#iti%n# engage in the h%1-an1-$aintain #trateg* %r the
pr%&it #trateg*! C%$panie# a1%pting the h%1-an1-$aintain #trateg* c%ntinue t%
1e&en1 their $ar(et #hare ;ut #t%p aggre##ive* pur#uing new cu#t%$er#! Thi#
ena;e# the$ t% give higher return# t% #hareh%1er#!
124 C%$panie# in wea( c%$petitive p%#iti%n# u#e the 1ecine #trategie# 1e#cri;e1
ne=t!
134 +ec'ine strategies The 1ecine #tage #tart# when 1e$an1# &%r the in1u#tr*? #
pr%1uct# ;egin t% &a! C%$panie# in #tr%ng p%#iti%n# revert t% $ar(et
c%ncentrati%n an1 t% a##et re1ucti%n #trategie#! Even the #tr%ng c%$pan* #trive# t%
c%n#%i1ate it# $ar(et niche! It narr%w# pr%1uct range an1 e=it# $argina niche# t%
re1ep%* re#%urce# $%re e&&icient*! CInternati%na Harve#ter an1 G%%w%rth
iu#trate thi# appr%ach!D Such a #trateg* i# #%$eti$e# cae1 a harve#t #trateg*
;ecau#e the c%$pan* re1uce# t% a $ini$u$ the a##et# it e$p%*# in the ;u#ine##
an1 &%rg%e# &uture inve#t$ent in %r1er t% $i( the re#%urce n%w!
144 The 1i&&erence ;etween a $ar(et c%ncentrati%n an1 a harve#t #trateg* i# that
$ar(et c%ncentrati%n i$pie# that the c%$pan* i# tr*ing t% turn it# ;u#ine## ar%un14
wherea# harve#ting i$pie# that it wi e=it the in1u#tr* when it ha# harve#te1 a
the return# it can!
154 Turnar%un1 #trategie# $a* ;e appie1 ;* c%$panie# at an* #tage in the i&e c*ce!
The )ue#ti%n i#4 I# there a via;e wa* t% c%$pete in the in1u#tr*4 an1 i& #%4 h%w $uch
wi thi# c%#tH S%$eti$e# it i# p%##i;e t% re#cue the c%$pan*A# #trateg* &r%$ ;eing
#tuc( in the $i11e! At %ther ti$e# the pr%;e$# $a* ;e 1ue t% ;a1 #trateg*
i$pe$entati%n4 an1 it $a* ;e that re#%urce# #h%u1 ;e inve#te1 in a new
#tructure %r $anage$ent tea$! Ge wi ta(e up thi# i##ue ater in the c%ur#e!
164 I& turnar%un1 i# n%t p%##i;e4 the tw% re$aining %pti%n# are i)ui1ati%n an1 1ive#ti-
ture! The#e inv%ve the c%$pan* #eing it# a##et# piece$ea %r #eing the wh%e
;u#ine## i& a ;u*er can ;e &%un1!
80
174 Thu#4 at the ;u#ine## eve4 &%r$uating #trateg* inv%ve# CaD the ch%ice %& a c%$peti-
tive #trateg*L C;D the ch%ice %& an inve#t$ent #trateg* t% $atch thi# generic #trateg*L
an1 CcD aign$ent %& %neA# #trateg* with %pp%rtunitie# an1 threat# that ari#e in the
in1u#tr*!
S"$$ary
1! "u#ine##-eve #trateg* re&er t% the wa* #trategic $anager# 1evice a pan %& acti%n t%
u#e a c%$pan*?# re#%urce# an1 1i#tinctive c%$petencie# t% gain a c%$petitive
a1vantage %ver riva# in a $ar(et %r in1u#tr*!
+! At the heart %& the 1eve%ping a generic ;u#ine## 7eve #trateg* are ch%ice#
c%ncerning pr%1uct 1i&&erentiati%n4 $ar(et #eg$entati%n an14 1i#tinctive c%$petenc*!
The c%$;inati%n %& th%#e three ch%ice# re#ut# in the #peci&ic &%r$ %& the #peci&ic
;u#ine##-eve #trateg* e$p%*e1 ;* a c%$pan*!
2! C%#t ea1er#hip4 1i&&erentiati%n4 c%#t ea1er#hip an1 1i&&erentiati%n4 &%cu#e1 %w
c%#t4 an1 &%cu#e1 1i&&erentiati%n are generic c%$petitive #trategie#! Each ha#
a1vantage# an1 1i#a1vantage#! A c%$pan* $u#t c%n#tant* $anage it# #trateg*L
%therwi#e4 it ri#(# ;eing #tuc( in the $i11e!
5! M%#t in1u#trie# are c%$p%#e1 %& #trategic gr%up#/ gr%up# %& c%$panie# pur#uing
the #a$e %r a #i$iar ;u#ine##-eve #trateg*! The $e$;er# %& a #trategic gr%up
c%n#titute it# i$$e1iate c%$petit%r#! "ecau#e gr%up c%n#titute it# i$$e1iate
c%$petit%r#! "ecau#e 1i&&erent #trategic gr%up# are characteri0e1 ;* 1i&&erent
%pp%rtunitie# an1 threat#4 it $a* pa* a c%$pan* t% #witch #trategic gr%up#! The
&ea#i;iit* %& 1%ing #% i# a &uncti%n %& the height %& $%;iit* ;arrier#!
6! The ch%ice %& inve#t$ent #trateg* &%r #upp%rting the c%$petitive #trateg*
1epen1# %n the #trength %& a c%$pan*?# c%$petitive p%#iti%n in the in1u#tr* an1
the #tage %& the in1u#tr*?# i&e c*ce! The $ain t*pe# %& inve#t$ent #trategie# are
#hare ;ui1ing4 gr%wth4 #hare increa#ing4 h%1-an1-$aintain4 pr%&it4 $ar(et
c%ncentrati%n4 a##et re1ucti%n4 harve#t4 turnar%un14 i)ui1ati%n4 an1 1ive#titure!
:! Gain the%r* %&&er# a nu$;er %& intere#ting in#ight# int% the (in1# %& c%$petitive
$%ve# an1 tactic# that c%$panie# can a1%pt t% increa#e the return# &r%$
pur#uing their ;u#ine##-eve #trategie#! S%$e principe# %& gain the%r* are %%(
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&%rwar1 an1 rea#%n ;ac(4 (n%w th* riva4 &in1 the $%#t pr%&ita;e 1%$inant
#trateg*4 re$e$;er that #trateg* can ater the pa*%&& #tructure %& the gain4 an1
u#e #trateg* t% change the pa*%&& #tructure %& the gain!
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Chapter D
COM7ETITI4E STRATEG9 AN+ T6E IN+;STR9 EN4IRONMENT
A Intr!d"cti!n
Thi# chapter e=ten1# the ana*#i# %& ;u#ine##-eve #trateg* ;* c%n#i1ering the
1i&&erent #trategie# that &ir$# can an1 #h%u1 a1%pt a# the* enter 1i&&erent in1u#tr*
envir%n$ent#! The &%r$uati%n %& c%$petitive #trateg* 1%e# n%t ta(e pace in a vacuu$L
c%$panie# have t% c%n#i1er the reacti%n %& %ther &ir$# t% their c%$petitive $%ve#! The
chapter i# there&%re a nece##ar* a11iti%n t% Chapter 6 an1 pr%vi1e# a ;ui1ing ;%c( t%
the chapter# %n c%rp%rate-eve #trateg*! Th%#e chapter# a#% 1ea with h%w c%$panie#
create vaue at the ;u#ine## eve an1 with the &act that the* %&ten 1% #% ;* entering
1i&&erent in1u#trie#!
The chapter ;egin# with a ;rie& %verview %& the &act%r# a&&ecting the eve %&
c%$petiti%n in an in1u#tr*4 #uch a# in1u#tr* #tructure an1 $ar(et 1e$an1! It then
e=a$ine# the pr%;e$# %& $anaging a generic ;u#ine##-eve c%$petitive #trateg* in
1i&&erent (in1# %& in1u#tr* envir%n$ent#/ in &rag$ente1 in1u#trie#4 in e$;r*%nic an1
gr%wth in1u#trie#4 in $ature in1u#trie#4 an1 &ina* in 1ecining in1u#trie#! It 1i#cu##e# the
c%$petitive pr%;e$# a##%ciate1 with each envir%n$ent an1 the appr%priate #trategie#
that &ir$# can u#e t% tac(e th%#e pr%;e$# -earning O;Bective#! "* the en1 %& thi#
chapter *%u wi ;e a;e t%/
Learning Objectives : )y the end !% this chapter y!" #i'' be ab'e t!/
'a$iiari0e *%ur#e& with the 1i&&erent (in1# %& c%$petitive pr%;e$# that e=i#t in 1i&&er-
ent in1u#tr* envir%n$ent#! Di#cu## the pr%;e$# %& 1eve%ping a c%$petitive
a1vantage in a &rag$ente1 in1u#tr* an1 the #%uti%n# t% #uch pr%;e$# Di#cu## the
pr%;e$# %& $aintaining a &ir#t-$%ver a1vantage in e$;r*%nic an1 gr%wth in1u#trie#!
E=a$ine the $ain (in1# %& c%$petitive #trategie# that &ir$# u#e t% $anage
c%$petitive in1u#tr* reati%n# in $ature in1u#trie#!
Ge are g%ing t% %%( at h%w &ir$# #ee( t% $a=i$i0e their c%$petitive a1vantage ;*
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1eve%ping #trategie# t% c%$pete in &rag$ente14 e$;r*%nic an1 gr%wth4 $ature4
an1 1ecining in1u#tr* envir%n$ent#!
) Strategy in &rag$ented Ind"stries
14 A &rag$ente1 in1u#tr* c%$pri#e# a arge nu$;er %& #$a an1 $e1iu$-#i0e1 c%$-
panie#! An in1u#tr* $a* ;e &rag$ente1 &%r #evera rea#%n#/ &ew ec%n%$ie# %&
#cae4 #peciai0e1 cu#t%$er nee1#4 %r high tran#p%rtati%n c%#t#! '%r #%$e
in1u#trie# the#e &act%r# $ean that a &%cu#e1 #trateg* i# the appr%priate
c%$petitive ch%ice4 an1 c%$panie# $a* #peciai0e ;* cu#t%$er gr%up4 cu#t%$er
nee14 %r ge%graphic regi%n! E=a$pe# are #$a #peciat* c%$panie# an1 #ervice
%rgani0ati%n#! H%wever4 i& awa* can ;e &%un1 t% %verc%$e the &act%r# that cau#e
in1u#tr* &rag$entati%n an1 t% et the in1u#tr* c%n#%i1ate4 the p%tentia return#
are high! Thi# i# what &ir$# i(e Ga-Mart an1 McD%na1A# an1 chain# %& heath
cu;#4 aw*er#4 an1 acc%untant# have 1%ne! The#e #trategie# are chaining4
&ranchi#ing4 an1 $a(ing a h%ri0%nta $erger! Chaining inv%ve# e#ta;i#hing a
netw%r( %& in(e1 $erchan1i#e %utet# t% %;tain the a1vantage# %& a c%#t-
ea1er#hip %r 1i&&erentiati%n #trateg*! It a%w# ;u( purcha#ing4 ec%n%$ie# %&
#cae in a1verti#ing4 an1 #% %n!
24 In &ranchi#ing4 the %ca %utet# %& a chain are %wne1 an1 $anage1 ;* the
#a$e per#%n! Thu# there i# a #tr%ng $%tivati%n &%r the %wner-$anager t% c%ntr%
c%#t# an1 $aintain )uait*- 'ranchi#ing a#% per$it# )uic( e=pan#i%n an1 thu#
gr%wth!
34 Ghen %ne &ir$ in an in1u#tr* ta(e# %ver an1 $erge# with an%ther &ir$4 a h!ri(!nta'
$erger ha# %ccurre1! '%r e=a$pe4 Te=a# Air ;%ught Pe%pe E=pre##! The re#ut %&
h%ri0%nta $erger# i# e## c%$petiti%n an1 greater a;iit* t% in&uence price an1
%utput 1eci#i%n#4 which increa#e# in1u#tr* pr%&ita;iit*!
C Strategy in E$bry!nic and Gr!#th Ind"stries
E$;r*%nic in1u#trie# t*pica* ari#e thr%ugh inn%vati%n# ;* pi%neering c%$panie#4 #uch a#
Appe4 which pi%neere1 the per#%na c%$puter in1u#tr*4 an1 ,er%=4 which pi%neere1
ph%t%c%p*ing! The high pr%&it# earne1 ;* inn%vating c%$panie# attract i$itat%r#4 which tr*
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t% enter the $ar(et t% #hare in the high pr%&it#! The entr* rate i# genera* ver* high in the
gr%wth #tage %& the in1u#tr*4 a# 'igure :!1 #h%w#! Ghie #%$e inn%vating c%$panie#
c%ntinue t% pr%#per4 %ther# are n%t #% uc(*4 an1 i$itat%r# en1 up capturing their $ar(et
#hare!
1! The pr%;e$ &%r c%$panie# in an e$;r*%nic in1u#tr* i# h%w t% e=p%it the inn%vati%n
an1 ;ui1 a %ng-ter$ c%$petitive a1vantage! There are three #trategie# &%r a
c%$pan* t% e=p%it/ g% it a%ne an1 1eve%p an1 $ar(et the inn%vati%n it#e&L
1eve%p an1 $ar(et the inn%vati%n B%int* with %ther c%$panie#L icen#e the
inn%vati%n t% an%ther c%$pan* an1 et it 1eve%p the $ar(et! Ghich #trateg* t%
ch%%#e 1epen1# %n three &act%r#/ 1eve%ping c%$pe$entar* a##et#4 ;arrier# t%
i$itati%n4 an1 c%$petiti%n capa;iitie#!
+! C!$p'e$entary assets! C%$pe$entar* a##et# are th%#e a##et# re)uire1 t%
e=p%it a new techn%%gica inn%vati%n an1 gain a c%$petitive a1vantage!
I$p%rtant a##et# incu1e c%$petitive $anu&acturing &aciitie# that can han1e rapi1
gr%wth in 1e$an1 an1 $aintain pr%1uct )uait*L $ar(eting (n%w-h%wL a traine1
#ae# &%rceL acce## t% in1u#tr* 1i#tri;uti%n #*#te$#L a&ter-#ae# #ervice an1
#upp%rtL an1 c%$pe$entar* techn%%g* that #upp%rt# the pr%1uct4 #uch a#
#%&tware &%r har1ware! A c%$pan* ha# t% 1eve%p c%$petencie# in $an* vaue-
creati%n &uncti%n# t% #upp%rt it# techn%%gica inn%vati%n! Thi# i# e=pen#ive an1 i#
%ne rea#%n wh* &ir#t $%ver#Nthe c%$panie# that are &ir#t in the in1u#tr*N%&ten
%#e %ut t% ate $%ver#4 the arge4 #ucce##&u c%$panie# that enter ate!
2! )arriers t! i$itati!n! The #ec%n1 &act%r that a&&ect# the #trateg* an inn%vat%r
#h%u1 pur#ue in an e$;r*%nic in1u#tr* i# ;arrier# t% i$itati%n4 which prevent
riva# &r%$ c%p*ing an1 i$itating the inn%vat%r! The higher the ;arrier#4 the %nger it
ta(e# riva# t% i$itate the inn%vat%r! "arrier# incu1e patent#4 a# in 1rug#4 an1
#ecret pr%ce##e#4 i(e P%ar%i1A# in#tant ca$era! H%wever4 in #%$e in1u#trie# it i#
ea#* t% invent ar%un1 patent#! One #tu1* #h%we1 that :9 percent %& patente1
inn%vati%n# were invente1 ar%un1 within &%ur *ear#
5! Capab'e c!$petit!rs! The capa;iit* %& c%$petit%r# t% i$itate a pi%neerA#
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inn%vati%n i# the thir1 &act%r! D% riva# have RQD #(i# an1 acce## t%
c%$pe$entar* a##et#H The $%re wi1e#prea1 the#e are4 the &a#ter wi
inn%vati%n ta(e pace an1 the $%re 1i&&icut it wi ;e &%r the inn%vat%r t% pr%tect the
#%urce %& it# c%$petitive a1vantage!
6! The wa* in which the#e three &act%r# a&&ect the ch%ice %& inn%vati%n #trateg* i#
#u$$ari0e1 in Ta;e :1!
a4 S%% venture i# pre&erre1 when the c%$pan* ha# c%$pe$entar* a##et# %r
can 1eve%p the$ )uic(*4 when it can erect high ;arrier# t% i$itati%n4 an1
when the nu$;er %& capa;e c%$petit%r# i# %w! T% e$;ar( %n a #%%
venture4 c%$panie# u#ua* have t% ;e arge an1 have acce## t% arge
a$%unt# %& capita!
b4 A #trategic aiance %r B%int venture i# pre&erre1 when ;arrier# t% i$itati%n are
high4 when a c%$pan* can c%ntr% the techn%%g* ;ut ac(# the re#%urce#
t% ;ui1! C%$pe$entar* a##et#4 an1 when there are #evera capa;e
c%$petit%r#! In #uch ca#e#4 a #$a &ir$ B%in# with a arge &ir$!
c4 I& ;arrier# t% i$itati%n are %w4 the c%$pan* ac(# c%$pe$entar* a##et#4
an1 there are $an* capa;e c%$petit%r#4 then it #h%u1 #e %r icen#e it#
techn%%g* t% an e#ta;i#he1 &ir$ an1 accept r%*at* pa*$ent#!
+ Strategy in Mat"re Ind"stries
A# a re#ut %& &ierce c%$petiti%n in the #ha(e%ut #tage4 the in1u#tr* ;ec%$e#
c%n#%i1ate1 #% that it c%$pri#e# a #$a nu$;er %& arge c%$panie#4 which are
inter1epen1ent/ the* rec%gni0e that their acti%n# a&&ect %ne an%ther! In the a#t
1i#cu##i%n we a##u$e1 that c%$panie# in an in1u#tr* c%u1 pur#ue a generic #trateg*
#ucce##&u* regar1e## %& what %ther &ir$# were 1%ing! H%wever4 ;ecau#e %& c%$petitive
inter1epen1ence4 thi# i# n%t true! T% a arge e=tent4 c%$petitive #trateg* in $ature
in1u#trie# rev%ve# ar%un1 c%$panie# ch%%#ing c%$petitive techni)ue# that a%w the$
t% pr%tect their in1ivi1ua c%$petitive a1vantage whie 1eve%ping in1u#tr* rue# that
pr%vi1e #ta;iit* in the in1u#tr* an1 re1uce the threat %& c%$petiti%n that w%u1 hurt a
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c%$panie#! Ghat c%$panie# tr* t% 1% i# u#e c%$petitive techni)ue# t% re1uce the threat
%& the &ive c%$petitive &%rce# #% that the* can rai#e the eve %& &ir$ an1 in1u#tr*
pr%&ita;iit*! 'ir$# in a $ature in1u#tr* can pur#ue #trategie# t% 1eter p%tentia entrant#4
t% re1uce in1u#tr* rivar*4 an1 t% c%ntr% p%wer&u ;u*er# an1 #uppier#!
E Strategies t! +eter Entry in Mat"re Ind"stries
There are three $ain $eth%1# c%$panie# in an in1u#tr* can u#e t% 1eter entr*
;* p%tentia riva#/ pr%1uct pr%i&erati%n4 price cutting4 an1 $aintaining e=ce##
capacit*!
1! 7r!d"ct pr!'i%erati!n Pr%1uct pr%i&erati%n %ccur# when a c%$pan* trie# t% ;r%a1en
it# pr%1uct ine an1 pr%vi1e pr%1uct# &%r a $ar(et #eg$ent# in %r1er t% $a(e it
ver* har1 &%r a p%tentia c%$petit%r t% enter the $ar(et! Such an e&&%rt i# a#% cae1
I&iing the niche#!I '%r e=a$pe4 it wa# n%t &iing the #$a car niche# that $a1e U!S!
car &ir$# #% vunera;e t% the <apane#e! Ghen the niche# are &ie14 it i# har1 t%
enter e=cept at a 1i#a1vantage!
+! A gap in the $ar(et %r un%ccupie1 pr%1uct #pace can a%w new &ir$# t% enter the
$ar(et ;* &in1ing a niche! "ut i& the #pace i# &ie14 entr* i# 1i&&icut!
2! 7rice c"tting In #%$e #ituati%n#4 pricing #trategie# inv%ving price-cutting can ;e
u#e1 t% 1eter entr* int% the in1u#tr* ;* %ther c%$panie#! C%$$%n*4 c%$panie#
initia* charge a high price t% pr%&it &r%$ their inn%vati%n# ;ut then #ucce##ive* cut
price# t% ;ui1 $ar(et #hare and $a(e it $%re 1i&&icut &%r new &ir$# t% enter the
$ar(et! Thi# #trateg* a#% et# a c%$pan* ri1e 1%wn the e=perience curve4 1eve%p
a reputati%n4 an1 %;tain ec%n%$ie# %& #cae t% 1rive 1%wn c%#t# an1 re1uce
entr*! Then n%npri$e c%$petiti%n ;ec%$e# the $ain vehice &%r in1u#tr*
c%$petiti%n a$%ng e=i#ting &ir$#L the* c%$pete %n the ;a#i# %& the )uait* %r
&eature# %& their pr%1uct#!
5! Maintaining eAcess capacity "* $aintaining en%ugh e=ce## capacit*4 e=i#ting &ir$#
put p%tentia entrant# %n n%tice that i& the* atte$pt t% enter the $ar(et4 the &ir$# wi
increa#e their pr%1ucti%n an1 1rive 1%wn price# t% a eve at which new entr* wi
;e unpr%&ita;e! Airine# ta(e thi# appr%ach! The threat ha# t% ;e cre1i;e ;ecau#e
e=i#ting &ir$# wi a#% %#e $%ne* in the #h%rt run!
87
& Strategies t! Manage Riva'ry in Mat"re Ind"stries
"e*%n1 #ee(ing t% 1eter entr*4 c%$panie# a#% wi#h t% utii0e #trategie# t% re1uce
the eve %& in1u#tr* rivar* ;ecau#e unre#tricte1 c%$petiti%n %ver price# %r %utput
can re1uce pr%&it#! Severa #trategie# are avaia;e!
14 Price #ignaing i# the pr%ce## ;* which &ir$# c%nve* their intenti%n# t%
riva# c%ncerning pricing #trateg* an1 h%w the* wi c%$pete in the &uture %r h%w the*
wi react t% the c%$petitive $%ve# %& their riva#! 'ir$# can ann%unce that the*
wi re#p%n1 vig%r%u#* t% %ther &ir$# h%#tie $%ve# i& attac(e14 re1uce price# i&
entr* int% the in1u#tr* %ccur#4 %r &%%w i$$e1iate* i& %ne &ir$ cut# price#! T% w%r(4
#uch ann%unce$ent# $u#t ;e cre1i;eL that i#4 c%$petit%r# $u#t ;eieve that
c%$panie# wi 1% what the* #a*!
+! Price ea1er#hip4 in which %ne c%$pan* ta(e# the re#p%n#i;iit* %& #etting
in1u#tr* price#4 i# an%ther wa* %& u#ing price #ignaing t% enhance in1u#tr*
pr%&ita;iit*! "* #etting price#4 the ea1er create# a $%1e that %ther &ir$# can &%%w!
The price ea1er i# genera* the #tr%nge#t &ir$ in the in1u#tr*4 #% it can ;e#t threaten
%ther c%$panie# that $ight cut price#! Such price #etting i# iega4 #% the pr%ce## i#
%&ten ver* #u;te! '%r e=a$pe4 &re)uent*4 the wea(e#t &ir$# #et the price#L then
the #tr%nge#t wi &%%w4 charge a higher price4 an1 $a(e $%re pr%&it#4 a# with
<apane#e aut%$a(er#!
2! C%$panie# u#e #evera techni)ue# t% prevent price war# an1 price-cutting4 ;ut
thi# 1%e# n%t 1eter n%n-price c%$petiti%n ;* pr%1uct 1i&&erentiati%n! In $an*
in1u#trie#4 thi# i# the principa wa* %& c%$peting! C%$panie# u#e pr%1uct
1i&&erentiati%n t% prevent a c%$petit%r &r%$ gaining acce## t% it# cu#t%$er# an1
&r%$ attac(ing it# $ar(et #hare! Pr%1uct 1i&&erentiati%n a#% re1uce# rivar*
;ecau#e it $ini$i0e# the ri#( that c%$panie# wi c%$pete ;* price4 which hurt#
ever*;%1*! Pr%1uct 1i&&erentiati%n a%w# c%$panie# t% c%$pete &%r $ar(et #hare
;* n%n-price $eth%1#N&%r in#tance4 ;* %&&ering pr%1uct# with 1i&&erent %r #uperi%r
&eature#! There are &%ur n%n-price c%$petitive #trategie# that are ;a#e1 %n
88
pr%1uct 1i&&erentiati%n!
Mar(et penetrati%n %ccur# when a c%$pan* e=pan1# $ar(et #hare in it# e=i#ting
pr%1uct@$ar(et#! A1verti#ing i# u#e1 t% increa#e ;ran1 na$e reputati%n4 an1 in
#%$e in1u#trie#N&%r e=a$pe4 in #%ap an1 1etergent# %r in 1iaper#Nthi# #trateg* i#
c%$$%n* the $ain %ne u#e1!
a4 Pr%1uct 1eve%p$ent inv%ve# c%$petiti%n ;* creating new %r i$pr%ve1
pr%1uct# t% repace e=i#ting %ne#4 a# in the wet #having in1u#tr* an1 #%ap
p%w1er#! N%te that thi# &%r$ %& c%$petiti%n can ;e a# vici%u# a# a price
war!
b4 Mar(et 1eve%p$ent inv%ve# &in1ing new $ar(et #eg$ent# t% e=p%it a
c%$pan*A# pr%1uct#! The &ir$ i# #ee(ing t% capitai0e %n it# ;ran1 na$e
in new $ar(et#4 a# the <apane#e 1i1 in entering the u=ur* #eg$ent %& the
car $ar(et!
c4 Pr%1uct pr%i&erati%n can a#% ;e u#e1 t% re1uce rivar*! Here each &ir$ in
the in1u#tr* $a(e# #ure that it i# in ever* niche t% prevent an* &ir$ &r%$
gaining a c%$petitive a1vantage4 an1 i& a new niche 1eve%p#4 it ru#he#
t% pr%vi1e a pr%1uct t% &i the niche an1 ree#ta;i#h in1u#tr* #ta;iit*!
5! Ath%ugh &ir$# pre&er n%n-price c%$petiti%n4 peri%1ica* price c%$petiti%n
1%e# ;rea( %ut! M%#t c%$$%n*4 thi# %ccur# ;ecau#e in1u#tr* %vercapacit* e=i#t#L
that i# c%$panie# c%ective* pr%1uce #% $uch that re1ucing price# i# the %n*
wa* t% 1i#p%#e %& the pr%1uct! I& %ne c%$pan* #tart# t% re1uce price#4 the
%ther# &%%w ;ecau#e %therwi#e the* wi ;e e&t with unwante1 g%%1#! Thu# a &ina
techni)ue that a%w# c%$panie# t% $anage rivar* incu1e# capacit* c%ntr%
#trategie# ai$e1 at c%ntr%ing the eve %& in1u#tr* %utput!
6! E=ce## capacit* $a* ;e 1ue #%$eti$e# t% &aing 1e$an14 in which ca#e
there i# n%thing that c%$panie# can 1% a;%ut it! H%wever4 #%$eti$e# it i#
generate1 when c%$panie# in an in1u#tr* #i$utane%u#* re#p%n1 t% &av%ra;e
in1u#tr* c%n1iti%n# ;* inve#ting in new pant# t% ta(e a1vantage %& an up#urge in
1e$an1! Para1%=ica*4 each c%$pan*A# atte$pt t% %utper&%r$ the %ther# hurt#
the$ a!
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:! Techn%%gica &act%r#4 t%%4 can ;ring a;%ut e=ce## capacit*N&%r in#tance4
when a in1u#tr* &ir$# intr%1uce new4 %w-c%#t techn%%g* at the #a$e ti$e!
E=ce## capacit* $a* a#% re#ut when there i# new entr* int% the in1u#tr* %r when
a &ir$# $%ve #i$utane%u#* t% ta(e a1vantage %& in1u#tr* tren1#!
E! H%w can c%$panie# &in1 a wa* %& c%ntr%ing in1u#tr* capacit*H Thi# i# a
ver* i$p%rtant i##ue #ince c%$panie# wi ;e una;e t% rec%up inve#t$ent# in their
generic #trategie# i& the* are awa*# pague1 ;* price cutting an1 price war#! Tw%
#trategie# are avaia;e!
a4 A pree$ptive #trateg* i# ;eing u#e1 when %ne &ir$4 rec%gni0ing an
%pp%rtunit*4 $%ve# )uic(* t% e#ta;i#h a &ir#t-$%ver a1vantage %ver %ther
&ir$#! The &ir$ h%pe# that %ther &ir$# wi rec%gni0e that the* are t%% &ar ;ehin1
t% catch up an1 wi there&%re n%t increa#e their capacit*! H%wever4 thi# $a*
n%t 1eter c%$petit%r#4 wh% $a* enter an*wa*4 an1 %n* a arge an1 #tr%ng
c%$pan* can pur#ue thi# #trateg*!
b4 The $%re i(e* ch%ice4 a c%%r1inati%n #trateg* inv%ve# &ir$#
#ignaing t% %ne an%ther their intenti%n# c%ncerning their &uture capacit*! "*
in1irect* in&%r$ing %ne an%ther %& their pan#4 the* #ee( t% en#ure B%int*
that capacit* 1%e# n%t ;ec%$e #% arge that it pr%$%te# a price war! A# a
re#ut4 the ri#(# a##%ciate1 with increa#ing capacit* are re1uce1!
G S"pp'y and +istrib"ti!n Strategy in Mat"re Ind"stries
"* the $ature #tage %& the i&e c*ce4 c%$panie# are genera* intere#te1 in having $%re
c%ntr% %ver the #upp* %& their input# an1 the 1i#p%#a %& their pr%1uct#! Ghen c%$panie#
#ee( t% %wn the#e #upp* %r 1i#tri;uti%n %perati%n#4 the* are pur#uing a #trateg* %& vertica
integrati%n4 which wi ;e 1i#cu##e1 in a ater ecture4 when we ta(e up c%rp%rate #trateg*!
Here we %%( at h%w $anaging reati%n# with #uppier# an1 1i#tri;ut%r# can hep #upp%rt
a c%$pan*A# generic #trateg*!
1! There are i$p%rtant rea#%n# t% c%ntr% #uppier-1i#tri;ut%r reati%n#hip#! On the
#upp* #i1e4 &ir$# $ight wi#h t% i$pr%ve pr%1uct )uait* ;* having $%re reia;e
input# %r t% re1uce their c%#t# ;* u#ing a Bu#t-in-ti$e invent%r* #*#te$! On the
90
1i#tri;uti%n #i1e4 the* $a* #i$p* wi#h t% pr%tect pr%1uct )uait* an1 their $ar(et
#hare ;* ;eing a;e t% in&uence %r c%ntr% 1i#tri;uti%n! There are #evera wa*# t%
1i#tri;ute pr%1uct#! 'ir#t4 the c%$pan* can #e t% an in1epen1ent 1i#tri;ut%r that
#e# t% retaier#4 %r the &ir$ $a* #e 1irect* t% retaier# %r even 1irect* t% the
cu#t%$er
De wa# the &ir#t c%$pan* t% 1irect* $ar(et per#%na c%$puter# t% c%n#u$er#4 ;*pa##ing
the $i11e$an t% (eep c%#t# %w an1 un1ercut it# riva#! In 1882 C%$pa) ann%unce1 that
it w%u1 a#% pur#ue thi# #trateg* a# a part %& it# e$ergence a# a %w-c%#t c%$puter $a(er4
an1 the tw% c%$panie# are n%w g%ing hea1-t%-hea1!
+! In genera4 the c%$pe=it* %& the pr%1uct an1 the a$%unt %& a&ter-#ae# #upp%rt it
re)uire# wi 1eter$ine which $eth%1 a c%$pan* wi u#e t% 1i#tri;ute it# pr%1uct#!
The $%re c%$pe= the pr%1uct4 the $%re i(e* i# a c%$pan* t% tr* t% c%ntr% the wa*
it# pr%1uct# are #%1 an1 #ervice1! H%wever4 arge &ir$# that #e nati%nwi1e u#ua*
#e 1irect* t% the retaier ;ecau#e the* #ave the pr%&it that w%u1 %therwi#e have
g%ne t% the wh%e#aer %r 1i#tri;ut%r! In #u$4 it i# i$p%rtant t% &in1 the ;e#t #upp* %r
1i#tri;uti%n #trateg* that $atche# the c%$pan*A# generic c%$petitive #trateg*!
6 Strategy in +ec'ining Ind"stries
Once 1e$an1 #tart# t% &a4 an in1u#tr* i# in 1ecine4 an1 c%$petitive pre##ure# ;ec%$e
even $%re inten#e! Thi# i# happening in the t%;acc% in1u#tr* t%1a* a# 1e$an1 &%r
cigarette# &a#
1! '%ur critica &act%r# 1eter$ine the inten#it* %& c%$petiti%n in a 1ecining in1u#tr*!
Rapi1 1ecine4 a# in t%;acc%4 high e=it ;arrier#4 an1 high &i=e1 c%#t#4 a# in #tee4 a
pr%$%te c%$petiti%n! 'urther$%re4 c%$$%1it* pr%1uct# generate $%re c%$petiti%n
than 1i&&erentiate1 pr%1uct#!
+! C%$panie# have &%ur 1i&&erent #trategie# avaia;e t% 1ea with 1ecine! The* can
a1%pt CaD a ea1er#hip #trateg* an1 tr* t% ;ec%$e the 1%$inant pa*er in a 1ecining
$ar(et C;D a niche #trateg* an1 &%cu# %n particuar p%c(et# %& 1e$an14 CcD a
harve#t #trateg* t% %pti$i0e ca#h &%w in a 1ecining in1u#tr*4 an1 C1D a 1ive#t$ent
#trateg* an1 #e the ;u#ine## t% %ther#!
2! A &ra$ew%r( that can gui1e the ch%ice a$%ng the#e #trategie# i# #h%wn4 the #everit*
%& 1ecine i# $ea#ure1 %n the vertica a=i# an1 a c%$pan*A# #trength# relative t%
91
re$aining p%c(et# %& 1e$an1 are #h%wn %n the h%ri0%nta a=i#D!
a4 -ea1er#hip #trateg*! The g%a %& a ea1er#hip #trateg* i# t% pic( up the
#hare %& c%$panie# eaving an in1u#tr*! Thi# $a(e# $%#t #en#e when a
c%$pan* ha# 1i#tinctive #trength#4 #uch a# a %w-c%#t c%$petenc*4 %r
#%$e 1i&&erentiati%n a1vantage4 #uch a# a ;ran1-na$e reputati%n4 that give
it a c%$petitive a1vantage!
Read Strategy in Acti!n
In the 1ecining vacuu$ tu;e in1u#tr*4 Richar1#%n ;%ught the #t%c(# an1 ;u#ine##
%& arge c%$panie# i(e Ge#tingh%u#e4 which were e=iting the vacuu$ tu;e in1u#tr*!
Richar1#%n then ;eca$e the 1%$inant c%$pan* in the in1u#tr*! A# #uch4 it i# a;e t%
charge cu#t%$er# high price# an1 reap ;ig pr%&it# &r%$ it# #trateg* an1 ha# ;een ver*
#ucce##&u!
b4 Niche #trateg*! Gith a niche #trateg* a c%$pan* &%cu#e# %n p%c(et# %&
1e$an1 where 1e$an1 i# #ta;e %r 1ecining e## #%w* than in the in1u#tr*
a# a wh%e!
c4 !arve#t #trateg*! A harve#t #trateg* inv%ve# a c%$pan* %pti$i0ing it# ca#h
&%w a# it e=it# an in1u#tr*
&4 Dive#t$ent #trateg*! Once a c%$pan* ha# rec%gni0e1 that an in1u#tr* i#
in 1ecine4 it $%ve# ear* t% #e the ;u#ine## t% $a=i$i0e the vaue that it
can get &%r it! O&ten it $ight #e t% the ea1er#hip c%$pan*4which i#
;e#t p%#iti%ne1 t% weather the #t%r$# ahea1!
S;MMMAR9
1! In a &rag$ente1 in1u#tr* c%$p%#e1 %& a arge nu$;er %& #$a an1 $e1iu$-#i0e1
c%$panie#L the principa &%r$# %& c%$petitive #trateg* are chaining4 &ranchi#ing4
an1 h%ri0%nta $erger!
+! The e$;r*%nic an1 gr%wth in1u#trie#4 the wa* in which 1i&&erent (in1# %& cu#t%$er
gr%up# e$erge %ver ti$e4 an1 cu#t%$er nee1# change4 are i$p%rtant
1eter$inant# %& ;u#ine##-eve #trateg*! Si$iar*4 un1er#tan1ing the &act%r# that
92
a&&ect a $a(er?# gr%wth rate a%w $anager# t% tai%r their ;u#ine## $%1e t% a
changing in1u#tr* envir%n$ent!
2! Mature in1u#trie# are c%$p%#e1 %& a &ew arge c%$panie# wh%#e acti%n# are #%
high* inter1epen1ent that the #ucce## %& %ne c%$pan*?# #trateg* 1epen1# %n the
re#p%n#e %& it# riva#!
5! The principa c%$petitive tactic# an1 $aneuver# u#e1 ;* c%$panie# in $ature
in1u#trie# t% 1eter entr* are pr%1uct pr%i&erati%n4 pricing ga$e#4 an1 $aintaining
e=ce## capacit*!
6! The principa c%$petitive tactic# $aneuver# u#e1 ;* c%$panie# in $ature
in1u#trie# t% $anage rivar* are price #ignaing4 price ea1er#hip4 n%n-price
c%$petiti%n an1 capacit* c%ntr%!
:! C%$panie# in $ature in1u#trie# nee1 t% 1eve%p a #upp*-an1-1i#tri;uti%n #trateg*
t% pr%tect the #%urce %& their c%$petitive a1vantage!
E! In 1ecining in which $ar(et 1e$an1 ha# evee1 %&& %r i# &aing4 c%$panie# $u#t
tai%r their price an1 n%n-price #trategie# t% the new c%$petitive envir%n$ent! The*
a#% nee1 t% $anage in1u#tr* capacit* t% prevent the e$ergence %& capacit*
e=pan#i%n pr%;e$#!
F! There are &%ur $ain #trategie# a c%$pan* can pur#ue when 1e$an1 i# &aing/
ea1er#hip4 niche4 harve#t4 an1 1ive#t$ent! The ch%ice i# 1eter$ine1 ;* the
#everit* %& in1u#tr* 1ecine an1 the c%$pan*?# #trength# reative t% the re$aining
p%c(et# %& 1e$an1!
93
Chapter 8
STRATEG9 IN 6IG6 GTEC6NOLOG9 IN+;STRIES
Intr!d"cti!n
In thi# chapter4 we %%( at the nature %& c%$petiti%n an1 #trateg* in high-techn%%g*
in1u#trie#! Techn!'!gy re&er# t% ;%1* %& #cienti&ic (n%we1ge u#e1 in the pr%1ucti%n %&
g%%1# an1 #ervice#! 6igh- techn!'!gy Bhigh-techC ind"stries are th%#e in which the
un1er*ing #cienti&ic (n%we1ge that c%$panie# the in1u#tr* u#e i# a1vancing rapi1*4 an1
;* i$picati%n #% are attri;ute# %& the pr%1uct an1 #ervice# that re#ut# &r%$ it#
appicati%n! The c%$puter in1u#tr* i# %&ten th%ught %& a# the )uinte##entia e=a$pe %&
high-techn%%g* in1u#tr*! Other in1u#trie# %&ten c%n#i1ere1 high tech are
teec%$$unicati%n#4 where new techn%%gie# are ;a#e1 %n wiree## an1 internet have
pr%i&erate1 an recent *ear#L c%n#u$er eectr%nic#4 where the 1igita techn%%g*
un1er*ing pr%1uct# &r%$ D3D pa*er# t% vi1e% ga$e ter$ina# an1 1igita ca$era# i#
a1vance1 rapi1*L phar$aceutica#4 where new techn%%gie# ;a#e1 %n ce ;i%%g*4
rec%$;inant DNA4 an1 gen%$ic# are rev%uti%ni0ing the pr%ce## %& 1rug 1i#c%ver*L p%wer
generati%n4 where new techn%%gie# ;a#e1 %n &ue ce# an1 c% generati%n $a* change
the ec%n%$ic# %& the in1u#tr* an1 aer%#pace where the c%$;inati%n %& new c%$p%#ite
$ateria#4 eectr%nic# an1 $%re e&&icient Bet engineer# $a* give ;irth t% anew era %& near-
#uper#%nic c%$$ercia aircra&t #uch a# "%eing?# panne1 #%nic crui#er!
Thi# chapter &%cu#e# %n high-techn%%g* in1u#trie# &%r a nu$;er %& rea#%n#! 'ir#t4
techn%%g* i# acc%unting &%r an ever-arger #hare %& ec%n%$ic activit*! E#ti$ate# #ugge#t
that r%ugh* 16 percent %& t%ta ec%n%$ic# activitie# in the Unite1 State# i# acc%unte1 &%r
;* in1u#trie#! Thi# &igure actua* un1er un1ere#ti$ate# the true i$pact %& techn%%g* %n
the ec%n%$*4 ;ecau#e it ign%re# the %ther high techn%%g* area# we have Bu#t $enti%ne1!
M%re%ver4 a# techn%%g* a1vance#4 $an* %w-techn%%g* in1u#trie# are ;ec%$ing $%re
high tech!4 &%r e=a$pe4 the 1eve%p$ent %& the ;i%techn%%g* an1 genetic engineering
tran#&%r$e1 the pr%1ucti%n %& #ee1 c%rn4 %ng c%n#i1ere1 a %w-techn%%g* ;u#ine##4 int%
high-techn%%g* ;u#ine##! M%re%ver4 high-techn%%g* pr%1uct# are $a(ing their wa* int%
wi1e range %& ;u#ine##e#L t%1a* a &%r1 Tauru# c%ntain# $%re c%$puting p%wer than the
94
$uti$ii%n 1%ar $ain&ra$e c%$puter# u#e1 in the Ap%% #pace pr%gra$4 an1 the
c%$petitive a1vantage %& ph*#ica #t%re# #uch a# Ga-Mart i# ;a#e1 %n their u#e %&
in&%r$ati%n techn%%g*!
Learning Objectives
"* the ti$e *%u have c%$pete1 rea1ing thi# chapter4 *%u wi ;e a;e t%/
1! Un1er#tan1 the nature %& c%$petiti%n in high-tech in1u#trie#!
+! Un1er#tan1 the #trategie# the c%$panie# can u#e t% #uccee1 in th%#e in1u#trie#!
Teaching !"t'ine
A Intr!d"cti!n
. Technica' Standard and &!r$at Wars In high tech-in1u#trie#4 %wner#hip %&
technica #tan1ar1# 7 a #et %& technica #peci&icati%n# that pr%1ucer# a1here t% when
$a(ing a pr%1uct %& a c%$p%nent %& it can ;e an i$p%rtant #%urce %& c%$petitive
a1vantage! In1ee1 the #%urce %& pr%1uct 1i&&erentiati%n i# ;a#e1 %n the technica
#tan1ar1! O&ten %n* %ne #tan1ar1 wi c%$e t% 1%$inate a $ar(et4 #% $an* ;atte#
in high-tech in1u#trie# rev%ve ar%un1 c%$panie# c%$peting t% ;e the %ne that #et#
the #tan1ar1!
0 "atte# t% #et an1 c%ntr% technica #tan1ar1# in a $ar(et are re&erre1 t% a# %!r$at
#arsL the* are e##entia* ;atte# t% c%ntr% the #%urce %& 1i&&erentiati%n an1 thu# the
vaue which #uch 1i&&erentiati%n can create &%r the cu#t%$er#!
1 The pr%&ita;iit* an1 ver* #urviva %& a c%$pan* $a* 1epen1 %n the %utc%$e %& the
;atte
2 E=a$pe# %& #tan1ar1# i# the a*%ut %& the c%$puter# (e*;%ar1! An%ther e=a$pe
%& a technica #tan1ar1 c%ncern# the 1i$en#i%n# %& c%ntainer# u#e1 t% #hip g%%1# %n
truc(#4 raicar#4 an1 #hip#/ a have the #a$e ;a#ic 1i$en#i%n#- #a$e height4 ength
an1 wi1th- an1 a $a(e u#e %& the #a$e %c(ing #*#te$# t% h%1 an1 %nt% a #ur&ace
%r t% ;%t again#t each %ther!
14 aC )ene%its !% standards having a technica* #tan1ar1 hep# t% guarantee
c%$pati;iit* ;etween pr%1uct an1 their c%$pi$ent#4 - %ther pr%1uct# u#e1 with
95
the$! E=a$pe c%ntainer# are u#e1 with truc(# an1 #hip#4 an1 PC# are u#e1 with
#%&tware appicati%n
bC c%$pati;iit* ha# tangi;e ec%n%$ic ;ene&it %& re1ucing the c%#t a##%ciate1 with
$a(ing #ure that pr%1uct# w%r( we with each %ther
24 Having a #tan1ar1 can hep t% re1uce c%n&u#i%n in the $in1 %& c%n#u$er#! An
e=a$pe wa# the ca#e %& c%n#u$er eectr%nic# c%$panie# wh% were v*ing with each
%ther t% pr%1uce an1 $ar(et the &ir#t D3D pa*er# an1 the* were cha$pi%ning
1i&&erent variant# %& the ;a#ic D3D techn%%g*-1i&&erent #tan1ar1 that were
inc%$pati;e with each %therL a D3D 1i#c 1e#igne1 t% run %n a D3D pa*er $a1e ;*
T%#hi;a w%u1 n%t run %n a pa*er $a1e ;* S%n*4 an1 vice ver#a! A cear ca#e %& thi#
c%u1 ;e rea1 in #trateg* in acti%n!
2!The e$ergence %& #tan1ar1# can hep t% re1uce pr%1ucti%n c%#t! Once #tan1ar1
e$ergence pr%1uct# ;a#e1 %n that #tan1ar1# 1e#ign can ;e $a##-pr%1uce14
ena;ing the $anu&acture# t% reai0e #u;#tantia ec%n%$ie# %& #cae an1 %wer their
c%#t #tructure#!
5!The e$ergence %& #tan1ar1# can hep t% re1uce the ri#( a##%ciate1 with #upp*ing
c%$pi$entar* pr%1uct# an1 thu# increa#e the #upp* &%r th%#e c%$pi$ent#!
Estab'ish$ent !% standard
Stan1ar1# e$erge in an in1u#tr* in three $ain wa*#!
Rec%gni0ing the ;ene&it# %& e#ta;i#hing a #tan1ar14 c%$panie# in an in1u#tr* $ight
%;;* the g%vern$ent t% $an1ate an in1u#tr* #tan1ar1
Technica #tan1ar1 are #et ;* c%%perati%n a$%ng ;u#ine##e# with%ut g%vern$ent
hep4 %&ten thr%ugh the $e1iu$ %& an in1u#tr* '%ru$! C%$panie# c%%perate in thi#
wa* when the* 1eci1e1 that c%$petiti%n a$%ng the$ t% create a #tan1ar1 $ight ;e
har$&u ;ecau#e %& the uncertaint* that it w%u1 create the $in1 %& the c%n#u$er#!
Ghen #tan1ar1 are #et ;* the g%vern$ent %r an in1u#tr* a##%ciati%n4 an*%ne can
&ree* in c%%perate the (n%we1ge an1 techn%%g* %n which a #tan1ar1 i# ;a#e1 int%
their pr%1uct!
96
Net#!r/ e%%ects 7!sitive e%%ective %eedbac/- and '!c/!"t
Net#!r/ e%%ects arise in in1u#tr* where the #i0e %& the Jnetw%r(K %& c%$pi$entar*
pr%1uct# i# a pri$ar* 1eter$inant %& 1e$an1 &%r an in1u#tr*?# pr%1uct! '%r e=a$pe the
1e$an1 &%r aut%$%;ie# ear* in the +9
th
centur* wa# an increa#ing &uncti%n %& the
netw%r( %& pave1 r%a1# an1 ga# #tati%n#!
T% un1er#tan1 wh* netw%r( e&&ect# are i$p%rtant in the e#ta;i#h$ent %& #tan1ar14
c%n#i1er the ca##ic e=a$pe %& a &%r$at war/ the ;atte ;etween S%n* an1 Mat#u#hita t%
e#ta;i#h their re#pective techn%%g* &%r vi1e% ca##ette rec%r1er# C3CR#D a# the #tan1ar1
in the $ar(et pace!
The genera principe that e$erge# &r%$ thi# e=a$pe i# that when tw% %r $%re
c%$panie# are c%$peting with each %ther t% get their techn%%g* a1%pte1 a# a #tan1ar1
in an in1u#tr* an1 when netw%r( e&&ect# an1 p%#itive &ee1;ac( %%p# are i$p%rtant4 the
c%$pan* that win# the &%r$at war wi ;e the %ne wh%#e #trateg* ;e#t e=p%it p%#itive
&ee1;ac( %%p#! Thi# i# a ver* i$p%rtant #trategic principe in $an* high-techn%%g*
in1u#tr*4 particuar* c%$puter har1ware4 #%&tware4 teec%$$unicati%n4 an1 c%n#u$er
eectr%nic#! Micr%#%&t i# an e=a$pe %& #uch a c%$pan*!

An i$p%rtant i$picati%n %& p%#itive &ee1;ac( i# that a# the $ar(et #ette# %n a
#tan1ar14 c%$panie# pr%$%ting aternative #tan1ar1# can ;ec%$e '!c/ed !"t %& the
$ar(et when c%n#u$er# are unwiing t% ;ear the #witching c%#t# re)uire1 &%r the$ t%
a;an1%n the e#ta;i#he1 #tan1ar1 an1 a1%pt the new #tan1ar1! In thi# c%nte=t4 s#itching
c!sts are the c%#t# that c%n#u$er# $u#t ;ear t% #witch &r%$ a pr%1uct ;a#e1 %n %ne
techn%%gica #tan1ar1 t% a pr%1uct ;a#e1 %n an%ther! C%n#u$er# wi ;ear #witching
c%#t# i& the ;ene&it %& a1%pting the new techn%%g* %utweigh# the c%#t# %& #witching! An
e=a$pe i# the #witching ;* $ii%n# %& pe%pe &r%$ ana%g rec%r1 pa*er# t% 1igita CD
pa*er !Even th%ugh the #witching c%#t# were high4 the ;ene&it %& ;etter #%un1 )uait*
$a1e pe%pe t% purcha#e new pa*er techn%%g*!
97
) Strategies %!r Winning a &!r$at War
The vari%u# #trategie# that c%$panie# #h%u1 a1%pt t% win &%r$at war# rev%ve
ar%un1 &in1ing wa*# t% $a(e netw%r( e&&ect# w%r( in their &av%r again#t their c%$petit%r#!
Ginning a &%r$at war re)uire# a c%$pan* t% ;ui1 the in#tae1 ;a#e &%r it# #tan1ar1
rapi1*4 there;* everaging the p%#itive &ee1;ac( %%p4 in1ucing cu#t%$er# t% ;are
#witching c%#t an1 uti$ate* %c(ing the $ar(et int% it# techn%%g*! There are a nu$;er
%& (e* #trategie# an1 tactic# that can ;e a1%pte1 t% tr* an1 achieve thi#
. Ens"re a S"pp'y !% C!$p'i$ents
It it?# i$p%rtant &%r the c%$pan* t% $a(e #ure that in a11iti%n t% the pr%1uct it#e&4
there i# an a1e)uate #upp* %& c%$pi$ent#4 &%r e=a$pe n% %ne wi ;u* the S%n*
Pa*#tati%n+ une## there i# an a1e)uate #upp* %& ga$e# t% run %n the $achine!
C%$panie# n%r$a* ta(e tw% #tep# t% en#ure a1e)uate #upp* %& c%$pe$ent#
a! The* $a* 1iver#i&* int% the pr%1ucti%n %& c%$pe$ent#! E=a$pe ;e&%re S%n*
pr%1uce1 the %rigina pa* #tati%n in the ear* 1889?# it e#ta;i#he1 it# %wn in h%u#e
unit t pr%1uce vi1e% ga$e# &%r the pa* #tati%n!
;! The* $a* create incentive %r $a(e it ea#ier &%r in1epen1ent c%$panie# t% pr%1uce
c%$pe$ent#! S%n* a#% icen#e1 the right t% pr%1uce ga$e# t% a nu$;er %&
in1epen1ent ga$e 1eve%per#4 charge a %wer r%*at* rate than the* ha1 t% pa* t%
c%$petit%r#!
0 Leverage Hi''er App'icati!ns
Mier appicati%n# are u#e# %& a new techn%%g* %r pr%1uct that are #% c%$peing that
the* per#ua1e cu#t%$er# t% per#ua1e a new &%r$at %r techn%%g* in 1r%ve#4 there;*
(iing 1e$an1 &%r c%$peting &%r$at! The (ier appicati%n# that 1r%ve a1%pti%n %& the
Pa$ &%r$at were the per#%na in&%r$ati%n $anage$ent &uncti%n# an1 a pen-;a#e1
input $e1iu$ C;a#e1 %n Gra%%itiC that Pa$ ;un1e1 with it# %rigina Pa$ Pi%t4 which it
intr%1uce1 in 188:!
1 Aggressive'y and Mar/et
98
A c%$$%n tactic t% Bu$p-#tart 1e$an1 i# t% a1%pt a ra(!r and b'ade strategy,
pricing the pr%1uct Cra0%rD %w in %r1er t% #ti$uate 1e$an1 an1 increa#e the in#tae1
;a#e4 an1 then tr*ing t% $a(e high pr%&it# %n the #ae %& c%$pe$ent# Cra0%r ;a1e#D4
which are price1 reative* high! Thi# #trateg* %we# it# na$e t% the &act that it wa#
pi%neere1 ;* Giette t% #e it# ra0%r# an1 ra0%r ;a1e#! Man* %ther c%$panie# have
&%%we1 thi# #trateg*N&%r e=a$pe4 Hewett Pac(ar1 t*pica* #e# it# printer# at c%#t ;ut
$a(e# #igni&icant pr%&it# %n the #u;#e)uent #ae %& it# repace$ent cartri1ge#! In thi#
ca#e4 the printer i# the Ira0%r4I an1 it i# price1 %w t% #ti$uate 1e$an1 an1 in1uce
c%n#u$er# t% #witch &r%$ their e=i#ting printer4 whie the cartri1ge# are the I;a1e#4I
which are price1 high t% $a(e pr%&it#!
Aggre##ive $ar(eting i# a#% a (e* &act%r in Bu$p-#tarting 1e$an1 t% get an ear*
ea1 in in#tae1 ;a#e! Su;#tantia up-&r%nt $ar(eting an1 p%int-%&-#ae# pr%$%ti%n
techni)ue# are %&ten u#e1 t% tr* t% get p%tentia ear* a1%pter# t% ;ear the #witching
c%#t# a##%ciate1 with a1%pting the &%r$at! I& the#e e&&%rt# are #ucce##&u4 the* can ;e
the #tart %& a p%#itive &ee1;ac( %%p! Again4 the S%n* Pa*Stati%n pr%vi1e# a g%%1
e=a$pe! S%n* c%-in(e1 the intr%1ucti%n %& the Pa*Stati%n with nati%nwi1e teevi #i%n
a1verti#ing ai$e1 at it# pri$ar* 1e$%graphic Ceighteen t% thirt*-&%ur-*ear-%1#D an1 in-
#t%re 1i#pa*# that a%we1 p%tentia ;u*er# t% pa* ga$e# %n the $achine ;e&%re
$a(ing a purcha#e! M%re recent*4 Micr%#%&t ear$ar(e1 S699 $ii%n &%r $ar (eting it#
new ,-"%= in +99+! Succe##&u $ar(eting can #et the ;a r%ing an1 create a p%#itive
&ee1;ac( %%p!
2 C!!perate #ith C!$petit!rs
C%$panie# have ;een c%#e t% #i$utane%u#* intr%1ucing c%$peting an1
inc%$pati;e techn%%gica #tan1ar1# a nu$;er %& ti$e#! A g%%1 e=a$pe i# the c%$pact
1i#c! Initia* &%ur c%$panie#NS%n*4 Phiip#4 <3C4 an1 Tee&un(enNwere 1eve%ping CD
pa*er# u#ing 1i&&erent variati%n# %& the un1er*ing a#er techn%%g*! I& thi# #ituati%n ha1
per#i#te14 the* $ight have uti$ate* intr%1uce1 inc%$pati;e techn%%gie# int% the
$ar(etpace4 #% a CD $a1e &%r a Phiip# CD pa*er w%u1 n%t pa* S%n* CD pa*er!
Un1er#tan1ing that the near-#i$utane%u# intr%1ucti%n %& #uch B inc%$pati;e
techn%%gie# can create #igni&icant c%n&u#i%n a$%ng c%n#u$er# %&ten ea1# the$ t%
99
1ea* their purcha#e#4 S%n* an1 Phiip# 1eci1e1 t% B%in &%rce# with each %ther an1
c%%perate %n 1eve%ping the techn%%g*! The re#ut %& the c%%perati%n wa# that
$%$entu$ a$%ng %ther pa*er# in the in1u#tr* #hi&te1 t%war1T the S%n*-Phiip#
aiance#L <3C an1 Tee&un(en were e&t with itte #upp%rt!
3 License the &!r$at
An%ther #trateg* %&ten a1%pte1 i# t% icen#e the &%r$at t% %ther enterpri#e# #% t
the* can pr%1uce pr%1uct# ;a#e1 %n it! The c%$pan* that pi%neere1 the &%r$at &r%$
the icen#ing &ee# that &%w ;ac( t% it an1 &r%$ the enarge1 #upp* %& the pr%1uct 4 which
can #ti$uate 1e$an1 an1 hep acceerate $ar(et a1%pti%n! Thi# wa# the #trateg* that
Mat#u#hita a1%pte1 with it# 3HS &%r$at &%r the vi1e%ca##ette rec%n In a11iti%n t%
pr%1ucing 3CR# at it# %wn &act%r* in O#a(a4 Mat#u#hita et a nu$;er %& %ther
c%$panie# pr%1uce 3HS &%r$at pa*er# un1er icen#e CS%n* 1eci1e1 n%t t% icen#e it#
c%$peting "eta$a= &%r$at an1 pr%1uce1 a "eta$a= &%r$at pa* it#e&D4 an1 #% 3HS
pa*er# were $%re wi1e* avaia;e! M%re pe%pe purcha#e1 pa*er#4 which create1 an
incentive &%r &i$ c%$panie# t% i##ue $%re &i$# %n
1
tape# Ca# %pp%#e1 t% "eta$a=
tape#D4 which &urther increa#e1 1e$an1 &%r 3HS pa*er#4 an1 hence hepe1 Mat#u#hita
t% %c( in 3HS a# the 1%$inant &%r$at in their $ar(et pace! S%n*4 ir%nica* the &ir#t t%
$ar(et4 #aw it# p%#iti%n $arginai0e1 ;* re1uce1 #upp* %& the critica c%$pe$ent4
prerec%r1e1 &i$#4 an1 uti$ate* " 1rew "eta$a= pa*er# &r%$ the c%n#u$er
$ar(etpace!
D%;*4 we #aw in Strateg* in Acti%n E!+4 a1%pte1 a #i$iar icen#ing #trateg* t%g it#
n%i#e-re1ucti%n techn%%g* a1%pte1 a# the techn%%gica #tan1ar1 in the $u#ic an1
&i$ in1u#trie#! The c%rrect #trateg* t% pur#ue in a particuar #cenari% re)uire# that the
c%$pan* c%n#i1er a %& the#e 1i&&erent #trategie# an1 tactic# an1 pur#ue th%#e that
#ee$ appr%priate given the c%$petitive circu$#tance# prevaiing in the in1u#tr* an1
i(e* #trateg* %& riva#! Ath%ugh there i# n% %ne ;e#t $i= %& #trategie# an1 tactic#4 %&
critica i$p%rtance i# (eeping the g%a %& rapi1* increa#ing the in#tae1 ;a#e %&
pr%1uct# ;a#e1 %n it# #tan1ar1 at the &r%nt %& it# $in1! "* heping t% Bu$p-#tart
1e$an1 &%r i t# &%r$at4 a c%$pan* can in1uce c%n#u$er# t% ;ear the #witching c%#t#
a##%ciate1 with a1%pting it# techn%%g* an1 everage an* p%#itive &ee1;ac( pr%ce##
100
that $ight e=i#t! A#% i$p%rtant i# n%t pur#uing #trategie# that have the %pp%#ite
e&&ect! '%r e=a$pe4 pricing high t% capture pr%&it# &r%$ ear* a1%pter#4 wh% ten1 n%t t%
;e a# price #en#itive a# ater a1%pter#4 can have the un&%rtunate e&&ect %& #%wing
1e$an1 gr%wth an1 etting a $%re aggre##ive c%$petit%r pic( up #hare an1 e#ta;i#h
it# &%r$at a# the in1u#tr* #tan1ar1!
C C!sts in 6igh Techn!'!gy Ind"stries
In $an* high-tech in1u#trie#4 the &i=e1 c%#t# %& 1eve%ping the pr%1uct are ver*
high4 ;ut the c%#t# %& pr%1ucing %ne e=tra unit %& the pr%1uct are ver* %w! Thi# i# $%#t
%;vi%u# in the ca#e %& #%&tware! '%r e=a$pe4 it rep%rte1* c%#t Micr%#%&t S1 ;ii%n t%
1eve%p Gin1%w# ,P4 the ate#t ver#i%n %& it# Gin1%w# %perating #*#te$4 ;ut the c%#t#
%& pr%1ucing %ne $%re c%p* %& Gin1%w# ,P i# virtua* 0er%! Once Gin1%w# ,P wa#
c%$pete14 Micr%#%&t pr%1uce1 $a#ter 1i#(# that it #ent %ut t% PC $anu&acturer#4 #uch
a# De C%$puter4 which then %a1e1 a c%p* %& Gin1%w# ,P %nt% ever* PC it #e#! The
c%#t t% Micr%#%&t wa# e&&ective* 0er%4 an1 *et it receive# a #igni&icant icen#ing &ee &%r
each c%p* %& Gin1%w# ,P in#tae1 %n a PC!
F
'%r Micr%#%&t4 the marginal cost %& $a(ing
%ne $%re c%p* %& Gin1%w# ,P i# c%#e t% 0er%4 ath%ugh the fixed costs %& 1eve%ping the
pr%1uct are S1 ;ii%n!
Man* %ther high-techn%%g* pr%1uct# have #i$iar c%#t ec%n%$ic#/ ver* high
&i=e1 c%#t# an1 ver* %w $argina c%#t#! M%#t #%&tware pr%1uct# #hare the#e &eature#4
ath%ugh i& the #%&tware i# #%1 thr%ugh #t%re#4 the c%#t# %& pac(aging an1 1i#tri;uti%n
wi rai#e the $argina c%#t#4 an1 i& it i# #%1 ;* a #ae# &%rce 1irect t% en1 u#er#4 thi# t%%
wi rai#e the $argina c%#t#! Man* c%n#u$er eectr%nic# pr%1uct# have the #a$e ;a#ic
ec%n%$ic#! The &i=e1 c%#t# %& 1eve%ping a D3D pa*er %r a vi1e% ga$e c%n#%e can
;e ver* e=pen#ive4 ;ut the c%#t# %& pr%1ucing an incre$enta unit are ver* %w!
1! C!$parative C!st Ec!n!$ics
T% gra#p wh* thi# c%#t #tructure i# #trategica* i$p%rtant4 it $u#t ;e
un1er#t%%1 that in $an* in1u#trie#4 $argina c%#t# rise a# a c%$pan* trie# t%
e=pan1 %utput Cec%n%$i#t ca thi# the law of diminishing returns#. T% pr%1uce $%re
101
%& a g%%14 a c%$pan* ha# t% hire $%re a;%r an1 inve#t in $%re pant an1
$achiner*! At the margin, the a11iti%na re#%urce# u#e1 are n%t a# pr%1uctive4 #%
thi# ea1# t% increa#ing $argina c%#t#! H%wever4 the aw %& 1i$ini#hing return#
%&ten 1%e# n%t app* in $an* high-tech #etting#4 #uch a# the pr%1ucti%n %&
#%&tware %r #en1ing %ne $%re ;it %& 1ata 1%wn a 1igita teec%$$unicati%n#
netw%r(!
C%n#i1er tw% c%$panie#4 U an1 V! C%$pan* U i# a c%nventi%na pr%1ucer an1
&ace# 1i$ini#hing return#4 #% a# it trie# t% e=pan1 %utput4 it# $argina c%#t# ri#e!
C%$pan* V i# a high-tech pr%1ucer4 an1 it# $argina c%#t# 1% n%t ri#e at a a# %utput
i# increa#e1! N%te that in 'igure E!24 C%$pan* VA# $argina c%#t curve i# 1rawn a# a
#traight ine near t% the h%ri0%nta a=i#4 i$p*ing that $argina c%#t# are c%#e t% 0er%
an1 1% n%t var* with %utput4 wherea# C%$pan* U A# $argina c%#t# ri#e a# %utput i#
e=pan1e14 iu#trating 1i$ini#hing return#! C%$pan* V?# &at an1 %w $argina c%#t
curve $ean# that it# average c%#t curve wi &a c%ntinu%u#* %ver a range# %& %utput
a# it #prea1# it# &i=e1 c%#t# %ut %ver greater v%u$e! In c%ntra#t4 the
102
C!$pany I, L!# Tech C!$pany C!$pany J, 6igh Tech
C!$pany



P1 P1
Output Output
ri#ing $argina c%#t# enc%untere1 ;* C%$pan* a $ean that it# average c%#t cu the U-
#hape1 curve &a$iiar &r%$ ;a#ic ec%n%$ic# te=t#! '%r #i$picit*4 a##u$eW ;%th
c%$panie# #e their pr%1uct at the #a$e price4 P$4 an1 ;%th #e e=actR #a$e )uantit* %&
%utput4 9 N Pr .%u wi #ee that at an %utput c C%$pan* P ha# $uch %wer average c%#t#
than C%$pan* a an1 a# a c%n#e)uence $a(ing &ar $%re pr%&it!
0 Strategic Signi%icance

I& a c%$pan* can #hi&t &r%$ a c%#t #tructure where it enc%unter# increa#ing
$argina c%#t# t% %ne where &i=e1 c%#t# $a* ;e high ;ut $argina c%#t# are $uch %wer4
it# pr%&ita;iit* $a* increa#e! In the c%n#u$er eectr%nic# in1u#tr*4 #uch a #hi&t ha# ;een
pa*ing %ut &%r pa#t tw% 1eca1e#! Mu#ic rec%r1ing# u#e1 t% ;e ;a#e1 %n ana%g
techn%%g* where $argina c%#t# r%#e a# %utput e=pan1e1 1ue t% 1i$ini#hing return# Ca#
103
.rice
.0
0
.rice
.0
0
-arginal osts
-arginal osts
#verage osts
#verage osts
in the ca#e %& C%$pan* a in 'igure E!2D! Since the 18F9#4 1igita #*#te$# #uch a# CD
pa*er# have repace1 ana%g #*#te$#! Digita #*#te$# are #%&tware ;a#e14 an1 thi# in
$uch %wer $argina c%#t# %& pr%1ucing %ne $%re c%p* %& a rec%r1ing! A# a re#ut4 the
$u#ic a;e# have ;een a;e t% %wer price#4 e=pan1 1e$an14 an1 #ee their pr%&ita;iit*
increa#e!
Thi# pr%ce## i# #ti un&%1ing! The ate#t techn%%g* &%r $a(ing c%pie# %& $u#ic
rec%r1ing# i# ;a#e1 %n 1i#tri;uti%n %ver the Internet C&%r e=a$pe4 ;* 1%wn%a1ing %nt% an
MP2 pa*erD!
A ca#e in p%int i# which e=pain# the #trategic #igni&icance %& c%#t #tructure in high
techn%%g* in1u#trie#!
+ Managing Inte''ect"a' 7r!perty Rights
Owner#hip %& a techn%%g* can ;e a #%urce %& #u#taine1 c%$petitive a1vantage
an1 #uperi%r pr%&ita;iit*4 particuar* when the c%$pan* %wn# a techn%%g* that i# the
#tan1ar1 in an in1u#tr*4 #uch a# Micr%#%&t an1 InteA# Ginte #tan1ar1 &%r per#%na
c%$puter# an1 D%;*A# %wner#hip %& the #tan1ar1 &%r n%i#e-re1ucti%n techn%%g* in the
$u#ic an1 &i$ rec%r1ing in1u#trie#! Even i& a techn%%g* i# n%t #tan1ar1 ;ut i# vaue1 ;*
a #u&&icient nu$;er# %& c%n#u$er#4 %wner#hip %& that techn%%g* can #ti ;e ver*
pr%&ita;e! AppeA# current per#%na c%$puter techn%%g* i# ;* n% $ean# the #tan1ar1 in
the $ar(et pace4 $uch a# Appe w%u1 i(e it t% ;e! In &act4 the c%$pan*?# iMac
techn%%g* acc%unt# &%r e## than 19 percent %& the per#%na c%$puter# #%1 ever* *ear!
"ut that #$a #ice %& a ver* arge $ar(et i# #ti a vaua;e niche &%r Appe!
. Inte''ect"a' 7r!perty Rights
"ecau#e new techn%%g* i# the pr%1uct %& inteectua an1 creative e&&%rt4 we ca it
inteectua pr%pert*! The ter$ inte''ect"a' pr!perty re&er# t% the pr%1uct %& an*
inteectua an1 creative e&&%rt an1 incu1e# n%t %n* new techn%%g* ;ut a#% a wi1e range
%& inteectua creati%n#4 incu1ing $u#ic4 &i$#4 ;%%(#4 an1 graphic art! A# #%ciet*4 we
vaue the pr%1uct# %& inteectua an1 creative activit*! Inteectua pr%pert* i# #een a# a
ver* i$p%rtant 1river %& ec%n%$ic pr%gre## an1 #%cia weath! "ut it i# a#% %&ten
104
e=pen#ive4 ri#(*4 an1 ti$e-c%n#u$ing t% create inteectua pr%pert*! '%r e=a$pe4 a new
1rug t% treat a 1anger%u# $e1ica c%n1iti%n #uch a# cancer can ta(e tweve t% #i=teen
*ear# t% 1eve%p an1 c%#t S699 $ii%n! M%re%ver4 %n percent %& new 1rug# that are te#te1
in hu$an# actua* $a(e it t% the $ar(et! The re$ain1er &ai# ;ecau#e the* are &%un1 t%
;e un#a&e %r ine&&ective!
The creati%n %& inteectua pr%pert* i# a centra en1eav%r in high-techn%%g*
in1u#trie#4 an1 the $anage$ent %& inteectua pr%pert* right# ha# $%ve1 t% centre #tage
in $an* %& the#e c%$panie#! Deve%ping #trategie# t% pr%tect an1 en&%rce inteectua
pr%pert* right# can ;e an i$p%rtant a#pect %& c%$petitive a1vantage $an* c%$panie#4
thi# a$%unt# t% $a(ing #ure that their patent# an1 c%p* re#pecte1! It i# n%t unc%$$%n4
there&%re4 t% #ee high-techn%%g* c%$panie# ;ring aw#uit# again#t their c%$petit%r# &%r
patent in&ringe$ent! In genera4 c%$panie# %&ten u#e #uch aw#uit# n%t %n* t% #ancti%n
th%#e the* #u#pect %& vi%ating the c%$pan*?# inteectua pr%pert* right# ;ut a#% t% #igna
t% p%tentia vi%at%r# that the c%$pan* wi aggre##ive* 1e&en1 it# pr%pert*!
0 +igita'i(ati!n and 7iracy Rates
Pr%tecting inteectua pr%pert* ha# ;ec%$e $%re c%$picate1 in the pa#t &ew
1eca1e# ;ecau#e %& digita'i(ati!n4 that i#4 the ren1ering %& creative %utput in 1igita &%r$!
Thi# can ;e 1%ne &%r $u#ic rec%r1ing#4 &i$#4 ;%%(#4 new#paper#4 $aga0ine#4 an1
c%$puter #%&tware! Digitai0ati%n ha# 1ra$atica* %were1 the c%#t %& c%p*ing an1
1i#tri;uting 1igitai0e1 inteectua pr%pert* %r 1igita $e1ia! A# we have #een4 the $argina
c%#t %& $a(ing %ne $%re c%p* %& a #%&tware pr%gra$ i# ver* %w4 an1 the #a$e i# true &%r
an* %ther inteectua pr%pert* ren1ere1 in 1igita &%r$! M%re%ver4 1igita $e1ia can ;e
1i#tri;ute1 at a ver* %w c%#t Cagain4 a$%#t 0er%D4 &%r e=a$pe4 ;* 1i#tri;uting %ver the
Internet! The %w $argina c%#t# %& c%p*ing an1 1i#tri;uting 1igita $e1ia have $a1e it
ver* ea#* t% #e iega c%pie# %& #uch pr%pert*! In turn4 thi# ha# hepe1 t% pr%1uce a high
eve %& pirac* Cin thi# c%nte=t4 piracy re&er# t% the the&t %& inteectua pr%pert*D!
In the #%&tware in1u#tr*4 e#ti$ate# #ugge#t that in +9994 #%$e 2E percent %& a
#%&tware u#e1 ar%un1 the w%r1 wa# pirate14 c%#ting #%&tware c%$panie# c%#e t% S1+
105
;ii%n in %#t revenue#! The pirac* rate range1 &r%$ 85 percent in China t% +5 percent in
the Unite1 State#! A# a regi%n4 A#ia ha1 the highe#t pirac* rate at 61 percent an1 N%rth
A$erica ha1 the %we#t pirac* rate at +6 percent! The pirac* rate in Ge#tern Eur%pe wa#
25 percent! Ath%ugh N%rth A$erica ha1 the %we#t rate %& #%&tware pirac*4 ;ecau#e %& the
#i0e %& the $ar(et4 the %## t% c%$panie# wa# #ti huge4 a$%unting t% a$%#t S2 ;ii%n!
The pr%;e$ %& pirac* i# a#% en1e$ic in the $u#ic in1u#tr*! The Internati%na 'e1erati%n
%& the Ph%n%graphic In1u#tr* e#ti$ate# that in +9994 #%$e 2: percent %& a CD# ar%un1
the g%;e were iega* pr%1uce1 an1 #%14 c%#ting the $u#ic rec%r1ing in1u#tr* #%$e
S5!1 ;ii%n in %#t revenue#!
Man* c%$panie# n%w ;ui1 #%phi#ticate1 encr*pti%n #%&tware int% their 1igita
pr%1uct#4 which can $a(e it $%re 1i&&icut &%r pirate# t% c%p* 1igita $e1ia an1 there;*
rai#e the c%#t# %& #teaing! "ut the pirate# t%% are #%phi#ticate1 an1 %&ten #ee$ t% ;e a;e
t% &in1 their wa* ar%un1 encr*pti%n #%&tware! Thi# rai#e# the )ue#ti%n %& whether there are
a11iti%na #trategie# that can ;e a1%pte1 t% $anage 1igita right#4 an1 there;* i$it pirac*!
1 Strategies %!r Managing +igita' Rights
One #trateg* i# #i$p* t% rec%gni0e that whie the %w c%#t# %& c%p*ing an1
1i#tri;uting 1igita $e1ia $a(e #%$e pirac* inevita;e4 the #a$e attri;ute# can ;e u#e1 t%
the c%$pan*?# a1vantage! The ;a#ic #trateg* here repre#ent# *et an%ther variati%n %& the
;a#ic ra0%r an1 ra0%r ;a1e# principe/ give #%$ething awa* &%r &ree in %r1er t% ;%%#t the
#ae# %& a c%$pe$entar* pr%1uct! A &a$iiar e=a$pe c%ncern# A1%;e Acr%;at Rea1er4
the #%&tware pr%gra$ &%r rea1ing 1%cu$ent# &%r$atte1 ;* A1%;e Acr%;at Ci!e!4 PD'4
&%r$atte1 1%cu$ent#D! A1%;e 1eve%pe1 A1%;e Acr%;at t% a%w pe%pe t% &%r$at
1%cu$ent# in a $anner that re#e$;e1 a high-)uait* printe1 page an1 t% 1i#pa* an1
1i#tri;ute the#e 1%cu$ent# %ver the Ge;! M%re%ver4 A1%;e 1%cu$ent# are &%r$atte1 in a
rea1-%n* &%r$at4 $eaning that the* cann%t ;e atere1 ;* in1ivi1ua# n%r can part# %&
th%#e 1%cu$ent# ;e c%pie1 an1 pa#te1 t% %ther 1%cu$ent#!
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It# #trateg* ha# ;een t% give awa* A1%;e Acr%;at Rea1er &%r &ree an1 then $a(e
$%ne* ;* #eing it# Acr%;at #%&tware &%r &%r$atting 1%cu$ent#! The #trateg* ha# w%r(e1
e=tre$e* we! An*%ne can 1%wn%a1 a c%p* %& Acr%;at Rea1er &r%$ A1%;eA# we;#ite!
"ecau#e the $argina c%#t# %& c%p*ing an1 1i#tri;uting thi# #%&tware %ver the Ge; are
e=tre$e* %w4 the pr%ce## i# a$%#t c%#te## &%r ;%th A1%;e an1 it# cu#t%$er#!
An%ther #trateg* i# t% ta(e a1vantage %& the %w c%#t# %& c%p*ing an1 1i#tri;uting
1igita $e1ia t% 1rive 1%wn the c%#t# %& purcha#ing th%#e $e1ia4 there;* re1ucing
incentive that c%n#u$er# have t% #tea! Ghen c%upe1 with encr*pti%n #%&tware that
$a(e# pirac* $%re 1i&&icut an1 vig%r%u# ega acti%n# t% en&%rce$ent %& inteectua
pr%pert* reguati%n#4 thi# can #%w the pirac* rate an1 generate incre$enta revenue that
c%#t itte t% pr%1uce!
E Capt"ring &irst:M!ver Advantages
In high-techn%%g* in1u#trie#4 c%$panie# %&ten c%$pete ;* #triving t% ;e the &ir#t t%
1eve%p rev%uti%nar* new pr%1uct#4 that i#4 t% ;e a %irst $!ver! "* 1e&initi%n4 &ir#t $%ver
with regar1 t% a rev%uti%nar* pr%1uct i# in a $%n%p%* p%#iti%n! I& the new pr%1uct
#ati#&ie# un$et c%n#u$er nee1# an1 1e$an1 i# high4 the &ir#t $%ver can capture
#igni&icant revenue# an1 pr%&it#! Such revenue# an1 pr%&it# #igna t% p%tentia riva# that
there i# $%ne* t% ;e $a1e ;* i$itating the &ir#t $%ver! As i''"strate in &ig"re- in the
a;#ence %& #tr%ng ;arrier# t% i$itati%n4 thi# i$pie# that i$itat%r# wi ru#h int% the $ar(et
create1 ;* the &ir#t $%ver4 c%$peting awa* the &ir#t $%ver?# $%n%p%* pr%&it# an1 eaving
a participant# in the $ar(et with a $uch %wer eve %& return#!
De#pite i$itati%n4 #%$e &ir#t $%ver# have the a;iit* t% capitai0e %n an1 reap
#u;#tantia %irst:$!ver advantagesNthe a1vantage# %& pi%neering new techn%%gie#
an1 pr%1uct# that ea1 t% an en1uring c%$petitive a1vantage! Inte intr%1uce1 the w%r1A#
&ir#t $icr%pr%ce##%r in 18E1 an1 t%1a* #ti 1%$inate# the $icr%pr%ce##%r #e$ic%n1uct%r
in1u#tr*! Cear* ;eing a &ir#t $%ver 1%e# n%t ;* it#e& guarantee #ucce##! "e&%re
c%n#i1ering the #trateg* i##ue4 h%wever4 we nee1 t% ta(e a c%#er %%( at the nature %&
&ir#t-$%ver a1vantage# an1 1i#a1vantage#!
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. &irst M!ver Advantages
There are &ive $ain #%urce# %& &ir#t-$%ver a1vantage#/
a4 The &ir#t $%ver ha# an %pp%rtunit* t% e=p%it netw%r( e&&ect# an1 p%#itive
&ee1;ac( %%p#4 %c(ing c%n#u$er# int% it# techn%%g*! In the 3CR in1u#tr*4 S%n*
c%u1 have e=p%ite1 netw%r( e&&ect# ;* icen#ing it# techn%%g*4 ;ut in#tea1 the
c%$pan* ce1e1 it# &ir#t-$%ver a1vantage t% the #ec%n1 $%ver4 Mat#u#hita!
b4 The &ir#t $%ver $a* ;e a;e t% e#ta;i#h #igni&icant ;ran1 %*at*4 which i#
e=pen#ive &%r ater entrant# t% ;rea( 1%wn! In1ee14 i& the c%$pan* i# #ucce##&u in
thi# en1eav%r4 it# na$e $a* ;ec%$e c%#e* a##%ciate1 with the entire ca## %&
pr%1uct#4 incu1ing th%#e pr%1uce1 ;* riva#! Pe%pe #ti ta( %& I,er%=ing when
the* are g%ing t% $a(e a ph%t%c%p* %r I'e1-E=ingI when the* are g%ing t% #en1 a
pac(age ;* %vernight $ai!
c4 The &ir#t $%ver $a* ;e a;e t% ra$p up #ae# v%u$e ahea1 %& riva# an1
thu# reap c%#t a1vantage# a##%ciate1 with the reai0ati%n %& #cae ec%n%$ie# an1
earning e&&ect#! Once the &ir#t $%ver ha# the#e c%#t a1vantage#4 it can re#p%n1 t%
new entrant# ;* cutting price# in %r1er t% h%1 %n t% it# $ar(et #hare an1 #ti earn
#igni&icant pr%&it#!
&4 The &ir#t $%ver $a* ;e a;e t% create #witching c%#t# &%r it# cu#t%$er# that
#u;#e)uent* $a(e it 1i&&icut &%r riva# t% enter the $ar(et an1 ta(e cu#t%$er#
awa* &r%$ the &ir#t $%ver! Giree## #ervice pr%vi1er#4 &%r e=a$pe4 wi give new
cu#t%$er# a I&reeI wiree## ph%ne4 ;ut cu#t%$er# $u#t #ign a c%ntract agreeing t%
pa* &%r the ph%ne i& the* ter$inate the #ervice c%ntract within a #peci&ie1 ti$e
peri%14 #uch a# a *ear! "ecau#e the rea c%#t %& a wiree## ph%ne $a* run S199 t%
S+994 thi# i# a #igni&icant #witching c%#t that ater entrant# have t% %verc%$e!
e4 The &ir#t $%ver $a* ;e a;e t% accu$uate vaua;e (n%we1ge reate1 t%
cu#t%$er nee1#4 1i#tri;uti%n channe#4 pr%1uct techn%%g*4 pr%ce## techn%%g*4
an1 #% %n! Thi# accu$uate1 (n%we1ge give# it a (n%we1ge a1vantage that ater
108
entrant# $ight &in1 1i&&icut %r e=pen#ive t% $atch! Sharp4 &%r e=a$pe4 wa# the &ir#t
$%ver in the c%$$ercia $anu&acture %& active $atri= i)ui1 cr*#ta 1i#pa*# u#e1
in c%$puter#! The pr%ce## &%r $anu&acturing the#e 1i#pa*# i# ver* 1i&&icut4 withW
reBect rate &%r &awe1 1i#pa*#! Sharp ha# accu$uate1 #uch an a1vantage withW t%
pr%1ucti%n pr%ce##e# that it ha# ;een ver* 1i&&icut &%r ater entrant# t% $atch it %n
pr%1uct )uait*4 an1 thu# c%#t#!
0 &irst M!ver +isadvantages
"aance1 again#t the#e &ir#t-$%ver a1vantage# are a nu$;er %& 1i#a1vantage#/
a4 The &ir#t $%ver ha# t% ;ear #igni&icant pi%neering c%#t# that ater entrant# 1%
n%t! The &ir#t $%ver ha# t% pi%neer the techn%%g*4 1eve%p 1i#tri;uti%n channe#4
an1 e1ucate cu#t%$er# a;%ut the nature %& the pr%1uct! A %& thi# can ;e e=pen#ive
an1 ti$e c%n#u$ing! -ater entrant#4 ;* wa* %& c%ntra#t4 $ight ;e a;e t% &ree-ri1e %n
the &ir#t $%verA# inve#t$ent# in pi%neering the $ar(et an1 cu#t%$er e1ucati%n!
b4 Reate1 t% thi#4 &ir#t $%ver# are $%re pr%ne t% $a(e $i#ta(e# ;ecau#e
there are #% $an* uncertaintie# in a new $ar(et! -ater entrant# $a* ;e a;e t% earn
&r%$ the $i#ta(e# $a1e ;* &ir#t $%ver#4 i$pr%ve %n the pr%1uct %r the wa* in which
it i# #%1 an1 c%$e t% $ar(et with a #uperi%r %&&ering that capture# #igni&icant $ar(et
#hare &r%$ the &ir#t $%ver! '%r e=a$pe4 %ne %& the rea#%n# that the Appe Newt%n
&aie1 wa# that the han1writing #%&tware in the han1-he1 c%$puter &aie1 t%
rec%gni0e hu$an han1writing! The #ec%n1 $%ver in thi# $ar(et4 Pa$4 earne1 &r%$
Appe?# err%r! Ghen it intr%1uce1 the Pa$ Pi%t4 it u#e1 #%&tware that rec%gni0e1
etter# written in a particuar wa*4 Gra&&iti4 an1 then per#ua1e1 cu#t%$er# t% earn thi#
$eth%1 %& inputting 1ata int% the han1-he1 c%$puter!
c4 'ir#t $%ver# run the ri#( %& ;ui1ing the wr%ng re#%urce# an1 capa;iitie#
;ecau#e the* are &%cu#ing %n a cu#t%$er #et that i# n%t g%ing t% ;e characteri#tic %&
the $a## $ar(et! Thi# i# the cr%##ing the cha#$ pr%;e$ that we 1i#cu##e1 in the
previ%u# chapter! .%u wi reca that the cu#t%$er# in the ear* $ar(etNth%#e
categ%ri0e1 a# inn%vat%r# an1 ear* a1%pter#Nhave 1i&&erent characteri#tic# &r%$
109
the &ir#t wave %& the $a## $ar(et4 the ear* $aB%rit*! The &ir#t $%ver run# the ri#( %&
gearing it# re#%urce# an1 capa;iitie# t% the nee1# %& inn%vat%r# an1 ear* a1%pter#
an1 n%t ;eing a;e t% #witch when the ear* $aB%rit* enter# the $ar(et! A# a re#ut4
&ir#t $%ver# run a greater ri#( %& punging int% the cha#$ that #eparate# the ear*
$ar(et &r%$ the $a## $ar(et!
&4 The &ir#t $%ver $a* inve#t in in&eri%r %r %;#%ete techn%%g*! Thi# can
happen when it# pr%1uct inn%vati%n i# ;a#e1 %n un1er*ing techn%%g* that i#
a1vancing rapi1*! "* ;a#ing it# pr%1uct %n an ear* ver#i%n %& the techn%%g*4 it $a*
%c( it#e& int% #%$ething that rapi1* ;ec%$e# %;#%ete! In c%ntra#t4 ater entrant#
$a* ;e a;e t% eap&r%g the &ir#t $%ver an1 intr%1uce pr%1uct# that are ;a#e1 %n
ater ver#i%n# %& un1er*ing techn%%g*!
e4 C%$pe$entar* a##et# a#% incu1e $ar(eting (n%w-h%w4 an a1e)uate
#ae# &%rce4 acce## t% 1i#tri;uti%n #*#te$#4 an1 an a&ter-#ae# #ervice an1 #upp%rt
netw%r(4 a %& the#e a##et# can hep an inn%vat%r ;ui1 ;ran1 %*at* an1 hep the
inn%vat%rL $ar(et penetrati%n $%re rapi1*! In turn4 the re#uting increa#e# in v%u$e
&aciitate $%re rapi1 $%ve$ent 1%wn the e=perience curve an1 the attain$ent %& a
#u#taina;e c%#t-;a#e1 a1vantage 1ue t% #cae ec%n%$ie# an1 earning e&&ect#! One
%& the rea#%n# that EMI4 the &ir#t $%ver in the $ar(et &%r CT #canner#4 uti$ate* %#t
%ut t% e#ta;i#he1 $e1ica e)uip$ent c%$panie#4 #uch a# GE Me1ica S*#te$#4
wa# that it ac(e1 the $ar(eting (n%w-h%w4 #ae# &%rce4 an1 1i#tri;uti%n #*#te$#
re)uire1 t% c%$pete e&&ective* in the w%r1A# arge#t $ar(et &%r $e1ica e)uip$ent4
the Unite1 State#!
Deve%ping c%$pe$entar* a##et# can ;e ver* e=pen#ive4 an1 c%$panie# %&ten
nee1 arge in&u#i%n# %& capita &%r thi# purp%#e! That i# the rea#%n &ir#t $%ver# %&ten %#e
%ut t% ate $%ver# that are arge4 #ucce##&u c%$panie#4 %&ten e#ta;i#he1 in %ther
in1u#trie#4 with the re#%urce# t% 1eve%p a pre#ence in the new in1u#tr* )uic(*!
bC 6eight !% )arriers t! I$itati!n
"arrier# t% i$itati%n give an inn%vat%r ti$e t% e#ta;i#h a c%$petitive a1vantage
an1 ;ui1 $%re en1uring ;arrier# t% entr* in the new* create1 $ar(et! Patent# &%r
e=a$pe4 are a$%ng the $%#t wi1e* u#e1 ;arrier# t% i$itati%n! "* pr%tecting it#
110
ph%t%c%pier techn%%g* with a thic(et %& patent#4 ,er%= wa# a;e t% 1ea* an* #igni&icant
i$itati%n %& it# pr%1uct &%r #eventeen *ear#! I& patent pr%tecti%n i# wea(4 a c%$pan* $ight
tr* t% #%w i$itati%n ;* 1eve%ping new pr%1uct# an1 pr%ce##e# in #ecret! The $%#t
&a$%u# e=a$pe %& thi# appr%ach i# C%ca-C%a4 which ha# (ept the &%r$ua &%r C%(e a
#ecret &%r generati%n#!
cC Capab'e C!$petit!rs
Capab'e c!$petit!rs are c%$panie# that can $%ve )uic(* t% i$itate the pi%neering
c%$pan*! C%$petit%r#A capa;iit* t% i$itate a pi%neer?# inn%vati%n 1epen1# pri$ari* %n
tw% &act%r#/
C1D! RQD #(i# an1
C+D!Acce## t% c%$pe$entar* a##et#!
In genera4 the greater the nu$;er %& capa;e c%$petit%r# with acce## t% the RQD
#(i# an1 c%$pe$entar* a##et# nee1e1 t% i$itate an inn%vati%nL the $%re rapi1 i$itati%n
i# i(e* t% ;e!
In thi# c%nte=t4 RQD #(i# re&er t% the a;iit* %& riva# t% rever#e-engineer an
inn%vati%n in %r1er t% &in1 %ut h%w it w%r(# an1 )uic(* 1eve%p a c%$para;e pr%1uct! A#
an e=a$pe4 c%n#i1er the CT #canner! GE ;%ught %ne %& the &ir#t CT #canner# pr%1uce1
;* EMI4 an1 it# technica e=pert# rever#e-engineere1 it! De#pite the pr%1uct#
techn%%gica c%$pe=it*4 GE 1eve%pe1 it# %wn ver#i%n4 which a%we1 it t% i$itate EMI
)uic(* an1 uti$ate* repace EMI a# the $aB%r #uppier %& CT #canner#!
1 Strategies %!r EAp'!iting &irst M!ver Advantages
The ta#( &acing a &ir#t $%ver i# h%w t% e=p%it it# ea1 in %r1er t% capitai0e %n &ir#t-
$%ver a1vantage# an1 ;ui1 a #u#taina;e %ng-ter$ c%$petitive a1vantage whie
#i$utane%u#* re1ucing the ri#(# a##%ciate1 with &ir#t $%ver 1i#a1vantage#4 There are
three ;a#ic #trategie# avaia;e/
1! Deve%p an1 $ar(et the inn%vati%n it#e&
+! Deve%p an1 $ar(et the inn%vati%n B%int* with %ther c%$panie# thr%ugh a #trategic
aiance %r B%int venture
111
2! -icen#e the inn%vati%n t% %ther# an1 et the$ 1eve%p the $ar(et!
The %pti$a ch%ice %& #trateg* 1epen1# %n the an#wer# t% three )ue#ti%n#/
1! D%e# the inn%vating c%$pan* have the c%$pe$entar* a##et# t% e=p%it it#
inn%vati%n an1 capture &ir#t-$%ver a1vantage#H
+! H%w 1i&&icut i# it &%r i$itat%r# t% c%p* the c%$pan*A# inn%vati%nH In %ther w%r1#4
what i# the height %& ;arrier# t% i$itati%nH
2! Are there capa;e c%$petit%r# that c%u1 rapi1* i$itate the inn%vati%nH
aC C!$p'e$entary Assets
Complementary assets are the a##et# re)uire1 t% e=p%it a new inn%vati%n an1
gain a c%$petitive a1vantage! A$%ng the $%#t i$p%rtant c%$pe$entar* a##et# are
c%$petitive $anu&acturing &aciitie# capa;e %& han1ing rapi1 gr%wth in cu#t%$er 1e$an1
whie $aintaining high pr%1uct )uait*! State-%&-the-art $anu&acturing &aciitie# ena;e the
&ir#t $%ver t% $%ve )uic(* 1%wn the e=perience curve with%ut enc%untering pr%1ucti%n
;%ttenec(# %r pr%;e$# with the )uait* %& the pr%1uct! The ina;iit* t% #ati#&* 1e$an1
;ecau#e %& the#e pr%;e$#4 h%wever4 create# the %pp%rtunit* &%r i$itat%r# t% enter the
$ar(etpace!
dC Three Inn!vati!n Strategies
The wa* in which the#e three &act%r#Nc%$pe$entar* a##et#4 height %& ;arrier# t%
i$itati%n4 an1 the capa;iit* %& c%$petit%r#N in&uence the ch%ice %& inn%vati%n #trateg* i#
#u$$ari0e1 ! The c%$petitive #trateg* %& 1eve%ping an1 $ar(eting the inn%vati%n a%ne
$a(e# $%#t #en#e when
1! The inn%vat%r ha# the c%$pe$entar* a##et# nece##ar* t% 1eve%p the inn%vati%n4
+! The ;arrier# t% i$itating a new inn%vati%n are high4 an1
2! The nu$;er %& capa;e c%$petit%r# i# i$ite1!
C%$pe$entar* a##et# a%w rapi1 1eve%p$ent an1 pr%$%ti%n %& the inn%vati%n!
High ;arrier# t% i$itati%n ;u* the inn%vat%r ti$e t% e#ta;i#h a c%$petitive a1vantage an1
;ui1 en1uring ;arrier# t% entr* thr%ugh ;ran1 %*at* %r e=perience-;a#e1 c%#t
112
a1vantage#! The &ewer the capa;e c%$petit%r# there are4 the e## i(e* it i# that an* %ne
%& the$ wi #uccee1 in circu$venting ;arrier# t% i$itati%n an1 )uic(* i$itating the
inn%vati%n!
The c%$petitive #trateg* %& 1eve%ping an1 $ar(eting the inn%vati%n B%int* with %ther
c%$panie# thr%ugh a #trategic aiance %r B%int venture $a(e# $%#t #en#e when
1! The inn%vat%r ac(# c%$pe$entar* a##et#4
+! "arrier# t% i$itati%n are high4 an1
2! There are #evera capa;e c%$petit%r#!
In #uch circu$#tance#4 it $a(e# #en#e t% enter int% an aiance with a c%$pan*
that area1* ha# the c%$pe$entar* a##et#Nin %ther w%r1#4 with a capa;e c%$petit%r!
The%retica*4 #uch an aiance #h%u1 pr%ve t% ;e $utua* ;ene&icia4 an1 each partner
can #hare in high pr%&it# that neither c%u1 earn %n it# %wn! M%re%ver4 #uch a #trateg* ha#
the ;ene&it %& c%-%pting a p%tentia riva! '%r e=a$pe4 ha1 EMI tea$e1 up with a capa;e
c%$petit%r t% 1eve%p the $ar(et &%r CT #canner#4 #uch a# GE Me1ica S*#te$#4 in#tea1
%& g%ing it a%ne4 the c%$pan* $ight n%t %n* have ;een a;e t% ;ui1 a $%re en1uring
c%$petitive a1vantage4 it w%u1 a#% have c%-%pte1 a p%tentia* p%wer&u riva int% it#
ca$p!
The thir1 #trateg*4 icen#ing4 $a(e# $%#t #en#e when
1! The inn%vating c%$pan* ac(# the c%$pe$entar* a##et#4
+! "arrier# t% i$itati%n are %w4 an1
2! There4 $an* capa;e c%$petit%r#!
The c%$;inati%n %& %w ;arrier# t% i$itati%n an1 $an* capa;e c%$petit%r# $a(e#
rapi1 i$itati%n a$%#t certain! The inn%vat%rA# ac( %& c%$pe$entar* a##et# &urther
#ugge#t# that an i$itat%r wi #%%n capture the inn%vat%rA# c%$petitive a1vantage! Given
the#e &act%r#4 ;ecau#e rapi1 1i&&u#i%n %& the inn%vat%rA# techn%%g* thr%ugh i$itati%n i#
inevita;e4 the inn%vat%r can at ea#t #hare in #%$e %& the ;ene&it# %& thi# 1i&&u#i%n ;*
icen#ing %ut it# techn%%g*!
113
& Techn!'!gica' 7aradig$ Shi%ts
Technological paradigm shifts %ccur when new techn%%gie# c%$e a%ng that
rev%uti%ni0e the #tructure %& the in1u#tr*4 1ra$atica* ater the nature %& c%$petiti%n4 an1
re)uire c%$panie# t% a1%pt new #trategie# in %r1er t% #urvive! A g%%1 e=a$pe %&
Para1ig$ #hi&t that i# current* un&%1ing i# the #hi&t &r%$ che$ica t% 1igita ph%t%graph*
Can%ther e=a$pe %& 1igitai0ati%nD! '%r %ver ha& a centur*4 the arge incu$;ent
enterpri#e# in the ph%t%graphic in1u#tr* #uch a# M%1a( an1 'uBi &i$ have generate1 $%#t
%& their revenue# &r%$ #eing an1 pr%ce##ing &i$ u#ing tra1iti%na #iver hai1e
techn%%g*! The ri#e %& 1igita ph%t%graph* i# a huge threat t% their ;u#ine## $%1e#!
1! Para1ig$ Shi&t# an1 the Decine %& E#ta;i#he1 C%$panie#
Para1ig$ #hi&t# appear t% ;e $%re i(e* t% %ccur in an in1u#tr* when %n %r ;%th %& the
&%%wing c%n1iti%n# are in pace/
'ir#t4 the e#ta;i#he1 techn%%g* in the in1u#tr* i# $ature an1 appr%aching a at it#
natura i$it#!
Sec%n14 a new 1e#tructive techn%%g* ha# entere1 the $ar(et pace an1 i# ta(ing r%%t in
niche# that are p%%r* #erve1 ;* incu$;ent c%$panie# u#ing the e#ta;i#he1 techn%%g*!
a The Nat"ra' Li$its t! Techn!'!gy
Ear* in it# ev%uti%n4 RQD inve#t$ent# in a new techn%%g* ten1 t% *ie1 rapi1
i$pr%ve$ent in per&%r$ance a# ;a#ic engineering pr%;e$# are #%ve1! A&ter a ti$e4
1i$ini#hing return# t% cu$uative RQD ;egin t% #et in4 the rate %& i$pr%ve$ent in
per&%r$ance #%w# an1 the techn%%g* #tart# t% appr%ach it# natura i$it#4 where &urther
a1vance# are n%t p%##i;e!
bC +isr"ptive Techn!'!gy
Chri#ten#en u#e# the ter$ disr"ptive techn!'!gy t% re&er t% a new techn%%g*
that get# it# #tart awa* &r%$ the $ain#trea$ %& a $ar(et an1 then4 a# it# &uncti%nait*
i$pr%ve# %ver ti$e4 inva1e# the $ain $ar(et! Such techn%%gie# are 1i#ruptive ;ecau#e
the* rev%uti%ni0e in1u#tr* #tructure an1 c%$petiti%n4 %&ten cau#ing the 1ecine %&
e#ta;i#he1 c%$panie#! The* cau#e a techn%%gica para1ig$ #hi&t!
114
Chri#ten#enA# greate#t in#ight i# that e#ta;i#he1 c%$panie# are %&ten aware %& the
new techn%%g* ;ut 1% n%t inve#t in it ;ecau#e the* i#ten t% their cu#t%$er#4 an1 their
cu#t%$er# 1% n%t want it! Once the per&%r$ance %& the new techn%%g* i$pr%ve#4
cu#t%$er# 1% want it4 ;ut ;* thi# ti$e it i# new entrant#4 a# %pp%#e1 t% e#ta;i#he1
c%$panie#4 that have accu$uate1 the (n%we1ge re)uire1 t% ;ring the new techn%%g*
int% the $a## $ar(et! Chri#ten#en #upp%rt# hi# view ;* #evera 1etaie1 hi#t%rica ca#e
#tu1ie#4 %ne %& which i# #u$$ari0e1 in Strateg* in Acti%n E!5 te=t ;%%( page +6+!
In a11iti%n t% i#tening t%% c%#e* t% their cu#t%$er#4 Chri#ten#en X a nu$;er %& %ther
&act%r# that $a(e it ver* 1i&&icut &%r e#ta;i#he1 c%n a1%pt a new 1i#ruptive techn%%g*!
He n%te# that $an* e#ta;i#he1 c%$panie# 1ecine1 t% inve#t in new 1i#ruptive
techn%%gie# ;ecau#e initia* the* #erve1 #uch #$a $ar(et niche# that it #ee$e1
uni(e* that the* w%u1 have an i$pact %n the c%$pan*A# revenue# an1 pr%&it#! A# the
new techn%%g* #tarte1 t% i$pr%ve in &uncti%nait* an1 inva1e the $ain $ar(et4 their
inve#t$ent wa# %&ten hin1ere1 ;* the &act that e=p%iting the new techn%%g* re)uire1 a
new ;u#ine## $%1e4 an1 th%#e ver* 1i&&icut t% i$pe$ent
Chri#ten#en a#% n%te# that a new netw%r( %& #uppier# an1 1i#tri;ut%r# t*pica*
gr%w# up ar%un1 the new entrant#! N%t %n* 1% e#ta;i#he1 c%$panie# initia* ign%re
1i#ruptive techn%%g*4 #% 1% their #uppier# an1 1i#tri;ut%r#! Thi# create# an %pp%rtunit*
&%r new #uppier# an1 1i#tri;ut%r# t% enter the $ar(et t% #erve the new entrant#! A# the
new entrant# gr%w4 #% 1%e# the a##%ciate1 netw%r(! Uti$ate*4 Chri#ten#en #ugge#t#4 the
new entrant# an1 their netw%r( $a* repace n%t %n* e#ta;i#he1 enterpri#e#4 ;ut a#% the
entire netw%r( %& #uppier# an1 1i#tri;ut%r# a##%ciate1 with e#ta;i#he1 c%$panie#! Ta(en
t% it# %gica e=tre$e4 thi# view #ugge#t# that 1i#ruptive techn%%gie# $a* re#ut in the
1e$i#e %& the entire netw%r( %& enterpri#e# a##%ciate1 with e#ta;i#he1 c%$panie# in an
in1u#tr*!
The e#ta;i#he1 c%$panie# in an in1u#tr* that i# ;eing r%c(e1 ;* a techn%%gica
para1ig$ #hi&t %&ten have t% c%pe with interna inertia &%rce# that i$it their a;iit* t% a1apt4
;ut the new entrant# 1% n%t an1 there;* have an a1vantage! The* 1% n%t have t% 1ea
with an e#ta;i#he1 an1 c%n#ervative cu#t%$er #et an1 an %;#%ete ;u#ine## $%1e!
115
In#tea14 the* can &%cu# %n %pti$i0ing the new techn%%g*4 i$pr%ving it# per&%r$ance4 an1
ri1ing the wave %& 1i#ruptive techn%%g* int% new $ar(et #eg$ent# unti the* inva1e the
$ain $ar(et an1 chaenge the e#ta;i#he1 c%$panie#4 ;* which ti$e the* $a* ;e we
e)uippe1 t% ;eat the$!
cC Strategic I$p'icati!ns %!r Estab'ished C!$panies
Ath%ugh Chri#ten#en ha# unc%vere1 an i$p%rtant ten1enc*4 it i# ;* n% $ean#
written in #t%ne that a e#ta;i#he1 c%$panie# are 1%%$e1 t% &ai when &ace1 with
1i#ruptive techn%%gie#!
'ir#t4 having acce## t% the (n%we1ge a;%ut h%w 1i#ruptive techn%%gie# can
rev%uti%ni0e $ar(et# i# it#e& a vaua;e #trategic a##et! Man* %& the e#ta;i#he1
c%$panie# that Chri#ten#en e=a$ine1 &aie1 ;ecau#e the* t%%( a $*%pic view %& the new
techn%%g* an1 a#(e1 their cu#t%$er# the wr%ng )ue#ti%n! In#tea1 %& a#(ing4 IAre *%u
intere#te1 in thi# new techn%%g*HI the* #h%u1 have rec%gni0e1 that the new techn%%g*
wa# i(e* t% i$pr%ve rapi1* %ver ti$e an1 in#tea1 have a#(e14 IG%u1 *%u ;e intere#te1
in thi# new techn%%g* i& it i$pr%ve# it# &uncti%nait* %ver ti$eHI I& the* ha1 1%ne thi#4 the*
$a* have $a1e ver* 1i&&erent #trategic 1eci#i%n#!
Sec%n14 it i# cear* i$p%rtant &%r e#ta;i#he1 enterpri#e# t% inve#t in new*
e$erging techn%%gie# that $a* uti$ate* ;ec%$e 1i#ruptive techn%%gie#! C%$panie#
have t% he1ge their ;et# a;%ut new techn%%g*! A# we have n%te14 at an* ti$e4 there $a*
;e a #war$ %& e$erging techn%%gie#4 an* %ne %& which $ight uti$ate* ;ec%$e a
1i#ruptive techn%%g*! -arge4 e#ta;i#he1 c%$panie# that are generating #igni&icant ca#h
&%w# can an1 %&ten #h%u1 e#ta;i#h an1 &un1 centra RQD %perati%n# t% inve#t in an1
1eve%p #uch techn%%gie#!
In a11iti%n4 the* $a* wi#h t% ac)uire new* e$erging c%$panie# that are
pi%neering p%tentia* 1i#ruptive techn%%gie# %r enter int% aiance# with the$ t% 1eve%p
the techn%%g* B%int*! The #trateg* %& ac)uiring c%$panie# that are 1eve%ping p%tentia*
1i#ruptive techn%%g* i# %ne that Ci#c% S*#te$#4 a 1%$inant pr%vi1er %& Internet netw%r(
e)uip$ent4 i# &a$%u# &%r pur#uing! At the heart %& thi# #trateg* $u#t ;e a rec%gniti%n %n
the part %& the incu$;ent enterpri#e that it i# ;etter &%r the c%$pan* t% 1eve%p 1i#ruptive
116
techn%%g* an1 then canni;ai0e it# e#ta;i#he1 #ae# ;a#e than t% have that #ae# ;a#e
ta(en awa* ;* new entrant#! dC Strategic I$p'icati!ns %!r Ne# Entrants

Thi# #trea$ %& w%r( a#% h%1# i$picati%n# &%r new entrant#! The new entrant# %r
attac(er#4 have #evera a1vantage# %ver e#ta;i#he1 enterpri#e#! Pre##ure# t% c%ntinue
the e=i#ting %ut-%&-1ate ;u#ine## $%1e 1% n%t ha$#tring new entrant#4 which 1% n%t
have t% w%rr* a;%ut pr%1uct canni;ai0ati%n i##ue#! The* 1% n%t have t% w%rr* a;%ut their
e#ta;i#he1 cu#t%$er ;a#e %r reati%n#hip# with e#ta;i#he1 #uppier# an1 1i#tri;ut%r#!
In#tea14 the* can &%cu# a their energie# %n the %pp%rtunitie# %&&ere1 ;* the new
1i#ruptive techn%%g*4 ri1e the S-curve %& techn%%g* i$pr%ve$ent4 an1 gr%w rapi1* with
the $ar(et &%r that techn%%g*! Thi# 1%e# n%t $ean that new entrant# have n% pr%;e$#
t% #%ve! The* $a* ;e c%n#traine1 ;* a ac( %& capita %r have t% $anage the
%rgani0ati%na pr%;e$# a##%ciate1 with rapi1 gr%wth4 $%#t i$p%rtant4 the* $a* nee1 t%
&in1 a wa* t% ta(e their techn%%g* &r%$ a #$a %ut %& the-wa* niche int% the $a##
$ar(et!
Perhap# %ne %& the $%#t i$p%rtant i##ue# &acing new entrant# i# the ch%ice %&
whether t% partner with an e#ta;i#he1 c%$pan* %r g% it a%ne in their atte$pt t% 1eve%p
an1 pr%&it &r%$ a new 1i#ruptive techn%%g*! Ath%ugh a new entrant $a* enB%* a %& the
a1vantage# %& the attac(er4 it $a* ac( the re#%urce# re)uire1 t% e=p%it the$ &u*! In
#uch a ca#e4 it $ight want t% c%n#i1er &%r$ing a #trategic aiance with a arger4
e#ta;i#he1 c%$pan* t% gain acce## t% th%#e re#%urce#! The $ain i##ue# here are the
#a$e a# th%#e that we 1i#cu##e1 earier when e=a$ining the three #trategie# that
c%$panie# can pur#ue t% capture &ir#t-$%ver a1vantage#/ g% it a%ne4 enter int% a
#trategic aiance4 %r icen#e it# techn%%g*!
S"$$ary
14 Technica #tan1ar1# are i$p%rtant in $an* high-Tec in1u#trie#/ the* guarantee
c%$pati;iit*4 re1uce c%n&u#i%n in the $in1# %& cu#t%$er#4 a%w &%r $a##
pr%1ucti%n an1 %wer c%#t#4 an1 re1uce the ri#(# a##%ciate1 with #upp*ing
c%$pe$entar* pr%1uct#!
24 Netw%r( e&&ect# an1 p%#itive &ee1;ac( %%p# %&ten 1eter$ine which #tan1ar1
117
c%$e# t% 1%$inate a $ar(et!
34 Owning a #tan1ar1 can ;e a #%urce %& #u#taine1 c%$petitive a1vantage!
44 E#ta;i#hing a pr%prietar* #tan1ar1 a# the in1u#tr* #tan1ar1 $a* re)uire the
c%$pan* t% win a &%r$at war again#t a c%$peting an1 inc%$pati;e #tan1ar1!
Strategie# &%r 1%ing thi# incu1e pr%1ucing c%$pe$entar* pr%1uct#4
everaging (ier appicati%n#4 aggre##ive pricing an1 $ar(eting4 icen#ing the
techn%%g*4 an1 c%%perating with c%$petit%r#!
54 Man* high-tech pr%1uct# are characteri0e1 ;* high &i=e1 c%#t# %& 1eve%p$ent
;ut ver* %w %r 0er% $argina c%#t# %& pr%1ucing %ne e=tra unit %& %utput!
The#e c%#t ec%n%$ic# create a pre#u$pti%n in &av%r %& #trategie# that
e$pha#i0e aggre##ive pricing t% increa#e v%u$e an1 1rive 1%wn average t%ta
c%#t#!
64 Man* 1igita pr%1uct# #u&&er &r%$ ver* high pirac* rate# 1ue t% the %w $argina
c%#t# %& c%p*ing an1 1i#tri;uting #uch pr%1uct#! Pirac* can ;e re1uce1 ;* the
appr%priate c%$;inati%n %& #trateg*4 encr*pti%n #%&t ware4 an1 vig%r%u# 1e&en#e
%& inteectua pr%pert* right#!
74 It i# ver* i$p%rtant &%r a &ir#t $%ver t% 1eve%p a #trateg* t% capitai0e %n &ir#t-
$%ver a1vantage#! A c%$pan* can ch%%#e &r%$ three #trategie#/ 1eve%p an1
$ar(et the techn%%g* it#e&4 t% 1% #% B%int* with an%ther c%$pan*4 an1 icen#e
the techn%%g* t% e=i#ting c%$panie#! The ch%ice 1epen1# %n the c%$pe-
$entar* a##et# re)uire1 t% capture a &ir#t-$%ver a1vantage4 the height %&
;arrier# t% i$itati%n4 an1 the capa;iit* %& c%$petit%r#!
84 Techn%%gica para1ig$ #hi&t# %ccur when new techn%%gie# c%$e a%ng that
rev%uti%ni0e the #tructure %& the in1u#tr*4 1ra$atica* ater the nature %& c%$-
petiti%n4 an1 re)uire c%$panie# t% a1%pt new #trategie# in %r1er t% #urvive!
94 Techn%%gica para1ig$ #hi&t# are $%re i(e* t% %ccur when pr%gre## in
i$pr%ving the e#ta;i#he1 techn%%g* i# #%wing 1ue t% 1i$ini#hing return# an1
a new-1i#ruptive techn%%g* i# ta(ing r%%t in a $ar(et niche!
104 E#ta;i#he1 c%$panie# can 1ea with para1ig$ #hi&t# ;* he1ging their ;et#
with regar1 t% techn%%g* %r #etting up a #tan1-a%ne 1ivi#i%n t% e=p%it the
techn%%g*!
118
Chapter <
STRATEG9 IN T6E GLO)AL EN4IRONMENT
INTRO+;CTION
Thi# chapter %%(# at the c%ntri;uti%n %& g%;a #trateg* t% the pr%ce## %&
;ui1ing an1 $aintaining a c%$petitive a1vantage! The chapter %pen# ;* 1i#cu##ing
h%w g%;a e=pan#i%n create# vaue &%r a c%$pan*! The &%cu# i# %n the a;iit* %& g%;a
c%$panie# t% tran#&er 1i#tinctive c%$petencie# acr%## nati%na $ar(et#4 t% reai0e
%cati%n ec%n%$ie# &r%$ ;a#ing in1ivi1ua vaue-creati%n-activitie# in the %pti$a
%cati%n &%r that activit*4 an1 t% ri1e 1%wn the e=perience curve $%re rapi1* than
c%$petit%r# that are &%cu#e1 %n Bu#t their 1%$e#tic $ar(et!
Ne=t the chapter e=a$ine# tw% t*pe# %& c%$petitive pre##ure# that &ir$#
c%$peting in the g%;a $ar(etpace t*pica* &ace/ pre##ure# &%r c%#t re1ucti%n# an1
pre##ure# t% ;e re#p%n#ive t% %ca c%n1iti%n#! The#e pre##ure# pace c%n&icting
1e$an1# %n a c%$pan*! The #%urce# %& pre##ure# &%r c%#t re1ucti%n# an1 pre##ure#
&%r %ca re#p%n#ivene## are e=p%re1!
The 1i#cu##i%n then turn# t% the 1i&&erent #trategie# that c%$panie# can pur#ue in
the g%;a arena! '%ur 1i&&erent #trategie# are reviewe1 in #%$e 1etaiNan
internati%na #trateg*4 a $uti-1%$e#tic #trateg*4 a g%;a #trateg*4 an1 a tran#nati%na
#trateg*! The pr%# an1 c%n# %& each %& the#e #trategie# are 1e;ate1! A in( i# $a1e
;etween the appr%priatene## %& 1i&&erent #trategie# an1 the pre##ure# &%r c%#t
re1ucti%n# an1 %ca re#p%n#ivene##! It i# #ugge#te1 that the %pti$a #trateg* i#
c%ntingent %n the e=tent %& pre##ure# &%r c%#t re1ucti%n# an1 %ca re#p%n#ivene##
&acing a c%$pan*!
In the ne=t #ecti%n4 which review# the vari%u# %pti%n# that a c%$pan* ha# &%r
entering a &%reign $ar(et4 the &ive ;a#ic %pti%n#Ne=p%rting4 icen#ing4 &ranchi#ing4 B%int
venture#4 an1 the e#ta;i#h$ent %& a wh%* %wne1 #u;#i1iar*Nare c%$pare1 an1
c%ntra#te1! A nu$;er %& c%ntingencie# that in&uence the %pti$a ch%ice %& entr* $%1e
119
are c%n#i1ere1!
A 1i#cu##i%n %& g%;a #trategic aiance# c%#e# the chapter! It a##e##e# the
a1vantage# an1 1i#a1vantage# %& entering int% #trategic aiance# with g%;a c%$petit%r#
an1 highight# wa*# %& i$pr%ving the pr%;a;iit* %& a #ucce##&u aiance!
LEARNING O)?ECTI4ES
A&ter rea1ing thi# chapter *%u wi ;e a;e t%/
14 Un1er#tan1 the i$p%rtance %& g%;a c%$petiti%n an1 g%;a c%$petit%r#!
24 Di#cu## h%w $utinati%na c%$panie# can a11 vaue in wa*# n%t avaia;e t% pure*
1%$e#tic c%$panie#!
34 Di#cu## the #%urce# %& pre##ure# &%r c%#t re1ucti%n# &acing g%;a c%$panie#!
44 Un1er#tan1 the #%urce# %& pre##ure# &%r %ca re#p%n#ivene## &acing g%;a c%$panie#!
54 Di#cu## the pr%# an1 c%n# %& &%ur 1i&&erent #trategie# &%r c%$peting in the g%;a
$ar(et-pace/ an internati%na #trateg*4 a $uti1%$e#tic #trateg*4 a g%;a #trateg*4
an1
a tran#nati%na #trateg*!
64 I1entit* the &act%r# that 1eter$ine which #trateg* i# %pti$a &%r a given c%$pan*
74 I1enti&* the 1i&&erent wa*# %& #erving a &%reign $ar(et!
84 I1enti&* the &act%r# that 1eter$ine which wa* %& entering a &%reign $ar(et i# ;e#t &%r a
particuar c%$pan*!
8! Di#cu## wa*# %& i$pr%ving the pr%;a;iit* %& #ucce## &%r g%;a #trategic aiance#!
TEAC6ING O;TLINE
A Intr!d"cti!n
'%r c%$panie# that c%$pete in the g%;a $ar(etpaceNa# increa#ing nu$;er#N
e#ta;i#hing a c%$petitive a1vantage re)uire# a 1i#per#a %& their in1ivi1ua vaue-creati%n
activitie# t% the %pti$a %cati%n &%r per&%r$ing that activit*4 in an e&&%rt t% $ini$i0e the
c%#t# %& vaue creati%n an1 $a=i$i0e vaue a11e1! In an integrate1 g%;a $ar(etpace
with %w ;arrier# t% the &%w %& g%%1# an1 #ervice# acr%## nati%na ;%r1er#4 #uch acti%n#
120
are n% %nger Bu#t a #%urce %& c%$petitive a1vantage &%r the pi%neering &ir$L the* are &a#t
;ec%$ing an a;#%ute i$perative!
) 7r!%iting %r!$ G'!ba' EApansi!n
E=pan1ing g%;a* et# ;%th arge an1 #$a c%$panie# increa#e their pr%&ita;iit* in a
nu$;er %& wa*# n%t avaia;e t% pure* 1%$e#tic enterpri#e#!
14 Tran#&erring 1i#tinctive c%$petencie#! Reca that 1i#tinctive c%$petencie# are
uni)ue #trength# that a%w a c%$pan* t% achieve #uperi%r e&&icienc*4 )uait*4
inn%vati%n4 %r cu#t%$er re#p%n#ivene##! Di#tinctive c%$petencie# &%r$ the ;e1r%c(
%& a c%$pan*A# c%$petitive a1vantage! The* ena;e a c%$pan* t% %wer the c%#t#
%&
vaue creati%n an1@%r t% per&%r$ vaue-creati%n activitie# in wa*# that ea1 t%
1i&&erentiati%n an1 pre$iu$ pricing!
24 C%$panie# with vaua;e 1i#tinctive c%$petencie# can %&ten reai0e en%r$%u# re
turn# ;* app*ing th%#e c%$petencie#4 an1 the pr%1uct# the* pr%1uce4 t% &%reign
$ar(et#4 where in1igen%u# c%$petit%r# ac( #i$iar c%$petencie# an1 pr%1uct#!
Read Strategy in Acti!n
Mc+!na'dKs c%$petencie# in $anaging &a#t-&%%1 %perati%n# have pr%ve1 t% ;e Bu#t
a# vaua;e in c%untrie# a# 1iver#e a# 'rance4 Ru##ia4 China4 Ger$an*4 an1 "ra0i4 a# the*
have ;een in the Unite1 State#! Pri%r t% McD%na1A# entr*4 n%ne %& the#e c%untrie# ha1
A$erican-#t*e &a#t-&%%1 chain#4 #% McD%na1A# wa# ;ringing uni)ue #(i# an1 a
uni)ue pr%1uct t% each c%untr*! The ac( %& in1igen%u# c%$petit%r# with #i$iar
c%$petencie# an1 pr%1uct#4 an1 the i$pie1 ac( %& c%$petiti%n4 ha# great* enhance1
the pr%&ita;iit* %& thi# #trateg* &%r McD%na1A#
34 Rea'i(ing '!cati!n ec!n!$ies -%cati%n ec%n%$ie# are the ec%n%$ie# that
ari#e &r%$ per&%r$ing a vaue-creati%n activit* in the %pti$a %cati%n &%r that
activit*4 wherever in the w%r1 that $ight ;e Ctran#p%rtati%n c%#t# an1 tra1e
;arrier# per$it tingD!
44 -%cating a vaue-creati%n activit* in the %pti$a %cati%n &%r that activit* can have
%ne %& tw% e&&ect#/ either it can %wer the c%#t# %& vaue-creati%n an1 hep the c%$pan*
121
achieve a %w-c%#t p%#iti%n4 %r it can ena;e a c%$pan* t% 1i&&erentiate it# pr%1uct
%&&ering an1 charge a pre$iu$ price! Thu# #triving t% reai0e %cati%n ec%n%$ie# i#
c%n#i#tent with the generic ;u#ine##-eve #trategie# %& %w c%#t an1 1i&&erentiati%n!
54 Getting d!#n the eAperience c"rve .%u wi reca that the e=perience curve re&er#
t% the #*#te$atic re1ucti%n %& c%#t# %& pr%1ucti%n4 which ha# ;een %;#erve1 t% %ccur
%ver the i&e %& a pr%1uct! Re$e$;er that earning e&&ect# an1 ec%n%$ie# %& #cae
un1erie the e=perience curve an1 that $%ving 1%wn the e=perience curve i# c%n#i#-
tent with the ;u#ine##-eve #trateg* %& c%#t ea1er#hip!
64 The (e* t% getting 1%wn the e=perience curve a# rapi1* a# p%##i;e i# t% increa#e
the accu$uate1 v%u$e pr%1uce1 ;* a pant a# rapi1* a# p%##i;e! In#%&ar a#
g%;a $ar(et# are arger than 1%$e#tic $ar(et#4 c%$panie# that #erve a g%;a
$ar(et &r%$ a #inge %cati%n are i(e* t% ;ui1 up accu$uate1 v%u$e $%re
)uic(* than c%$panie# that &%cu# pri$ari* %n #erving their h%$e $ar(et %r %n
#erving $utipe $ar(et# &r%$ $utipe pr%1ucti%n %cati%n#! Thu# #erving a g%;a
$ar(et &r%$ a #inge %cati%n i# c%n#i#tent with $%ving 1%wn the e=perience curve
an1 e#ta;i#hing a %w-c%#t p%#iti%n!
74 The c%#t a1vantage# %& #erving the w%r1 $ar(et &r%$ a #inge %cati%n wi ;e a
the $%re #igni&icant i& that %cati%n i# a#% the %pti$a %ne &%r per&%r$ing that
vaue-creati%n activit*Nthat i#4 i& the c%$pan* i# #i$utane%u#* reai0ing c%#t
ec%n%$ie# &r%$ e=perience-curve e&&ect# an1 &r%$ %cati%n ec%n%$ie#!
C 7ress"res %!r C!st Red"cti!ns and L!ca' Resp!nsiveness
14 C%$panie# that c%$pete in the g%;a $ar(etpace &ace tw% t*pe# %& c%$petitive
pre##ure#/ pre##ure# &%r c%#t re1ucti%n# an1 pre##ure# t% ;e %ca* re#p%n#ive!
24 The#e c%$petitive pre##ure# pace c%n&icting 1e$an1# %n a c%$pan*!
34 Re#p%n1ing t% pre##ure# &%r c%#t re1ucti%n# 1e$an1# that a c%$pan* tr* t%
$ini$i0e it# unit c%#t#! Attaining #uch a g%a $a* re)uire a c%$pan* t% ;a#e it#
pr%1uctive activitie# at the $%#t &av%ra;e %w-c%#t %cati%n4 wherever in the w%r1
that $ight ;e! It $a* a#% $ean that a c%$pan* $u#t %&&er a #tan1ar1i0e1 pr%1uct
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t% the g%;a $ar(etpace in %r1er t% ri1e 1%wn the e=perience curve a# )uic(* a#
p%##i;e!
44 Reacting t% pre##ure# t% ;e %ca* re#p%n#ive re)uire# a c%$pan* t% 1i&&erentiate
it# pr%1uct %&&ering an1 $ar(eting #trateg* &r%$ c%untr* t% c%untr*! It $u#t tr* t%
acc%$$%1ate the 1iver#e 1e$an1# ari#ing &r%$ nati%na 1i&&erence# in c%n#u$er
ta#te# an1 pre&erence#4 ;u#ine## practice#4 1i#tri;uti%n channe#4 c%$petitive
c%n1iti%n#4 an1 g%vern$ent p%icie#! "ecau#e 1i&&erentiati%n acr%## c%untrie# can
inv%ve #igni&icant 1upicati%n an1 a ac( %& pr%1uct #tan1ar1i0ati%n4 it $a* rai#e
c%#t#!
54 Pre##ure# &%r c%#t re1ucti%n#! Pre##ure# &%r c%#t re1ucti%n# can ;e particuar*
inten#e in in1u#trie# pr%1ucing c%$$%1it*-t*pe pr%1uct#4 where $eaning&u
1i&&erentiati%n %n n%n price &act%r# i# 1i&&icut an1 price i# the $ain c%$petitive
weap%n! Thi# ten1# t% ;e the ca#e &%r pr%1uct# that #erve univer#a nee1#
64 Pre##ure# &%r c%#t re1ucti%n# are a#% #tr%ng in in1u#trie# where $aB%r c%$petit%r#
are ;a#e1 in %w-c%#t %cati%n#4 where there i# per#i#tent e=ce## capacit*4 an1
where c%n#u$er# are p%wer&u an1 &ace %w #witching c%#t#!
74 Pressures or local responsiveness! Pre##ure# &%r %ca re#p%n#ivene## ari#e
&r%$
a4 Di&&erence# in c%n#u$er ta#te# an1 pre&erence#4
b4 Di&&erence# in in&ra#tructure an1 tra1iti%na practice#4
c4 Di&&erence# in 1i#tri;uti%n channe#
&4 H%#t g%vern$ent 1e$an1#!
F! Str%ng pre##ure# &%r %ca re#p%n#ivene## e$erge when c%n#u$er ta#te# an1
pre&erence# 1i&&er #igni&icant* ;etween c%untrie#Na# the* $a* &%r hi#t%ric %r
cutura rea#%n#! In #uch ca#e#4 pr%1uct an1@%r $ar(eting $e##age# have t%
;e cu#t%$i0e1 t% appea t% the ta#te# an1 pre&erence# %& %ca c%n#u$er#!
Thi# t*pica* create# pre##ure# &%r the 1eegati%n %& pr%1ucti%n an1 $ar(eting
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&uncti%n# t% nati%na #u;#i1iarie#!
8! Pre##ure# &%r %ca re#p%n#ivene## e$erge when there are 1i&&erence# in
in&ra#tructure an1 @%r tra1iti%na practice# ;etween c%untrie#! In #uch
circu$#tance#4 there can ;e a nee1 t% cu#t%$i0e the pr%1uct t% the 1i#tinctive
in&ra#tructure an1 practice# %& 1i&&erent nati%n#! Thi# $a* nece##itate the
1eegati%n %& $anu&acturing an1 pr%1ucti%n &uncti%n# t% &%reign #u;#i1iarie#!
19! A c%$pan*A# $ar(eting #trategie# $a* have t% ;e re#p%n#ive t% 1i&&erence# in
1i#tri;uti%n channe# ;etween c%untrie#! Thi# $a* nece##itate the 1eegati%n
%& $ar(eting &uncti%n# t% nati%na #u;#i1iarie#!
11! Ec%n%$ic an1 p%itica 1e$an1# i$p%#e1 ;* h%#t c%untr* g%vern$ent# $a*
re)uire
1+! A 1egree %& %ca re#p%n#ivene##! '%r e=a$pe4 the p%itic# %& heath care
ar%un1 the w%r1 &%rce# phar$aceutica c%$panie# t% $anu&acture in $utipe
%cati%n#! Phar$aceutica c%$panie# are #u;Bect t% %%( at cinica te#ting4
regi#trati%n pr%ce1ure#4 an1 pricing re#tricti%n#4 a %& which $ean that the
$anu&acturing an1 $ar(eting %& a 1rug ha# t% $eet %ca re)uire$ent#!
12! !mplications o pressures or local responsiveness. "ecau#e %& pre##ure#
&%r %ca re#p%n#ivene##4 it $a* n%t ;e p%##i;e &%r a c%$pan* t% reai0e the
&u ;ene&it# &r%$ e=perience-curve an1 %cati%n ec%n%$ie#! It $a* n%t ;e
p%##i;e t% #erve the g%;a $ar(etpace &r%$ a #inge %w-c%#t %cati%n4
pr%1ucing a g%;a* #tan1ar1i0e1 pr%1uct an1 $ar(eting it w%r1wi1e t%
achieve e=perience-curve c%#t ec%n%$ie#! The nee1 t% cu#t%$i0e the pr%1uct
%&&ering t% %ca c%n1iti%n# $a* w%r( again#t the i$pe$entati%n %& #uch a
#trateg*!
15! It $a* a#% n%t ;e p%##i;e t% tran#&er wh%e#ae &r%$ %ne nati%n t% an%ther
the #(i# an1 pr%1uct# a##%ciate1 with a c%$pan*A# 1i#tinctive c%$petencie#!
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+ Strategic Ch!ice
1! C%$panie# u#e &%ur ;a#ic #trategie# t% enter an1 c%$pete in the internati%na
envir%n$ent/ an internati%na #trateg*4 a $uti-1%$e#tic #trateg*4 a g%;a
#trateg*4 an1 a tran#nati%na #trateg*! Each %& the#e #trategie# ha# it#
a1vantage# an1 1i#a1vantage#! The appr%priatene## %& each #trateg* varie#
with the e=tent %& pre##ure# &%r c%#t re1ucti%n# an1 %ca re#p%n#ivene##!
+! !nternational strategy. C%$panie# that pur#ue an internati%na #trateg* tr* t%
create vaue ;* tran#&erring vaua;e #(i# an1 pr%1uct# t% &%reign $ar(et#
where in1igen%u# c%$petit%r# ac( th%#e #(i# an1 pr%1uct#!
2! M%#t internati%na c%$panie# have create1 vaue ;* tran#&erring 1i&&erentiate1
pr%1uct %&&ering# 1eve%pe1 at h%$e t% new $ar(et# %ver#ea#! Acc%r1ing*4
the* ten1 t% centrai0e pr%1uct 1eve%p$ent &uncti%n# at h%$e! H%wever4 the*
a#% ten1 t% e#ta;i#h $anu&acturing an1 $ar(eting &uncti%n# in each $aB%r
c%untr* in which the* 1% ;u#ine##! Ath%ugh the* $a* un1erta(e #%$e %ca
cu#t%$i0ati%n %& pr%1uct %&&ering an1 $ar(eting #trateg*4 thi# ten1# t% ;e
rather i$ite1 in #c%pe! Uti$ate*4 in $%#t internati%na c%$panie# the hea1
%&&ice retain# tight c%ntr% %ver $ar(eting an1 pr%1uct #trateg*!
5! An internati%na #trateg* $a(e# #en#e i& a c%$pan* ha# a vaua;e 1i#tinctive
c%$petenc* that in1igen%u# c%$petit%r# in &%reign $ar(et# ac( an1 i& the
c%$pan* &ace# reative* wea( pre##ure# &%r %ca re#p%n#ivene## an1 c%#t
re1ucti%n#! In #uch circu$#tance#4 an internati%na #trateg* can ;e ver*
pr%&ita;e!
6! H%wever4 when pre##ure# &%r %ca re#p%n#ivene## are #tr%ng4 c%$panie#
pur#uing thi# #trateg* %#e %ut t% c%$panie# that put $%re e$pha#i# %n
cu#t%$i0ing the pr%1uct %&&ering an1 $ar(et #trateg* t% %ca c%n1iti%n#L
$%re%ver4 ;ecau#e the* $u#t 1upicate $anu&acturing &aciitie#4 c%$panie#
that pur#ue an internati%na #trateg* ten1 t% #u&&er &r%$ high %perating c%#t#!
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:! M"'ti:d!$estic strategy! C%$panie# pur#uing a $uti-1%$e#tic #trateg*
%rient the$#eve# t%war1 achieving $a=i$u$ %ca re#p%n#ivene##! -i(e
c%$panie# pur#uing an internati%na #trateg*4 the* ten1 t% tran#&er #(i# an1
pr%1uct# 1eve%pe1 at h%$e t% &%reign $ar(et#! Uni(e internati%na
c%$panie#4 h%wever4 the* e=ten#ive* cu#t%$i0e ;%th their pr%1uct %&&ering
an1 their $ar(eting #trateg* t% 1i&&erent nati%na c%n1iti%n#! The* a#% have a
ten1enc* t% e#ta;i#h a c%$pete #et %& vaue-creati%n activitie# incu1ing
pr%1ucti%n4 $ar(eting4 an1 RQDNin each $aB%r nati%na $ar(et in which the*
1% ;u#ine##! C%n#e)uent*4 #uch c%$panie# are genera* una;e t% reai0e
vaue &r%$ e=perience-curve e&&ect# an1 %cati%n ec%n%$ie#! Thu# $an* $uti-
1%$e#tic c%$panie# have a high c%#t #tructure!
E! A $uti-1%$e#tic #trateg* $a(e# $%#t #en#e when there are #tr%ng pre##ure#
&%r %ca re#p%n#ivene## an1 wea( pre##ure# &%r c%#t re1ucti%n#! The high-
c%#t #tructure a##%ciate1 with the 1upicati%n %& pr%1ucti%n &aciitie# $a(e# thi#
#trateg* inappr%priate in in1u#trie# where c%#t pre##ure# are inten#e!
F! An%ther 1raw;ac( %& thi# #trateg* i# that $an* $uti-1%$e#tic c%$panie#
1eve%p int% 1ecentrai0e1 &e1erati%n# in which each nati%na #u;#i1iar*
&uncti%n# in a arge* aut%n%$%u# $anner! A# a re#ut4 a&ter a ti$e the* ;egin
t% ac( the a;iit* t% tran#&er the #(i# an1 pr%1uct# 1erive1 &r%$ 1i#tinctive
c%$petencie# t% their vari%u# nati%na #u;#i1iarie# ar%un1 the w%r1!
8! G%;a #trateg*! C%$panie# that pur#ue a g%;a #trateg* &%cu# %n increa#ing
pr%&ita;iit* ;* reaping the c%#t re1ucti%n# that c%$e &r%$ e=perience-curve
e&&ect# an1 %cati%n ec%n%$ie#! The* are pur#uing a %w-c%#t #trateg*!
19! The pr%1ucti%n4 $ar(eting4 an1 RQD activitie# %& c%$panie# pur#uing a g%;a
#trateg* are c%ncentrate1 in a &ew &av%ra;e %cati%n#! G%;a c%$panie# ten1
n%t t% cu#t%$i0e their pr%1uct %&&ering an1 $ar(eting #trateg* t% %ca
c%n1iti%n# ;ecau#e cu#t%$i0ati%n rai#e# c%#t#! In#tea14 g%;a c%$panie#
pre&er t% $ar(et a #tan1ar1i0e1 pr%1uct w%r1wi1e #% that the* can reap the
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$a=i$u$ ;ene&it# &r%$ the ec%n%$ie# %& #cae that un1erie the e=perience
curve! The* a#% ten1 t% u#e their c%#t a1vantage t% #upp%rt aggre##ive pricing
in w%r1 $ar(et#!
11! Thi# #trateg* $a(e# $%#t #en#e when there are #tr%ng pre##ure# &%r c%#t
re1ucti%n#4 ;ut $ini$a 1e$an1# &%r %ca re#p%n#ivene##! Increa#ing*4 the#e
c%n1iti%n# prevai in $an* in1u#tria g%%1# in1u#trie#!
1+! Tran#nati%na #trateg*! "artett an1 Gh%#ha have argue1 that in t%1a*A#
envir%n$ent c%$petitive c%n1iti%n# are #% inten#e that in %r1er t% #urvive in
the g%;a $ar(etpace c%$panie# $u#t e=p%it e=perience-;a#e1 c%#t
ec%n%$ie# an1 %cati%n ec%n%$ie#4 tran#&er 1i#tinctive c%$petencie# within
the c%$pan*4 an1 1% a thi# whie pa*ing attenti%n t% pre##ure# &%r %ca
re#p%n#ivene##!
12! The* a#% n%te that in the $%1ern $utinati%na enterpri#e 1i#tinctive
c%$petencie# 1% n%t re#i1e Bu#t in the h%$e c%untr*! The* can 1eve%p in an*
%& the c%$pan*A# w%r1wi1e %perati%n#! Thu# the* $aintain that the &%w %&
#(i# an1 pr%1uct %&&ering# #h%u1 n%t ;e a %ne wa*4 &r%$ h%$e c%$pan* t%
&%reign #u;#i1iar*4 a# in the ca#e %& c%$panie# pur#uing an internati%na
#trateg*! Rather4 the &%w #h%u1 a#% ;e &r%$ &%reign #u;#i1iar* t% h%$e
c%untr*4 an1 &r%$ &%reign #u;#i1iar* t% &%reign #u;#i1iar*Na pr%ce## the* re&er
t% a# g%;a earning!
15! The #trateg* pur#ue1 ;* c%$panie# that are tr*ing t% achieve a %& the#e
%;Bective# #i$utane%u#* i# re&erre1 t% a# a tran#nati%na #trateg*! The
#trateg* $a(e# #en#e when a c%$pan* &ace# high pre##ure# &%r c%#t
re1ucti%n# an1 high pre##ure# &%r %ca re#p%n#ivene##! C%$panie# that
pur#ue a tran#nati%na #trateg* are tr*ing t% #i$utane%u#* achieve %w-c%#t
an1 1i&&erentiati%n a1vantage#!
16! "ui1ing an %rgani0ati%n capa;e %& #upp%rting a tran#nati%na #trategic
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p%#ture i# a c%$pe= an1 1i&&icut ta#(! Si$utane%u#* tr*ing t% achieve c%#t
e&&iciencie#4 g%;a earning4 an1 %ca re#p%n#ivene## pace# c%ntra1ict%r*
1e$an1# %n a c%$pan*! The %rgani0ati%na pr%;e$# a##%ciate1 with
c%n&icting %;Bective# c%n#titute a $aB%r i$pe1i$ent t% the pur#uit %& a
tran#nati%na #trateg*! C%$panie# that atte$pt t% pur#ue a tran#nati%na
#trateg* can ;ec%$e ;%gge1 1%wn in an %rgani0ati%na $%ra## that ea1# %n*
t% ine&&iciencie#!
1:! "artett an1 Gh%#ha $a* ;e %ver#tating the ca#e &%r the tran#nati%na
#trateg*L the* pre#ent it a# the %n* via;e #trateg*! Ath%ugh 1%u;te## in #%$e
in1u#trie# the c%$pan* that can a1%pt a tran#nati%na #trateg* wi have a
c%$petitive a1vantage4 in %ther in1u#trie# g%;a4 $uti1%$e#tic4 an1
internati%na #trategie# re$ain via;e! In the g%;a #e$ic%n1uct%r in1u#tr*4 &%r
e=a$pe4 pre##ure# &%r %ca cu#t%$i0ati%n are $ini$a4 an1 c%$petiti%n i#
pure* a c%#t ga$e4 in which ca#e a g%;a #trateg*4 n%t a tran#nati%na
#trateg*4 i# %pti$a!
1E! The a1vantage# an1 1i#a1vantage# %& the &%ur #trategie# Bu#t 1i#cu##e1!
Ath%ugh a tran#nati%na #trateg* appear# t% %&&er the $%#t a1vantage#4 it
#h%u1 n%t ;e &%rg%tten that i$pe$enting it rai#e# 1i&&icut %rgani0ati%na
i##ue#! M%re genera*4 the appr%priatene## %& each #trateg* 1epen1# %n the
reative #trength %& pre##ure# &%r c%#t re1ucti%n# an1 pre##ure# &%r %ca
re#p%n#ivene##!
E The Ch!ice !% Entry M!de
1! E"porting. M%#t $anu&acturing c%$panie# ;egin their g%;a e=pan#i%n a#
e=p%rter#! E=p%rting 1%e# have tw% 1i#tinct a1vantage#/ CaD it av%i1# the c%#t#
%& having t% e#ta;i#h $anu&acturing %perati%n# in the h%#t c%untr*4 an1 C;D it i#
c%n#i#tent with a pure g%;a #trateg*!
+! H%wever4 e=p%rting ha# 1raw;ac(#! E=p%rting &r%$ the c%$pan*A# h%$e ;a#e
$a* n%t ;e appr%priate i& there are %wer-c%#t %cati%n# &%r $anu&acturing the
128
pr%1uct a;r%a1! High tran#p%rt c%#t# can $a(e e=p%rting unec%n%$ica4
particuar* in the ca#e %& ;u( pr%1uct#! Tari&& ;arrier#4 t%%4 can $a(e the
#trateg* unec%n%$ica!
2! #icensing. The a1vantage %& icen#ing i# that the c%$pan* 1%e# n%t have t%
;ear the 1eve%p$ent c%#t# an1 ri#(# a##%ciate1 with %pening up a &%reign
$ar(et! A#%4 icen#ing $a* ;e an attractive %pti%n &%r c%$panie# that are
unwiing t% c%$$it &inancia re#%urce# t% an un&a$iiar %r p%itica* v%atie
&%reign $ar(et!
5! There are three #eri%u# 1raw;ac(# t% icen#ing! 'ir#t4 icen#ing 1%e# n%t give a
c%$pan* the tight c%ntr% %ver $anu&acturing4 $ar(eting4 an1 #trategic
&uncti%n# in &%reign c%untrie# that i# re)uire1 i& a c%$pan* i# g%ing t% pur#ue a
g%;a #trateg* %r a tran#nati%na #trateg*! Sec%n14 ;* icen#ing it# techn%%g*4
a c%$pan* %&ten give# awa* vaua;e (n%w-h%w t% &uture c%$petit%r#! Thir14
c%$peting in a g%;a $ar(etpace $a* re)uire a c%$pan* t% c%%r1inate
#trategic $%ve# acr%## c%untrie# #% that the pr%&it# earne1 in %ne c%untr* can
;e u#e1 t% #upp%rt c%$petitive attac(# in an%ther! -icen#ing4 ;* it# ver*
nature4 #evere* i$it# a c%$pan*A# a;iit* t% 1% #%!
6! $ranchising. Ghen &ranchi#ing4 the c%$pan* #e# i$ite1 right# t% &ranchi#ee#
t% u#e it# ;ran1 na$e in return &%r a u$p #u$ pa*$ent an1 a #hare %& the
&ranchi#eeA# pr%&it#! H%wever4 in c%ntra#t t% $%#t icen#ing agree$ent#4 the
&ranchi#ee ha# t% agree t% a;i1e ;* #trict rue# a# t% h%w it 1%e# ;u#ine##!
:! The a1vantage# %& &ranchi#ing a# an entr* $%1e are the #a$e a# th%#e %&
icen#ing! One 1i#a1vantage i# that &ranchi#ing $a* inhi;it a c%$pan*A# a;iit*
t% achieve g%;a #trategic c%%r1inati%n! An%ther 1i#a1vantage inv%ve# )uait*
c%ntr%! '%reign &ranchi#ee# $a* n%t ;e a# c%ncerne1 a;%ut )uait* a# the
&ranchi#er i#! An1 p%%r )uait* $a* $ean n%t %n* %#t #ae# in the &%reign
$ar(et4 ;ut a#% a 1ecine in the c%$pan*A# w%r1wi1e reputati%n!
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E! %oint ventures! <%int venture# have the &%%wing a1vantage#/ a $utinati%na
$a* &ee that it can ;ene&it &r%$ a %ca partnerA# (n%we1ge %& a h%#t c%untr*A#
c%$petitive c%n1iti%n#4 cuture4 anguage4 p%itica #*#te$#4 an1 ;u#ine##
#*#te$#L a c%$pan* can #hare the c%#t# an1 ri#( %& #etting up ;u#ine## with a
%ca partnerL an1 in $an* c%untrie# p%itica c%n#i1erati%n# $a(e B%int
venture# the %n* &ea#i;e entr* $%1e!
F! "ut B%int venture# have tw% 1raw;ac(#! 'ir#t4 a# in the ca#e %& icen#ing4 a
c%$pan* that enter# int% a B%int venture run# the ri#( %& %#ing c%ntr% %ver it#
techn%%g* t% it# venture partner! Sec%n14 a B%int venture 1%e# n%t give a
c%$pan* the tight c%ntr% %ver 1i&&erent #u;#i1iarie# that it $ight nee1 i& it
wi#he# t% pur#ue a g%;a #trateg*!
8! &holly owned subsidiaries. A wh%* %wne1 #u;#i1iar* i# the $%#t c%#t*
$eth%1 %& #erving a &%reign $ar(et! C%$panie# ta(ing thi# appr%ach have t%
;ear the &u c%#t# an1 ri#(# a##%ciate1 with #etting up %ver#ea# %perati%n#!
De#pite thi# c%n#i1era;e 1i#a1vantage4 h%wever4 #etting up a wh%* %wne1
#u;#i1iar* ha# tw% cear a1vantage#!
19! 'ir#t4 when a c%$pan*A# c%$petitive a1vantage i# ;a#e1 %n c%ntr% %ver a
techn%%gica c%$petenc*4 a wh%* %wne1 #u;#i1iar* wi n%r$a* ;e the
pre&erre1 entr* $%1e4 #ince it re1uce# the ri#( %& %#ing c%ntr% %ver that
c%$petenc*! Sec%n14 a wh%* %wne1 #u;#i1iar* give# a c%$pan* the (in1 %&
tight c%ntr% %ver %perati%n# in 1i&&erent c%untrie# that are nece##ar* &%r
pur#uing a g%;a #trateg*!
11! Ch!!sing bet#een entry $!des! Inevita;*4 ch%%#ing an entr* $%1e inv%ve#
tra1e%&&#! There&%re4 it i# 1i&&icut t% $a(e har1 an1 &a#t rec%$$en1ati%n# a# t%
what a c%$pan* #h%u1 1%! A nu$;er %& r%ugh generai0ati%n# can ;e $a1e4
h%wever!
1+! +istinctive c!$petencies and entry $!de! I& a c%$pan*A# c%$petitive
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a1vantage i# ;a#e1 %n c%ntr% %ver pr%prietar* techn%%gica (n%w-h%w4
icen#ing an1 B%int venture arrange$ent# #h%u1 ;e av%i1e14 i& p%##i;e4 in
%r1er t% $ini$i0e the ri#( %& %#ing c%ntr% %ver that techn%%g*! I& a high-tech
c%$pan* i# c%n#i1ering #etting up %perati%n# in a &%reign c%untr* in %r1er t%
pr%&it &r%$ a c%re c%$petenc* in techn%%gica (n%w-h%w4 it #h%u1 pr%;a;* 1%
#% thr%ugh a wh%* %wne1 #u;#i1iar*!
12! The c%$petitive a1vantage %& $an* #ervice c%$panie# i# ;a#e1 %n
$anage$ent (n%w-h%w! '%r #uch c%$panie#4 the ri#( %& %#ing c%ntr% %ver
their $anage$ent #(i# t% &ranchi#ee# %r B%int venture partner# i# n%t that
great! The vaua;e a##et %& #uch c%$panie# i# their ;ran1 na$e4 an1 ;ran1
na$e# are genera* we pr%tecte1 ;* internati%na aw# pertaining t%
tra1e$ar(#!
15! Thu# $a$1 %& the i##ue# that ari#e in the ca#e %& techn%%gica (n%w-h%w 1%
n%t ari#e in the ca#e %& $anage$ent (n%w-h%w! A# a re#ut4 $an* #ervice
c%$panie# &av%r a c%$;inati%n %& &ranchi#ing an1 #u;#i1iarie# t% c%ntr%
&ranchi#ee# within a particuar c%untr* %r regi%n The #u;#i1iar* $a* ;e wh%*
%wne1 %r a B%int venture! In $%#t ca#e#4 h%wever4 #ervice c%$panie# have
&%un1 that entering int% a B%int venture with a %ca partner in %r1er t% #et up a
c%ntr%ing #u;#i1iar* in a c%untr* %r regi%n w%r(# ;e#t! Thi# i# ;ecau#e a B%int
venture i# %&ten p%itica* $%re accepta;e an1 ;ring# a 1egree %& %ca
(n%we1ge t% the #u;#i1iar*!
16! 7ress"res %!r c!st red"cti!n and entry $!de! The greater the pre##ure# &%r
c%#t re1ucti%n# the $%re i(e* it i# that a c%$pan* wi want t% pur#ue #%$e
c%$;inati%n %& e=p%rting an1 wh%* %wne1 #u;#i1iarie#! "* $anu&acturing in
th%#e %cati%n# where &act%r c%n1iti%n# are %pti$a an1 then e=p%rting t% the
re#t %& the w%r14 a c%$pan* $a* ;e a;e t% reai0e #u;#tantia %cati%n
ec%n%$ie# an1 e=perience curve e&&ect#!
1:! 1:! The c%$pan* $ight then want t% e=p%rt the &ini#he1 pr%1uct t% $ar(eting
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#u;#i1iarie# ;a#e1 in vari%u# c%untrie#! The#e #u;#i1iarie# wi t*pica* ;e
wh%* %wne1 an1 have the re#p%n#i;iit* &%r %ver#eeing 1i#tri;uti%n in a
particuar c%untr*! Setting up wh%* %wne1 $ar(eting #u;#i1iarie# i# pre&era;e
t% a B%int venture arrange$ent %r u#ing a &%reign $ar(eting agent ;ecau#e it
give# the c%$pan* the tight c%ntr% %ver $ar(eting that $ight ;e re)uire1 t%
c%%r1inate a g%;a* 1i#per#e1 vaue chain! In a11iti%n4 tight c%ntr% %ver a
%ca %perati%n ena;e# the c%$pan* t% u#e the pr%&it# generate1 in %ne
$ar(et t% i$pr%ve it# c%$petitive p%#iti%n in an%ther! Hence c%$panie#
pur#uing g%;a %r tran#nati%na #trategie# pre&er e#ta;i#hing wh%* %wne1
#u;#i1iarie#!
GLO)AL STRATEGIC ALLIANCES
1! Strategic aiance# are c%%perative agree$ent# ;etween c%$panie# that $a*
a#% ;e c%$petit%r#! In thi# #ecti%n4 we are c%ncerne1 #peci&ica* with
#trategic aiance# ;etween c%$panie# &r%$ 1i&&erent c%untrie#! Strategic
aiance# run the range &r%$ &%r$a B%int venture#4 where tw% %r $%re
c%$panie# have an e)uit* #ta(e4 t% #h%rt-ter$ c%ntractua agree$ent#
;etween tw% c%$panie# t% c%%perate %n a particuar pr%;e$!
+! Advantages !% a''iances! C%$panie# enter int% #trategic aiance# with actua
%r p%tentia c%$petit%r# in %r1er t% achieve certain #trategic %;Bective#!
a4 Strategic aiance# $a* &aciitate entr* int% a &%reign $ar(et!
b4 Man* c%$panie# have entere1 int% #trategic aiance# in %r1er t% #hare the
&i=e1 c%#t# Can1 a##%ciate1 ri#(#D that ari#e &r%$ the 1eve%p$ent %& new
pr%1uct# %r pr%ce##e#!
c4 Aiance# $a* ;e a wa* %& ;ringing t%gether c%$pe$entar* #(i# an1
a##et# that neither c%$pan* c%u1 ea#i* 1eve%p %n it# %wn!
&4 Aiance# $a* ;e u#e&u i& the* hep a c%$pan* #et techn%%gica
#tan1ar1# &%r it# in1u#tr* an1 i& th%#e #tan1ar1# ;ene&it the c%$pan*!
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34 +isadvantages !% a''iances! C%$$entat%r# have critici0e1
#trategic aiance# %n the gr%un1# that the* give c%$petit%r# a %w-c%#t r%ute t%
gaining new techn%%g* an1 $ar(et acce##! Une## it i# care&u4 a c%$pan* can
give awa* $%re than it get# in return! Thi# rai#e# the )ue#ti%n4 wh* 1% #%$e
aiance# ;ene&it a c%$pan*4 whie in %ther# it can en1 up giving awa*
techn%%g* an1 $ar(et acce## an1 get ver* itte in returnH
G Ma/ing Strategic A''iances W!r/
1! The ;ene&it# a c%$pan* 1erive# &r%$ a #trategic aiance #ee$ t% ;e
a &uncti%n %& three &act%r#/ partner #eecti%n4 aiance #tructure4 an1 the wa* the
aiance i# $anage1!
+! Partner #eecti%n! One %& the (e*# t% $a(ing a #trategic aiance w%r(
i# t% #eect the right (in1 %& partner! The right (in1 %& partner ha# three principa
characteri#tic#!
a4 It $u#t ;e a;e t% hep the c%$pan* achieve it# #trategic g%a#4 whether
the* are $ar(et acce##4 #haring the c%#t# an1 ri#(# %& new pr%1uct
1eve%p$ent4 %r gaining acce## t% critica c%re c%$petencie#! In %ther
w%r1#4 the partner $u#t have capa;iitie# that the c%$pan* ac(# ;ut
vaue#!
b4 The partner $u#t #hare the c%$pan*A# vi#i%n &%r the purp%#e %& the
aiance! I& tw% c%$panie# appr%ach an aiance with ra1ica* 1i&&erent
agen1a#4 the chance# are that har$%ni%u# reati%n#hip# wi n%t &%uri#h
an1 the aiance wi en1 in 1iv%rce!
c4 The partner $u#t ;e uni(e* t% tr* t% %pp%rtuni#tica* e=p%it the aiance
&%r it# %wn en1#4 e=pr%priating the c%$pan*A# techn%%gica (n%w-h%w4
whie giving itte in return! In thi# re#pect4 c%$panie# with a reputati%n &%r
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&air pa* pr%;a;* $a(e the ;e#t aiance partner#!
2! Aiance #tructure! The aiance #h%u1 ;e #tructure1 #% that the ri#(#
%& a c%$pan* giving t%% $uch awa* t% it# aiance partner with%ut getting
an*thing in return are re1uce1 t% an accepta;e eve! There are at ea#t %ur
wa*# in which a c%$pan* can #a&eguar1 again#t %pp%rtuni#$ ;* it# aiance
partner!
a4 Aiance# can ;e 1e#igne1 t% $a(e it 1i&&icut i& n%t i$p%##i;e t% tran#&er
techn%%g* that i# n%t $eant t% ;e tran#&erre1! Speci&ica*4 the 1e#ign4
1eve%p$ent4 $anu&acture4 an1 #ervice %& a pr%1uct $anu&acture1 ;* an
aiance $a* ;e #tructure1 #% a# t% wa %&& the $%#t #en#itive
techn%%gie# an1 prevent their ea(age t% the %ther participant Cthat i#4 ;*
1en*ing the partner acce## t% the#e area#D!
b4 C%ntractua #a&eguar1# can ;e written int% an aiance agree$ent t%
1i$ini#h the ri#( %& %pp%rtuni#$ ;* a partner!
c4 "%th partie# t% an aiance can agree in a1vance t% e=change #(i# an1
techn%%gie# that the %ther c%ver#4 there;* en#uring a chance &%r
e)uita;e gain! Cr%##-icen#ing agree$ent# are %ne wa* %& achieving thi#
g%a!
&4 The ri#( %& %pp%rtuni#$ ;* an aiance partner can ;e 1ecrea#e1 i& the
c%$pan* e=tract# a #igni&icant credib'e c!$$it$ent &r%$ the partner in
a1vanceNa c%$$it$ent $a(ing it e## i(e* that the aiance $ight en1
with the c%$pan* giving awa* $uch an1 getting itte in return
5! Managing the aiance! Once a partner ha# ;een #eecte1 an1 an
appr%priate aiance #tructure agree1 up%n4 the ta#( &acing the c%$pan* i# t%
$a=i$i0e the ;ene&it# &r%$ the aiance! One i$p%rtant ingre1ient appear# t% ;e
#en#itivit* t% cutura 1i&&erence#! Di&&erence# in $anage$ent #t*e can %&ten ;e
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attri;ute1 t% cutura 1i&&erence#! Manager# nee1 t% ta(e the$ int% acc%unt
when 1eaing with their partner! "e*%n1 thi#4 part %& the tric( in $anaging an
aiance #ucce##&u* #ee$# t% inv%ve ;ui1ing interper#%na reati%n#hip#
;etween $anager# &r%$ the 1i&&erent c%$panie#4 which $ean# ;ui1ing tru#t!
6! -earning i# a#% i$p%rtant! A&ter a &ive-*ear #tu1* %& &i&teen #trategic
aiance# ;etween $aB%r $utinati%na#4 Gar* Ha$e4 .ve# D%04 an1 C! M!
Prahaa1 ca$e t% the c%ncu#i%n that %ne %& the $aB%r &act%r# 1eter$ining h%w
$uch a c%$pan* gain# &r%$ an aiance i# it# a;iit* t% earn &r%$ aiance
partner#!
S;MMAR9
14 '%r #%$e c%$panie#4 internati%na e=pan#i%n repre#ent# a wa* %& earning greater
return# ;* tran#&erring the #(i# an1 pr%1uct %&&ering# 1erive1 &r%$ their 1i#tinctive
c%$petencie# t% $ar(et# where in1igen%u# c%$petiti%n ac( th%#e #(i#!
24 "ecau#e %& nati%na 1i&&erence#4 it pain# a c%$pan* t% ;a#e each vaue creati%na
activitie# it per&%r$# at the %cati%n where &act%r c%n1iti%n# are $%#t c%n1ucive t%
the per&%r$ance %& that activit*! Thi# #trateg* i# (n%wn a# &%cu#ing %n the
attain$ent %& %cati%n ec%n%$ie#!
34 "* ;ui1ing #ae# v%u$e $%re rapi1*4 internati%na e=pan#i%n can a##i#t a
c%$pan* in the pr%ce## %& $%ving 1%wn the e=perience curve!
44 The ;e#t #trateg* &%r a c%$pan* t% pur#ue $a* 1epen1 %n the (in1 %& pre##ure# it
$u#t c%pe withL pre##ure# &%r c%#t re1ucti%n# %r &%r %ca re#p%n#ivene##!
Pre##ure# &%r c%#t re1ucti%n# are greate#t in the in1u#trie# pr%1ucing c%$$%1it*
t*pe pr%1uct#4 where price i# the $ain c%$petitive weap%n! Pre##ure# &%r %ca
re#p%n#ivene## ari#e &r%$ 1i&&erence# in c%n#u$er ta#te# an1 pre&erence#4 a# we
a# &r%$ nati%na in&ra#tructure an1 tra1iti%na practice#4 1i#tri;uti%n channe#4 an1
h%#t a g%vern$ent 1e$an1#!
54 C%$panie# pur#uing an internati%na #trateg* tran#&er the #(i# an1 pr%1uct#
1erive1 &r%$ 1i#tinctive c%$petence# t% &%reign $ar(et#4 whie un1erta(ing #%$e
i$ite1 cu#t%$i0ati%n!
135
64 C%$panie# pur#uing a $uti1%$e#tic #trateg* cu#t%$i0e their pr%1uct %&&ering4
$ar(eting #trateg*4 an1 ;u#ine## #trateg* t% nati%na c%n1iti%n#!
74 C%$panie# pur#uing a g%;a #trateg* &%cu# %n reaping the c%#t re1ucti%n# that
c%$e &r%$ e=perience curve e&&ect# an1 %cati%n ec%n%$ie#!
84 Man* in1u#trie# are n%w #% c%$petitive that c%$panie# $u#t a1%pt a tran#nati%na
#trateg*! Thi# inv%ve# a #i$utane%u# &%cu# %n re1ucing c%#t#4 tran#&erring #(i#
an1 pr%1uct#4 an1 %ca re#p%n#ivene##! I$pe$enting #uch a #trateg* $a* n%t ;e
ea#*!
94 Severa a1vantage# are a##%ciate1 with entering a nati%na $ar(et ear*4 ;e&%re
%ther internati%na ;u#ine##e# have e#ta;i#he1 the$#eve#! The#e a1vantage#
$u#t ;e ;aance1 again#t the pi%neering c%#t# that ear* entrant# %&ten have t%
;ear4 incu1ing the greater ri#( %& ;u#ine## &aiure!
104 -arge-#cae entr* int% a nati%na $ar(et c%n#titute# a $aB%r #trategic c%$$it$ent
that i# i(e* t% change the nature %& c%$petiti%n in that $ar(et an1 i$it the
entrantA# &uture #trategic &e=i;iit*! The &ir$ nee1# t% thin( thr%ugh the i$picati%n#
%& #uch c%$$it$ent# ;e&%re e$;ar(ing %n a arge-#cae entr*! Ath%ugh $a(ing
$aB%r #trategic c%$$it$ent# can *ie1 $an* ;ene&it#4 there are a#% ri#(#
a##%ciate1 with #uch a #trateg*!
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Chapter E
COR7ORATE STRATEG9, 6ORILONTAL INTEGRATION- 4ERTICAL INTEGRATION- AN+
STRATEGIC
INTRO+;CTION
Thi# chapter i# the &ir#t %& tw% that 1ea with the i##ue %& c%rp%rate-eve #trateg*!
The principa c%ncern# %& c%rp%rate-eve #trateg* are t% i1enti&* the ;u#ine##e# in
which 4a c%$pan* #h%u1 participate4 the vaue creati%n activitie# it #h%u1 per&%r$ in
th%#e ;u#ine##e#4 an1 the ;e#t $ean# &%r e=pan1ing %r c%ntracting in 1i&&erent
;u#ine##e#4 incu1ing $erger#4 ac)ui#iti%n#4 an1 #pin-%&&#! A# with a %ther #trategie#4 the
g%a i# t% $a=i$i0e the %ng-run pr%&ita;iit* %& the c%$pan*! The &%cu# %& thi# chapter i#
%n three c%rp%rate-eve #trategie#/ h%ri0%nta integrati%n4 vertica integrati%n4 an1
#trategic %ut#%urcing! In the ne=t chapter4 we %%( at a &%urth c%rp%rate-eve #trateg*4
1iver#i&icati%n4 an1 1i#cu## the 1i&&erent $ean# that c%$panie# u#e t% e=ecute their
c%rp%rate-eve #trateg*4 #uch a# $erger# an1 ac)ui#iti%n#!
6!ri(!nta' integrati!n i# the pr%ce## %& ac)uiring %r $erging with in1u#tr*
c%$petit%r# in an e&&%rt t% achieve the c%$petitive a1vantage# that c%$e with arge #cae
an1 #c%pe! An ac)ui#iti%n %ccur# when %ne c%$pan* u#e# it# capita re#%urce#N#uch a#
#t%c(4 1e;t4 %r ca#hNt% purcha#e the %ther4 an1 a $erger i# an agree$ent ;etween
e)ua# t% p%% their %perati%n# an1 create a new entit*! The c%rp%rate #trateg* that
G%r1C%$ pur#ue1 ;etween 18F2 an1 +991 i# an e=a$pe %& h%ri0%nta integrati%n!
G%r1C%$ ac)uire1 %ver #i=t* c%$panie# %ver thi# peri%1 in an e&&%rt t% ;ec%$e %ne %&
the arge#t pa*er# in the teec%$$unicati%n# #ervice in1u#tr*! Ath%ugh it #ta*e1 within
the ;%un1# %& a #inge in1u#tr*4 it# #trateg* wa# t% enter 1i&&erent ;u#ine##e# within that
in1u#tr*/ %ng-1i#tance #ervice4 Internet acce##4 an1 wiree## #ervice! It# g%a wa# t%
re1uce c%#t# ;* reai0ing ec%n%$ie# %& #cae an1 #c%pe an1 increa#e it# vaue t%
cu#t%$er# ;* ;un1ing t%gether 1i&&erent #ervice#4 which w%u1 give the c%$pan* $%re
pricing %pti%n#! The uti$ate g%a wa# t% e=ecute the ;u#ine## $%1e that CEO "ernie
137
E;;er# ha1 $appe1 %ut &%r the c%$pan*4 there;* ;%%#ting G%r1C%$A# pr%&ita;iit*
Creturn %n inve#te1 capitaD! The #t%r* %& G%r1C%$ a#% iu#trate# #%$e %& the ri#(#
a##%ciate1 with thi# #trateg*!
)y vertica' integrati!n- a c%$pan* e=pan1# it# %perati%n# either ;ac(war1 int%
an in1u#tr* that pr%1uce# input# &%r the c%$pan*A# pr%1uct# %r &%rwar1 int% an in1u#tr*
that u#e# %r 1i#tri;ute# the c%$pan*A# pr%1uct#! Tra1iti%na*4 I"M ha# ;een a ver*
vertica* integrate1 c%rp%rati%n! It integrate1 ;ac(war1 int% the 1i#c 1rive in1u#tr* t%
pr%1uce the 1i#c 1rive# that g% int% it# c%$puter har1ware #*#te$# an1 &%rwar1 int% the
c%$puter c%n#uting #ervice# in1u#tr*!
Strategic !"ts!"rcing inv%ve# #eparating %ut #%$e %& a c%$pan*A# vaue
creati%n activitie# within a ;u#ine## an1 etting the$ ;e per&%r$e1 ;* an in1epen1ent
entit* %r #pinning %&& the part %& the c%$pan* that per&%r$# that activit* a# an in1epen1ent
entit*!
Thr%ugh%ut the chapter an1 the ne=t4 we repeate1* #tre## that t% #uccee1
c%rp%rate-eve #trategie# #h%u1 increa#e pr%&ita;iit*! T% un1er#tan1 what thi# $ean#4 we
have t% g% ;ac( t% the c%ncept# %& pr%&ita;iit* an1 the vaue chain4 intr%1uce1 in Chapter
2! T% increa#e pr%&ita;iit*4 a c%rp%rate #trateg* #h%u1 ena;e a c%$pan* %ne %r $%re %&
it# ;u#ine## unit#4 t% per&%r$ %ne %r $%re %& the vaue-creati%n &uncti%n# at a %wer c%#t4
%r per&%r$ %ne %r $%re %& the vaue-creati%n &uncti%n# in a wa* that a%w# &%r
1i&&erentiati%n an1 give# a c%$pan* pricing %pti%n#! In a11iti%n4 c%rp%rate-eve #trateg*
wi ;%%#t pr%&ita;iit* i& it hep# the c%$pan* t% $anage in1u#tr* rivar* ;etter ;* re1ucing
the threat %& 1a$aging price c%$petiti%n! Thu# a c%$pan*A# c%rp%rate #trateg* #h%u1
hep in the pr%ce## %& e#ta;i#hing a #u#taina;e c%$petitive a1vantage at the ;u#ine##
eve4 an1 %& c%ur#e4 it i# that c%$petitive a1vantage that ea1# t% higher pr%&ita;iit*!
There i#4 there&%re4 a ver* i$p%rtant in( ;etween c%rp%rate-eve #trateg* an1 c%$petitive
a1vantage an1 pr%&ita;iit* ;u#ine## eve!
138
LEARNING O)?ECTI4ES
A&ter rea1ing thi# chapter4 *%u #h%u1 have a g%%1 un1er#tan1ing %&/
1! H%w $anager# can u#e h%ri0%nta integrati%n4 vertica integrati%n4 an1 #trategic
%ut#%urcing t% e=ecute their ;u#ine## $%1e an1 ;%%#t their pr%&ita;iit*
+! Un1er#tan1 what the 1raw;ac(# a##%ciate1 with each #trateg* are!
TEAC6ING O;TLINE
A Intr!d"cti!n
6!ri(!nta' Integrati!n
H%ri0%nta integrati%n ha# ;een a p%puar c%rp%rate #trateg* &%r a 1eca1e %r #%! In
in1u#tr* a&ter in1u#tr*4 there have ;een nu$er%u# $erger# an1 ac)ui#iti%n! '%r e=a$pe4
in the aut%$%;ie in1u#tr*4 Chr*#er $erge1 with Dai$er "en0 t% create Dai$erChr*#er4
in the aer%#pace in1u#tr*4 "%eing $erge1 with McD%na1 D%uga## t% create the w%r1A#
arge#t aer%#pace c%$pan*L in the phar$aceutica in1u#tr*4 P&i0er ac)uire1 Garner
-a$;ert t% ;ec%$e the arge#t phar$aceutica &ir$L in the &inancia #ervice# in1u#tr*4
Citic%rp an1 Traveer# $erge1 t% create Citigr%up4 the w%r1A# arge#t &inancia #ervice#
c%$pan*L an1 in the c%$puter har1ware in1u#tr*4 C%$pa) ac)uire1 Digita E)uip$ent
an1 then it#e& wa# ac)uire1 ;* Hewett Pac(ar1!
The net re#ut %& thi# wave %& $erger# an1 ac)ui#iti%n# ha# ;een t% increa#e the
eve %& c%ncentrati%n in a wi1e range %& in1u#trie#! C%n#%i1ate1 %ig%p%ie# have ;een
repacing $%re &rag$ente1 in1u#tr* #tructure#! '%r e=a$pe4 twent* *ear# ag%4 ca;e
teevi#i%n wa# 1%$inate1 ;* a patchw%r( %& th%u#an1# %& #$a4 &a$i*-%wne1
;u#ine##e#4 ;ut ;* +99+4 three c%$panie# c%ntr%e1 near* tw%-thir1# %& the $ar(et! In
18894 the three ;ig pu;i#her# %& c%ege te=t;%%(# acc%unte1 &%r 26 percent %& the
$ar(etL ;* +99+4 the* acc%unte1 &%r :+ percent! In 188:4 there were eight "a;* "e#
%&&ering regi%na teeph%ne #ervice in the Unite1 State#L ;* +99+4 there were &%ur! In the
$anu&acture %& ;a#ic DRAM #e$ic%n1uct%r chip#4 1ue t% $erger# an1 ac)ui#iti%n# the
&%ur arge#t &ir$# acc%unte1 &%r F2 percent %& the g%;a $ar(et in ear* +99+4 up &r%$ 56
percent in 1886!2
139
Gh* i# thi# happeningH An an#wer can ;e &%un1 ;* %%(ing at the ec%n%$ic ;ene&it# %&
h%ri0%nta integrati%n!
. )ene%its !% 6!ri(!nta'
H%ri0%nta integrati%n i# a wa* %& tr*ing t% increa#e the pr%&ita;iit* %& a c%$pan* ;*/
5i46 Re1ucing c%#t#!
5ii46 Increa#ing the vaue %& the c%$pan*A# pr%1uct %&&ering !Integrati%n thr%ugh
1i&&erentiati%n!
5iii46 Managing rivar* within the in1u#tr* t% re1uce the ri#( %& price war&are4 an1
5iv46 Increa#ing ;argaining p%wer %ver #uppier# an1 ;u*er#!
Red"cing C!sts
H%ri0%nta integrati%n i# %&ten #een a# a wa* t% capture the c%#t a1vantage#
a##%ciate1 with ec%n%$ie# %& #cae! Thi# wa# %ne %& the $%tive# ;ehin1 G%r1C%$A#
ac)ui#iti%n# 1uring the 1889# C#ee the Opening Ca#eD! Such a $%tive can ;e ver*
i$p%rtant in in1u#trie# that have a high &i=e1-c%#t #tructure! In the#e in1u#trie#4 arge #i0e
a%w# c%$panie# t% #prea1 their &i=e1 c%#t# %ver a arge v%u$e4 there;* 1riving 1%wn
the average unit c%#t! A# n%te1 in the Opening Ca#e4 the &i=e1 c%#t# %& ;ui1ing a
teec%$$unicati%n# netw%r( are ver* high4 an1 t% $a(e that inve#t$ent pa*4 the
c%$pan* nee1# a arge v%u$e %& cu#t%$er#! Thu#4 G%r1C%$ %&ten ac)uire1 %ther
teec%$$unicati%n# c%$panie# in %r1er t% get their cu#t%$er#4 wh% w%u1 then ;e
#witche1 t% G%r1C%$A# netw%r(4 1riving up it# utii0ati%n an1 1riving 1%wn the unit c%#t %&
#erving each cu#t%$er %n the netw%r(!
Increasing 4a'"e
The vaue %& a c%$pan*A# pr%1uct %&&ering# $a* ;e increa#e1 i& h%ri0%nta
integrati%n a%w# the c%$pan* t% %&&er a wi1er range %& pr%1uct# that can ;e ;un1e1
t%gether! Pr%1uct ;un1ing entai# %&&ering a ;un1e %& pr%1uct# t% a cu#t%$er an1
charging a #inge price! "ecau#e the* have t% pa* %n* %nce an1 1ea with %ne c%$pan*
&%r a #et %& pr%1uct# the* $a* nee14 cu#t%$er# pace a higher vaue %n the ;un1e
pr%1uct %&&ering! In %ther w%r1#4 ;un1ing i# a #%urce %& 1i&&erentia a1vantage! G%r1C%$
140
wa# pur#uing thi# #trateg*! One g%a %& CEO "ernie E;;er# wa# t% ;e a;e t% %&&er
cu#t%$er# a #inge pr%vi1er an1 a #inge ;i &%r a range %& teec%$$unicati%n# #ervice#!
One %& the &a$%u# iu#trati%n# %& the vaue %& ;un1ing c%ncern# Micr%#%&t O&&ice4 which
i# a ;un1e %& 1i&&erent #%&tware pr%gra$#4 incu1ing a w%r1 pr%ce##%r4 #prea1#heet4 an1
pre#entati%n pr%gra$! In the/ ear* 1889#4 Micr%#%&t wa# nu$;er tw% %r three in each %&
the#e pr%1uct categ%rie# ;ehin1 c%$panie# #uch a# G%r1Per&ect Cwhich e1 in the w%r1
pr%ce##ing categ%r*D4 -%tu# Cwhich ha1 the ;e#t-#eing #prea1#heetD4 an1 Harvar1
Graphic# Cwhich ha1 the ;e#t-#eing pre#entati%n #%&twareD! "* %&&ering a three
pr%gra$# in a #inge pac(age4 Micr%#%&t pre#ente1 c%n#u$er# with a #uperi%r vaue
pr%p%#iti%n4 an1 it# pr%1uct ;un1e )uic(* gaine1 $ar(et #hare4 uti$ate* acc%unting &%r
$%re than 89 percent %& a #ae# %& w%r1 pr%ce##%r#4 #prea1#heet#4 an1 pre#entati%n
#%&tware!
An%ther wa* %& tr*ing t% increa#e vaue i# t% cr%##-#e! Gith cr!ss se''ing4 a
c%$pan* trie# t% everage it# reati%n#hip with it# cu#t%$er# ;* ac)uiring a11iti%na
pr%1uct categ%rie# that can ;e #%1 t% the$! Thi# ha# ;een a ver* p%puar #trateg* in the
&inancia #ervice# in1u#tr* an1 ha# 1riven #igni&icant h%ri0%nta integrati%n! Here4 the
;a#ic i1ea ha# ;een a ;eie& that cu#t%$er# w%u1 pre&er t% purcha#e a %& their &inancia
#ervice pr%1uct# &r%$ a #inge pr%vi1er/ their chec(ing acc%unt4 $%rtgage % in#urance
p%icie#4 an1 inve#t$ent #ervice# in a #%rt %& &inancia #ervice# #uper$ar(et! A ;ig part %&
the rati%nae ;ehin1 the creati%n %& Citigr%up &r%$ the $erger %& Cit* c%rp! an1 Traveer#
wa# t% create a c%$pan* that c%u1 #e in#urance pr%1uct# 1ire t% ;an(ing cu#t%$er#
an1 ;an(ing #ervice# t% in#urance cu#t%$er#! The increa#e in vaue here c%nie# &r%$ the
i1ea that cu#t%$er# wi pre&er t% 1% ;u#ine## with a #inge pr%vi1er %& #uch #ervice an1
thu# pace a higher vaue %n purcha#ing &r%$ a c%$pan* that can pr%vi1e #uch #ervice#!
Managing Ind"stry Riva'ry
H%ri0%nta integrati%n can hep a c%$pan* t% $anage in1u#tr* rivar* in tw% wa*#!
'ir#t4 ac)uiring %r $erging with a c%$petit%r $a* ;e re)uire1 in %r1er t% ei$inate e=ce##
capacit* in an in1u#tr*!
In a11iti%n4 ;* re1ucing the nu$;er %& pa*er# in an in1u#tr*4 h%ri0%nta integrati%n
141
$ight $a(e it ea#ier t% i$pe$ent tacit price c%%r1inati%n ;etween riva# Creca that tacit
c%%r1inati%n re&er# t% c%%r1inati%n reache1 with%ut c%$$unicati%n4 an1 e=picit
c%$$unicati%n t% &i= price# ;eing iega! A# a genera rue4 the arger the nu$;er %&
pa*er# in an in1u#tr*4 the $%re 1i&&icut it i# t% e#ta;i#h pricing c%nventi%n#4 #uch a# price
ea1er#hip ;* a 1%$inant &ir$4 that re1uce the p%##i;iit* that a price war wi erupt! "*
c%ncentrating the in1u#tr* an1 creating an %ig%p%*4 h%ri0%nta integrati%n can $a(e tacit
c%%r1inati%n riva# ea#ier t% e#ta;i#h
) 4ertica' Integrati!n
14 3ertica integrati%n $ean# that a c%$pan* i# pr%1ucing it# %wn input# C;ac(war1 %r
up#trea$ integrati%nD %r i# 1i#p%#ing %& it# %wn %utput# C&%rwar1 %r 1%wn#trea$
integrati%nD!
24 '%ur $ain #tage# in a t*pica raw-$ateria-t%-c%n#u$er pr%1ucti%n chain! '%r a
c%$pan* ;a#e1 in the a##e$;* #tage4 ;ac(war1 integrati%n inv%ve# $%ving int%
inter$e1iate $anu&acturing an1 raw-$ateria pr%1ucti%n! '%rwar1 integrati%n
inv%ve# $%ve$ent int% 1i#tri;uti%n!
34 At each #tage in the chain vaue i# a11e1 t% the pr%1uct! Ghat thi# $ean# i# that a
c%$pan* at that #tage ta(e# the pr%1uct pr%1uce1 in the previ%u# #tage4
tran#&%r$# it in #%$e wa*4 an1 then #e# the %utput at a higher price t% a c%$pan*
at the ne=t #tage in the chain! The 1i&&erence ;etween the price pai1 &%r input# an1
the price at which the pr%1uct i# #%1 i# a $ea#ure %& the vaue-a11e1 at that
#tage!
44 3iewe1 thi# wa*4 vertica integrati%n inv%ve# a ch%ice a;%ut which vaue-a11e1
#tage# %r the raw-$ateria-t%-c%n#u$er chain t% c%$pete in!
54 In a11iti%n t% &%rwar1 an1 ;ac(war1 integrati%n4 it i# a#% p%##i;e t% 1i#tingui#h
;etween &u integrati%n an1 taper integrati%n! A c%$pan* achieve# &u integrati%n
when it pr%1uce# a %& a particuar input nee1e1 &%r it# pr%ce##e# %r when it
142
1i#p%#e# %& a %& it# %utput thr%ugh it# %wn %perati%n#! Taper integrati%n %ccur#
when a c%$pan* ;u*# &r%$ in1epen1ent #uppier# in a11iti%n t% c%$pan*-%wne1
#uppier# %r when it 1i#p%#e# %& it# %utput thr%ugh in1epen1ent %utet# in a11iti%n
t% c%$pan*-%wne1 %utet#!
64 Creating va'"e thr!"gh vertica' integrati!n There are &%ur $ain argu$ent# &%r
pur#uing a vertica integrati%n #trateg*! 3ertica integrati%n ena;e# the c%$pan* t%
;ui1 ;arrier# t% new c%$petiti%nL &aciitate# inve#t$ent# in e&&icienc*-enhancing
#peciai0e1 a##et#L pr%tect# pr%1uct )uait*L an1 re#ut# in i$pr%ve1 #che1uing!
74 )"i'ding entry barriers "* vertica* integrating ;ac(war1 t% gain c%ntr% %ver
the #%urce %& critica input# %r vertica* integrating &%rwar1 t% gain c%ntr% %ver
1i#tri;uti%n channe#4 a c%$pan* can ;ui1 ;arrier# t% new entr* int% it# in1u#tr*! T%
the e=tent that thi# #trateg* i# e&&ective4 it i$it# c%$petiti%n in the c%$pan*A#
in1u#tr*4 there;* ena;ing the c%$pan* t% charge a higher price an1 $a(e greater
pr%&it# than w%u1 %therwi#e ;e the ca#e!
84 &aci'itating invest$ents in specia'i(ed assets A #peciai0e1 a##et i# an a##et
that i# 1e#igne1 t% per&%r$ a #peci&ic ta#( an1 wh%#e vaue i# #igni&icant* re1uce1
in it# ne=t ;e#t u#e! A #peciai0e1 a##et $a* ;e th%ught %& a# a piece %& e)uip$ent
that ha# ver* #peciai0e1 u#e#4 %r it $a* ;e the (n%w-h%w %r #(i# that an
in1ivi1ua %r c%$pan* ha# ac)uire1 thr%ugh training an1 e=perience!
94 C%$panie# un1erta(e inve#t$ent# in #peciai0e1 a##et# ;ecau#e #uch a##et#
a%w the$ t% %wer the c%#t# %& vaue creati%n an1@%r t% ;etter 1i&&erentiate their
pr%1uct %&&ering &r%$ that %& c%$petit%r#4 there;* &aciitating pre$iu$ pricing!
Speciai0ati%n can thu# ;e the ;a#i# &%r achieving a c%$petitive a1vantage at the
;u#ine## eve!
104 Ghen achieving a c%$petitive a1vantage re)uire# %ne c%$pan* t% $a(e
inve#t$ent# in #peciai0e1 a##et# in %r1er t% tra1e with an%ther4 a #ituati%n i#
create1 where each c%$pan* i# 1epen1ent %n the %ther!
143
114 The re#uting 1epen1ence ;etween the tw% give# ri#e t% the ri#( that %ne wi ta(e
a1vantage %& the %ther! '%r e=a$pe4 i& c%$pan* A inve#t# in #peciai0e1 a##et# t%
tra1e with c%$pan* "4 A i# in e##ence c%$$itting it#e& t% a reati%n#hip with "!
Given thi#4 the p%##i;iit* ari#e# that %nce the inve#t$ent ha# ;een $a1e4 " wi
1e$an1 $%re &av%ra;e ter$# h%rn! A! Thi# i# re&erre1 t% a# h%1up!
124 Given thi# ri#(4 the inve#t$ent in #peciai0e1 a##et# $a* n%t ta(e pace CA! $a*
n%t $a(e the inve#t$ent#D4 in which ca#e the re#uting c%$petitive ga$e# &r%$
#peciai0ati%n wi ;e %#t! It i# t% $a(e #ure that thi# 1%e# n%t %ccur that c%$panie#
vertica* integrate int% a1Bacent #tage# in the vaue chain!
134 Pr%tecting pr%1uct )uait*! "* pr%tecting pr%1uct )uait*4 vertica integrati%n
ena;e# a c%$pan* t% ;ec%$e a 1i&&erentiate1 pa*er in it# c%re ;u#ine##!
144 I$pr%ve1 #che1uing4 it i# #%$eti$e# argue1 that #trategic a1vantage# ari#e &r%$
the ea#ier panning4 c%%r1inati%n4 an1 #che1uing %& a1Bacent pr%ce##e# $a1e
p%##i;e in vertica* integrate1 %rgani0ati%n#! Thi# can ;e particuar* i$p%rtant in
c%$panie# tr*ing t% reai0e the ;ene&it# %& Bu#t-in-ti$e invent%r* #*#te$#! The
a##u$pti%n un1er*ing thi# argu$ent i# that #che1uing i# #%$eh%w $%re
pr%;e$atic ;etween &ree#tan1ing enterpri#e#Nan argu$ent that #ee$# rather
1u;i%u#!
154 Argu$ent# again#t vertica integrati%n! 3ertica integrati%n ha# it# 1i#a1vantage#!
M%#t i$p%rtant a$%ng the$ are/
a4 C%#t 1i#a1vantage#4
b4 Di#a1vantage# that ari#e when techn%%g* i# changing &a#t4 an1
c4 Di#a1vantage# that ari#e when 1e$an1 i# unpre1icta;e! The#e
1i#a1vantage# i$p* that the ;ene&it# %& vertica integrati%n are n%t awa*#
a# #u;#tantia a# the* $ight #ee$ initia*!
164 C%#t 1i#a1vantage#! Ath%ugh %&ten un1erta(en t% gain a pr%1ucti%n c%#t
a1vantage4 vertica integrati%n can ;ring higher c%#t# i& a c%$pan* ;ec%$e#
144
c%$$itte1 t% purcha#ing input# &r%$ c%$pan*-%wne1 #uppier# when %w-c%#t
e=terna #%urce# %& #upp* e=i#t!
174 C%$pan*-%wne1 #uppier# $ight have high %perating c%#t# reative t% in1epen1ent
#uppier# ;ecau#e the* (n%w that the* can awa*# #e their %utput t% %ther part# %&
the c%$pan*! The &act that the* 1% n%t have t% c%$pete &%r %r1er# with %ther
#uppier# re1uce# their incentive t% $ini$i0e %perating c%#t#!
184 The pr%;e$ $a* ;e e## #eri%u#4 h%wever4 when the c%$pan* pur#ue# taper4
rather than &u4 integrati%n4 #ince the nee1 t% c%$pete with in1epen1ent #uppier#
can pr%1uce a 1%wnwar1 pre##ure %n the c%#t #tructure %& c%$pan*-%wne1
#uppier#!
194 Techn!'!gica' change! Ghen techn%%g* i# changing &a#t4 vertica integrati%n
p%#e# the ha0ar1 %& t*ing a c%$pan* t% an %;#%e#cent techn%%g*! 3ertica
integrati%n can inhi;it a c%$pan*A# a;iit* t% change it# #uppier# %r it# 1i#tri;uti%n
#*#te$# t% $atch the re)uire$ent# %& changing techn%%g*!
204 +e$and "ncertainty! 3ertica integrati%n can ;e ri#(* in un#ta;e %r unpre1icta;e
1e$an1 c%n1iti%n#! Ghen 1e$an1 c%n1iti%n# are unpre1icta;e4 it $a* ;e 1i&&icut
t% achieve c%#e c%%r1inati%n a$%ng vertica* integrate1 activitie#! The re#uting
ine&&iciencie# can give ri#e t% #igni&icant ;ureaucratic c%#t#!
214 The pr%;e$ inv%ve# ;aancing capacit* a$%ng 1i&&erent #tage# %& a pr%ce##! '%r
e=a$pe4 an aut% $anu&acturer $ight vertica* integrate ;ac(war1 t% ac)uire it#
%wn #uppier %& car;uret%r# that ha# a capacit* e=act* $atching the aut%
$anu&acturerA# nee1#! H%wever4 i& 1e$an1 &%r aut%# #u;#e)uent* &a#4 the
c%$pan* wi &in1 it#e& %c(e1 int% a ;u#ine## that i# running ;e%w capacit*!
Cear*4 thi# w%u1 ;e unec%n%$ica!
224 Ghen 1e$an1 c%n1iti%n# are unpre1icta;e4 taper integrati%n $ight ;e #%$ewhat
e## ri#(* than &u integrati%n! Ghen the c%$pan* pr%vi1e# %n* part %& it# t%ta
145
input re)uire$ent# &r%$ c%$pan*-%wne1 #uppier#4 in ti$e# %& %w 1e$an1 it can
(eep it# in-h%u#e #uppier# running at &u capacit* ;* %r1ering e=cu#ive* &r%$
the$!
234 )"rea"cratic c!sts and the 'i$its t! vertica' integrati!n! "ureaucratic c%#t# are
the c%#t# %& running an %rgani0ati%n! The* incu1e the c%#t# ari#ing &r%$ the ac( %&
incentive %n the part %& c%$pan*-%wne1 #uppier# t% re1uce their %perating c%#t#
an1 &r%$ a p%##i;e ac( %& #trategic &e=i;iit* in the &ace %& changing techn%%g* %r
uncertain 1e$an1 c%n1iti%n#!
244 "ureaucratic c%#t# pace a i$it %n the a$%unt %& vertica integrati%n that can ;e
pr%&ita;* pur#ue1! Given their e=i#tence4 it $a(e# #en#e &%r a c%$pan* t%
integrate vertica* %n* when thi# c%n1iti%n %;tain#/ when the vaue create1 ;*
#uch a #trateg* e=cee1# the ;ureaucratic c%#t# a##%ciate1 with e=pan1ing the
;%un1arie# %& the %rgani0ati%n t% inc%rp%rate a11iti%na up#trea$ %r 1%wn#trea$
activitie#!
254 N%t a vertica integrati%n %pp%rtunitie# have the #a$e p%tentia &%r vaue creati%n!
Ath%ugh vertica integrati%n $a* initia* have a &av%ra;e i$pact4 the vaue
create1 ;* a11iti%na vertica integrati%n $%ve# int% area# $%re 1i#tant &r%$ a
c%$pan*A# c%re ;u#ine## i# i(e* t% ;ec%$e increa#ing* $argina! The $%re
$argina the vaue create1 ;* a vertica integrati%n $%ve4 the $%re i(e* it i# that
the ;ureaucratic c%#t# a##%ciate1 with e=pan1ing the ;%un1arie# %& the
%rgani0ati%n int% new activitie# wi %utweigh the vaue create1! Once thi# %ccur#4 a
i$it t% pr%&ita;e vertica integrati%n wi have ;een reache1!
C Strategic A''iances as an A'ternative t! 4ertica' Integrati!n
1! Un1er certain c%n1iti%n#4 c%$panie# can reai0e the gain# a##%ciate1 with
vertica integrati%n4 with%ut having t% ;ear the a##%ciate1 ;ureaucratic c%#t#4 i&
the* enter int% %ng-ter$ c%%perative reati%n#hip# with their tra1ing partner#! Such
%ng-ter$ reati%n#hip# are %&ten re&erre1 t% in the p%puar pre## a# #trategic
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aiance#!
+! H%wever4 c%$panie# wi genera* ;e una;e t% reai0e the gain# a##%ciate1
with vertica integrati%n i& the* enter int% #h%rt-ter$ c%ntract# with their tra1ing
partner#! T% #ee wh* thi# i# #%4 we &ir#t 1i#cu## the pr%;e$# a##%ciate1 with #h%rt-
ter$ c%ntract# an1 then %%( a t #trategic aiance# an1 %ng-ter$ c%ntract# a# an
aternative t% vertica integrati%n!
2! Sh!rt:ter$ c!ntracts and c!$petitive bidding! A #h%rt-ter$ c%ntract i#
%ne that a#t# a *ear %r e##! A ca##ic e=a$pe i# the aut%$%;ie c%$pan* that
u#e# a c%$petitive ;i11ing #trateg* t% neg%tiate the price &%r a particuar part
pr%1uce1 ;* c%$p%nent #uppier#! '%r e=a$pe4 Genera M%t%r# %&ten #%icit# ;i1#
&r%$ a nu$;er %& 1i&&erent #uppier# &%r pr%1ucing a c%$p%nent part! It awar1# a
%ne-*ear c%ntract t% the #uppier that #u;$it# the %we#t ;i1! At the en1 %& the *ear
the c%ntract i# put %ut &%r c%$petitive ;i11ing again! Thu# there i# n% guarantee
that the c%$pan* that w%n the c%ntract %ne *ear wi retain it the ne=t *ear!
5! "ecau#e it #igna# a ac( %& %ng-ter$ c%$$it$ent t% it# #uppier# %n the
part %& a c%$pan*4 the #trateg* %& #h%rt-ter$ c%ntracting an1 c%$petitive ;i11ing
$a(e# it ver* 1i&&icut &%r that c%$pan* t% reai0e the gain# a##%ciate1 with vertica
integrati%n! Thi# i# n%t a pr%;e$ when there i# $ini$a nee1 &%r c%#e c%%perati%n
;etween the c%$pan* an1 it# #uppier# t% &aciitate inve#t$ent# in #peciai0e1
a##et#4 i$pr%ve #che1uing4 %r i$pr%ve pr%1uct )uait*! In1ee14 in #uch ca#e#
c%$petitive ;i11ing $a* ;e %pti$a! H%wever4 a c%$petitive ;i11ing #trateg* can
;e a #eri%u# 1raw;ac( when the#e c%n#i1erati%n# 1% ari#e!
6! Strategic aiance# an1 %ng-ter$ c%ntracting! -%ng-ter$ c%ntract# are %ng-
ter$ c%%perative reati%n#hip# ;etween tw% c%$panie#! A# area1* n%te14 #uch
agree$ent# are %&ten re&erre1 t% a# #trategic aiance#! Un1er #uch arrange$ent#
%ne c%$pan* t*pica* agree# t% #upp* the %ther4 an1 the %ther agree# t% c%ntinue
purcha#ing &r%$ that #uppier! "%th $a(e a c%$$it$ent t% w%r( t%gether an1 #ee(
wa*# %& %wering the c%#t# %r rai#ing the )uait* %& input# int% the 1%wn#trea$
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c%$pan*A# vaue-creati%n pr%ce##!
:! I& it can ;e attaine14 #uch a #ta;e %ng-ter$ reati%n#hip et# the
participating c%$panie# #hare the vaue that $ight ;e create1 ;* vertica
integrati%n whie av%i1ing $an* %& the ;ureaucratic c%#t# a##%ciate1 with
%wner#hip %& an a1Bacent #tage in the raw-$ateria-t%-c%n#u$er pr%1ucti%n chain!
Thu# %ng-ter$ c%ntract# can ;e a #u;#titute &%r vertica integrati%n!
E! )"i'ding '!ng:ter$ c!!perative re'ati!nships! H%w can a c%$pan*
achieve a #ta;e4 %ng-ter$ #trategic aiance with an%ther4 given the ac( %& tru#t4
a# we a# the &ear %& h%1up that ari#e# in #ituati%n# where %ne c%$pan* ha# t%
inve#t in a #peciai0e1 a##et in %r1er t% tra1e with an%therH
F! 6!stages! One wa* %& 1e#igning %ng-ter$ c%%perative reati%n#hip# t%
;ui1 tru#t an1 re1uce the p%##i;iit* %& a c%$pan* reneging %n an agree$ent i# &%r
the c%$pan* $a(ing inve#t$ent# in #peciai0e1 a##et# t% 1e$an1 a h%#tage &r%$
it# partner!
8! Credib'e c!$$it$ents- A cre1i;e c%$$it$ent i# a ;eieva;e
c%$$it$ent t% #upp%rt the 1eve%p$ent %& a %ng-ter$ reati%n#hip ;etween
c%$panie#!
19! Maintaining $ar/et discip'ine! "ui1ing c%%perative %ng-ter$
reati%n#hip# with tra1ing partner# i# a ver* we4 ;ut une## the c%$pan* ha#
#%$e #ancti%n that it can app* t% that partner i& it &ai# t% ive up t% it# #i1e %& the
;argain4 the re#ut can ;e that the c%$pan* ;ec%$e# t%% 1epen1ent %n an
ine&&icient partner! "ecau#e it 1%e# n%t have t% c%$pete with %ther %rgani0ati%n# in
the $ar(etpace &%r the ;u#ine## %& the c%$pan*4 the partner $a* ac( the
incentive t% ;e a# c%#t e&&icient a# it c%u1 ;e! There&%re4 the )ue#ti%n &%r a
c%$pan* that i# a;%ut t% enter int% a c%%perative %ng-ter$ reati%n#hip i# h%w t%
$aintain #%$e (in1 %& $ar(et 1i#cipine %n it# partner!
148
11! One wa* %& $aintaining $ar(et 1i#cipine i# t% peri%1ica* reneg%tiate the
agree$ent# C#a* ever* &%ur t% &ive *ear#D! Thu# a partner (n%w# that i& it &ai# t%
ive up t% it# #i1e %& the agree$ent the c%$pan* $a* re&u#e t% renew the
agree$ent a&ter a peri%1 %& ti$e!
1+! S%$e c%$panie# that enter int% %ng-ter$ reati%n#hip# with #uppier# u#e a
parae #%urcing p%ic*! Un1er thi# arrange$ent4 a c%$pan* enter# int% a %ng-
ter$ c%ntract with tw% #uppier# &%r the #a$e part! The i1ea i# that when a
c%$pan* ha# tw% #uppier# &%r a #inge part4 each #uppier (n%w# that it $u#t &u&i
it# #i1e %& the ;argain4 e#t the c%$pan* ter$inate the c%ntract an1 #witch
;u#ine## t% the %ther #uppier! Ath%ugh thi# threat i# rare* $a1e e=picit4 #ince
that w%u1 ;e again#t the #pirit %& ;ui1ing c%%perative %ng-ter$ reati%n#hip#4 the
$ere e=i#tence %& #uch an arrange$ent inBect# an ee$ent %& $ar(et 1i#cipine int%
the reati%n#hip! It #igna# t% #uppier# that i& the nee1 ari#e# the* can ;e repace1
at #h%rt n%tice!
+ Strategic O"ts!"rcing
Strategic %ut#%urcing inv%ve# #eparating %ut #%$e %& a c%$pan*?# vaue creati%n
activitie# within a ;u#ine## an1 etting the$ ;e per&%r$e1 ;* a #peciai#t in that activit*
Cthe #peciai#t &%cu#e# %n Bu#t thi# %ne activit*D! Strategic %ut#%urcing i# c%ncerne1 with
re1ucing the ;%un1arie# %& the c%$pan* an1 &%cu#ing %n &ewer vaue creati%n &uncti%n#!
The activit* t% ;e %ut#%urce1 $a* enc%$pa## an entire &uncti%n4 #uch a# the
$anu&acturing &uncti%n4 %r it $a* entai an activit* e$;e11e1 within a &uncti%n! '%r
e=a$pe4 $an* c%$panie# %ut#%urce $anage$ent %& their pen#i%n #*#te$ whie (eeping
%ther Hu$an re#%urce &uncti%n activitie# within the c%$pan*!
. )ene%its !% O"ts!"rcing
a4 The tren1 t%war1 #trategic %ut#%urcing i# ;eing 1riven ;* a reai0ati%n that
%ut#%urcing can %wer the c%#t #tructure %& a c%$pan* an1 hep it t% 1i&&erentiate it#
pr%1uct %&&ering# in the $ar(et pace ;etter4 there ;* #trengthening it# ;u#ine##
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$%1ue an1 ;%%#ting it# pr%&ita;iit*!
b4 Strategic %ut#%urcing %& n%n-c%re activitie# hep# the c%$pan* t% &%cu#
$anage$ent attenti%n %n th%#e activitie# that are $%#t i$p%rtant &%r it# %ng ter$
c%$petitive p%#iti%n that i#4 it# 1i#tinctive c%$petence#!
0 Red"cing C!st thr!"gh O"ts!"rcing
Out#%urcing an activit* wi re1uce c%#t# when the price that $u#t ;e pai1 t% a #peciai#t
c%$pan* t% per&%r$ that activit* i# e## than what it w%u1 c%#t the c%$pan* t% per&%r$
that activit* interna*! Speciai#t# $a* ;e a;e t% per&%r$ an activit* at a %wer c%#t
;ecau#e the* are a;e t% reai0e ec%n%$ie# %& #cae %r %ther e&&iciencie# that are n%t
avaia;e t% the c%$pan*!
1 Identi%ying and Managing the Ris/s !% O"ts!"rcing
Ath%ugh %ut#%urcing n%n-c%re activitie# can have c%n#i1era;e ;ene&it#4 there are
a#% #igni&icant ri#(# a##%ciate1 with it 7 ri#(# a##%ciate1 with h%1up4 the %## %& 1irect
c%ntr% %ver the #che1uing %& activitie#4 an1 a %## %& i$p%rtant in&%r$ati%n when an
activit* i# %ut#%urce1 7 that $u#t ;e ;aance1 again#t the ;ene&it# %& %ut#%urcing ;e&%re
1eci1ing whether t% %ut#%urce a particuar activit*! "* ta(ing the appr%priate #tep#4 the#e
ri#(# can ;e re1uce1!
S"$$ary
1! A c%rp%rate #trateg* #h%u1 ena;e a c%$pan*4 %r %ne %r $%re %& it# ;u#ine##
unit#4 t% per&%r$ %ne %r $%re %& the vaue creati%n &uncti%n# at a %wer c%#t %r in a
wa* that a%w# &%r 1i&&erentiati%n an1 a pre$iu$ price!
+! H%ri0%nta integrati%n can ;e un1er#t%%1 a# a wa* %& tr*ing t% increa#e the
pr%&ita;iit* %& a c%$pan* ;* CaD re1ucing c%#t#4 C;D increa#ing the vaue %& the
c%$pan*A# pr%1uct %&&ering thr%ugh 1i&&erentiati%n4 CcD $anaging rivar* within the
in1u#tr* t% re1uce the ri#( %& price war&are4 an1 C1D increa#ing ;argaining p%wer
150
%ver #uppier# an1 ;u*er#!
2! There are tw% 1raw;ac(# a##%ciate1 with h%ri0%nta integrati%n/ the nu$er%u#
pit&a# a##%ciate1 with $erger# an1 ac)ui#iti%n# an1 that the #trateg* can ;ring a
c%$pan* int% 1irect c%n&ict with the antitru#t auth%ritie#!
5! 3ertica integrati%n can ena;e a c%$pan* t% achieve a c%$petitive a1vantage ;*
heping ;ui1 ;arrier# t% entr*4 &aciitating inve#t$ent# in #peciai0e1 a##et#4
pr%tecting pr%1uct )uait*4 an1 heping t% i$pr%ve #che1uing ;etween a1Bacent
#tage# in the vaue chain!
6! The 1i#a1vantage# %& vertica integrati%n incu1e c%#t 1i#a1vantage# i& a
c%$pan*A# interna #%urce %& #upp* i# a high-c%#t %ne an1 ac( %& &e=i;iit* when
techn%%g* i# changing &a#t %r 1e$an1 i# uncertain!
:! Entering int% a %ng-ter$ c%ntract can ena;e a c%$pan* t% reai0e $an* %& the
;ene&it# a##%ciate1 with vertica integrati%n with%ut having t% ;ear the #a$e eve
%& ;ureaucratic c%#t#! H%wever4 t% av%i1 the ri#(# a##%ciate1 with ;ec%$ing t%%
1epen1ent %n it# partner4 it nee1# t% #ee( a cre1i;e c%$$it$ent &r%$ it# partner
%r e#ta;i#h a $utua h%#tage-ta(ing #ituati%n!
E! The #trategic %ut#%urcing %& n%n-c%re vaue creati%n activitie# $a* a%w a
c%$pan* t% %wer it# c%#t#4 ;etter 1i&&erentiate it# pr%1uct %&&ering4 an1 $a(e ;etter
u#e %& #carce re#%urce#4 whie a#% ena;ing it t% re#p%n1 rapi1* t% changing
$ar(et c%n1iti%n#! H%wever4 #trategic %ut#%urcing $a* have a 1etri$enta e&&ect i&
the c%$pan* %ut#%urcer# i$p%rtant vaue creati%n activitie# %r ;ec%$e# t%%
1epen1ent %n (e* #uppier# %& th%#e activitie#!
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Chapter .=
COR7ORATE STRATEG9 G +I4ERSI&ICATION- AC5;ISITIONS- AN+ INTERNAL NEW
4ENT;RES
Intr!d"cti!n
Thi# chapter c%ntinue# with the the$e %& c%rp%rate-eve #trateg* 1i#cu##e1 in
chapter nine It ;egin# with a 1etaie1 %%( at #trateg* %& diversi%icati!n4 which i# the
pr%ce## %& a11ing new ;u#ine##e# t% the c%$pan* that are 1i#tinct &r%$ it# e#ta;i#he1
%perati%n#! A diversi%ied c!$pany i# thu# %ne that i# inv%ve1 in tw% %r $%re 1i#tinct
;u#ine##e#! A&ter reviewing 1iver#i&icati%n4 we turn t% the 1i&&erent vehice#4 %r $ean# that
c%$panie# u#e t% e=ecute a 1iver#i&icati%n #trateg* an1 e#ta;i#h new ;u#ine## area#!
The ;a#ic ch%ice here i# a$%ng interna new venture#4 ac)ui#iti%n#4 an1 B%int venture#!
Interna' ne# vent"ring i# a;%ut #tarting a new venture &r%$ #cratch4 ac>"isiti!ns
inv%ve ;u*ing an e=i#ting ;u#ine##4 an1 j!int vent"res t*pica* e#ta;i#h a new
;u#ine## with the a##i#tance %& a partner! The chapter c%#e# with restr"ct"ring!

Learning Objectives
A&ter rea1ing thi# chapter4 *%u wi have a g%%1 gra#p %& the pr%# an1 c%n# %&
1i&&erent 1iver#i&icati%n #trategie#4 an1 %& the reative $erit# %& the 1i&&erent $eth%1# that
can ;e u#e1 t% e=ecute a 1iver#i&icati%n #trateg*
Teaching O"t'ine
A Intr!d"cti!n
EApanding )ey!nd a Sing'e Ind"stry- The r%e %& the $anage$ent in c%rp%rate eve
#trateg* i# t% i1enti&* which in1u#trie# a c%$pan* #h%u1 c%$pete in t% $a=i$i0e it# %ng
ter$ pr%&ita;iit*! '%r $an* c%$panie#4 pr%&ita;e gr%wth an1 e=pan#i%n %&ten entai#
c%ncentrating %n a #inge in1u#tr* %r $ar(et! E=a$pe# incu1e McD%na1 with a &%cu# %n
g%;a &a#t &%%1 re#taurant ;u#ine## an1 Ga-Mart %n g%;a 1i#c%unt retaiing!
152
1! +iversi%icati!n! There are tw% $aB%r t*pe# %& 1iver#i&icati%n/ reate1 1iver#i&icati%n
an1 unreate1 1iver#i&icati%n!
+! Reate1 1iver#i&icati%n re&er# t% 1iver#i&icati%n int% a new activit* that i# in(e1 t% a
c%$pan*A# e=i#ting activit* ;* a c%$$%nait* ;etween %ne %r $%re c%$p%nent# %&
each activit*A# vaue chain! Unreate1 1iver#i&icati%n re&er# t% 1iver#i&icati%n int% a
new activit* that ha# n% %;vi%u# c%$$%naitie# with an* %& the c%$pan*A# e=i#ting
activitie#!
2! Creating va'"e thr!"gh diversi%icati!n! The 1iver#i&ie1 c%$pan* can create
vaue in three $ain wa*#/ ;* ac)uiring an1 re#tructuring p%%r* run enterpri#e#L ;*
tran#&erring c%$petencie# a$%ng ;u#ine##e#L an1 ;* reai0ing ec%n%$ie# %&
#c%pe!
5! Ac>"iring and restr"ct"ring A re#tructuring #trateg* i# ;a#e1 %n the
pre#u$pti%n that an e&&icient* $anage1 c%$pan* can create vaue ;* ac)uiring
ine&&icient an1 p%%r* $anage1 enterpri#e# an1 i$pr%ving the e&&icienc* %& th%#e
enterpri#e#! Such i$pr%ve$ent# can c%$e &r%$ a nu$;er %& #%urce#!
a4 The ac)uiring c%$pan* wi t*pica* repace the t%p $anage$ent tea$ %&
the ac)uire1 c%$pan* with a $%re aggre##ive t%p $anage$ent tea$!
b4 The new t%p $anage$ent tea$ wi ;e enc%urage1 t% #e %&& an*
unpr%1uctive a##et#4 #uch a# e=ecutive Bet# an1 ea;%rate c%rp%rate
hea1)uarter#4 an1 t% re1uce #ta&&ing eve#!
c4 The new t%p $anage$ent tea$ wi ;e enc%urage1 t% pr%active*
intervene in the running %& the ac)uire1 ;u#ine##e# in %r1er t% %%( &%r
wa*# %& i$pr%ving the pr%1uctivit*4 )uait*4 inn%vativene##4 an1 cu#t%$er
re#p%n#ivene## %& the unit!
&4 T% create incentive# &%r the new t%p $anage$ent tea$ an1 %ther
e$p%*ee# %& the ac)uire1 unit t% un1erta(e #uch acti%n#4 increa#e# in
153
their pa* $a* ;e in(e1 t% increa#e# in the per&%r$ance %& the ac)uire1
unit!
e4 The t%p $anager# %& the ac)uire1 unit wi a#% ;e $a1e aware that &aiure
t% 1eiver per&%r$ance i$pr%ve$ent# c%n#i#tent with the#e g%a# within a
given a$%unt %& ti$e wi pr%;a;* re#ut in their %#ing their B%;#!
6! Thu#4 in #u$4 the #*#te$ %& rewar1# an1 puni#h$ent# e#ta;i#he1 ;*
the ac)uiring c%$pan* give# the new $anager# %& the ac)uire1 enterpri#e ever*
incentive t% %%( &%r wa*# %& i$pr%ving the e&&icienc* %& the unit un1er their charge!
:! Trans%erring c!$petencies C%$panie# that ;a#e their
1iver#i&icati%n #trateg* %n tran#&erring c%$petencie# #ee( %ut new ;u#ine##e#
reate1 t% their e=i#ting ;u#ine## ;* %ne %r $%re vaue-creati%n &uncti%n#! The*
$a* create vaue ;* 1rawing %n the 1i#tinctive #(i# in %ne %r $%re %& their e=i#ting
vaue-creati%n &uncti%n# in %r1er t% i$pr%ve the c%$petitive p%#iti%n %& the new
;u#ine##! Aternative*4 the* $a* ac)uire a c%$pan* in a 1i&&erent ;u#ine## area in
the ;eie& that #%$e %& the #(i# %& the ac)uire1 c%$pan* $ight i$pr%ve the
e&&icienc* %& their e=i#ting vaue-creati%n activitie#!
E! I& #ucce##&u4 c%$petenc* tran#&er# can %wer the c%#t# %& vaue
creati%n in %ne %r $%re %& a c%$pan*A# 1iver#i&ie1 ;u#ine##e# %r ena;e %ne %r
$%re %& a c%$pan*A# 1iver#i&ie1 ;u#ine##e# t% un1erta(e their vaue-creati%n
&uncti%n# in a wa* that ea1# t% 1i&&erentiati%n an1 a pre$iu$ price! '%r #uch a
#trateg* t% w%r(4 the c%$petencie# ;eing tran#&erre1 $u#t inv%ve activitie# that
are i$p%rtant &%r e#ta;i#hing a c%$petitive a1vantage!
F! Ec!n!$ies !% sc!pe! Ec%n%$ie# %& #c%pe ari#e when tw% %r $%re
;u#ine## unit# #hare re#%urce# #uch a# $anu&acturing &aciitie#4 1i#tri;uti%n
channe#4 a1verti#ing ca$paign#4 RQD c%#t#4 an1 #% %n! Each ;u#ine## unit that
#hare# re#%urce# ha# t% inve#t e## in the #hare1 &uncti%n#! Thu# a 1iver#i&icati%n
#trateg* ;a#e1 %n ec%n%$ie# %& #c%pe can hep a c%$pan* attain a %w-c%#t
154
p%#iti%n in each %& the ;u#ine##e# in which it %perate#! C%n#e)uent*4
1iver#i&icati%n t% reai0e ec%n%$ie# %& #c%pe can ;e a vai1 wa* %& #upp%rting the
generic ;u#ine##-eve #trateg* %& c%#t ea1er#hip!
8! H%wever4 1iver#i&icati%n t% reai0e ec%n%$ie# %& #c%pe i# p%##i;e
%n* when there are #igni&icant c%$$%naitie# ;etween %ne %r $%re %& the vaue-
creati%n &uncti%n# %& a c%$pan*A# e=i#ting an1 new activitie#! M%re%ver4 $anager#
nee1 t% ;e aware that the ;ureaucratic c%#t# %& c%%r1inati%n nece##ar* t% achieve
ec%n%$ie# %& #c%pe within a c%$pan* %&ten %utweigh the vaue that can ;e
create1 ;* #uch a #trateg*!
19! )"rea"cratic c!sts and the 'i$its t! diversi%icati!n! A arge
nu$;er %& aca1e$ic #tu1ie# have c%$e t% the genera c%ncu#i%n that e=ten#ive
1iver#i&icati%n ten1# t% 1epre## rather than i$pr%ve c%$pan* pr%&ita;iit*! Thi#
re#earch rai#e# the )ue#ti%n/ wh* 1%e# 1iver#i&icati%n &ai #% %&tenH
11! One rea#%n that #% $uch 1iver#i&icati%n &ai# i# that a t%% %&ten the
;ureaucratic c%#t# %& 1iver#i&icati%n e=cee1 the vaue create1 ;* the #trateg*! The
eve %& ;ureaucratic c%#t# in a 1iver#i&ie1 %rgani0ati%n i# a &uncti%n %& tw% &act%r#/
the nu$;er %& ;u#ine##e# in a c%$pan*A# p%rt&%i% an1 the e=tent %& c%%r1inati%n
re)uire1 ;etween the 1i&&erent ;u#ine##e# %& the c%$pan* in %r1er t% reai0e vaue
&r%$ a 1iver#i&icati%n #trateg*!
1+! N"$ber !% b"sinesses The greater the nu$;er %& ;u#ine##e# in a
c%$pan*A# p%rt&%i%4 the $%re 1i&&icut it i# &%r c%rp%rate $anager# t% re$ain
in&%r$e1 a;%ut the c%$pe=itie# %& each ;u#ine##! The* #i$p* 1% n%t have the
ti$e t% pr%ce## a the in&%r$ati%n that i# re)uire1 t% %;Bective* a##e## the
#trategic pan %& each ;u#ine## unit!
12! "ecau#e %& the in&%r$ati%n %ver%a1 in e=ten#ive* 1iver#i&ie1
c%$panie#4 c%rp%rate- eve $anage$ent en1# up $a(ing i$p%rtant re#%urce
a%cati%n 1eci#i%n# %n the ;a#i# %& %n* the $%#t #uper&icia ana*#i# %& the
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c%$petitive p%#iti%n %& each ;u#ine## unit! In a11iti%n4 the ac( %& &a$iiarit* with
%perating a&&air# %n the part %& c%rp%rate-eve $anage$ent increa#e# the
pr%;a;iit* that ;u#ine##-eve $anager# wi ;e a;e t% 1eceive th%#e at the
c%rp%rate eve!
15! Thu# in&%r$ati%n %ver%a1 can re#ut in #u;#tantia ine&&iciencie#
within e=ten#ive* 1iver#i&ie1 c%$panie#! The#e ine&&iciencie# incu1e the
#u;%pti$a a%cati%n %& ca#h re#%urce# within the c%$pan* an1 a &aiure %n the
part %& c%rp%rate $anage$ent t% #ucce##&u* enc%urage an1 rewar1 aggre##ive
pr%&it-#ee(ing ;ehavi%r ;* ;u#ine##- unit $anager#!
16! C!!rdinati!n a$!ng b"sinesses! An%ther #%urce %& ;ureaucratic
c%#t# i# the c%%r1inati%n re)uire1 t% reai0e vaue &r%$ a 1iver#i&icati%n #trateg*
;a#e1 %n tran#&erring c%$petencie# an1@%r re#%urce #haring! "%th tran#&erring
c%$petencie# an1 #haring re#%urce# re)uire# c%#e c%%r1inati%n a$%ng ;u#ine##
unit#! Thi# give# ri#e t% ;ureaucratic c%#t# in ter$# %& the ;ureaucratic
$echani#$# nece##ar* t% achieve c%%r1inati%n a$%ng the unit#!
1:! Su;#tantia ;ureaucratic c%#t# can ari#e &r%$ an ina;iit* t% i1enti&*
the uni)ue pr%&it c%ntri;uti%n %& a ;u#ine## unit that i# #haring re#%urce# with
an%ther unit! C%n#i1er a c%$pan* that ha# tw% ;u#ine## unit#4 %ne pr%1ucing
h%u#eh%1 pr%1uct# an1 the %ther4 pac(age1 &%%1 pr%1uct#! "%th pr%1uct# are #%1
thr%ugh #uper$ar(et#! T% %wer the c%#t# %& vaue creati%n4 the parent c%$pan*
1eci1e# t% p%% the $ar(eting an1 #ae# &uncti%n# %& each ;u#ine## unit! Thi#
a%w# the ;u#ine## unit# t% #hare the c%#t# %& a #ae# &%rce an1 gain c%#t
ec%n%$ie# &r%$ u#ing the #a$e ph*#ica 1i#tri;uti%n #*#te$!
1E! Ghie #uch an arrange$ent $a* create vaue4 it $a* a#% give ri#e t%
#u;#tantia c%ntr% pr%;e$# an1 hence4 ;ureaucratic c%#t#! I& the per&%r$ance %&
the h%u#eh%1 pr%1uct# ;u#ine## ;egin# t% #ip4 it $a* pr%ve 1i&&icut t% i1enti&*
wh% i# t% ;e he1 acc%unta;e4 the $anage$ent %& the h%u#eh%1 pr%1uct# 1ivi#i%n
%r the $anage$ent %& tie $ar(eting 1ivi#i%n! In1ee14 each $a* ;a$e the %ther &%r
p%%r per&%r$ance!
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1F! Ath%ugh thi# (in1 %& pr%;e$ can ;e re#%ve1 i& c%rp%rate
$anage$ent 1irect* au1it# the a&&air# %& ;%th 1ivi#i%n#4 it i# c%#t* t% 1% #% in
ter$# %& ;%th the ti$e an1 e&&%rt that c%rp%rate $anage$ent $u#t 1e1icate t%
#%ving the pr%;e$!
18! I$agine the #ituati%n within a c%$pan* that i# tr*ing t% create vaue
;* #haring $ar(eting4 $anu&acturing4 an1 RQD re#%urce# acr%## ten ;u#ine##e#
rather than Bu#t tw%! The acc%unta;iit* pr%;e$ c%u1 ;ec%$e &ar $%re #eri%u# in
#uch a c%$pan*! The e&&%rt inv%ve1 in tr*ing t% tie 1%wn acc%unta;iit* $ight
create a #eri%u# in&%r$ati%n %ver%a1 pr%;e$ &%r c%rp%rate $anage$ent! Ghen
thi# %ccur#4 c%rp%rate $anage$ent e&&ective* %#e# c%ntr% %& the c%$pan*
+9! -i$it# t% 1iver#i&icati%n! Thu#4 even th%ugh 1iver#i&icati%n can create
vaue &%r a c%$pan*4 it a#% inv%ve# ;ureaucratic c%#t#! The e=i#tence %&
;ureaucratic c%#t# pace# a i$it %n the a$%unt %& 1iver#i&icati%n that can ;e
pr%&ita;* pur#ue1! Given the e=i#tence %& ;ureaucratic c%#t#4 it $a(e# #en#e &%r a
c%$pan* t% 1iver#i&* %n* #% %ng a# the vaue create1 ;* #uch a #trateg* e=cee1#
the ;ureaucratic c%#t# a##%ciate1 with e=pan1ing the ;%un1arie# %& the
%rgani0ati%n t% inc%rp%rate a11iti%na ;u#ine## activitie#!
+1! The greater the nu$;er %& ;u#ine##e# area1* in a c%$pan*A#
p%rt&%i% an1 the greater the nee1 &%r c%%r1inati%n a$%ng th%#e ;u#ine##e#@ the
$%re i(e* i# the vaue create1 ;* a 1iver#i&icati%n $%ve t% ;e %utweighe1 ;* the
re#uting increa#e in ;ureaucratic c%#t#! Once thi# %ccur#4 a pr%&ita;e i$it t% the
1iver#i&ie1 #c%pe %& the enterpri#e wi have ;een reache1!
++! +iversi%icati!n that dissipates va'"e! An%ther rea#%n #% $uch
1iver#i&icati%n &ai# t% create vaue i# that $an* c%$panie# 1iver#i&* &%r the wr%ng
rea#%n#! C%n#e)uent*4 the* en1 up 1i##ipating vaue rather than creating it! Thi#
i# particuar* true %& 1iver#i&icati%n t% p%% ri#(# %r t% achieve greater gr%wth4 ;%th
%& which are %&ten given ;* c%$pan* $anager# a# rea#%n# &%r 1iver#i&icati%n!
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+2! +iversi%icati!n t! p!!' ris/s The ;ene&it# %& ri#( p%%ing are #ai1 t%
c%$e &r%$ $erging i$per&ect* c%rreate1 inc%$e #trea$# t% create a $%re #ta;e
inc%$e #trea$! Acc%r1ing t% the a1v%cate# %& ri#( p%%ing4 the $%re #ta;e inc%$e
#trea$ re1uce# the ri#( %& ;an(ruptc* an1 i# in the ;e#t intere#t# %& the c%$pan*A#
#t%c(h%1er#!
+5! Thi# argu$ent ign%re# tw% &act#! 'ir#t4 #t%c(h%1er# can ea#i*
ei$inate the ri#(# inherent in h%1ing an in1ivi1ua #t%c( ;* 1iver#i&*ing their %wn
p%rt&%i%#4 an1 the* can 1% #% at a $uch %wer c%#t than the c%$pan* can! Thu#4
&ar &r%$ ;eing in the ;e#t intere#t# %& #t%c(h%1er#4 atte$pt# t% p%% ri#(# thr%ugh
1iver#i&icati%n repre#ent an unpr%1uctive u#e %& re#%urce#! Sec%n14 re#earch
#ugge#t# that c%rp%rate 1iver#i&icati%n i# n%t a ver* e&&ective wa* t% p%% ri#(#! The
;u#ine## c*ce# %& 1i&&erent in1u#trie# are n%t ea#* t% pre1ict an1 in an* ca#e ten1
t% ;e e## i$p%rtant than a genera ec%n%$ic 1%wnturn4 which hit# a in1u#trie#
#i$utane%u#*!
+6! +iversi%icati!n t! achieve greater gr!#th Such 1iver#i&icati%n i#
n%t a c%herent #trateg* ;ecau#e gr%wth %n it# %wn 1%e# n%t create vaue! Gr%wth
#h%u1 ;e the ;*pr%1uct4 n%t the %;Bective4 %& a 1iver#i&icati%n #trateg*! H%wever4
e$pire-;ui1ing t%p e=ecutive# #%$eti$e# have a ten1enc* t% pur#ue gr%wth &%r it#
%wn #a(e!
+:! Re'ated !r "nre'ated diversi%icati!n? One i##ue that a c%$pan*
$u#t re#%ve i# whether t% 1iver#i&* int% ;u#ine##e# reate1 t% it# e=i#ting ;u#ine##
;* vaue chain c%$$%naitie# %r int% unreate1 ;u#ine##e#!
+E! Reate1 c%$panie# can create vaue ;* #haring re#%urce# an1 ;*
tran#&erring c%$petencie# ;etween ;u#ine##e#! The* can a#% carr* %ut #%$e
re#tructuring!
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+F! "* 1e&initi%n4 unreate1 1iver#i&ie# can create vaue %n* ;* ac)uiring
an1 re#tructuring p%%r* $anage1 c%$panie#!
+8! Since reate1 1iver#i&icati%n can create vaue in $%re wa*# than
unreate1 1iver#i&icati%n4 %ne $ight thin( that reate1 1iver#i&icati%n #h%u1 ;e the
$%re pr%&ita;e #trateg*! In a11iti%n4 reate1 1iver#i&icati%n i# n%r$a* perceive1 a#
inv%ving &ewer ri#(# #ince the c%$pan* i# $%ving int% ;u#ine## area# %& which the
t%p $anage$ent ha# #%$e (n%we1ge!
29! H%wever the ;ureaucratic c%#t# %& a reate1 1iver#i&icati%n #trateg*
ten1 t% ;e higher than the ;ureaucratic c%#t# %& an unreate1 #trateg*! Thi# $a*
$ean that in practice the #trateg* i# n% $%re pr%&ita;e than unreate1
1iver#i&icati%n!
21! "ureaucratic c%#t# ari#e &r%$ CaD the nu$;er %& ;u#ine##e# in a
c%$pan*A# p%rt&%i%4 an1 C;D the e=tent %& c%%r1inati%n re)uire1 a$%ng the 1i&&erent
;u#ine##e# %& the c%$pan* in %r1er t% reai0e vaue &r%$ a 1iver#i&icati%n #trateg*!
2+! An unreate1 c%$pan* 1%e# n%t have t% achieve c%%r1inati%n
;etween ;u#ine## unit#! It %n* ha# t% c%pe with the ;ureaucratic c%#t# that ari#e
&r%$ the nu$;er %& ;u#ine##e# in it# p%rt&%i%! In c%ntra#t4 the reate1 1iver#i&ie1
c%$pan* ha# t% achieve c%%r1inati%n a$%ng ;u#ine## unit# i& it i# t% reai0e the
vaue that c%$e# &r%$ #(i tran#&er# an1 re#%urce #haring!
22! H%w then i# a c%$pan* t% ch%%#e ;etween the#e #trategie#H The
ch%ice 1epen1# %n a c%$pari#%n %& the reative vaue-a11e1 an1 ;ureaucratic
c%#t# a##%ciate1 with each #trateg*!
25! Opp%rtunitie# &%r creating vaue &r%$ reate1 1iver#i&icati%n are a
&uncti%n %& the e=tent %& c%$$%naitie# ;etween the #(i# re)uire1 t% c%$pete in
the c%$pan*A# c%re ;u#ine## an1 the #(i# re)uire1 t% c%$pete in %ther in1u#tria
an1 c%$$ercia area#!
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26! It wi pa* the &ir$ t% c%ncentrate %n reate1 1iver#i&icati%n when CaD
the c%$pan*A# c%re #(i# are appica;e t% a wi1e variet* %& in1u#tria an1
c%$$ercia #ituati%n# an1 C;D the ;ureaucratic c%#t# %& i$pe$entati%n 1% n%t
e=cee1 the vaue that can ;e create1 thr%ugh re#%urce #haring an1@%r c%$petenc*
tran#&er#! At high eve# %& reate1 1iver#i&icati%n4 the ;ureaucratic c%#t# %&
a11iti%na 1iver#i&icati%n are i(e* t% %utweigh the vaue create1 ;* that
1iver#i&icati%n4 an1 the #trateg* $a* ;ec%$e unpr%&ita;e!
2:! It $a* pa* a c%$pan* t% c%ncentrate %n unreate1 1iver#i&icati%n
when CaD the c%$pan*A# c%re #(i# are high* #peciai0e1 an1 have &ew
appicati%n# %ut#i1e the c%$pan*A# c%re ;u#ine## an1 C;D the ;ureaucratic c%#t# %&
i$pe$entati%n 1% n%t e=cee1 the vaue that can ;e create1! Once again4
h%wever4 the #ec%n1 c%n1iti%n i# uni(e* t% h%1 &%r c%$panie# that are high*
1iver#i&ie1!
) Strategic A''iances as an A'ternative t! +iversi%icati!n
1! The ;ureaucratic c%#t# a##%ciate1 with i$pe$enting the #trateg* can $a(e
1iver#i&icati%n unpr%&ita;e! One wa* %& tr*ing t% reai0e the vaue a##%ciate1 with
1iver#i&icati%n4 with%ut having t% ;ear the #a$e eve %& ;ureaucratic c%#t#4 i# t%
enter int% a #trategic aiance with an%ther c%$pan* t% #tart up a new ;u#ine##
venture!
+! In thi# c%nte=t4 #trategic aiance# are e##entia* agree$ent# ;etween tw% %r $%re
c%$panie# t% #hare the c%#t#4 ri#(#4 an1 ;ene&it# a##%ciate1 with 1eve%ping new
;u#ine## %pp%rtunitie#! Man* #trategic aiance# are c%n#titute1 a# &%r$a B%int
venture# in which each part* ha# an e)uit* #ta(e! Other aiance# ta(e the &%r$ %&
a %ng-ter$ c%ntract ;etween c%$panie# in which the* agree t% un1erta(e #%$e
B%int activit* that ;ene&it# ;%th! Agree$ent# t% w%r( t%gether %n B%int RQD pr%Bect#
%&ten ta(e thi# &%r$
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2! Strategic aiance# #ee$ t% ;e a particuar* via;e %pti%n when a c%$pan* wi#he#
t% create vaue &r%$ tran#&erring c%$petencie# %r #haring re#%urce# ;etween
1iver#i&ie1 ;u#ine##e#!
C Ac>"isiti!ns and Interna' Ne# 4ent"res as Entry Strategies
1! There are three vehice# &%r pur#uing c%rp%rate-eve #trategie# #uch a#
1iver#i&icati%n an1 vertica integrati%n/ ac)ui#iti%n#4 interna new venture#4 an1 B%int
venture#! In thi# #ecti%n4 we %%( at the ch%ice ;etween ac)ui#iti%n# an1 interna
new venture# a# aternative vehice# &%r entering new ;u#ine## area#! -ater we
c%n#i1er B%int venture#!
+! Entr* int% a new ;u#ine## area thr%ugh ac)ui#iti%n inv%ve# purcha#ing an
e#ta;i#he1 c%$pan*4 c%$pete with a it# &aciitie#4 e)uip$ent4 an1 per#%nne!
Entr* int% a new ;u#ine## area thr%ugh interna new venturing inv%ve# #tarting a
;u#ine## &r%$ #cratch/ ;ui1ing &aciitie#4 purcha#ing e)uip$ent4 recruiting
per#%nne4 %pening up 1i#tri;uti%n %utet#4 an1 #% %n!
2! The ch%ice ;etween ac)ui#iti%n# an1 new venture# a# a pre&erre1 entr* $%1e i#
in&uence1 ;* &ive $ain &act%r#!
a! "arrier# t% entr*
;! Reate1ne## %& new an1 e=i#ting ;u#ine##e#
c! Spee1 an1 1eve%p$ent c%#t# %& 1i&&erent entr* $%1e#
1! Ri#(# %& 1i&&erent entr* $%1e#
e! In1u#tr* i&e c*ce &act%r#
5! )arriers t! entry Ghen ;arrier# t% entr* are #u;#tantia4 it i# 1i&&icut
t% enter an in1u#tr* thr%ugh interna venturing Cthe c%#t# %& entr* are highD! "*
ac)uiring an area1* e#ta;i#he1 enterpri#e in the in1u#tr*4 the c%$pan* can
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circu$vent $%#t entr* ;arrier#! Aternative*4 when ;arrier# t% entr* are %w4
interna venturing ten1# t% ;e &av%re1!
6! Re'atedness! The $%re reate1 a new ;u#ine## i# t% a c%$pan*A#
e=i#ting %perati%n#4 the $%re i(e* it i# that the c%$pan* area1* ha# the (n%w-
h%w nece##ar* t% c%$pete in that ;u#ine##! Thi# ten1# t% &av%r interna venture#!
The $%re unreate1 a new ;u#ine##4 the e## i(e* it i# that the c%$pan* ha# the
(n%w-h%w nee1e1 t% c%$pete in that ;u#ine##! Thi# ten1# t% &av%r ac)ui#iti%n#4
;ecau#e with the ac)ui#iti%n c%$e# a $anage$ent tea$ with accu$uate1
e=perience an1 (n%w-h%w &%r c%$peting in that ;u#ine##!
:! Speed and deve'!p$ent c!sts! Acc%r1ing t% #tu1ie# ;* "igga1i(e4
interna venturing can ta(e eight t% tweve *ear# an1 $aB%r %ng%ing inve#t$ent#
;e&%re a #igni&icant $ar(et pre#ence ha# ;een e#ta;i#he1 an1 the new ;u#ine##
i# generating #u;#tantia pr%&it#! Ac)ui#iti%n# repre#ent a $uch )uic(er $ean# %&
e#ta;i#hing a #igni&icant $ar(et pre#ence an1 generating pr%&it#! Thu# when
#pee1 i# %& the e##ence4 ac)ui#iti%n# ten1 t% ;e &av%re1!
E! Ris/s Regar1ing the ri#(# %& entr*4 new venturing ten1# t% ;e a ver*
uncertain pr%ce##4 with a %w pr%;a;iit* %& #ucce## C#tu1ie# ;* Man#&ie1 #ugge#t
that F9 t% FF percent %& new venture# &aiD! Ghen it $a(e# an ac)ui#iti%n4 h%wever4
the c%$pan* i# a#% ac)uiring a (n%wn pr%&ita;iit* an1 $ar(et #hare! Thu#
ac)ui#iti%n# are $%re certain pr%ce## an1 ten1 t% ;e &av%re1 when 1eci#i%n
$a(er# are unwiing t% ;ear high ri#(#!
F! Ind"stry 'i%e cyc'e In1u#tr* i&e c*ce &act%r# have an i$pact %n
$an* %& the &act%r# Bu#t 1i#cu##e1! Speci&ica*4 in e$;r*%nic an1 gr%wth
in1u#trie#4
a4 "arrier# t% entr* ten1 t% ;e %wer than in $ature in1u#trie#!
162
b4 E#ta;i#he1 c%$panie# are #ti g%ing thr%ugh a earning pr%ce## an1 1%
n%t have the #a$e e=perience a1vantage# that e#ta;i#he1 c%$panie# in
a $ature in1u#tr* have!
8! A# a c%n#e)uence4 interna venturing 1uring the ear* #tage# %& the
in1u#tr* i&e c*ce inv%ve# %wer ri#(# an1 1eve%p$ent c%#t#4 an1 carrie# &ewer
penatie# in ter$# %& e=pan#i%n #pee1 than i# the ca#e in a $ature envir%n$ent!
Thu# interna venturing ten1# t% ;e the &av%re1 entr* $%1e in e$;r*%nic an1
gr%wth in1u#trie#4 wherea# ac)ui#iti%n# are $%re &av%re1 in $ature in1u#trie#!
+ Ac>"isiti!n 7it%a''s and G"ide'ines %!r S"ccess
14 '%r the rea#%n# we have n%te14 in $an* #ituati%n# ac)ui#iti%n# are the &av%re1
entr* $%1e! H%wever4 $uch evi1ence #ugge#t# that $%re than ha& %& a
ac)ui#iti%n# &ai t% reai0e the gain# pre1icte1 &%r the$! Gh* 1% #% $an*
ac)ui#iti%n# &aiH There #ee$ t% ;e &%ur $ain rea#%n#!
24 Integrati!n Unanticipate1 pr%;e$# %&ten %ccur when an atte$pt i# $a1e t%
$arr* tw% 1ivergent c%rp%rate cuture#! Thi# can ea1 t% high $anage$ent
turn%ver an1 can 1epre## pr%&ita;iit*!
34 Overesti$ating ec!n!$ic bene%its Even when c%$panie# achieve
integrati%n4 the* %&ten %vere#ti$ate the p%tentia &%r creating vaue ;*
B%ining t%gether 1i&&erent ;u#ine##e#! The* %vere#ti$ate the #trategic
a1vantage# that can ;e 1erive1 &r%$ the ac)ui#iti%n an1 thu# pa* $%re &%r
the target c%$pan* than it i# pr%;a;* w%rth!
44 EApense !% ac>"isiti!n Ac)ui#iti%n# ten1 t% ;e ver* e=pen#ive! The #t%c(
price %& the ac)uiring c%$pan* %&ten get# ;i1 1uring the ac)ui#iti%n pr%ce##4
re#uting in ac)ui#iti%n pre$iu$# %ver pri%r $ar(et vaue# %& 59 t% F9 percent!
The 1e;t ta(en %n t% &inance #uch ac)ui#iti%n# can 1epre## c%$pan* pr%&it#!
54 Inade>"ate screening It ha# ;een &%un1 that $an* c%$panie# $a(e
ac)ui#iti%n 1eci#i%n# with%ut th%r%ugh* ana*0ing the p%tentia ;ene&it# an1
c%#t#! A# a c%n#e)uence4 a&ter the ac)ui#iti%n i# c%$pete14 $an* ac)uiring
163
c%$panie# &in1 that the* have purcha#e1 a tr%u;e1 %rgani0ati%n in#tea1 %&
a we-run ;u#ine##!
E Entry Strategy, ?!int 4ent"res
14 There are #ituati%n# when a c%$pan* pre&er# interna venturing t% ac)ui#iti%n#
a# an entr* #trateg*4 *et he#itate# t% c%$$it it#e& & t% an interna venture
;ecau#e %& the ri#(# an1 c%#t# inv%ve1! In #uch circu$#tance#4 the c%$pan*
$a* pre&er t% enter int% a B%int venture with an%ther c%$pan* an1 then u#e
the B%int venture a# a vehice &%r entering the new ;u#ine## area!
24 The a1vantage %& #uch an arrange$ent i# that it ena;e# the c%$pan* t%
#hare the #u;#tantia ri#(# an1 c%#t# inv%ve1 in a new venture pr%Bect!
34 In a11iti%n4 a B%int venture $a(e# #en#e when a c%$pan* ha# #%$e4 ;ut n%t
a4 %& the #(i# an1 a##et# nece##ar* t% e#ta;i#h a #ucce##&u new venture!
Ghen it tea$# up with a c%$pan* that ha# the #(i# an1 @%r a##et# that it
ac(#4 the pr%;a;iit* %& #%urce# $a* ;e increa#e1!
44 Such an arrange$ent ha# three $ain 1raw;ac(#4 h%wever/
a4 Ghie a B%int venture a%w# a c%$pan* t% #hare the ri#(# an1 c%#t# %&
1eve%ping a new ;u#ine##4 it a#% $ean# that it $u#t #hare the pr%&it# i&
the new ;u#ine## i# #ucce##&u
b4 Ghen a c%$pan* enter# int% a B%int venture4 it awa*# run# the ri#( %&
giving awa* critica (n%w-h%w t% it# B%int venture partner!
c4 "* 1e&initi%n4 in the ca#e %& a B%int venture4 c%ntr% $u#t ;e #hare1 with
the venture partner! Thi# can ea1 t% #u;#tantia pr%;e$# i& the tw%
c%$panie# have 1i&&erent ;u#ine## phi%#%phie#4 ti$e h%ri0%n#4 %r
inve#t$ent pre&erence#! C%n&ict# %ver h%w t% run the B%int venture can
tear it apart an1 re#ut in ;u#ine## &aiure!
164
& Restr"ct"ring
14 S% &ar we have ;een c%n#i1ering #trategie# &%r e=pan1ing the #c%pe %& a
c%$pan* int% new ;u#ine## area#! N%w we turn t% the %pp%#ite t%pic/
#trategie# &%r re1ucing the #c%pe %& the c%$pan* ;* e=iting &r%$ ;u#ine##
area#!
24 In recent *ear# re1ucing the #c%pe %& a c%$pan* thr%ugh re#tructuring ha#
;ec%$e an increa#ing* p%puar #trateg*! In $%#t ca#e#4 c%$panie# that are
engage1 in re#tructuring are 1ive#ting the$#eve# %& 1iver#i&ie1 activitie# in
%r1er t% c%ncentrate up%n their c%re ;u#ine##e#!
34 Why restr"ct"re? There #ee$ t% ;e three $ain rea#%n# &%r the upweing %&
re#tructuring that we have witne##e1 in recent *ear#! 'ir#t4 there i# pent* %&
evi1ence that in the he*1a* %& the c%rp%rate 1iver#i&icati%n $%ve$ent4 $an*
c%$panie# %ver 1iver#i&ie1 an1 their per&%r$ance #u&&ere1 a# a re#ut!
44 A #ec%n1 rea#%n &%r 1iver#i&icati%n 1i#c%unt i# that $an* inve#t%r# have earnt
&r%$ e=perience that $anager# %&ten have a ten1enc* t% pur#ue t%% $uch
1iver#i&icati%n4 %r 1iver#i&* &%r the wr%ng rea#%n# #uch a# the pur#uit %& gr%wth
&%r it# %wn #a(e rather than the pur#uit %& greater pr%&ita;iit*!
54 Re#tructuring can a#% ;e a re#p%n#e t% &aie1 the ac)ui#iti%n#!
64 A &ina &act%r %& #%$e i$p%rtance in re#tructuring tren1# i# that inn%vati%n# in
$anage$ent pr%ce##e# an1 #trateg* have 1i$ini#he1 the a1vantage# %&
vertica integrati%n %& 1iver#i&icati%n! In re#p%n#e c%$panie# have re1uce1 the
#c%pe %& activitie# thr%ugh re#tructuring an1 1ive#t$ent#!
74 EAit strategies C%$panie# u#e three $ain #trategie# t% e=it &r%$ ;u#ine##
area#/ 1ive#t$ent4 harve#t4 an1 i)ui1ati%n!
165
84 +ivest$ent O& the three $ain #trategie#4 1ive#t$ent i# u#ua* the &av%re1
%ne! It repre#ent# the ;e#t wa* &%r a c%$pan* t% rec%up a# $uch %& it# initia
inve#t$ent in a ;u#ine## unit a# p%##i;e! The i1ea i# t% #e the ;u#ine## unit
t% the highe#t ;i11er! Three t*pe# %& ;u*er# are p%##i;e/ in1epen1ent
inve#t%r#4 %ther c%$panie#4 an1 the $anage$ent %& the unit t% ;e 1ive#te1!
94 Seing %&& a ;u#ine## unit t% in1epen1ent inve#t%r# i# n%r$a* re&erre1 t% a# a
#pin-%&&! A #pin-%&& $a(e# g%%1 #en#e when the unit t% ;e #%1 i# pr%&ita;e
an1 when the #t%c( $ar(et ha# an appetite &%r new #t%c( i##ue#!
104 Seing %&& a unit t% an%ther c%$pan* i# a #trateg* that i# %&ten pur#ue1 when
a unit can ;e #%1 t% a c%$pan* that i# in the #a$e ine %& ;u#ine## a# that
unit! In #uch ca#e#4 the purcha#er wi %&ten ;e prepare1 t% pa* a c%n#i1era;e
a$%unt %& $%ne* &%r the %pp%rtunit* t% #u;#tantia* increa#e the #i0e %& it#
;u#ine## virtua* %vernight!
114 Seing %&& a unit t% it# $anage$ent i# n%r$a* re&erre1 t% a# a $anage$ent
;u*%ut CM"OD4 M"O# are ver* #i$iar t% everage1 ;u*%ut# C-"O#D! In an
M"O4 the unit i# #%1 t% it# $anage$ent4 which &inance# the purcha#e thr%ugh
the #ae %& high-*ie1 ;%n1# t% inve#t%r#! M"O# %&ten inv%ve &inancia*
tr%u;e1 unit#4 where the aternative# t% an M"O are either a harve#t #trateg*
%r i)ui1ati%n! An M"O can ;e ver* ri#(* &%r the $anage$ent tea$4 #ince it#
$e$;er# $a* have t% #ign per#%na guarantee# t% ;ac( up the ;%n1 i##ue
an1 $a* %#e ever*thing i& the M"O uti$ate* &ai#! On the %ther han14 i& the
$anage$ent tea$ #uccee1# in turning ar%un1 the tr%u;e1 unit4 rewar1 can
;e a #igni&icant increa#e in it# $e$;er#A per#%na weath!
124 A harve#t %r i)ui1ati%n #trateg* i# genera* c%n#i1ere1 in&eri%r t% a
1ive#t$ent #trateg* #ince the c%$pan* can pr%;a;* ;e#t rec%up it#
inve#t$ent in a ;u#ine## unit ;* 1ive#t$ent!
166
134 A harve#t #trateg* inv%ve# hating inve#t$ent in a unit in %r1er t% $a=i$i0e
#h%rt-t% $e1iu$-ter$ ca#h &%w &r%$ that unit4 ;e&%re i)ui1ating it! Ath%ugh
thi# #trateg* #%un1# nice in the%r*4 it i# %&ten a p%%r %ne t% pur#ue in practice
#ince the $%rae %& the unitA# e$p%*ee#4 a# we a# the c%n&i1ence %& the
unitA# cu#t%$er# an1 #uppier# in it# c%ntinuing %perati%n can a 1ecine
rapi1* %nce it ;ec%$e# apparent that the unit i# pur#uing a harve#t #trateg*! I&
thi# %ccur#4 a# i# %&ten the ca#e4 the rapi1 1ecine in the unitA# revenue# can
$a(e the #trateg* untena;e!
144 A i)ui1ati%n #trateg* i# the ea#t attractive %& a t% pur#ue ;ecau#e the
c%$pan* ha# t% write %&& it# inve#t$ent in a ;u#ine## unit- %&ten at a
c%n#i1era;e c%#t!
S"$$ary
14 Manager# %&ten &ir#t c%n#i1er 1iver#i&icati%n when their c%$pan* i# generating
&ree ca#h &%w4 which are &inancia re#%urce# in e=ce## %& th%#e nece##ar* t%
$aintain a c%$petitive a1vantage in the c%$pan*A# %rigina4 %r c%re4 ;u#ine##!
24 A 1iver#i&ie1 c%$pan* can create vaue ;*
a4 Tran#&erring c%$petencie# a$%ng e=i#ting ;u#ine##e#4
b4 -everaging c%$petencie# t% create new ;u#ine##e#4
c4 Sharing re#%urce# t% reai0e ec%n%$ie# %& #c%pe4
&4 U#ing 1iver#i&icati%n a# a $ean# %& $anaging rivar* in %ne %r $%re
in1u#trie#4
e4 E=p%iting genera %rgani0ati%na c%$petencie# that enhance the
per&%r$ance %& a ;u#ine## unit# within a 1iver#i&ie1 c%$pan*! The
;ureaucratic c%#t# %& 1iver#i&icati%n are a &uncti%n %& the nu$;er %&
in1epen1ent ;u#ine## unit# within the c%$pan* an1 the e=tent %&
c%%r1inati%n ;etween th%#e ;u#ine## unit#!
34 Diver#i&icati%n $%tivate1 ;* a 1e#ire t% p%% ri#(# %r achieve greater gr%wth i#
%&ten a##%ciate1 with the 1i##ipati%n %& vaue!
167
44 There are three vehice# that c%$panie# u#e t% enter new ;u#ine## area#/
interna venture#4 ac)ui#iti%n4 an1 B%int venture#!
54 Interna new venturing i# t*pica* e$p%*e1 a# an entr* #trateg* when a
c%$pan* ha# a #et %& vaua;e c%$petencie# in it# e=i#ting ;u#ine##e# that
can ;e everage1 %r rec%$;ine1 t% enter the new ;u#ine## area!
64 Man* interna venture# &ai ;ecau#e %& entr* %n t%% #$a a #cae4 p%%r
c%$$erciai0ati%n4 an1 p%%r c%rp%rate $anage$ent %& the interna venture
pr%ce##! Guar1ing again#t &aiure inv%ve# a #tructure1 appr%ach t%war1
pr%Bect #eecti%n an1 $anage$ent4 integrati%n %& RQD an1 $ar(eting t%
i$pr%ve c%$$erciai0ati%n %& a venture i1ea4 an1 entr* %n a #igni&icant #cae!
74 Ac)ui#iti%n# are %&ten &av%re1 a# an entr* #trateg* when the c%$pan* ac(#
i$p%rtant c%$petencie# Cre#%urce# an1 capa;iitie#D re)uire1 t% c%$pete in
an area4 ;ut it can purcha#e an incu$;ent c%$pan* that ha# th%#e
c%$petencie# an1 1% #% at a rea#%na;e price! Ac)ui#iti%n# a#% ten1 t% ;e
&av%re1 when the ;arrier# t% entr* int% the target in1u#tr* are high an1 the
c%$pan* i# unwiing t% accept the ti$e &ra$e4 1eve%p$ent c%#t#4 an1 ri#(#
%& interna new venturing!
84 Man* ac)ui#iti%n# &ai ;ecau#e %& p%%r p%#t ac)ui#iti%n integrati%n4
%vere#ti$ati%n %& the vaue that can ;e create1 &r%$ an ac)ui#iti%n4 the high
c%#t %& ac)ui#iti%n4 an1 p%%r pre-ac)ui#iti%n #creening! Guar1ing again#t
ac)ui#iti%n &aiure re)uire# #tructure1 #creening4 g%%1 ;i11ing #trategie#4
p%#itive atte$pt# t% integrate the ac)uire1 c%$pan* int% the %rgani0ati%n %&
the ac)uiring %ne4 an1 earning &r%$ e=perience!
94 <%int venture# $a* ;e the pre&erre1 entr* #trateg* when
a4 The ri#(# an1 c%#t# a##%ciate1 with #etting up a new ;u#ine## unit are
$%re than the c%$pan* i# wiing t% a##u$e %n it# %wn an1
168
b4 The c%$pan* can increa#e the pr%;a;iit* %& #ucce##&u* e#ta;i#hing a
new ;u#ine## ;* tea$ing up with an%ther c%$pan* that ha# #(i# an1
a##et# c%$pe$enting it# %wn!
19! Re#tructuring i# %&ten a re#p%n#e t%
a4 E=ce##ive 1iver#i&icati%n4
b4 'aie1 ac)ui#iti%n#4 an1
c4 Inn%vati%n# in $anage$ent pr%ce## that have re1uce1 the
a1vantage# %& vertica integrati%n an1 1iver#i&icati%n!
11! E=it #trategie# incu1e 1ive#t$ent4 harve#t4 an1 i)ui1ati%n!
The ch%ice %& e=it #trateg* i# g%verne1 ;* the characteri#tic# %& the reevant
;u#ine## unit!
169
Chapter ..
COR7ORATE 7ER&ORMANCE- GO4ERNANCE- AN+ );SINESS ET6ICS
Intr!d"cti!n
The %pening ca#e4 JThe &a %& Enr%nK4 rai#e1 tr%u;ing )ue#ti%n# a;%ut c%rp%rate
per&%r$ance4 c%rp%rate g%vernance4 an1 ;u#ine## ethic#! It i# n%w ver* cear that at
ea#t4 #eni%r $anager# ;ehave1 in an unethica $anner4 1ei;erate* $i#ea1ing
#hareh%1er# an1 e$p%*ee# a;%ut the #tate %& the c%$pan*?# per&%r$ance! It w%u1
#ee$ that the* 1i1 thi# t% c%ntinue t% $eet the high &inancia per&%r$ance e=pectati%n#
that the* the$#eve# ha1 e#ta;i#he1 &%r the c%$pan*! It i# ha1 t% e#cape the c%ncu#i%n
that #en%r $anager# at Enr%n 1ei;erate* $i##tate1 the true &inancia #tate %& the
c%$pan* t% enrich the$#eve#! The %#er# in thi# pr%ce## were (e* #ta(eh%1er# in
Enr%n/ the c%$pan*?# #t%c(h%1er#4 cre1it%r#4 an1 e$p%*ee#! Increa#ing*4 the c%rp%rate
#can1a# at c%$panie# i(e Enr%n an1 Arthur An1er#en an1 the huge acr%##-the ;%ar1
1ecine in #t%c( price# that %ccurre1 in +991-+99+ have the pu;ic a#(ing JGhat i#
happening in the w%r1 %& ;u#ine## t%1a*H
Thi# chapter e=a$ine# the $an* i$p%rtant &act%r# an1 i##ue# that $a* prevent a
c%$pan*?# #trategie# &r%$ ;eing i$pe$ente1 in wa*# that rai#e c%rp%rate per&%r$ance
an1 ea1 t% #uperi%r pr%&ita;iit*! The chapter i# c%ncerne1 with h%w t% en#ure that
$anager# i$pe$ent #trategie# that are in the %ng-run intere#t# %& (e* #ta(eh%1er# %&
the c%$pan*4 #uch a# #t%c(h%1er# an1 e$p%*ee#! C%rp%rate g%vernance an1 ;u#ine##
ethic# are t%%# that ;e put in pace t% $a(e #ure that the intere#t# %& #ta(eh%1er# %& the
c%$pan* are rec%gni0e1 an1 inc%rp%rate1 int% the #trateg* $a(ing pr%ce##!
Learning Objectives
A&ter rea1ing thi# chapter4 *%u wi un1er#tan1/
1! Gh* $anger# when &%r$uating an1 i$pe$enting #trategie# ai$e1 at
e#ta;i#hing a #u#taina;e c%$petitive a1vantage an1 #uperi%r pr%&ita;iit*!
170
+! Gh* $anager# #h%u1 ch%%#e th%#e that are ega an1 ethica an1 ;aance the
cai$# %& a it# #ta(eh%1er gr%up#!

Teaching O"t'ine
A The Ca"ses !% 7!!r 7er%!r$ance
Seven $ain cau#e# #tan1 %ut in $%#t ca#e# %& c%rp%rate p%%r per&%r$ance/ p%%r
$anage$ent4 %vere=pan#i%n4 ina1e)uate &inancia c%ntr%#4 high c%#t#4 the e$ergence %&
p%wer&u new c%$petiti%n4 un&%re#een #hi&t# in 1e$an14 an1 %rgani0ati%na inertia!
N%r$a*4 #evera4 i& n%t a4 %& the#e &act%r# are pre#ent in a 1ecine #ituati%n!
1! 7!!r $anage$ent The phra#e p%%r $anage$ent c%ver# a $utitu1e %& #in#4
ranging &r%$ #heer inc%$petence t% negect t %& c%re ;u#ine##e# an1 an
in#u&&icient nu$;er %& g%%1 $anager#! Ath%ugh n%t nece##ari* a ;a1 thing4 %ne-
per#%n rue %&ten #ee$# t% ;e at the r%%t %& p%%r $anage$ent! One #tu1* &%un1
that the pre#ence %& a 1%$inant an1 aut%cratic chie& e=ecutive with a pa##i%n &%r
e$pire-;ui1ing #trategie# %&ten characteri0e# $an* taiing c%$panie#! An%ther
#tu1* %& eight*-%ne turn ar%un1 #ituati%n# &%un1 that in thirt*-#i= ca#e# tr%u;e1
c%$panie# #u&&ere1 &r%$ an aut%cratic $anager wh% trie1 t% 1% it a an14 in the
&ace %& c%$pe=it* an1 change4 c%u1 n%t!
+! OvereApansi!n! The e$pire-;ui1ing #trategie# %& aut%cratic CEO# %&ten inv%ve
rapi1 e=pan#i%n an1 e=ten#ive 1iver#i&icati%n! Much %& thi# 1iver#i&icati%n ten1# t%
;e p%%r* c%nceive1 an1 a11# itte vaue t% a c%$pan*! The c%n#e)uence# %& t%%
$uch 1iver#i&icati%n incu1e %## %& c%ntr% an1 an ina;iit* t% c%pe with
rece##i%nar* c%n1iti%n#! M%re%ver4 c%$panie# that e=pan1 rapi1* ten1 t% 1% #% ;*
ta(ing %n arge a$%unt# %& 1e;t &inancing! A1ver#e ec%n%$ic c%n1iti%n# can i$it a
c%$pan*A# a;iit* t% $eet it# 1e;t re)uire$ent# an1 can thu# precipitate a &inancia
cri#i#!
34 Inade>"ate %inancia' c!ntr!'s The $%#t c%$$%n a#pect %& ina1e)uate &inancia
c%ntr%# i# a &aiure t% a##ign pr%&it re#p%n#i;iit* t% (e* 1eci#i%n $a(er# within the
%rgani0ati%n! A ac( %& acc%unta;iit* &%r the &inancia c%n#e)uence# %& their acti%n#
171
can enc%urage $i11e-eve $anager# t% e$p%* e=ce## #ta&& an1 #pen1
re#%urce# ;e*%n1 what i# nece##ar* &%r $a=i$u$ e&&icienc*! In #uch ca#e#4
;ureaucrac* $a* ;a%%n an1 c%#t# #pira %ut %& c%ntr%!
44 6igh c!sts! Ina1e)uate &inancia c%ntr%# can ea1 t% high c%#t#! "e*%n1 thi#4 the
$%#t c%$$%n cau#e %& a high-c%#t #tructure i# %w a;%r pr%1uctivit*! It $a* #te$
&r%$ uni%n-i$p%#e1 re#trictive w%r(ing practice#4 $anage$entA# &aiure t% inve#t in
new a;%r-#aving techn%%gie#4 %r4 $%re %&ten4 a c%$;inati%n %& ;%th!
54 Ne# c!$petiti!n C%$petiti%n in capitai#t ec%n%$ie# i# a pr%ce## characteri0e1 ;*
the c%ntinua e$ergence %& new c%$panie# cha$pi%ning new wa*# %& 1%ing ;u#i -
ne##! In recent *ear# &ew in1u#trie# an1 &ew e#ta;i#he1 c%$panie# have ;een
#pare1 the c%$petitive chaenge %& p%wer&u new c%$petiti%n! In1ee14 $an*
e#ta;i#he1 ;u#ine##e# have &aie1 %r run int% #eri%u# tr%u;e ;ecau#e the* 1i1
n%t re#p%n1 )uic(* en%ugh t% #uch threat#! P%wer&u new c%$petiti%n i# a
centra cau#e %& c%rp%rate 1ecine
64 ;n%!reseen de$and shi%ts Un&%re#een4 an1 %&ten un&%re#eea;e4 #hi&t# in
1e$an1 can ;e ;r%ught a;%ut ;* $aB%r change# in techn%%g*4 ec%n%$ic %r
p%itica c%n1iti%n#4 an1 #%cia an1 cutura n%r$#! Ath%ugh #uch change# can
%pen up $ar(et %pp%rtunitie# &%r new pr%1uct#4 the* a#% threaten the e=i#tence %&
$an* e#ta;i#he1 enterpri#e#4 nece##itating re#tructuring
74 Organi(ati!na' inertia On their %wn4 the e$ergence %& p%wer&u new c%$petiti%n
an1 un&%re#een #hi&t# in 1e$an1 $ight n%t ;e en%ugh t% cau#e c%rp%rate
1ecine! Ghat i# a#% re)uire1 i# an %rgani0ati%n that i# #%w t% re#p%n1 t% #uch
envir%n$enta change#! A# area1* n%te1 in Chapter 54 %rgani0ati%na inertia #tan1#
%ut a# a $aB%r rea#%n wh* c%$panie# are %&ten #% #%w t% re#p%n1 t% new
c%$petitive c%n1iti%n#! '%r $%re 1etai#4 #ee Chapter 5!
84 The $ain steps !% t"rnar!"nd There i# n% #tan1ar1 $%1e %& h%w a c%$pan*
#h%u1 re#p%n1 t% a 1ecine! In1ee14 there can ;e n% #uch $%1e ;ecau#e ever*
#ituati%n i# uni)ue! H%wever4 in $%#t #ucce##&u turnar%un1 #ituati%n#4 a nu$;er
%& c%$$%n &eature# are pre#ent! The* incu1e changing the ea1er#hip4 re1e&ining
172
the c%$pan*A# #trategic &%cu# 1ive#ting %r c%#ing unwante1 a##et#4 ta(ing #tep#
t% i$pr%ve the pr%&ita;iit* %& re$aining %perati%n#4 an14 %cca#i%na*4 $a(ing
ac)ui#iti%n# t% re;ui1 c%re %perati%n#
94 Changing the 'eadership Since the %1 ea1er#hip ;ear# the #tig$a %& &aiure4 new
ea1er#hip i# an e##entia ee$ent %& $%#t retrench$ent an1 turnar%un1 #ituati%n#!
104 Rede%ining strategic %!c"s '%r a #inge-;u#ine## enterpri#e4 re1e&ining #trategic
&%cu# inv%ve# a reevauati%n %& the c%$pan*A# ;u#ine##-eve #trateg*! A &aie1 c%#t
ea1er4 &%r e=a$pe4 $a* re%rient t%war1 a $%re &%cu#e1 %r 1i&&erentiate1 #trateg*!
'%r a 1iver#i&ie1 c%$pan*4 re1e&ining #trategic &%cu# $ean# i1enti&*ing the
;u#ine## in the p%rt&%i% that have the ;e#t %ng-ter$ pr%&it an1 gr%wth pr%#pect#
an1 c%ncentrating inve#t$ent there!
114 Asset #ae# an1 c%#ure#! Having re1e&ine1 it# #trategic &%cu#4 a c%$pan* #h%u1
1ive#t a# $an* unwante1 a##et# a# it can &in1 ;u*er# &%r an1 i)ui1ate whatever
re$ain#4 it i# i$p%rtant n%t t% c%n&u#e unwante1 a##et# with unpr%&ita;e a##et#!
A##et# that n% %nger &it in with the re1e&ine1 #trategic &%cu# %& the c%$pan* $a* ;e
ver* pr%&ita;e! Their #ae can ;ring the c%$pan* $uch-nee1e1 ca#h4 which it can
inve#t in i$pr%ving the %perati%n# that re$ain!
124 I$pr!ving pr!%itabi'ity I$pr%ving the pr%&ita;iit* %& the %perati%n# that re$ain
a&ter a##et #ae# an1 c%#ure# inv%ve# a nu$;er %& #tep# t% i$pr%ve pr%1uctivit*4
)uait*4 inn%vati%n4 an1 cu#t%$er re#p%n#ivene##! Man* %& the &uncti%na-eve
#trategie# that c%$panie# can pur#ue t% achieve the#e en1# are 1i#cu##e1 in
Chapter
5 an1 1etai# are pr%vi1e1 there!
) Sta/eh!'ders and C!rp!rate 7er%!r$ance
1! Organi0ati%n# nee1 t% inc%rp%rate the cai$# %& vari%u# #ta(eh%1er gr%up# int%
the #trateg* &%r$uati%n pr%ce##! The i##ue at han1 i# i1enti&*ing h%w the* can 1%
#%!
+! Sta(eh%1er gr%up# are gr%up# that have #%$e cai$ %n a c%$pan*! '%r e=a$pe4
#t%c(h%1er# pr%vi1e a c%$pan* with capita4 an1 the* e=pect an appr%priate
return %n their inve#t$ent in e=changeL e$p%*ee# pr%vi1e a c%$pan* with their
173
a;%r an1 #(i#4 an1 the* e=pect c%$$en#urate inc%$e an1 B%; #ati#&acti%n in
returnL cu#t%$er# pr%vi1e a c%$pan* with it# revenue#4 an1 the* e=pect vaue &%r
their $%ne*L an1 #% %n!
2! The c%rp%rate $i##i%n #tate$ent i# a (e* in1icat%r %& h%w an %rgani0ati%n view# the
cai$# %& it# #ta(eh%1er#! The $i##i%n #tate$ent 1e&ine# the ;u#ine## %& the
%rgani0ati%n an1 #tate# ;a#ic g%a# an1 gui1ing phi%#%phie#! It# purp%#e i# t%
e#ta;i#h the %rgani0ati%na c%nte=t within which #trategie# are &%r$uate1!
C 4isi!n and Maj!r G!a's
14 An %rgani0ati%nA# vi#i%n an1 $aB%r g%a# #pe %ut &%r$a* what the %rgani0ati%n i#
tr*ing t% achieveL the* give 1irecti%n t% the c%rp%rate $i##i%n #tate$ent an1 hep
gui1e the &%r$uati%n %& #trateg*!
24 The vi#i%n %& an %rgani0ati%n can %&ten ;e viewe1 a# an articuati%n %& it# #trategic
intent!
34 "e*%n1 articuating their vi#i%n4 $an* c%$panie# a#% #tate %ther $aB%r g%a# in their
$i##i%n #tate$ent! The#e g%a# %&ten articuate with $%re preci#i%n h%w a
c%$pan* inten1# t% g% a;%ut attaining it# #trategic intent!
44 '%r $an* c%$panie#4 $a=i$i0ing #t%c(h%1er weath i# an %verri1ing c%rp%rate g%a
t%war1 which a %ther# are %riente1! St%c(h%1er# are the ega %wner# %& the
c%$pan*4 an14 in the%r* at ea#t4 the c%$pan* #h%u1 tr* t% #ati#&* the cai$# %&
it# %wner#!
54 The ;e#t wa* &%r the c%$pan* t% $a=i$i0e #t%c(h%1er weath i# t% pur#ue
#trategie# 1e#igne1 t% $a=i$i0e return %n inve#t$ent CROID! H%wever4
%ver0ea%u# pre%ccupati%n with ROI can $i#1irect $anageria attenti%n an1 re#ut
in #%$e %& the w%r#t practice# %& $anage$ent! In the 1rive t% $a=i$i0e #h%rt-run
ROI4 e=pen1iture# Bu1ge1 t% ;e n%ne##entia in the #h%rt run C#uch a# re#earch
an1 1eve%p$ent e=pen1iture#4 $ar(eting e=pen1iture#4 an1 new capita
inve#t$ent#D $a* ;e cut4 Be%par1i0ing the c%$pan*A# %ng-ter$ &uture!
174
+ C!rp!rate 7hi'!s!phy
1! The thir1 c%$p%nent %& the $i##i%n #tate$ent4 c%rp%rate phi%#%ph*4 re&ect# the
;a#ic ;eie&#4 vaue #*#te$#4 a#pirati%n#4 an1 phi%#%phica pri%ritie# that #trategic
1eci#i%n $a(er# are c%$$itte1 t%!
+! Man* c%$panie# e#ta;i#h a phi%#%phica cree1 t% e$pha#i0e their %wn
1i#tinctive %ut%%( %n ;u#ine##! Thi# cree1 &%r$# the ;a#i# &%r 1eve%ping the
c%$pan*A# c%rp%rate cuture!
E C!rp!rate Sta/eh!'ders
14 Sta(eh%1er# are in1ivi1ua# %r gr%up# that have #%$e cai$ %n the &ir$! The*
incu1e interna #ta(eh%1er#4 #uch a# e$p%*ee #t%c(h%1er# an1 e=ecutive %&&icer#4
a%ng with e=terna #ta(eh%1er#4 #uch a# cu#t%$er#4 #uppier#4 g%vern$ent#4 uni%n#4
c%$petit%r#4 %ca c%$$unitie#4 an1 the genera pu;ic!
24 A #ta(eh%1er# have Bu#ti&ia;e rea#%n t% e=pect that the c%$pan* wi tr* t% #ati#&*
their 1e$an1#! '%r e=a$pe4 #t%c(h%1er# pr%vi1e a c%$pan* with capita an1
e=pect an appr%priate return %n their inve#t$ent in e=changeL e$p%*ee# pr%vi1e a
c%$pan* with their a;%r an1 #(i# an1 e=pect c%$$en#urate inc%$e an1 B%;
#ati#&acti%n in returnL cu#t%$er# pr%vi1e a c%$pan* with it# revenue# an1 e=pect
vaue &%r their $%ne*L an1 #% %n!
34 The c%$pan* ha# t% ta(e #ta(eh%1er cai$# int% acc%unt when &%r$uating it#
#trategie#! I& it 1%e# n%t4 #ta(eh%1er# $a* with1raw their #upp%rt &r%$ the &ir$! '%r
e=a$pe4 #t%c(h%1er# $a* #e their #hare#4 e$p%*ee# eave their B%;#4 cu#t%$er#
;u* e#ewhere4 an1 #uppier# #ee( $%re 1epen1a;e ;u*er#4 an1 #% %n!
44 "* c%$$itting it#e& t% #ati#&*ing the cai$# %& (e* #ta(eh%1er gr%up# in it# $i##i%n
#tate$ent4 the c%$pan* i# #en1ing a $e##age t% th%#e gr%up# that it# #trategie# wi
;e &%r$uate1 with their cai$# in $in1!
54 H%wever4 the cai$# %& 1i&&erent #ta(eh%1er gr%up# $a* c%n&ict C&%r in#tance4 uni%n
cai$# &%r higher wage# $a* c%n&ict with c%n#u$er 1e$an1# &%r rea#%na;e
price#D4an1 in practice4 &ew %rgani0ati%n# have the re#%urce# t% $anage a #ta(e-
h%1er#! Hence the c%$pan* %&ten ha# t% 1eci1e which cai$# t% #ati#&* &ir#t!
175
64 Thi# can ;e 1%ne via a #ta(eh%1er i$pact ana*#i#4 which inv%ve#
a! I1enti&*ing (e* #ta(eh%1er#!
;! I1enti&*ing their intere#t# an1 c%ncern#!
c! I1enti&*ing what cai$# the* are i(e* t% $a(e %n the %rgani0ati%n!
1! I1enti&*ing the $%#t i$p%rtant #ta(eh%1er# &%r the %rgani0ati%n!
e! I1enti&*ing the re#utant #trategic chaenge#!
& C!rp!rate G!vernance and Strategy
14 "ecau#e %& the uni)ue p%#iti%n %& #t%c(h%1er# a# the %wner# %& the c%$pan*4
#ati#&*ing #t%c(h%1er cai$# t*pica* receive# the greate#t attenti%n in $an* c%rp%rate
$i##i%n #tate$ent#!
24 Thi# #ugge#t# that $anager# #h%u1 pur#ue #trategie# that are in the ;e#t intere#t# %&
the c%$pan*A# #t%c(h%1er#Nthat i#4 th%#e that $a=i$i0e the long$run pr%&ita;iit* %&
the c%$pan*! H%wever4 $anage$ent #%$eti$e# &ai# t% 1% #%!
34 S%$e argue that $anager# are $%tivate1 ;* 1e#ire &%r #tatu#4 p%wer4 B%; #ecurit*4
inc%$e4 an1 the i(e! "* virtue %& their p%#iti%n within the c%$pan*4 certain $anager#4
#uch a# the CEO4 are a;e t% u#e their auth%rit* an1 c%ntr% %ver c%rp%rate &un1# t%
#ati#&* #uch 1e#ire#! '%r e=a$pe4 CEO# $ight u#e their p%#iti%n t% inve#t c%rp%rate
&un1# in vari%u# per(# that enhance their %wn #tatu#N#uch a# e=ecutive Bet#4 avi#h
%&&ice#4 an1 e=pen#e-pai1 trip# t% HawaiiNrather than inve#t th%#e &un1# in wa*#
that increa#e #t%c(h%1er weath! Ec%n%$i#t# have ter$e1 #uch ;ehavi%r !n:the:j!b
c%n#u$pti%n!
44 In a11iti%n t% %n-the-B%;-c%n#u$pti%n4 it i# p%##i;e that CEO#4 a%ng with %ther
#eni%r $anager#4 $ight #ati#&* their 1e#ire &%r greater inc%$e ;* awar1ing the$
#eve# e=ce##ive pa* increa#e#! Man* critic# %& A$erican in1u#tr* cai$ that thi# ha#
n%w ;ec%$e an en1e$ic pr%;e$ a$%ng U!S! c%$panie#!
54 A &urther pr%;e$ i# that in an atte$pt t% #ati#&* their 1e#ire &%r #tatu#4 #ecurit*4
p%wer4 an1 inc%$e4 the CEO# $ight gr%w the c%$pan* thr%ugh 1iver#i&icati%n!
Ghie thi# $a* 1% itte t% enhance the pr%&ita;iit* %& the c%$pan*4 an1 thu#
#t%c(h%1er weath4 it 1%e# increa#e the #i0e %& the e$pire un1er the c%ntr% %& the
176
CEO4 an1 ;* e=ten#i%n4 hi# %r her #tatu#4 p%wer4 #ecurit*4 an1 inc%$e Cthere i# a
#tr%ng reati%n#hip ;etween c%$pan* #i0e an1 CEO pa*D! Thu#4 in#tea1 %& $a=i$i0ing
#t%c(h%1er weath4 #%$e #eni%r $anager# are th%ught t% tra1e %ng-run pr%&it
a;iit* &%r greater gr%wth thr%ugh 1iver#i&icati%n!
:! The e=tent t% which $anage$ent can pur#ue #trategie# inc%n#i#tent with $a=i$i0ing
#t%c(h%1er weath i# i$ite1 ;* &%ur g%vernance $echani#$#/ #t%c(h%1er $eeting#4
the ;%ar1 %& 1irect%r#4 #t%c( c%$pen#ati%n #che$e#4 an1 the ta(e%ver $ar(et!
E4 St!c/h!'der $eetings In the%r*4 #t%c(h%1er# can ta;e re#%uti%n# at annua
genera $eeting#4 an1 the#e re#%uti%n#4 i& the* receive a $aB%rit* %& #t%c(h%1er
v%te#4 can #hape $anage$ent p%ic*4 i$it the #trategie# $anage$ent can
pur#ue4 an1 re$%ve %r app%int (e* per#%nne!
F In practice4 unti recent* #t%c(h%1er $eeting# &uncti%ne1 a# itte $%re than ru;;er
#ta$p# &%r $anage$ent re#%uti%n#! St%c(h%1er# $u#t &inance their %wn chaenge#
an14 in $an* ca#e#4 $eet #ti&& reguati%n# i$iting the nu$;er %& pr%=* v%te# the* can
#%icit! Thu#4 it wa# n%r$a* c%n#i1ere1 t%% e=pen#ive an1 1i&&icut t% ;e w%rth ta;ing
re#%uti%n# critica %& $anage$ent! Rather it wa# un1er#t%%1 that #t%c(h%1er# c%u1
;e#t #h%w 1i##ati#&acti%n with a c%$pan* ;* #eing their #hare#!
8! The recent e$ergence %& p%wer&u in#tituti%na inve#t%r# a# $aB%r #t%c(h%1er# $a* ;e
changing the #ituati%n! The #igni&icance %& the gr%wing c%ncentrati%n %& #t%c( in
in#tituti%na han1# i# that in#tituti%n# can n% %nger #e their #hare# with%ut pu#hing
1%wn the price an1 ta(ing a %## %n the tran#acti%n!
19! Thi# ac( %& r%%$ t% #e i# increa#ing* putting pre##ure %n in#tituti%n# t% #h%w their
1i##ati#&acti%n with $anage$ent ;* v%ting pr%=ie# $%re aggre##ive*! A# a re#ut4
there i# evi1ence that in#tituti%n# are ;eginning t% ;an1 t%gether an1 put pre##ure
%n $anage$ent tea$# that are perceive1 a# ;eing inc%$petent %r pur#uing #trategie#
inc%n#i#tent with $a=i$i0ing %ng-run return#!
11! The b!ard !% direct!rs In the%r*4 the ;%ar1 %& 1irect%r# i# the guar1ian %& #t%c(-
h%1er intere#t# in the &ir$! Thi# i# ;ecau#e
177
a! "%ar1 $e$;er# are 1irect* eecte1 ;* #t%c(h%1er#!
;! The ;%ar1 can ;e he1 ega* acc%unta;e &%r the acti%n# %& the &ir$!
c4 The ;%ar1 i# p%#iti%ne1 at the ape= %& 1eci#i%n $a(ing within the &ir$ an1 i#
we pace1 t% $%nit%r c%rp%rate #trategie#!
&4 The ;%ar1 ha# the auth%rit* t% hire4 &ire4 an1 c%$pen#ate c%$pan*
e$p%*ee#4 incu1ing the CEO!
1+! In practice4 ;%ar1 $e$;er# are %&ten the n%$inee# %& the CEO an1@%r
are &u-ti$e e$p%*ee# %& the &ir$! C%n#e)uent*4 their intere#t# are $%re
c%#e* aigne1 with th%#e %& $anage$ent than with th%#e %& #t%c(h%1er#! In
#h%rt4 the ;%ar1 $a* ;e 1%$inate1 ;* $anage$ent an1 $a* #erve a# a
ru;;er #ta$p &%r $anage$ent 1eci#i%n!
134 H%wever4 there are #ign# that $an* c%rp%rate ;%ar1# are $%ving awa* &r%$
$ere* ru;;er-#ta$ping t%p-$anage$ent 1eci#i%n# an1 are ;eginning t% pa* a
$uch $%re active g%vernance r%e! The cata*#t ha# ;een an increa#e in the
nu$;er %& aw#uit# &ie1 ;* #t%c(h%1er# again#t ;%ar1 $e$;er#!
144 Spurre1 ;* the threat %& ega acti%n4 an increa#ing nu$;er %& ;%ar1# have #tarte1
t% a##ert their in1epen1ence &r%$ c%$pan* $anage$ent in genera an1 &r%$
c%rp%rate CEO# in particuar
154 St!c/ c!$pensati!n p'ans Man* c%$panie# have intr%1uce1 #t%c(-;a#e1 c%$pen-
#ati%n pan# &%r their #eni%r e=ecutive#! The#e pan# are 1e#igne1 t% aign the intere#t#
%& $anager# with th%#e %& #t%c(h%1er#! Un1er the$4 e=ecutive# receive a $aB%r
pr%p%rti%n %& their inc%$e &r%$ #t%c(h%1ing# in the c%$pan*! Thu# it i# in the
intere#t %& #uch e=ecutive# t% pr%$%te #trategie# that $a=i$i0e #t%c(h%1er weath
#ince the#e #trategie# $a=i$i0e their %wn weath t%%!
164 Critic# charge that #uch pan# 1% n%t awa*# have the 1e#ire1 e&&ect! '%r e=a$pe4
when #t%c( price# are &aing ;ecau#e %& &act%r# %ut#i1e the &ir$A# c%ntr%4 a# %ccur# in
a rece##i%n4 e=ecutive# $a* #ee the vaue %& their h%1ing# 1ecine rapi1*! In #uch
circu$#tance#4 #t%c( c%$pen#ati%n pan# give e=ecutive# itte incentive t% aign their
178
g%a# with th%#e %& #t%c(h%1er# in genera!
174 The ta/e!ver c!nstraint and c!rp!rate raiders I& the ;%ar1 %& 1irect%r# %r #t%c(
c%$pen#ati%n pan# &ai# t% per#ua1e $anage$ent t% a1%pt #trategie# c%n#i#tent with
$a=i$i0ing #t%c(h%1er weath4 #t%c(h%1er# awa*# have a a#t re#%rt/ the* can #e
their #t%c(! I& a c%$pan*A# #t%c( price &a# &ar en%ugh4 the c%$pan* can ;e purcha#e1
;* an%ther %rgani0ati%n &%r e## than the ;%%( vaue %& the ac)uire1 c%$pan*A# a##et#!
Thi# $a(e# the c%$pan* an attractive ta(e%ver target!
214 The ri#( %& ;eing ;%ught %ut i# (n%wn a# the ta(e%ver c%n#traint! The ta(e%ver
c%n#traint i$p%#e# a i$it %n the 1egree t% which $anager# can pur#ue #trategie#
inc%n#i#tent with $a=i$i0ing #t%c(h%1er weath! I& $anager# ign%re #t%c(h%1er
intere#t#4 then uti$ate* the c%$pan* wi ;e purcha#e1 ;* an%ther c%$pan*4 an1
the* wi %#e their in1epen1ence an1 pr%;a;* their B%;#!
224 Leveraged b"y!"ts The -"O i# a #pecia (in1 %& ta(e%ver! Gherea# in a
t*pica ta(e%ver a rai1er ;u*# en%ugh #t%c( t% gain c%ntr% %& a c%$pan*4 in
an -"O a c%$pan*A# %wn e=ecutive# are %&ten C;ut n%t awa*#D a$%ng the
;u*er#! The gr%up un1erta(ing an -"O t*pica* rai#e# ca#h ;* i##uing ;%n1#
an1 then u#e# that ca#h t% ;u* the c%$pan*A# #t%c(! Thu# -"O# inv%ve a
#wap %& e)uit* &%r 1e;t!
G Strategy and Ethics
14 The purp%#e %& ;u#ine## ethic# i# t% give pe%pe the t%%# &%r 1eaing with
$%ra c%$pe=it*4 &%r i1enti&*ing an1 thin(ing thr%ugh the $%ra i$picati%n# %&
#trategic 1eci#i%n#!
24 The ta#( %& ;u#ine## ethic#4 there&%re4 i# t% $a(e tw% centra p%int#/ that
;u#ine## 1eci#i%n# 1% have an ethica c%$p%nent an1 that $anager# $u#t
weigh the ethica i$picati%n# %& #trategic 1eci#i%n# ;e&%re ch%%#ing a c%ur#e %&
acti%n!
34 T% $a(e $anager# #ee that #trategic 1eci#i%n# have an ethica 1i$en#i%n4 it i#
nece##ar* t% e#ta;i#h a ci$ate within the %rgani0ati%n that #tre##e# the i$p%rtance
%& ethic#! Thi# re)uire# at ea#t three #tep#/
179
a4 'ir#t4 t%p $anager# nee1 t% u#e their ea1er#hip p%#iti%n t% inc%rp%rate an
ethica 1i$en#i%n int% the vaue# that the* #tre##!
b4 Sec%n14 ethica vaue# have t% ;e inc%rp%rate1 int% the $i##i%n #tate$ent
%& the %rgani0ati%n!
c4 Thir14 ethica vaue# $u#t ;e acte1 %n4 n%t $ere* given ip #ervice! Thi#
re)uire# t%p $anager# t% i$pe$ent hiring4 &iring4 an1 incentive #*#te$#
that e=picit* rec%gni0e the i$p%rtance %& a1hering t% ethica vaue# in
#trategic 1eci#i%n $a(ing!
44 Manager# a#% nee1 t% ;e a;e t% thin( thr%ugh the ethica i$picati%n# %&
#trategic 1eci#i%n# in a #*#te$atic $anner! Thi# inv%ve# &%ur $ain #tep#/
a! Step 1 i# t% evauate a pr%p%#e1 #trategic 1eci#i%n &r%$ an ethica #tan1p%int
i1enti&*ing which #ta(eh%1er# are a&&ecte1 ;* a 1eci#i%n an1 h%w it a&&ect# the$!
It i# nece##ar* t% 1eter$ine i& the rights %& an* #ta(eh%1er# are vi%ate1 ;* the
pr%p%#e1 1eci#i%n! Right# re&er t% the &un1a$enta entite$ent# %& a
#ta(eh%1er!
;! Step + inv%ve# $a(ing a Bu1g$ent a;%ut the ethica nature %& the
pr%p%#e1 #trategic 1eci#i%n4 given the in&%r$ati%n gaine1 a# a re#ut %& #tep 1!
The Bu1g$ent at thi# #tage #h%u1 ;e gui1e1 ;* vari%u# moral principles that
#h%u1 n%t ;e vi%ate1!
c! Step 2 re)uire# the c%$pan* t% e#ta;i#h $%ra intent! Thi# $ean# re#%ving
t% pace $%ra c%ncern# ahea1 %& %ther c%ncern# in th%#e ca#e# where the
right# %& #ta(eh%1er# an1@%r (e* $%ra principe# have ;een vi%ate1!
1! Step 5 re)uire# the c%$pan* t% engage in ethica ;ehavi%r!
54 C!rp!rate s!cia' resp!nsibi'ity i# a c%ncept ;a#e1 %n the argu$ent that
when c%$panie# evauate 1eci#i%n# &r%$ an ethica per#pective4 there #h%u1
;e a pre#u$pti%n in &av%r %& a1%pting c%ur#e# %& acti%n that enhance the we&are
%& #%ciet* at arge! The c%ncept %& c%rp%rate #%cia re#p%n#i;iit* #ugge#t# that
180
c%$panie# #h%u1 ;ui1 certain #%cia criteria %r g%a# int% their #trategic 1eci#i%n
$a(ing!
64 S%cia re#p%n#i;iit* can ;e #upp%rte1 &%r it# %wn #a(e #i$p* ;ecau#e it i# the
n%;e4 %r right4 wa* &%r a c%$pan* t% ;ehave!
74 -e## pure ;ut perhap# $%re practica are argu$ent# that #%cia* re#p%n#i;e
;ehavi%r i# in a c%$pan*A# #e&-intere#t! Since ec%n%$ic acti%n# have #%cia
c%n#e)uence# a&&ecting a c%$pan*A# %ut#i1e cai$ant#4 i& a c%$pan* want# t%
retain the #upp%rt %& the cai$ant#4 it $u#t ta(e th%#e #%cia c%n#e)uence# int%
acc%unt when &%r$uating #trategie#! Otherwi#e it $a* generate i wi an1
%pp%#iti%n!
84 H%wever4 there are th%#e wh% argue that a c%$pan* ha# n% ;u#ine## pur#uing
#%cia g%a#! N%;e aureate Mit%n 'rie1$an4 &%r %ne4 in#i#t# that c%ncept# %& #%cia
re#p%n#i;iit* #h%u1 n%t enter the c%rp%rate #trategic 1eci#i%n pr%ce##! 'rie1$anA#
p%#iti%n i# that a ;u#ine## ha# %n* %ne (in1 %& #%cia re#p%n#i;iit*/ t% u#e it#
re#%urce# &%r activitie# that increa#e it# pr%&it#4 so long as it stays within the
rules of the game, which i# t% #a*4 #% %ng a# it engage# in %pen an1 &ree
c%$petiti%n with%ut 1ecepti%n %r &rau1!
94 %n c%ntra#t4 E1war1 H! "%w$an ha# argue1 that #%cia re#p%n#i;iit* i# actua*
a #%un1 inve#t$ent #trateg*! He $aintain# that a c%$pan*A# #%cia ;ehavi%r a&&ect#
the price %& it# #t%c(! In %ther w%r1#4 #%cia* re#p%n#i;e p%ic* can a#%
;ene&it a c%$pan*A# i$p%rtant in#i1e cai$ant#4 the #t%c(h%1er#! Acc%r1ing t%
"%w$an4 $an* inve#t%r# view c%$panie# that are n%t #%cia* re#p%n#i;e a#
ri#(ier inve#t$ent#! M%re%ver4 $an* in#tituti%na inve#t%r#4 #uch a# churche#4
univer#itie#4 citie#4 #tate#4 an1 $utua &un1#4 pa* attenti%n t% c%rp%rate #%cia
;ehavi%r an1 thu# in&uence the $ar(et &%r a c%$pan*A# #t%c(!
S"$$ary
1! The cau#e# %& per#i#tent* p%%r c%$pan* per&%r$ance incu1e p%%r
$anage$ent4 a high c%#t #tructure4 ina1e)uate 1i&&erentiati%n4 e=ten#ive
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1iver#i&icati%n4 #tructura #hi&t# in 1e$an14 the e$ergence %& p%wer &u new
c%$petit%r#4 an1 %rgani0ati%n inertia!
+! In#tituting a #ucce##&u turnar%un1 #trateg* re)uire# new ea1er#hip4 a change
%& #trateg*4 an1 a change in %rgani0ati%n!
2! Sta(eh%1er# are in1ivi1ua# %r gr%up# that have intere#t4 cai$4 %r #ta(e in the
c%$pan*4 in what it 1%e#4 an1 in h%w we it per&%r$#!
5! Sta(eh%1er# are in an e=change reati%n#hip with the c%$pan*! The* #upp* the
%rgani0ati%n with i$p%rtant re#%urce# C%r c%ntri;uti%n#D an1 in e=change it
e=pect it# intere#t# t% ;e #ati#&ie1 C;* in1uce$ent#D!
6! A c%$pan* cann%t awa*# #ati#&* the #ta(eh%1er#! The g%a# %& 1i&&erent gr%up
c%n&ict! The c%$pan* $u#t i1enti&* the $%#t i$p%rtant #ta(eh%1er# an1 give
highe#t pri%rit* t% pur#uing #trategie# that #ati#&* their nee1#!
:! A c%$pan*A# #t%c(h%1er# are it# ega %wner# an1 the pr%vi1er# %& ri#( capita4 a
$aB%r #%urce %& the capita re#%urce# that a%w a c%$pan* t% %perate it#
;u#ine##! A# #uch4 the* have a uni)ue r%e a$%ng #ta(eh%1er gr%up#!
E! Ma=i$i0ing %ng-run ROIC i# the r%ute t% $a=i$i0ing return# t% #t%c(h%1er#4
an1 it i# a#% c%n#i#tent with #ati#&*ing the cai$# %& #evera %ther (e* #ta(e
h%1er gr%up#!
F! Ath%ugh $a=i$i0ing %ng-run ROIC i# the ;e#t wa* t% #ati#&* the cai$# %&
#evera (e* #ta(eh%1er gr%up#4 a c%$pan* ha# the %;igati%n t% 1% #% within the
i$it# it# #et ;* the aw! an1 in a $anner c%n#i#tent with #%cieta e=pectati%n#!
8! An agenc* reati%n#hip i# he1 t% ari#e whenever %ne part* 1eegate# 1eci#i%n-
$a(ing auth%rit* %r c%ntr% %ver re#%urce# t% an%ther!
19! The e##ence %& the agenc* pr%;e$ i# that the intere#t# %& principa# an1 agent#
182
are n%t awa*# the #a$e4 an1 #%$e agent# $a* ta(e a1vantage %& in&%r$ati%n
a#*$$etrie# t% $a=i$i0e their %wn intere#t# at the e=pen#e %& principa#!
11! A nu$;er %& g%vernance $echani#$# #erve t% i$it the agenc* pr%;e$! The#e
incu1e the ;%ar1 %r 1irect%r#4 #t%c(-;a#e1 c%$pen#ati%n #che$e#4 an1 the
threat %& a ta(e%ver!
1+!Man* #trategic 1eci#i%n# have an ethica 1i$en#i%n! An* acti%n ;* a c%$pan*
inevita;* ha# an i$pact %n the we&are %& it# #ta(eh%1er#!
12! The purp%#e %& ;u#ine## ethic# i# n%t #% $uch t% teach the 1i&&erence ;etween
right an1 wr%ng4 ;ut t% give pe%pe the t%%# &%r 1eaing with $%ra c%$pe=it*
&%r i1enti&*ing an1 thin(ing thr%ugh the $%ra i$picati%n# %& #trategic 1eci#i%n#!
183
Chapter .0
IM7LEMENTING STRATEG9 IN COM7ANIES T6AT COM7ETE IN A SINGLE IN+;STR9
INTRO+;CTION
A# the #t%r* %& De #ugge#t#4 thi# chapter e=a$ine# h%w $anager# can ;e#t
i$pe$ent their #trategie# t% achieve a c%$petitive a1vantage an1 #uperi%r per&%r$ance!
A th%ught-%ut ;u#ine## $%1e ;ec%$e# pr%&ita;e t% pur#ue %n* i& it can ;e i$pe$ente1
#ucce##&u*! In practice4 #trateg* i$pe$entati%n i# a 1i&&icut an1 chaenging ta#( an1 a
never-en1ing ta#(! Manager# cann%t Bu#t create an %rgani0ing &ra$e &%r a c%$pan*A#
vaue chain activitie# an1 then a##u$e it wi (eep w%r(ing e&&icient* an1 e&&ective*4 Bu#t
a# the* cann%t #eect #trategie# an1 a##u$e that the#e #trategie# w%r( a# inten1e1 in the
&uture when the envir%n$ent i# changing!
'ir#t4 the $ain ee$ent# %& #trateg* i$pe$entati%n an1 the wa* the* t%gether t%
create an %rgani0ing &ra$ew%r( &%r a c%$pan*A# pe%pe an1 activitie# c%n#i1ere1!
Sec%n14 each %& the#e ee$ent#-#tructure4 c%ntr% #*#te$#4 an1 cuture-i# ana*0e1 in
1etai! Thir14 the wa* #trategic $anager# can u#e #tructure4 c%ntr%4 an1 cuture at the
&uncti%na eve t% pur#ue &uncti%na-eve #trategie# that create an1 ;ui1 1i#tinctive
c%$petencie# i# e=a$ine1! The ana*#i# then g%e# t% the in1u#tr* eve an1 the $an*
1i&&erent i##ue# &acing $anager# in i$pe$enting #trateg* t% gain a c%$petitive
a1vantage in a #inge in1u#tr* are a11re##e1!
Then ne=t chapter ta(e# up where thi# %ne eave# %&& an1 e=a$ine# #trateg*
i$pe$entati%n acr%## in1u#trie# an1 acr%## c%untrie#Nthat i#4 i$pe$enting c%rp%rate
an1 g%;a #trateg*!
Learning Objective
A&ter rea1ing thi# chapter4 an1 the ne=t *%u wi un1er#tan1/
1! The 1*na$ic# %& #trateg* i$pe$entati%n
184
+! Gh* the &%rtune# %& a c%$pan* %&ten re#t %n it# $anager#A a;iitie# t% 1e#ign an1
$anage it# #tructure4 c%ntr% #*#te$#4 an1 cuture4

O"t'ine
A I$p'e$enting Strategy thr!"gh Organi(ati!na' Str"ct"re- C!ntr!'- and C"'t"re

Strateg* i$pe$entati%n re&er# t% h%w a c%$pan* #h%u1 create4 u#e4 an1 c%$;ine
%rgani0ati%na #tructure4 c%ntr% #*#te$#4 an1 cuture t% pur#ue #trategie# that ea1 t% a
c%$petitive a1vantage an1 #uperi%r per&%r$ance! Organi(ati!na' str"ct"re a##ign#
e$p%*ee# t% #peci&ic vaue creati%n ta#(# an1 r%e# an1 #peci&ie# h%w ta#(# an1 r%e#
are t% ;e in(e1 t%gether in a wa* that increa#e# e&&icienc*4 )uait* inn%vati%n4 an1
re#p%n#ivene## t% cu#t%$er#-the ;ui1ing ;%c(# %& c%$petitive a1vantage! The purp%#e
%& %rgani0ati%na #tructure i# t% c%%r1inate an1 integrate e&&%rt# %& e$p%*ee# at a eve#
Nc%rp%rate4 ;u#ine##4 an1 &uncti%naNan1 acr%## a c%$pan*A# &uncti%n# an1 ;u#ine##
unit# #% that the* w%r( t%gether in the wa* that wi a%w it t% achieve the #peci&ic #et %&
#trategie# in it# ;u#ine## $%1e!
Organi0ati%na #tructure 1%e# n%t ;* it#e& pr%vi1e the #et %& incentive# thr%ugh which
pe%pe can ;e $%tivate1 t% $a(e it w%r(! Hence4 there i# a nee1 &%r c%ntr% #*#te$#! The
purp%#e %& a c!ntr!' syste$ i# t% pr%vi1e $anager# with/
1! A #et %& incentive# t% $%tivate e$p%*ee# t% w%r( t%war1 increa#ing e&&icienc*4
)uait* an1 inn%vati%n4 an1 re#p%n#ivene## t% cu#t%$er#
+! Speci&ic &ee1;ac( %n h%w we an %rgani0ati%n an1 it# $e$;er# are per&%r$ing
an1 ;ui1ing c%$petitive a1vantage #% that $anager# can c%n#tant* ta(e acti%n t%
#trengthen a c%$pan*A# ;u#ine## $%1e! Structure pr%vi1e# an %rgani0ati%n with a
#(eet%nL c%ntr% give# it the $u#ce#4 #inew#4 nerve#4 an1 #en#ati%n# that a%w
$anager# t% reguate an1 g%vern it# activitie#!
Organi0ati%na cuture4 the thir1 ee$ent %& #trateg* i$pe$entati%n4 i# #peci&ic
c%ecti%n %& vaue#4 n%r$#4 ;eie&#4 an1 attitu1e# #hare1 ;* pe%pe an1 a gr%up in an
%rgani0ati%n an1 that c%ntr% the wa* the* interact with each %therL #ta(eh%1er# %ut#i1e
the %rgani0ati%n!
185
) )"i'ding )'!c/s !% Organi(ati!na' Str"ct"re

A&ter &%r$uating a c%$pan*A# ;u#ine## $%1e an1 #trategie#4 $anager# $u#t
$a(e 1e#igning %rgani0ati%na #tructure it# ne=t pri%rit*! The vaue creati%n activitie# %&
%rgani0ati%na $e$;er# are $eaninge## une## #%$e t*pe %& #tructure i# u#e1 t% a##ign
the$ t% ta#(# an1 c%nnect the activitie# %& 1i&&erent pe%pe an1 &uncti%n#! Three ;a#ic
ch%ice# are inv%ve1 when $anager# 1e#ign an %rgani0ati%nA# #tructure/
1! H%w ;e#t t% gr%up ta#(# int% &uncti%n# an1 gr%up &uncti%n# int% ;u#ine## unit#
%r 1ivi#i%n# t% create 1i#tinctive c%$petencie# an1 pur#ue a particuar #trateg*
+! H%w t% a%cate auth%rit* an1 re#p%n#i;iit* t% the#e &uncti%n# an1 1ivi#i%n#
2! H%w t% increa#e the eve %& c%%r1inati%n %r integrati%n ;etween &uncti%n# an1
1ivi#i%n# a# a #tructure ev%ve# an1 ;ec%$e# $%re c%$pe=
. Gr!"ping Tas/s- &"ncti!ns- and +ivisi!ns
"ecau#e4 t% a arge 1egree4 an %rgani0ati%nA# ta#(# are a &uncti%n %& it# #trateg*4
theL 1%$inant view i# that c%$panie# ch%%#e a &%r$ %& #tructure t% $atch their
%rgani0ati%na #trateg*! In genera4 thi# $ean# that $%#t c%$panie# &ir#t gr%up pe%pe
an1 ta#(# int% &uncti%n#4 an1 &uncti%n# int% 1ivi#i%n#!
A &uncti%n i# a c%ecti%n %& pe%pe wh% w%r( t%gether an1 per&%r$ the t*pe# %&
ta#(# %r h%1 #i$iar p%#iti%n# in an %rgani0ati%n! '%r e=a$pe4 the #ae pe%pe in a car
1eaer#hip ;e%ng t% the #ae# &uncti%n! T%gether4 car #ae#4 car repair4W car part#4 an1
acc%unting are the #et %& &uncti%n# that a%w a car 1eaer#hip t% #e an1 $aintain car#!
A# %rgani0ati%n# gr%w an1 pr%1uce a wi1er range %& pr%1uct#4 the a$%untL
c%$pe=it* %& the han1%&&# %r tran#&er# ;etween pe%pe4 &uncti%n#4 an1 #u;unit#
nece##ar* t% create a pr%1uct an1 1eiver it t% the cu#t%$er increa#e!
T%p $anager# can ch%%#e &r%$ a$%ng $an* (in1# %& #tructure t% gr%up their
activitie#4 with the ch%ice $a1e %n the ;a#i# %& it# a;iit* t% ;e#t $eet the nee1# %& their
186
#trategie#!
0 A''!cating A"th!rity and Resp!nsibi'ity
A# %rgani0ati%n# gr%w an1 pr%1uce a wi1er range %& g%%1# an1 #ervice#4 the #i0e
an1 nu$;er %& their &uncti%n# an1 1ivi#i%n# increa#e! The nu$;er %& han1%&&# %r tran#&er#
;etween e$p%*ee# a#% increa#e#4 an1 t% ec%n%$i0e %n tran#acti%n e&&ective*
c%%r1inate the activitie# %& pe%pe4 &uncti%n#4 an1 1ivi#i%n#4 $u#t 1eve%p a cear an1
una$;igu%u# hierarchy !% a"th!rity/ an %rgani0ati%n chain %& c%$$an1Nthe reative
auth%rit* that each $anager ha#Ne=ten1ing &r%$ the CEO at the t%p 1%wn thr%ugh the
$i11e $anager# an1 &ir#t-ine $anager#4 t% the n%n-$anageria e$p%*ee# wh% actua*
$a(e g%%1# %r pr%vi1e #ervice#! Manager4 at ever* eve %& the hierarch*4 #upervi#e# %ne
%r $%re #u;%r1inate#! The ter$ span !% c!ntr!' re&er# t% the nu$;er %& #u;%r1inate#
wh% rep%rt 1irect* t% the $anager! Ghen $anager# (n%w e=act* what their auth%rit* an1
re#p%n#i;iit* i#4 in&%r$ati%n 1i#t%rti%n pr%;e$# are (ept t% a $ini$u$4 an1 han1%&&# an1
tran#&er# can ;e neg%tiate1 in a wa* that ec%n%$i0e %n ;ureaucratic c%#t#!
aC Ta'' and &'at Organi(ati!ns
C%$panie# ch%%#e the nu$;er %& hierarchica eve# the* nee1 %n the ;a#i# %& their
#trateg* an1 the &uncti%na ta#(# nece##ar* t% achieve it!
i! A ta'' %rgani0ati%n ha# $an* eve# %& auth%rit* reative t% c%$pan*
#i0eL
ii! A %'at %rgani0ati%n ha# &ewer eve# reative t% c%$pan* #i0e!
A# a hierarch* ;ec%$e# taer4 pr%;e$# that $a(e the %rgani0ati%nA# #tructure
e## &e=i;e an1 #%w $anager#A re#p%n#e t% change# in the %rgani0ati%na envir%n$ent
$a* re#ut! It i# vita that $anager# un1er#tan1 h%w the#e pr%;e$# ari#e #% the* (n%w
h%w t% change a c%$pan*A# #tructure t% re#p%n1 t% the$!
'ir#t4 c%$$unicati%n pr%;e$# $a* ari#e! Ghen an %rgani0ati%n ha# $an* eve#
in the hierarch*4 it can ta(e a %ng ti$e &%r the 1eci#i%n# an1 %r1er# %& upper-eve
$anager# t% reach $anager# &urther 1%wn in the hierarch*4 an1 it can ta(e a %ng ti$e &%r
187
t%p $anager# t% earn h%w we their 1eci#i%n# w%r(e1 %ut! 'eeing %ut %& t%uch4 t%p
$anager# $a* want t% veri&* that %wer-eve $anager# are &%%wing %r1er# an1 $a*
re)uire written c%n&ir$ati%n &r%$ the$! Mi11e $anager#4 wh% (n%w the* wi ;e he1
#trict* acc%unta;e &%r their acti%n#4 #tart 1ev%ting $%re ti$e t% the pr%ce##4 %& $a(ing
1eci#i%n# in %r1er t% i$pr%ve their chance# %& ;eing right! The* $ight even tr* t% av%i1
re#p%n#i;iit* ;* $a(ing t%p $anager# 1eci1e what acti%n# t% ta(e!
A #ec%n1 c%$$unicati%n pr%;e$ that can re#ut i# the 1i#t%rti%n %& c%$$an1#
an1 %r1er# a# the* are tran#$itte1 up an1 1%wn the hierarch*4 which cau#e# $anager# at
1i&&erent eve# t% interpret what i# happening 1i&&erent*! Di#t%rti%n %& %r1er# an1
$e##age# can ;e acci1enta4 %ccurring ;ecau#e 1i&&erent $anager# interpret $e##age#
&r%$ their %wn narr%w &uncti%na per#pective#!
A thir1 pr%;e$ with ta hierarchie# i# that the* u#ua* in1icate that an
%rgani0ati%n i# e$p%*ing $an* $anager#4 an1 $anager# are e=pen#ive!
1 The Mini$"$ Chain !% C!$$and
The &inimum chain of command #tate# that a c%$pan* #h%u1 ch%%#e the
hierarch* with the &ewe#t eve# %& auth%rit* nece##ar* t% u#e %rgani0ati%na re#%urce#
e&&icient* an1 e&&ective*!
E&&ective $anager# c%n#tant* #crutini0e their hierarchie# t% #ee whether the
nu$;er %& eve# can ;e re1uce1-&%r e=a$pe4 ;* ei$inating %ne eve an1 giving
re#p%n#i;iitie# %& $anager# at that eve t% $anager# a;%ve an1 e$p%wering e$p%*ee#
;e%w!
Ghen c%$panie# ;ec%$e t%% ta an1 the chain %& c%$$an1 t%% %ng4 the
$anager# ten1 t% %#e c%ntr% %ver the hierarch*4 which $ean# that the* %%#e c%ntr%
%ver their #trategie#! Di#a#ter %&ten &%%w# ;ecau#e a ta %rgani0ati%na #tructure
1ecrea#e#4 rather than pr%$%te#4 $%tivati%n an1 c%%r1inati%n ;etween e$p%*ee# an1
&uncti%n# an1 ;ureaucratic c%#t# e#caate a# a re#ut!
188
2 Centra'i(ati!n !r +ecentra'i(ati!n?
Auth%rit* i# centrai0e1 when $anager# at the upper eve# %& a c%$pan*A#
hierarch* retain the auth%rit* t% $a(e the $%#t i$p%rtant 1eci#i%n#! Ghen auth%rit* i#
1ecentrai0e14 it i# 1eegate1 t% 1ivi#i%n#4 &uncti%n#4 an1 e$p%*ee# at %wer eve# in the
c%$pan*! "* 1eegating auth%rit* in thi# &a#hi%n4 $anager# can ec%n%$i0e %n
;ureaucratic c%#t# an1 av%i1 c%$$unicati%n an1 c%%r1inati%n pr%;e$# ;ecau#e
in&%r$ati%n 1%e# n%t have t% ;e c%n#tant* #ent t% the t%p %& the %rgani0ati%n &%r
1eci#i%n# t% ;e $a1e!
Integrati!n and Integrating Mechanis$s
Much c%%r1inati%n ta(e# pace ;etween pe%pe4 &uncti%n#4 an1 1ivi#i%n# thr%ugh
the hierarch* %& auth%rit*! O&ten4 h%wever4 a# a #tructure ;ec%$e# c%$pe=4 thi# i# n%t
en%ugh4 an1 t%p $anager# nee1 t% u#e vari%u# integrating $echani#$# t% increa#e
c%$$unicati%n an1 c%%r1inati%n a$%ng &uncti%n# an1 1ivi#i%n#!
There are three $eth!ds !% Integrating Mechanis$,
. +irect C!ntact
Direct c%ntact a$%ng $anager# create# a c%nte=t within which $anager# &r%$
1i&&erent &uncti%n# %r 1ivi#i%n# can w%r( t%gether t% #%ve $utua pr%;e$#!
H%wever4 #evera pr%;e$# are a##%ciate1 with e#ta;i#hing c%ntact a$%ng
$anager# in 1i&&erent &uncti%n# %r 1ivi#i%n#! Manager# &r%$ 1i&&erent &uncti%n# $a*
have 1i&&erent view# a;%ut what $u#t ;e 1%ne t% achieve %rgani0ati%na g%a#! "ut
i& the $anager# have e)ua auth%rit* Ca# &uncti%na $anager# t*pica* 1%D4 the %n*
$anager wh% can te the$ what t% 1% i# the CEO! I& &uncti%na $anager# cann%t
reach agree$ent4 n% $echani#$ e=i#t# t% re#%ve the c%n&ict apart &r%$ the
auth%rit* %& the ;%##! In &act4 %ne #ign %& a p%%r* per&%r$ing %rgani0ati%na
#tructure i# the nu$;er %& pr%;e$# #ent up the hierarch* &%r t%p $anager# t%
#%ve!
0 Liais!n R!'es
Manager# can increa#e c%%r1inati%n a$%ng &uncti%n# an1 1ivi#i%n# ;* e#ta;i#hing
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iai#%n r%e#! Ghen the v%u$e %& c%ntact# ;etween tw% &uncti%n# increa#e#4 %ne
wa* t% i$pr%ve c%%r1inati%n i# t% give %ne $anager in each &uncti%n %r 1ivi#i%n the
re#p%n#i;iit* &%r c%%r1inating with the %ther! The#e $anager# $a* $eet 1ai*4
wee(*4 $%nth*4 %r a# nee1e1 t% #%ve han1%&& i##ue# an1 tran#&er pr%;e$#! The
re#p%n#i;iit* &%r c%%r1inati%n i# part %& the iai#%nA# &u-ti$e B%;4 an1 u#ua* an
in&%r$a reati%n#hip &%r$# ;etween the pe%pe inv%ve14 great* ea#ing #train#
;etween &uncti%n#! 'urther$%re4 iai#%n r%e# pr%vi1e a wa* %& tran#$itting
in&%r$ati%n acr%## an %rgani0ati%n4 which i# i$p%rtant in arge %rgani0ati%n wh%#e
e$p%*ee# $a* (n%w n% %ne %ut#i1e their i$$e1iate &uncti%n %r 1ivi#i%n
1 Tea$s
Ghen $%re than tw% &uncti%n# %r 1ivi#i%n# #hare $an* c%$$%n pr%;e$#4 1irect
c%ntact an1 iai#%n r%e# $a* n%t pr%vi1e #u&&icient c%%r1inati%n! In the#e ca#e#4 a
$%re c%$pe= integrating $echani#$4 the tea$4 $a* ;e appr%priate! One
$anager &r%$ each reevant &uncti%n %r 1ivi#i%n i# a##igne1 t% a tea$ that nee1#
t% #%ve a #peci&ic $utua pr%;e$L $e$;er# are re#p%n#i;e &%r rep%rting I their
#u;unit# %n the i##ue# a11re##e1 an1 the #%uti%n# rec%$$en1e1! Tea$# are
increa#ing* ;eing u#e1 at a %rgani0ati%na eve#!
C Strategic C!ntr!' Syste$s
Strategic $anager# ch%%#e the %rgani0ati%na #trategie# an1 #tructure the* h%pe
wi a%w the %rgani0ati%n t% u#e it# re#%urce# $%#t e&&ective* t% pur#ue it#
;u#ine## $%1e an1 create vaue an1 pr%&it! Then the* create strategic c!ntr!'
syste$s4 t%%# that a%w the$ t% $%nit%r an1 evauate whether4 in &act4 their
#trateg* an1 #tructure are w%r(ing a# inten1e14 h%w the* c%u1 ;e i$pr%ve14 an1
h%w the* #h%u1 ;e change1 i& the* are n%t w%r(ing!
Strategic c%ntr% i# n%t Bu#t a;%ut $%nit%ring h%w we an %rgani0ati%n an1 it#
$e$;er# are per&%r$ing current* %r a;%ut h%w we the &ir$ i# u#ing it# e=i#ting
re#%urce#! T% un1er#tan1 the vita i$p%rtance %& #trategic c%ntr%4 c%n#i1er h%w it hep#
$anager# t% %;tain #uperi%r e&&icienc*4 )uait*4 inn%vati%n4 an1 re#p%n#ivene## t%
cu#t%$er#4 the &%ur ;a#ic ;ui1ing ;%c(# %& c%$petitive a1vantage/
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a C!ntr!' and e%%iciency
T% 1eter$ine h%w e&&icient* the* are u#ing %rgani0ati%na re#%urce#4 $anager#
$u#t ;e a;e t% $ea#ure accurate* h%w $an* unit# %& input# Craw $ateria#4 hu$an
re#%urce#4 an1 #% %nD are ;eing u#e1 t% pr%1uce a unit %& %utput! The* $u#t a#% ;e a;e
t% $ea#ure the nu$;er %& unit# %& %utput# Cg%%1# an1 #ervice#D the* pr%1uce! A c%ntr%
#*#te$ c%ntain# the $ea#ure# %r *ar1#tic(# that a%w $anager# t% a##e## h%w e&&icient*
the* are pr%1ucing g%%1# an1 #ervice#!
b C!ntr!' and >"a'ity!
T%1a*4 c%$petiti%n %&ten rev%ve# ar%un1 increa#ing the )uait* %& g%%1# an1
#ervice#! Strategic c%ntr% i# i$p%rtant in 1eter$ining the )uait* %& g%%1# an1 #ervice#
;ecau#e it give# $anager# &ee1;ac( %n pr%1uct )uait*! I& $anager# c%n#i#tent*
$ea#ure the nu$;er %& cu#t%$er#A c%$paint#4 the* can have a g%%1 in1icati%n %& h%w
$uch )uait* the* have ;uit int% their pr%1uct!
c C!ntr!' and inn!vati!n
Strategic c%ntr% can hep t% rai#e the eve %& inn%vati%n in an %rgani0ati%n!
Succe##&u inn%vati%n ta(e# pace when $anager# create an %rgani0ati%na #etting in
which e$p%*ee# &ee e$p%were1 t% ;e creative an1 auth%rit* i# 1ecentrai0e1 t%
e$p%*ee# #% that the* &ee &ree t% e=peri$ent an1 ta(e ri#(#! Deci1ing %n the
appr%priate c%ntr% #*#te$# t% enc%urage ri#( ta(ing i# an i$p%rtant $anage$ent
chaenge4 an %rgani0ati%nA# cuture ;ec%$e# i$p%rtant in thi# regar1!
d C!ntr!' and resp!nsiveness t! c"st!$ers
'ina*4 #trategic $anager# can hep $a(e their %rgani0ati%n# $%re re#p%n#ive t%
cu#t%$er# i& the* 1eve%p a c%ntr% #*#te$ that a%w# the$ t% evauate h%w we
e$p%*ee# with cu#t%$er c%ntact are per&%r$ing their B%;#!
De#igning Strategic c%ntr% #*#te$# are the &%r$a target-#etting4 $ea#ure$ent4
an1 &ee1;ac( #*#te$# that a%w #trategic $anager# t% evauate whether a c%$pan* i#
achieving #uperi%r e&&icienc*4 )uait*4 inn%vati%n4 an1 cu#t%$er re#p%n#ivene##
i$pe$enting it# #trateg* #ucce##&u*! An e&&ective c%ntr% #*#te$ #h%u1 have three
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characteri#tic#/
1! It #h%u1 ;e &e=i;e en%ugh t% a%w $anager# t% re#p%n1 a# nece##ar* t%
une=pecte1 event#L
+! It #h%u1 pr%vi1e accurate in&%r$ati%n4 giving a true picture %& %rgani0ati%na
per&%r$anceL
2! It #h%u1 #upp* $anager# with in&%r$ati%n in a ti$e* $anner ;ecau#e $a(ing
1eci#i%n# %n the ;a#i# %& %ut1ate1 in&%r$ati%n i# a recipe &%r &aiure!
+ Types !% C!ntr!'
. 7ers!na' C!ntr!'
Per#%na c%ntr% i# the 1e#ire t% #hape an1 in&uence the ;ehavi%r %& a per#%n in a
&ace-t%-&ace interacti%n in the pur#uit %& a c%$pan*A# g%a#! The $%#t %;vi%u# (in1 %&
per#%na c%ntr% i# 1irect #upervi#i%n &r%$ a $anager &urther up in the hierarch*! The
per#%na appr%ach i# u#e&u ;ecau#e $anager# can )ue#ti%n an1 pr%;e #u;%r1inate#
a;%ut pr%;e$# %r new i##ue# the* are &acing t% get a ;etter un1er#tan1ing %& the
#ituati%n4 a# we a# t% en#ure that #u;%r1inate# are per&%r$ing their w%r( e&&ective* an1
n%t hi1ing an* in&%r$ati%n that c%u1 cau#e pr%;e$# 1%wn the ine!
0 O"tp"t C!ntr!'
Output c%ntr% i# a #*#te$ in which #trategic $anager?# e#ti$ate %r &%reca#t
appr%priate per&%r$ance g%a# &%r each 1ivi#i%n4 1epart$ent4 an1 e$p%*ee an1 then
$ea#ure actua per&%r$ance reative t% the#e g%a#! O&ten c%$pan*A# rewar1 #*#te$ i#
in(e1 t% per&%r$ance %n the#e g%a#4 #% %utput c%ntr% a#% pr%vi1e# an incentive
#tructure &%r $%tivating e$p%*ee# at a eve# in the %rgani0ati%n!
Output c%ntr% at the &uncti%na an1 in1ivi1ua eve# i# a c%ntinuati%n %& c%ntr% at
the 1ivi#i%na eve! Divi#i%na $anager# #et g%a# &%r &uncti%na $anager# that wi a%w
the 1ivi#i%n t% achieve it# g%a#! A# at the 1ivi#i%na eve4 &uncti%na g%a# are e#ta;i#he1
t% enc%urage 1eve%p$ent %& c%$petencie# that pr%vi1e the c%$pan* with a c%$petitive
a1vantage!
1 )ehavi!r C!ntr!'
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"ehavi%r c%ntr% i# c%ntr% thr%ugh the e#ta;i#h$ent %& a c%$prehen#ive #*#te$
%& rue# an1 pr%ce1ure# t% 1irect the acti%n# %r ;ehavi%r %& 1ivi#i%n#4 &uncti%n#4 an1
in1ivi1ua#! The intenti%n %& u#ing ;ehavi%r c%ntr%# i# n%t t% #peci&* the g%a# ;ut t%
#tan1ar1i0e the wa* %& reaching the$! Rue# #tan1ar1i0e ;ehavi%r an1 $a(e %utc%$e#
pre1icta;e! I& e$p%*ee# &%%w the rue#4 then acti%n# are per&%r$e1 an1 1eci#i%n#
han1e1 the #a$e wa* ti$e an1 ti$e again! The re#ut i# pre1icta;iit* an1 accurac*4 the
ai$ %& a c%ntr% #*#te$#! The $ain (in1 %& ;ehavi%r c%ntr%# i# %perating ;u1get#4
#tan1ar1i0ati%n4 an1 rue# an1 pr%ce1ure#!
Once $anager# at each eve have ;een given a g%a t% achieve4 %perating
;u1get# that reguate h%w $anager# an1 w%r(er# are t% attain th%#e g%a# are
e#ta;i#he1! An !perating b"dget i# a ;ueprint that #tate# h%w $anager# inten1 t% u#e
%rgani0ati%na re#%urce# t% achieve %rgani0ati%na g%a# $%#t e&&icient*! M%#t c%$$%n*4
$anager# at %ne eve a%cate t% $anager# at a %wer eve a #peci&ic a$%unt %&
re#%urce# t% u#e t% pr%1uce g%%1# an1 #ervice#!
Standardi(ati!n re&er# t% the 1egree t% which a c%$pan* #peci&ie# h%w 1eci#i%n#
are t% ;e $a1e #% that e$p%*ee#A ;ehavi%r ;ec%$e# pre1icta;e! In practice4 there are
three thing# an %rgani0ati%n can #tan1ar1i0e/ input#4 c%nver#i%n activitie#4 an1 %utput#!
Ghen $anager# #tan1ar1i0e4 the* #creen input# acc%r1ing t% pre-e#ta;i#he1 criteria %r
#tan1ar1# that 1eter$ine which input# t% a%w int% the %rgani0ati%n!
2 ;sing In%!r$ati!n Techn!'!gy
In&%r$ati%n techn%%g* i# pa*ing an increa#ing r%e in #trateg* i$pe$entati%n a
%rgani0ati%na eve#! In &act4 it i# $a(ing it $uch ea#ier &%r %rgani0ati%n# t% c%#t
e&&ective* 1eve%p %utput an1 ;ehavi%r c%ntr%# that give #trategic $anager# $uch $%re
an1 $uch ;etter in&%r$ati%n t% $%nit%r the $an* a#pect# %& their #trategie# an1 t%
re#p%n1 appr%priate*! IT4 which pr%vi1e# a wa* %& #tan1ar1i0ing ;ehavi%r thr%ugh the u#e
%& a c%n#i#tent4 %&ten cr%##-&uncti%na #%&tware pat&%r$4 i# a &%r$ %& ;ehavi%r c%ntr%! IT
i# a#% a &%r$ %& %utput c%ntr% ;ecau#e when a e$p%*ee# %r &uncti%n# u#e the #a$e
#%&tware pat&%r$ t% pr%vi1e up-t%-1ate in&%r$ati%n %n their activitie#4 thi# c%1i&ie# an1
#tan1ar1i0e# %rgani0ati%na (n%we1ge an1 $a(e# it ea#ier t% $%nit%r pr%gre## t%war1
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#trategic %;Bective#!
3 Strategic Re#ard Syste$s
Organi0ati%n# #trive t% c%ntr% e$p%*ee#A ;ehavi%r ;* in(ing rewar1 #*#te$# t%
their c%ntr% #*#te$#! "a#e1 %n it# #trateg* C%w c%#t %r 1i&&erentiati%n4 &%r e=a$peD4
#trategic $anager# $u#t 1eci1e which ;ehavi%r# t% rewar1! The* then create a c%ntr%
#*#te$ t% $ea#ure the#e ;ehavi%r# an1 in( the rewar1 #tructure t% the$! Deter$ining
h%w t% reate rewar1# t% per&%r$ance i# a crucia #trategic 1eci#i%n ;ecau#e it 1eter$ine#
the incentive #tructure that a&&ect# the wa* $anager# an1 e$p%*ee# at a eve# in the
%rgani0ati%n ;ehave!
E Organi(ati!na' C"'t"re
The thir1 ee$ent that g%e# int% #ucce##&u #trateg* i$pe$entati%n i# $anaging
%rgani0ati%na cuture4 the #peci&ic c%ecti%n %& vaue# an1 n%r$# #hare1 ;* pe%pe an1
gr%up# in an %rgani0ati%n! Organi(ati!na' va'"es are ;eie&# an1 i1ea# a;%ut what (in1#
%& g%a# $e$;er# %& an %rgani0ati%n #h%u1 pur#ue an1 a;%ut the appr%priate (in1# %r
#tan1ar1# %& ;ehavi%r %rgani0ati%na $e$;er# #h%u1 u#e t% ach g%a#!
"i Gate# i# a CEO wh% i# &a$%u# &%r the #et %& %rgani0ati%na vaue# that he
e$pha#i0e#/ entrepreneur#hip4 %wner#hip4 creativit*4 h%ne#t*4 &ran(ne##4 an1 %pen
c%$$unicati%n! "* #tre##ing entrepreneur#hip an1 %wner#hip4 he #trive# t% $a(e
Micr%#%&t ;ehave e## i(e a ;ig ;ureaucrac* an1 $%re i(e a c%ecti%n %& #$aer an1
ver* a1aptive c%$panie#! Gate# ha# e$pha#i0e1 giving %wer-eve $anager#
c%n#i1era;e 1eci#i%n-$a(ing aut%n%$* an1 enc%urage1 the$ t% ta(e ri#(#Nthat i# t% ;e
$%re i(e entrepreneur# an1 e## i(e c%rp%rate ;ureaucrat#! The #tre## he pace# %n
vaue# #uch a# h%ne#t*4 &ran(ne##4 an1 %pen c%$$unicati%n i# a re&ecti%n %& hi# ;eie&
that an %pen interna 1ia%gue i# nece##ar* &%r #ucce##&u %perati%n# at Micr%#%&t!
Organi0ati%na cuture &uncti%n# a# a (in1 %& c%ntr% in that #trategicR can in&uence
the (in1 %& vaue# an1 n%r$# that 1eve%p in an %rgani0ati%n an1 n%r$# that #peci&*
appr%priate an1 inappr%priate ;ehavi%r# an1 that #hape an1 in&uence the wa* it#
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$e$;er# ;ehave!
Organi(ati!na' s!cia'i(ati!n i# the ter$ u#e1 t% 1e#cri;e h%w pe%pe earn
%rgani0ati%na cuture! Thr%ugh #%ciai0ati%n4 pe%pe internai0e an1 earn the n%r$# an1
vaue# %& the cuture #% that the* ;ec%$e %rgani0ati%na $e$;er#! C%ntr% thr%ugh
cuture i# #% p%wer&u ;ecau#e %nce the#e vaue# have ;een internai0e14 the* ;ec%$e
part %& the in1ivi1uaA# vaue#4 an1 the in1ivi1ua &%%w# %rgani0ati%na vaue# with%ut
thin(ing a;%ut the$!
. C"'t"re and Strategic Leadership
Organi0ati%na cuture i# create1 ;* the #trategic ea1er#hip pr%vi1e1 ;* an
%rgani0ati%nA# &%un1er an1 t%p $anager#! The %rgani0ati%nA# &%un1er i# particuar*
i$p%rtant in 1eter$ining cuture ;ecau#e the &%un1er i$print# hi# %r her vaue# an1
$anage$ent #t*e %n the %rgani0ati%n! Gat Di#ne*A# c%n#ervative in&uence %n the
c%$pan* he e#ta;i#he1 c%ntinue1 unti we a&ter hi# 1eath4 &%r e=a$pe! Manager# were
a&rai1 t% e=peri$ent with new &%r$# %& entertain$ent ;ecau#e the* were a&rai1 IGat
Di#ne* w%u1nAt i(e it!I It t%%( the in#taati%n %& a new $anage$ent tea$ un1er Michae
Ei#ner t% turn ar%un1 the c%$pan*A# &%rtune# an1 a%w it t% 1ea with the reaitie# %& the
new entertain$ent in1u#tr*!
0 Traits !% Str!ng and Adaptive C!rp!rate C"'t"re
'ew envir%n$ent# are #ta;e &%r an* pr%%nge1 peri%1 %& ti$e! I& an %rgani0ati%n i#
t% #urvive4 $anager# $u#t ta(e acti%n# that ena;e it t% a1apt t% envir%n$enta change#!
I& the* 1% n%t ta(e #uch acti%n4 the* $a* &in1 the$#eve# &ace1 with 1ecining 1e$an1 &%r
their pr%1uct#!
One wa* that $anager# can tr* i# t% create an adaptive c"'t"re4 %ne that i#
inn%vative an1 enc%urage# an1 rewar1# initiative ta(ing ;* $i11e- an1 %wer-eve
$anager#! Manager# in %rgani0ati%n# with a1aptive cuture# are a;e t% intr%1uce
change# in the wa* the %rgani0ati%n %perate#4 incu1ing change# in it# #trateg* an1
#tructure that a%w it t% a1apt t% change# in the e=terna envir%n$ent! Organi0ati%n# with
195
a1aptive cuture# are $%re i(e* t% #urvive in a changing envir%n$ent an1 in1ee1 #h%u1
have higher per&%r$ance than %rgani0ati%n# with inert cuture#!
)"i'ding +istinctive C!$petencies at the &"ncti!na' Leve'

N%w that the $ain ee$ent# %& #trateg* i$pe$entati%n have ;een %utine14 the
i##ue %& creating the #tructure4 c%ntr% #*#te$#4 an1 cuture t% put a c%$pan*A# #trategie#
int% acti%n can ;e a11re##e1! The &ir#t eve %& #trateg* t% e=a$ine i# the &uncti%na eve
;ecau#e4 a# Chapter 2 1i#cu##e14 a c%$pan*A# c%$petitive a1vantage 1epen1# %n it#!
The %rgani0ati%nA# attenti%n i# &%cu#e1 %n the e##ence %& winning4 $%tivating pe%pe ;*
c%$$unicating the vaue %& the target4 eaving r%%$ &%r in1ivi1ua an1 tea$ c%ntri;uti%n#4
#u#taining enthu#ia#$4 an1 u#ing intent c%n#i#tent* t% gui1e re#%urce a%cati%n!
C%n#i1ering the three ee$ent# %& #trateg* i$pe$entati%n in turn4 what i# the ;e#t wa*
&%r $anager# t% gr%up pe%pe an1 ta#(# t% ;ui1 c%$petencie#H The an#wer &%r $%#t
c%$panie# i# t% gr%up the$ ;* &uncti%n an1 create a &uncti%na #tructure!
. Gr!"ping by &"ncti!n, &"ncti!na' Str"ct"re
'uncti%na #tructure# gr%up pe%pe %n the ;a#i# %& their c%$$%n e=perti#e an1
e=perience %r ;ecau#e the* u#e the #a$e re#%urce#! '%r e=a$pe4 engineer# are
gr%upe1 in a &uncti%n ;ecau#e the* per&%r$ the #a$e ta#(# an1 u#e the #a$e #(i# %r
e)uip$ent!
'uncti%na #tructure# have #evera a1vantage#! 'ir#t4 i& pe%pe wh% per&%r$ #i$iar ta#(#
are gr%upe1 t%gether4 the* can earn &r%$ %ne an%ther an1 ;ec%$e $%re #peciai0e1 an1
pr%1uctive at what the* 1%! Thi# can create capa;iitie# an1 c%$petencie# in each
&uncti%n!
Sec%n14 the* can $%nit%r each %ther t% $a(e #ure that a are per&%r$ing their
ta#(# e&&ective* an1 n%t #hir(ing their re#p%n#i;iitie#! A# a re#ut4 the w%r( pr%ce##
;ec%$e# $%re e&&icient4 re1ucing $anu&acturing c%#t# an1 increa#ing %perati%na
&e=i;iit*! A thir1 i$p%rtant a1vantage %& &uncti%na #tructure# i# that the* give $anager#
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greater c%ntr% %& %rgani0ati%na activitie#!
0 The R!'e !% Strategic C!ntr!'
"ehin1 the c%ncept %& #trategic intent i# a vi#i%n %& #trategic c%ntr% a# a #*#te$
that #et# a$;iti%u# g%a# an1 target# &%r a $anager# an1 e$p%*ee# an1 then 1eve%p#
per&%r$ance $ea#ure# that #tretch an1 enc%urage $anager# an1 e$p%*ee# t% e=ce
their )ue#t t% rai#e per&%r$ance! A &uncti%na #tructure pr%$%te# thi# g%a ;ecau#e it
pr%$%te# the a;iit* %& $anager# an1 e$p%*ee# t% $%nit%r an1 $a(e c%n#tant
i$pr%ve$ent# t% %perating pr%ce1ure#! It a#% a%w# &%r %rgani0ati%na earning #ince
$anager#4 w%r(ing c%#e* with #u;%r1inate# can $ent%r the$ an1 hep their technica
1eve%p$ent &urther!

1 +eve'!ping C"'t"re at the &"ncti!na' Leve'
O&ten &uncti%na #tructure# %&&er the ea#ie#t wa* &%r $anager# t% ;ui1 a c%he#ive
cuture! C%n#i1er Hewett Pac(ar1 CHPD4 a $aB%r pr%vi1er %& IT an1 c%$puter
in&ra#tructure an1 #ervice#! E#ta;i#he1 in the 1859#4 HPA# cuture i# an %utgr%wth %& the
#tr%ng per#%na ;eie&# %& the c%$pan*A# &%un1er#4 "i Hewett an1 Dave Pac(ar1! "i
an1 Dave4 a# the* were (n%wn within the c%$pan*4 create1 HPA# cuture in a &%r$a
#tate$ent %& HPA# ;a#ic vaue# t% #erve ever*%ne wh% ha1 a #ta(e in the c%$pan* with
integrit* an1 &airne##4 incu1ing cu#t%$er#4 #uppier#4 e$p%*ee#4 #t%c(h%1er#4 an1
#%ciet* in genera!
In %r1er t% #ee h%w the 1i&&erent c%$p%nent# %& the #trateg* i$pe$entati%n
pr%ce## w%r( t%gether t% i$pe$ent &uncti%na #trateg*4 c%n#i1er h%w it w%r(# in three
&uncti%n#/ $anu&acturing4 RQD4 an1 #ae#!
a Man"%act"ring
In $anu&acturing4 &uncti%na #trateg* u#ua* center# %n i$pr%ving e&&icienc*4
)uait*4 an1 re#p%n#ivene## t% cu#t%$er#! A c%$pan* $u#t create an %rgani0ati%na
#etting in which $anager# can earn h%w t% ec%n%$i0e %n c%#t#! In i$pe$enting
&uncti%na #trategie# in a $anu&acturing #etting4 $an* c%$panie# t%1a* &%%w the ea1 %&
197
<apane#e c%$panie# #uch a# T%*%ta an1 S%n*4 which 1eve%pe1 #tr%ng capa;iitie# an1
c%$petencie# in $anu&acturing ;* %perating t%ta )uait* $anage$ent CTPMD an1 &e=i;e
$anu&acturing #*#te$#!
b RF+
The &uncti%na #trateg* &%r an RQD 1epart$ent i# t% 1eve%p a 1i#tinctive
c%$petenc* in inn%vati%n an1 techn%%g* that re#ut# in pr%1uct# that &it# cu#t%$er?#
nee1#! C%n#e)uent*4 the RQD 1epart$entA# #tructure4 c%ntr%4 an1 cuture #h%u1 pr%vi1e
the c%%r1inati%n nece##ar* &%r #cienti#t# an1 engineer# t% ;ring pr%1uct# )uic(* t%
$ar(et! M%re%ver4 the#e #*#te$# #h%u1 $%tivate RQD #cienti#t# t% 1eve%p inn%vative
pr%1uct# %r pr%ce##e#!
In practice4 RQD 1epart$ent# t*pica* have a &at4 1ecentrai0e1 #tructure that
give# their $e$;er# the &ree1%$ an1 aut%n%$* t% ;e inn%vative! Scienti#t# an1
engineer# are a#% gr%upe1 int% tea$# ;ecau#e their per&%r$ance can t*pica* ;e Bu1ge1
%n* %ver the %ng ter$ Cit $a* ta(e #evera *ear# &%r a pr%Bect t% ;e c%$pete1D!
C%n#e)uent*4 e=ten#ive #upervi#i%n ;* $anager# an1 the u#e %& ;ehavi%r c%ntr% i# a
wa#te %& $anageria ti$e an1 e&&%rt!
c Sa'es!
Sae#pe%pe w%r( 1irect* with cu#t%$er#4 an1 when the* are 1i#per#e1 in the
&ie14 the#e e$p%*ee# are e#pecia* 1i&&icut t% $%nit%r! The c%#t-e&&ective wa* t% 1eve%p
an1 $%nit%r their ;ehavi%r an1 enc%urage high re#p%n#ivene## t% cu#t%$er# i# u#ua* t%
1eve%p #%phi#ticate1 %utput an1 ;ehavi%r c%ntr%#! Output c%ntr%#4 #uch a# #peci&ic
#ae# g%a# %r g%a# &%r increa#ing re#p%n#ivene## t% cu#t%$er#4 can ;e ea#i*
e#ta;i#he1 an1 $%nit%re1 ;* #upervi#%r#! Then %utput c%ntr%# can ;e in(e1 t% a ;%nu#
rewar1 #*#te$ t% $%tivate #ae#pe%pe! "ehavi%r c%ntr%#4 &%r in#tance4 1etai# rep%rt#
that #ae#pe%pe &ie 1e#cri;ing their interacti%n# with cu#t%$er#4 can a#% ;e u#e1 t%
#tan1ar1i0e #ae#pe%peA# ;ehavi%r an1 $a(e it ea#ier &%r #upervi#%r# t% review their
per&%r$ance!
2 &"ncti!na' Str"ct"re and )"rea"cratic C!sts
198
N% $atter h%w c%$pe= their #trategie# ;ec%$e4 $%#t c%$panie# awa*# retain a
&uncti%na %rientati%n ;ecau#e %& the $an* a1vantage# %;taine1 ;* u#ing a &uncti%na
#tructure! Ghenever 1i&&erent &uncti%n# w%r( t%gether4 ;ureaucratic c%#t# inevita;* ari#e
;ecau#e %& the in&%r$ati%n 1i#t%rti%n# that ea1 t% the c%$$utati%n# an1 $ea#ure$ent
pr%;e$# 1i#cu##e1 in Chapter 19!
a C!$$"nicati!ns 7r!b'e$s
A# #eparate &uncti%na hierarchie# ev%ve4 &uncti%n# can gr%w $%re re$%te &r%$
%ne an%ther4 an1 it ;ec%$e# increa#ing* 1i&&icut t% c%$$unicate acr%## &uncti%n# an1 t%
c%%r1inate their activitie#! Thi# c%$$unicati%n pr%;e$ #te$# &r%$ 1i&&erence# in g%a
%rientati%n#!
b Meas"re$ent 7r!b'e$s
O&ten a c%$pan*A# pr%1uct range wi1en# a# it 1eve%p# new c%$petencie# an1
enter# new $ar(et #eg$ent#4 a# happene1 t% De! Ghen thi# happen#4 a c%$pan* $a*
&in1 it 1i&&icut t% gauge %r $ea#ure the c%ntri;uti%n %& a pr%1uct %r a gr%up %& pr%1uct# t%
it# %vera pr%&ita;iit*Na# n%te1 in Chapter 19! C%n#e)uent*4 the c%$pan* $a* turn %ut
#%$e unpr%&ita;e pr%1uct# with%ut reai0ing it an1 $a* a#% $a(e p%%r 1eci#i%n# a;%ut
re#%urce a%cati%n! Thi# $ean# that the c%$pan*A# $ea#ure$ent #*#te$# are n%t
c%$pe= en%ugh t% #erve it# nee1#!
c C"st!$er 7r!b'e$s
A# the range an1 )uait* %& an %rgani0ati%nA# g%%1# an1 #ervice# increa#e4 %&ten
$%re4 an1 1i&&erent (in1# %&4 cu#t%$er# are attracte1 t% it# pr%1uct#! Servicing the nee1#
%& $%re cu#t%$er gr%up# an1 tai%ring pr%1uct# t% #uit new (in1# %& cu#t%$er# cau#e1
increa#ing han1%&& pr%;e$# ;etween &uncti%n#! It ;ec%$e# increa#ing* 1i&&icut t%
c%%r1inate the activitie# %& vaue chain &uncti%n# acr%## the gr%wing pr%1uct range! A#%4
&uncti%n# i(e pr%1ucti%n4 $ar(eting4 an1 #ae# have itte %pp%rtunit* t% 1i&&erentiate
pr%1uct# an1 increa#e vaue &%r cu#t%$er# ;* #peciai0ing in the nee1# %& particuar
cu#t%$er gr%up#! In#tea14 the* are re#p%n#i;e &%r #ervicing the c%$pete pr%1uct range!
Thu#4 the a;iit* t% i1enti&* an1 #ati#&* cu#t%$er nee1# $a* &a #h%rt in a &uncti%na
#tructure!
199
d L!cati!n 7r!b'e$s
-%cati%n &act%r# $a* ha$per c%%r1inati%n an1 c%ntr%! I& a gr%wing c%$pan*
;egin# pr%1ucing %r #eing in $an* 1i&&erent regi%na area#4 then a &uncti%na #tructure
$a* n%t ;e a;e t% pr%vi1e the &e=i;iit* nee1e1 &%r $anager# t% re#p%n1 t% the 1i&&erent
cu#t%$er nee1# %r pre&erence# in the vari%u# regi%n#! A &uncti%na #tructure i# #i$p* n%t
the right wa* t% han1e regi%na 1iver#it*!
e Strategic 7r!b'e$s
S%$eti$e# the c%$;ine1 e&&ect %& a the#e &act%r# i# that %ng-ter$ #trategic
c%n#i1erati%n# are ign%re1 ;ecau#e $anager# are pre%ccupie1 with #%ving
c%$$unicati%n an1 c%%r1inati%n pr%;e$#! A# a re#ut4 a c%$pan* $a* %#e 1irecti%n
an1 &ai t% ta(e a1vantage %& new %pp%rtunitie# whie ;ureaucratic c%#t# e#caate!
% The O"ts!"rcing Opti!n
Rather than $%ve t% a $%re c%$pe=4 e=pen#ive #tructure4 increa#ing* c%$panie#
are turning t% the %ut#%urcing %pti%n an1 c%ntracting with %ther c%$panie# t% per&%r$
#peci&ic &uncti%na ta#(# &%r the$! It 1%e# $a(e #en#e t% %ut#%urce an1 c%ntract with
c%$panie# t% per&%r$ #uch activitie# when the* have a c%$petitive a1vantage ;ecau#e
the* #peciai0e in a particuar vaue chain activit*!
Thu#4 %ne wa* %& av%i1ing the (in1# %& c%$$unicati%n an1 $ea#ure$entL
pr%;e$# that ari#e when a c%$pan*A# pr%1uct ine ;ec%$e# c%$pe= i# t% re1uce
nu$;er %& &uncti%na vaue chain activitie# it per&%r$#! Thi# a%w# a c%$pan* t% &%cu# %n
th%#e c%$petencie# that are at the heart %& it# c%$petitive a1vantage ec%n%$i0e %n
;ureaucratic c%#t#!
E I$p'e$enting Strategy in a Sing'e Ind"stry
"ui1ing capa;iitie# in #trateg* i$pe$entati%n that a%w a c%$pan* t% 1eve%p
c%$petitive a1vantage #tart# at the &uncti%na eve! H%wever4 t% pur#ue it# ;u#ine## eve
#trateg* #ucce##&u*4 $anager# $u#t &in1 the right c%$;inati%n %& # c%ntr%4 an1 cuture
that in(# an1 c%$;ine# that c%$petencie# in a c%$pan*?# vaue chain &uncti%n# in a wa*
200
that enhance# the a;iit* t% 1i&&erentiate pr%1uct# an1 ec%n%$i0e# %n ;ureaucratic c%#t#!
There are tw% i$p%rtant i##ue# that $anager# $u#t a11re## in #trateg*
i$pe$entati%n at the ;u#ine## eve/ %ne c%ncern# the revenue #i1e %& the pr%&it an1 the
%ther the c%#t #i1e! 'ir#t4 e&&ective #trateg* i$pe$entati%n i$pr%ve# the wa* in which
pe%pe an1 gr%up# ch%%#e #trategie# an1 $a(e 1eci#i%n# that ea1 t% increa#ing
1i&&erentiati%n4 $%re vaue &%r cu#t%$er#4 an1 %pp%rtunit* t% charge a pre$iu$ price!
Sec%n14 e&&ective #trateg* i$pe$entati%n re1uce# the ;ureaucratic c%#t#
a##%ciate1 with #%ving the $ea#ure$ent an1 c%$$unicati%n# pr%;e$# that 1erive #uch
thing# a# tran#&erring a pr%1uct in pr%gre## ;etween &uncti%n# %r a ac( %& c%%perati%n
;etween $ar(eting an1 $anu&acturing %r ;etween ;u#ine## unit#!
E&&ective #trateg* i$pe$entati%n4 which %&ten $ean# the $%ve t% a $%re c%$-
pe= #tructure4 ec%n%$i0e# %n ;ureaucratic c%#t#4 uti$ate* %wer# a c%$pan*A# c%#t
#tructure4 an1 can give a c%$pan* a %w-c%#t a1vantage that rai#e# pr%&it#
. I$p'e$enting a C!st:Leadership Appr!ach
The ai$ %& the c%#t-ea1er#hip #trateg* i# t% $a(e the c%$pan* pur#uing it the
%we#t-c%#t pr%1ucer in the $ar(et!
T% i$pe$ent a c%#t-ea1er#hip #trateg*4 the c%$pan* ch%%#e# a c%$;inati%n %&
#tructure4 c%ntr%4 an1 cuture c%$pati;e with the nee1# %& the %w-c%#t #trateg*! In
practice4 the &uncti%na #tructure i# the $%#t #uita;e pr%vi1e1 that care i# u#e1 t% #eect
the appr%priate integrating $echani#$# that re1uce c%$$unicati%n# an1 $ea#ure$ent
pr%;e$#!
0 I$p'e$enting +i%%erentiati!n Appr!ach
C%$$%n*4 in pur#uing 1i&&erentiati%n4 a c%$pan* #tart# t% pr%1uce a wi1er rage %&
pr%1uct# an1 #erve $%re $ar(et #eg$ent#4 which $ean# it ha# t% cu#t%$i0e it#
pr%1uct# t% the nee1# %& 1i&&erent gr%up# %& cu#t%$er#!
201
1 I$p'e$enting a )r!ad Line:7r!d"ct Str"ct"re
The #tructure that %rgani0ati%n# $%#t c%$$%n* a1%pt t% #%ve the c%ntr%
pr%;e$# that re#ut &r%$ pr%1ucing $an* 1i&&erent (in1# %& pr%1uct# &%r $an* 1i&&erent
$ar(et #eg$ent# i# the product structure. The intent ;ehin1 the change t% a pr%1uct
#tructure i# t% ;rea( up a c%$pan*A# gr%wing pr%1uct ine int% a nu$;er %& #$aer4
$%re $anagea;e #u;unit# within an %rgani0ati%n t% re1uce ;ureaucratic c%#t# 1ue t%
c%$$unicati%n4 $ea#ure$ent4 an1 the %ther pr%;e$# n%te1 earier!
2 Increasing Resp!nsiveness t! C"st!$er Gr!"ps:Mar/et Str"ct"re
'%r a c%$pan* pur#uing a #trateg* ;a#e1 %n increa#ing re#p%n#ivene## t%
cu#t%$er#4 it i# vita that the nature an1 nee1# %& each 1i&&erent cu#t%$er gr%up ;e i1en-
ti&ie1! Then pe%pe an1 &uncti%n# are gr%upe1 ;* cu#t%$er %r $ar(et #eg$ent4 an1 a
1i&&erent #et %& $anager# ;ec%$e# re#p%n#i;e &%r 1eve%ping the pr%1uct# that each
gr%up %& cu#t%$er# want# an1 tai%ring %r cu#t%$i0ing pr%1uct# t% the nee1# %& each
particuar cu#t%$er gr%up! In %ther w%r1#4 t% pr%$%te #uperi%r re#p%n#ivene## t%
pr%$%te cu#t%$er#4 c%$panie# 1e#ign a #tructure ar%un1 their cu#t%$er# an1 a $ar(et
#tructure i# a1%pte1!
202
S"$$ary
14 I$pe$enting a #trateg* #ucce##&u* 1epen1# %n #eecting the right
c%$;inati%n %& %rgani0ati%na #tructure4 c%ntr% #*#te$#4 an1 cuture!
C%$panie# nee1 t% $%nit%r an1 %ver#ee the #trateg* i$pe$entati%n
pr%ce## t% achieve #uperi%r pr%&ita;iit*!
24 E&&ective #trateg* i$pe$entati%n can increa#e pr%&ita;iit* in tw% wa*#!
'ir#t4 it ec%n%$i0e# %n ;ureaucratic c%#t# an1 hep# a c%$pan* %wer it#
c%#t #tructure! Sec%n14 it enhance# the a;iit* %& a c%$pan*A# vaue cre-
ati%n &uncti%n# t% achieve #uperi%r e&&icienc*4 )uait*4 inn%vativene##4 an1
cu#t%$er re#p%n#ivene## an1 t% %;tain the a1vantage# %& 1i&&erentiati%n!
34 The $ain i##ue# in 1e#igning %rgani0ati%n #tructure are h%w t% gr%up
ta#(#4 &uncti%n#4 an1 1ivi#i%n#L h%w t% a%cate auth%rit* an1
re#p%n#i;iit*L an1 h%w t% u#e integrating $echani#$# t% i$pr%ve
c%%r1inati%n ;etween &uncti%n#!
44 Strategic c%ntr% pr%vi1e# the $%nit%ring an1 incentive #*#te$#
nece##ar* t% $a(e an %rgani0ati%na #tructure w%r( a# inten1e1 an1
e=ten1# c%rp%rate g%vernance 1%wn t% a eve# in#i1e the c%$pan*! The
$ain (in1# %& #trategic c%ntr% #*#te$ are %utput c%ntr% an1 ;ureaucratic
c%ntr%4 rewar1# #*#te$#4 an1 c%ntr% thr%ugh in&%r$ati%n techn%%g*!
54 Organi0ati%na cuture i# the #et %& vaue#4 n%r$#4 ;eie&#4 an1 attitu1e#
that hep t% energi0e an1 $%tivate e$p%*ee# an1 c%ntr% their
;ehavi%r! A c%$pan*A# &%un1er an1 t%p $anager# hep 1eter$ine
which (in1# %& vaue# e$erge in an %rgani0ati%n4 an1 a# #uch the*
#h%u1 tr* t% ;ui1 a #tr%ng an1 a1aptive cuture t% hep increa#e
per&%r$ance %ver ti$e!
64 At the &uncti%na eve4 each &uncti%n re)uire# a 1i&&erent c%$;inati%n %&
203
#tructure an1 c%ntr% #*#te$ t% achieve it# &uncti%na %;Bective#!
74 At the ;u#ine## eve4 #tructure4 c%ntr%4 an1 cuture $u#t ;e c%$;ine1
in a wa* that hep# the$ in $erit their ;u#ine##-eve #trateg* an1
$anage I reati%n#hip# a$%ng a the &uncti%n#!
84 C%#t-ea1er#hip an1 1i&&erentiati%n #trategie# re)uire a #tructure an1
c%ntr% #*#te$ that $atche# the #%urce %& their c%$petitive a1vantage!
I$pe$enting a #i$utane%u# c%#t-ea1er#hip an1 1i&&erentiati%n# #trateg*
i# the pr%;e$ &acing $an* c%$panie# t%1a*!W
94 Other #peciai0e1 (in1# %& #tructure# incu1e the pr%1uct4 $ar(et4
ge%graphic4 $atri=4 an1 tea$ #tructure#! Each ha# a #peciai0e1 u#e
an1 i# i$pe$ente1 a# a c%$pan*A# #trateg* warrant#!
104 Re#tructuring an1 reengineering are tw% wa*# %& in i$pr%ving the wa* a
c%$pan*A# #trateg* i# i$pe$ent!
204
Chapter .1
IM7LEMENTING STRATEG9 IN COM7ANIES T6AT COM7ETE ACROSS IN+;STRIES AN+
CO;NTRIES
INTRO+;CTION
The #t%r* %& the new HPA# e&&%rt# t% 1eve%p a c%$petitive $uti ;u#ine## $%1e t%
a%w it t% c%$;ine the %1 HP an1 C%$pa)A# c%$petencie# t% ;atte c%$petit%r# i(e I"M an1
De #ugge#t# h%w c%$pe= #trategic thin(ing can ;ec%$e at the c%rp%rate eve! C%$panie#
have t% c%ntinua* e=a$ine h%w t% i$pr%ve the wa* the* i$pe$ent their $uti ;u#ine##
$%1e# t% rai#e their per&%r$ance!
Thi# chapter ta(e# %&& where the a#t %ne en1# an1 e=a$ine# h%w t% i$pe$ent
#trateg* when a c%$pan* 1eci1e# t% enter an1 c%$pete in new in1u#trie#4 %r c%untrie#
when it e=pan1# g%;a*4 an1 when it ch%%#e# $ean# #uch a# $erger %ut#%urcing t%
#trengthen it# $uti-;u#ine## $%1e! The #trateg* i$pe$entati%n i##ue re$ain# the
#a$e/ h%w t% u#e %rgani0ati%na #tructure4 c%ntr%4 an1 cuture a c%$pan* t% pur#ue it#
;u#ine## $%1e an1 #trategie# #ucce##&u*! Once a c%$pan* 1eci1e# t% c%$pete acr%##
in1u#trie# an1 c%untrie#4 h%wever4 it c%n&r%nt# a new #et pr%;e$#4 #%$e %& the$
c%ntinuati%n# %& pr%;e$# 1i#cu##e1 in Chapter #%$e %& the$ a 1irect c%n#e)uence %&
the $%re c%$pe= pr%1uct an1 $ar(et it ha# $a1e an1 hence which have t% ;e
i$pe$ente1!
Learning Objectives
"* the en1 %& the chapter4 *%u wi appreciate/
1! The $an* c%$pe= i##ue# an1 ch%ice# c%n&r%nting $anager# with the ta#( %&
$anaging $uti-;u#ine## an1 g%;a c%$panie#!
+! The rea#%n# that #trateg* i$pe$entati%n i# an integra part %& the pr%ce## %&
achieving #uperi%r per&%r$ance!
205
O"t'ine
A Managing C!rp!rate Strategy thr!"gh the M"'tidivisi!na' Str"ct"re
A# Chapter 19 1i#cu##e#4 there are $an* wa*# in which c%rp%rate-eve #trategie#
a# vertica integrati%n %r 1iver#i&icati%n can ;e u#e1 t% #trengthen a c%$pan* c%$petitive
p%#iti%n in the in1u#trie# in which it c%$pete#! H%wever4 #u;#tantia i$pe$entati%n
pr%;e$# ari#e a# we4 $an* %& the$ 1ue t% the increa#ing ;ureaucratic c%#t# a##%ciate1
with $anaging a arger c%ecti%n %& c%$panie# that %perate in 1i&&erent in1u#trie#! The#e
c%#t# are e#pecia* high when a c%$pan* i# #ee(ing t% gain the 1i&&erentiati%n an1 %w-
c%#t a1vantage# %& tran#&erring4 #haring4 %r everaging it# 1i#tinctive c%$petencie# acr%##
in1u#trie#! '%r c%$panie# pur#uing a $uti;u#ine## $%1e4 the pr%;e$# an1 c%#t# %&
$anaging the han1%&&# %r tran#&er# ;etween vaue chain &uncti%n# acr%## in1u#trie# t%
%;tain the#e ;ene&it# ri#e #harp*! It i# the re-ec%n%$i0e %n the#e c%#t# that pr%pe#
#trategic $anager# t% #earch &%r i$pr%ve1 wa*# %& i$pe$enting the c%rp%rate-eve
#trategie# nece##ar* t% pur#ue a $uti;u#ine## $%1e!
The $uti1ivi#i%na #tructure p%##e##e# tw% $ain inn%vati%n# %ver a &uncti%na %r
pr%1uct #tructure that a%w a c%$pan* t% gr%w an1 1iver#i&* whie re1ucing the
c%%r1inati%n an1 c%ntr% pr%;e$# inherent in entering an1 c%$peting in new in1u#trie#!
'ir#t4 in each in1u#tr* in which a c%$pan* %perate#4 #trategic $anager# %rgani0e
the c%$panie# in that in1u#tr* int% %ne %r $%re #u;unit# cae1 1ivi#i%n# S%$eti$e# each
1ivi#i%n c%ntain# a &u #et %& a the vaue chain &uncti%n# it nee pur#ue it# ;u#ine##
$%1eL in thi# ca#e4 it i# cae1 a #e&-c%ntaine1 1ivi#i%n!
Sec%n14 the %&&ice %& corporate headquarters staff is create1 t% $%nit%r
1ivi#i%na activitie# an1 t% e=erci#e &inancia c%ntr% %ver each %& the 1ivi#i%n#! Thi#
#ta&& c%ntain# the c%rp%rate-eve $anager# wh% %ver#ee the activitie# %& 1ivi#i%na
$anager#! Hence4 the %rgani0ati%na hierarch* i# taer in a $uti1ivi#i%na #tructure
than in a pr%1uct %r &uncti%na #tructure! The r%e %& the e=tra $anager# i# t%
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1eve%p #trategic c%ntr% #*#te$# that %wer a c%$pan*A# %vera c%#t #tructure4
incu1ing &in1ing wa*# t% ec%n%$i0e %n the c%#t# %& c%ntr%ing the han1%&&# an1
tran#&er# ;etween 1ivi#i%n#! The e=tra c%#t %& the#e c%rp%rate $anager# i# $%re
than Bu#ti&ie1 i& their acti%n# ea1 t% c%#t #aving# e#ewhere %r revenue-enhancing
1i&&erentiati%n that ;%%#t# %vera return %n inve#t$ent capita CROICD %& the
c%$pan*!
In the $uti1ivi#i%na #tructure4 1a*-t%-1a* %perati%n# %& a 1ivi#i%n are the
re#p%n#i;iit* %& 1ivi#i%na $anage$entL that i#4 1ivi#i%na $anage$ent ha# operat$
ing responsibility. The c%rp%rate hea1)uarter#4 which incu1e# t%p e=ecutive# a# we
a# their #upp%rt #ta&&4 i# re#p%n#i;e &%r %ver#eeing the c%$pan*A# %ng-ter$ $uti-
;u#ine## $%1e an1 &%r pr%vi1ing gui1ance &%r inter1ivi#i%na pr%Bect#! The#e e=ecu-
tive# have strategic responsibility. Such a c%$;inati%n %& #e&-c%ntaine1 1ivi#i%n# with
a centrai0e1 c%rp%rate $anage$ent pr%vi1e# the e=tra c%%r1inati%n an1 c%ntr%
nece##ar* t% $anage entr* int% new in1u#trie#!
) Advantage !% M"'tidivisi!na' Strategy
Ghen $anage1 e&&ective* at ;%th the c%rp%rate an1 the 1ivi#i%na eve#-
1ivi#i%na #tructure %&&er# #evera a1vantage#! T%gether4 the* can rai#e pr%& ita;iit* t% a
new pea( ;ecau#e the* a%w the %rgani0ati%n t% in c%rp%rate-eve #trategie#
nece##ar* t% pur#ue the $uti;u#ine## $%1e!
. Enhanced C!rp!rate &inancia' C!ntr!'
The pr%&ita;iit* %& 1i&&erent ;u#ine## 1ivi#i%n# i# cear* vi#i;e in the $uti1ivi#i%na
#tructure! "ecau#e each 1ivi#i%n i# it# %wn pr%&it center4 &inancia c%ntr%# can ;e appie1
t% each ;u#ine## %n the ;a#i# %& pr%&ita;iit* criteria #uch a# ROIC! T*pica*4 the#e
c%ntr%# c%ver e#ta;i#hing target#4 $%nit%ring per&%r$ance %n a reguar ;a#i#4 an1
#eective* intervening when pr%;e$# ari#e
0 Enhanced Strategic C!ntr!'
The multi$divisional structure' $anager# &r%$ ;u#ine##-eve re#p%n#i;iitie#! C%rp%rate
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$anager# have the ti$e an1 #c%pe &%r c%nte$pating wi1er #trategic i##ue# an1 &%r
1eve%ping re#p%n#e# t% envir%n$enta change#4 #uch a# )uic(* changing in1u#tr*
;%un1arie#!
The $uti1ivi#i%na #tructure a#% ena;e# c%rp%rate hea1)uarter# t% %;tain the
pr%per in&%r$ati%n t% per&%r$ %ng-run #trategic an1 #cenari% panning &%r the entire
c%rp%rati%n4 incu1ing 1eci#i%n# a;%ut which ;u#ine##e# t% e=pan1 an1 which t% e=it
&r%$!
1 Gr!#th The $uti1ivi#i%na #tructure et# the c%$pan* %verc%$e an
%rgani0ati%na i$it t% it# gr%wth! "* re1ucing in&%r$ati%n %ver%a1 at the center4
c%rp%rate $anager# can c%n#i1er e$erging %pp%rtunitie# &%r &urther gr%wth an1
1iver#i&icati%n! C%$$unicati%n pr%;e$# are re1uce1 ;ecau#e the #a$e #et %&
#tan1ar1i0e1 acc%unting an1 &inancia %utput c%ntr%# can ;e u#e1 &%r a 1ivi#i%n#
2 Str!nger 7"rs"it !% Interna' E%%iciency! Gi thi n a &uncti %na #tructure
inter1epen1ence %& &uncti%na 1epart$ent# $ean# that the per&%r$ance %& each
in1ivi1ua &uncti%n in#i1e a c%$pan* cann%t ;e $ea#ure1 ;* %;Bective criteria! '%r
e=a$pe4 the pr%&ita;iit* %& the &inance &uncti%n4 $ar(eting &uncti%n4 %r $anu&acturing
&uncti%n cann%t ;e a##e##e1 in i#%ati%n4 ;ecau#e the* are %n* part %& the wh%e!
Thi# %&ten $ean# that within the &uncti%na #tructure4 c%n#i1era;e 1egree# %&
%rgani0ati%na #ac(4 that i#4 the unpr%1uctive u#e %& &uncti%na re#%urce#4 can g%
un1etecte1! '%r e=a$pe4 the hea1 %& the &inance &uncti%n $ight e$p%* a arger #ta&&
than re)uire1 &%r e&&icienc* t% re1uce w%r( pre##ure# in#i1e the 1epart$ent an1 t%
;ring the $anager higher #tatu#!
C 7r!b'e$ in I$p'e$enting a M"'tidivisi!na' Str"ct"re
. (stablishing the )ivisional$Corporate Authority *elationship. The auth%rit*
reati%n#hip ;etween c%rp%rate hea1)uarter# an1 the 1ivi#i%n# $u#t ;e c%rrect*
e#ta;i#he1! The $uti1ivi#i%na #tructure intr%1uce# a new eve in the hierarch*/ the
c%rp%rate eve! The pr%;e$ ie# in 1eci1ing h%w $uch auth%rit* an1 c%ntr% t% 1eegate
t% the %perating 1ivi#i%n# an1 h%w $uch auth%rit* t% retain at c%rp%rate hea1)uarter#!
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Thu#4 the centra i##ue in $anaging the $uti1ivi#i%na #tructure i# h%w $uch
auth%rit* #h%u1 ;e centrai0e1 at c%rp%rate hea1)uarter# an1 h%w $uch #h%u1 ;e
1ecentrai0e1 t% the 1ivi#i%n#! Thi# i##ue $u#t ;e 1eci1e1 ;* each c%$pan* in re&erence
t% the nature %& it# ;u#ine##- an1 c%rp%rate-eve #trategie#! There are n% ea#* an#wer#4
an1 a# the envir%n$ent change# %r the c%$pan* ater# it# #trategie# %ver ti$e4 the
;aance ;etween c%rp%rate an1 1ivi#i%na c%ntr% wi a#% change!
0 +ist!rti!n !% In%!r$ati!n I& c%rp%rate hea1)uarter# pace# t%% $uch e$pha#i#
%n each 1ivi#i%nA# in1ivi1ua pr%&ita;iit*N&%r in#tance4 ;* #etting ver* high an1 #tringent
ROIC target#N1ivi#i%na $anager# $a* ch%%#e t% 1i#t%rt the in&%r$ati%n the* #upp* t%p
$anage$ent an1 paint a r%#* picture %& it at the e=pen#e %& &uture pr%&ita;iit*!
"ureaucratic c%#t# n%w increa#e a# 1ivi#i%n# $a* atte$pt t% $a(e ROIC %%( ;etter ;*
cutting pr%1uct 1eve%p$ent %r new inve#t$ent# %r $ar(eting e=pen1iture#!
1 C!$petiti!n %!r Res!"rces! The thir1 pr%;e$ %& $anaging a $uti1ivi#i%na
#tructure i# that the 1ivi#i%n# the$#eve# $a* c%$pete &%r re#%urce#4 an1 thi# rivar* can
prevent gain# &r%$ tran#&erring4 #haring4 %r everaging 1i#tinctive c%$petencie# acr%##
;u#ine##e#! '%r e=a$pe4 the a$%unt %& capita &%r inve#t$ent that c%rp%rate $anager#
have t% 1i#tri;ute t% the 1ivi#i%n# i# &i=e1! Genera*4 the 1ivi#i%n# that can 1e$%n#trate
the highe#t ROIC get the i%nA# #hare %& the $%ne*!!
2 Trans%er 7ricing Divi#i%na c%$petiti%n $a* ea1 t% ;atte# %ver tran#&er pricing4
that i#4 c%n&ict# %ver e#ta;i#hing the &air %r Ic%$petitiveI price %& a re#%urce #(i
1eve%pe1 in %ne 1ivi#i%n that i# t% ;e tran#&erre1 an1 #%1 t% %ther 1ivi#i%n#! That
re)uire# it!
Rivar* a$%ng 1ivi#i%n# i# c%$$%n in the tran#&er pricing pr%ce## ;ecau#e each
#upp*ing 1ivi#i%n ha# the incentive t% #et the highe#t price &%r it# re#%urce# %r #(i# t%
$a=i$i0e it# %wn revenue# an1 pr%&it#! H%wever4 purcha#ing 1ivi#i%n# view atte$pt# t%
charge high price# a# un1er$ining their %wn pr%&ita;iit*Nhence the pr%;e$!
3 Sh!rt:Ter$ RF+ &!c"s! I& c%rp%rate hea1)uarter# #et# e=tre$e* high an1 rigi1
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ROIC target#4 there i# a 1anger that the 1ivi#i%n# wi cut ;ac( %n RQD e=pen1iture# t% i$pr%ve
their &inancia per&%r$ance! Ath%ugh thi# in&ate# 1ivi#i%na per&%r$ance in the #h%rt ter$4 it
un1er$ine# a 1ivi#i%nA# a;iit* t% 1eve%p new pr%1uct# an1 ea1# t% a &a in the #trea$ %&
%ng-ter$ pr%&it#! Hence4 c%rp%rate hea1)uarter# per#%nne $u#t care&u* c%ntr% their
interacti%n# with the 1ivi#i%n# t% en#ure that ;%th the #h%rt- an1 %ng-ter$ g%a# %& the
;u#ine## are ;eing achieve1!
D +"p'icati!n !% &"ncti!na' Res!"rces "ecau#e each 1ivi#i%n %&ten p%#-
#e##e# it# %wn #et %& &uncti%n#4 #uch a# &inance %r RQD4 $uti1ivi#i%na #tructure# are e=pen#ive
t% run an1 $anage! RQD i# an e#pecia* c%#t* activit*4 an1 #% #%$e c%$panie# centrai0e
#uch &uncti%n# at the c%rp%rate eve t% #erve a 1ivi#i%n#! The 1upicati%n %& #peciai#t
#ervice# i# n%t a pr%;e$ i& the c%#t an1 1i&&erentiati%n gain# &r%$ having #eparate #peciai#t
&uncti%n# are #u;#tantia! C%rp%rate $anager# 1eci1e whether 1upicati%n i# &inancia* Bu#ti&ie1
an1 which #ervice# t% centrai0e %r 1ecentrai0e t% %pti$i0e #h%rt- an1 %ng-run pr%&ita;iit*!
+ Str"ct"re- C!ntr!'- C"'t"re- and C!rp!rate Leve' Strategy
Once #trategic $anager# #eect a $uti1ivi#i%na #tructure4 the* $u#t then $a(e
ch%ice# a;%ut what (in1 %& integrating $echani#$# an1 c%ntr% #*#te$# t% u#e t% $a(e the
#tructure w%r( e&&icient*! Such ch%ice# 1epen1 %n whether a c%$pan* ch%%#e# t% pur#ue a
$uti;u#ine## $%1e ;a#e1 %n a #trateg* %& unreate1 1iver#i&icati%n4 vertica integrati%n4 %r
reate1 1iver#i&icati%n!
A c%$pan* can c%%r1inate re#%urce-#che1uing 1eci#i%n# a$%ng 1ivi#i%n# %perating in
a1Bacent in1u#trie# t% re1uce $anu&acturing c%#t# an1 i$pr%ve )uait*! The $an* ;ene&it# &r%$
reate1 1iver#i&icati%n a#% c%$e &r%$ tran#&erring4 #haring4 %r everaging &uncti%na re#%urce#
%r #(i# acr%## 1ivi#i%n#4 #uch a# #haring 1i#tri;uti%n an1 #ae# netw%r(# t% increa#e 1i&&eren-
tiati%n %r %wer the %vera c%#t #tructure! Gith ;%th #trategie#4 the ;ene&it# t% the c%$pan*
c%$e &r%$ #%$e exchange of distinctive competencies a$%ng 1ivi#i%n#! T% #ecure the#e
;ene&it#4 the c%$pan* $u#t c%%r1inate activitie# a$%ng 1ivi#i%n! C%n#e)uent*4 #tructure
an1 c%ntr% $u#t ;e 1e#igne1 t% han1e the han1%&&# %r tran#&er# a$%ng 1ivi#i%n#!
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In the ca#e %& unreate1 1iver#i&icati%n4 the $uti;u#ine## $%1e i# ;a#e1 %n u#ing
capa;iitie# in entrepreneur#hip4 capa;iitie# in $anaging %rgani0ati%na #tructure %r
cuture e&&ective*4 %r #trategic capa;iitie#!
The ch%ice %& #tructure an1 c%ntr% $echani#$# 1epen1# %n the 1egree t% which
a c%$pan* u#ing a $uti1ivi#i%na #tructure nee1# t% c%ntr% the han1%&&# an1 interacti%n#
acti%n# a$%ng 1ivi#i%n#! The $%re inter1epen1ence 1ivi#i%n#- that i# the $%re the*
1epen1 each %ther &%r #(i# an1 re#%urce# the greater are the ;ureaucratic c%#t#
a##%ciate1 with %;taining the p%tentia ;ene&it# &r%$ a particuar #trateg*!
;nre'ated +iversi%icati!n-"ecau#e there are n% e=change# %r in(age# a$%ng 1ivi#i%n#4
unreate1 1iver#i&icati%n i# the ea#ie#t an1 cheape#t #trateg* t% $anageL it i# a##%ciate1
with the %we#t eve %& ;ureaucratic c%#t#! The $ain re)uire$ent %& the #tructure an1
c%ntr% #*#te$ i# that it a%w# c%rp%rate $anager# t% evauate 1ivi#i%na per&%r$ance
ea#i* an1 accurate*! Thu#4 c%$panie# u#e a $uti1ivi#i%na #tructure4 an1 each 1ivi#i%n
i# evauate1 ;* %utput c%ntr%# #uch a# return %n inve#te1 capita!
I$p'e$enting Strategy acr!ss C!"ntries
C%$panie# can u#e &%ur ;a#ic #trategie# a# the* ;egin t% $ar(et their
pr%1uct#H
E#ta;i#h pr%1ucti%n &aciitie# a;r%a1/
1 A $uti1%$e#tic #trateg* i# %riente1 t%war1 %ca re#p%n#ivene##4 an1 a
c%$pan* 1ecentrai0e# c%ntr% t% #u;#i1iarie# an1 1ivi#i%n# in each c%untr* in which
it %perate# t% pr%1uce an1 cu#t%$i0e pr%1uct# t% %ca $ar(et#!
+! An internati%na #trateg* i# ;a#e1 %n RQD an1 $ar(eting ;eing centrai0e1 an1 at
h%$e an1 a the %ther vaue creati%n &uncti%n# ;eing 1ecentrai0e1 t% nati%na unit#!
2! A g%;a #trateg* i# %riente1 t%war1 c%#t re1ucti%n4 with a the principa vaue
creati%n &uncti%n# centrai0e1 at the %pti$a g%;a %cati%n!
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5! A tran#nati%na #trateg* i# &%cu#e1 #% that it can achieve %ca re#p%n#ivene## an1
c%#t re1ucti%n! S%$e &uncti%n# are centrai0e1 an1 %ther# 1ecentrai0e1 at the g%;a
%cati%n ;e#t #uite1 t% achieving the#e %;Bective#!
The nee1 t% c%%r1inate an1 integrate g%;a vaue chain activitie# increa#e# a# a
c%$pan* $%ve# &r%$ a $uti1%$e#tic t% an internati%na t% a g%;a an1 then t% a
tran#nati%na #trateg*!
In genera4 the ch%ice %& #tructure an1 c%ntr% #*#te$# &%r $anaging a ;u#ine## i#
a &uncti%n %& three &act%r#/
1! The 1eci#i%n %n h%w t% 1i#tri;ute an1 a%cate re#p%n#i;iit* an1 ;etween $anager# at
h%$e an1 a;r%a1 #% that e&&ective c%ntr% %ver a c%$pan*?# g%;a %perati%n i#
$aintaine1
+! The #eecti%n %& the %rgani0ati%na #tructure that gr%up# 1ivi#i%n# ;%th at h%$e
an1 a;r%a1 in a wa* that a%w# the ;e#t u#e %& re#%urce# an1 #erve# the nee1# %&
&%reign cu#t%$er# $%#t e&&ective*
2! The #eecti%n %& the right (in1# %& integrati%n an1 c%ntr% $echani#$# an1 %rgan-
i0ati%na cuture t% $a(e the %vera g%;a #tructure &uncti%n e&&ective*!
I$p'e$enting a M"'ti d!$estic Strategy
Ghen a c%$pan* pur#ue# a $uti1%$e#tic #trateg* it genera* %perate# with a
g%;a-area# #tructure Ghen u#ing thi# #tructure4 a c%$pan* 1upicate# a vaue creati%n
activitie# an1 e#ta;i#he# an %ver#ea# 1ivi#i%n in ever* c%untr* %r w%r1 area in which it
%perate#! Auth%rit* i# 1ecentrai0e1 t% $anager# in each %ver#ea# 1ivi#i%n4 wh% 1evi#e
the appr%priate #trateg* &%r re#p%n1ing t% the nee1# %& the %ca envir%n$ent!
Manager# at g%;a hea1)uarter# u#e $ar(et an1 %utput c%ntr%#4 #uch a# ROIC4
gr%wth in $ar(et #hare4 an1 %perati%n c%#t#4 t% evauate the per&%r$ance %& %ver#ea#
1ivi#i%n#! On the ;a#i# %& #uch g%;a c%$pari#%n#4 the* can $a(e 1eci#i%n# a;%ut
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capita a%cati%n an1 %rche#trate the tran#&er %& new (n%we1ge a$%ng 1ivi#i%n#!
S"$$ary
1! At the c%rp%rate eve4 a c%$pan* $u#t ch%%#e the c%$;inati%n %& #tructure4 c%ntr%
#*#te$#4 an1 cuture that wi a%w it t% %perate a $uti;u#ine## $%1e in a wa* that
wi ea1 t% #uperi%r pr%&ita;iit*!
+! A# a c%$pan* gr%w# an1 1iver#i&ie#4 it a1%pt# a $uti-1ivi#i%na #tructure! Ath%ugh
thi# #tructure c%#t# $%re t% %perate than a &uncti%na %r pr%1uct #tructure4 it
ec%n%$i0e# %n the ;ureaucratic c%#t# a##%ciate1 with %perating thr%ugh a &uncti%na
#tructure an1 give# a c%$pan* the capa;iit* t% han1e it# vaue creati%n activitie#
$%re e&&ective*!
2! A# c%$panie# change their c%rp%rate #trategie# %ver ti$e4 the* $u#t change their
#tructure ;ecau#e 1i&&erent #trategie# are $anage1 in 1i&&erent wa*#! In particuar4 the
$%ve &r%$ unreate1 1iver#i&icati%n t% vertica integrati%n t% reate1 1iver#i&icati%n
increa#e# the ;ureaucratic c%#t# a##%ciate1 with $anaging a $uti;u#ine## $%1e!
Each re)uire# a 1i&&erent c%$;inati%n %n #tructure4 c%ntr%4 an1 cuture t% ec%n%$i0e
%n th%#e c%#t#!
5! A# a c%$pan* $%ve# &r%$ a $uti1%$e#tic t% an internati%na4 g%;a4 an1
tran#nati%na #trateg*4 it a#% nee1# t% #witch t% a $%re c%$pe= #tructure that a%w#
it t% c%%r1inate increa#ing* c%$pe= re#%urce tran#&er#! Si$iar*4 it nee1# % a1%pt a
$%re c%$pe= integrati%n an1 c%ntr% #*#te$ that &aciitate# re#%urce #haring an1
the everage %& c%$petencie# ar%un1 the g%;e! Ghen the gain# are #u;#tantia4
c%$panie# &re)uent* a1%pt a g%;a $atri= #tructure t% #hare (n%w e1ge an1
e=perti#e %r i$pe$ent c%ntr% #*#te$# an1 cuture t% a%w the$ t% achieve it#
a1vantage#!
6! T% enc%urage interna new venturing4 c%$panie# $u#t 1e#ign an interna
venturing pr%ce## that give# new-venture $anager# the aut%n%$* the* nee1 t%
1eve%p new pr%1uct#! C%rp%rate $anager# nee1 t% pr%vi1e the %ver#ight that
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(eep# new-venture $anager# $%tivate1 an1 %n trac(!
:! The pr%&ita;iit* %& $erger# an1 ac)ui#iti%n# 1epen1# %n the #tructure an1 c%ntr%
#*#te$# that c%$panie# a1%pt t% $anage the$ an1 the wa* a c%$pan* integrate#
the$ int% it# e=i#ting ;u#ine##e#!
E! IT i# having increa#ing* i$p%rtant e&&ect# %n the wa* $uti;u#ine## c%$panie#
i$pe$ent their #trategie#! N%t %n* i# it heping i$pr%ve the e&&icienc* with
which the $uti1ivi#i%na #tructure %perate#4 it a#% a%w# &%r the ;etter c%ntr% %&
c%$pe= vaue chain activitie#! The gr%wth %& %ut#%urcing ha# a#% ;een pr%$%te1
;* IT an1 #%$e c%$panie# have 1eve%pe1 netw%r( #tructure# t% c%%r1inate their
g%;a vaue chain activitie#!
7RACTICE 5;ESTIONS
State Tr"e !r &a'se in the %!''!#ing 5"esti!ns B1= $ar/sC
1! T ' -%cati%n ec%n%$ie# $a* ena;e a c%$pan* t% charge a pre$iu$ price!
+! T ' "* %&&ering a #tan1ar1i0e1 pr%1uct t% the g%;a $ar(etpace an1
$anu&acturing that pr%1uct in each nati%n in which it 1%e# ;u#ine##4 a
$utinati%na c%$pan* can reai0e #u;#tantia #cae ec%n%$ie#!
2! T ' De$an1# &%r %ca re#p%n#ivene## c%n#train a c%$pan*A# a;iit* t%
tran#&er c%re c%$petencie#!
5! T ' C%$panie# that are e=pan1ing %ver#ea# %&ten tr* t% create vaue ;*
tran#&erring #(i# 1eve%pe1 in their 1%$e#tic $ar(et!
6! T ' A $uti1%$e#tic #trateg* inv%ve# $anu&acturing g%;a %utput in a
i$ite1 nu$;er %& centrai0e1 %cati%n# t% reai0e #cae ec%n%$ie#!
:! T ' C%#t ea1er# pur#ue an internati%na #trateg* t% )uic(* ri1e 1%wn the
e=perience curve!
E! T ' In c%$panie# pur#uing a pure g%;a #trateg*4 vaue i# create1 ;* citing4
$anu&acturing at th%#e %cati%n# where the &act%r c%#t@#(i $i= i# $%#t &av%ra;e!
214
F! T ' The pr%;e$ with a $uti1%$e#tic #trateg* i# that the %rgani0ati%na c%#t# are
#igni&icant* greater than with a g%;a #trateg*!
8 T ' A tran#nati%na #trateg* i# pr%;a;* the ea#ie#t $utinati%na #trateg* t%
i$pe$ent!
19!T ' Pre##ure# &%r g%;a integrati%n are higher in in1u#trie# pr%1ucing #$a
;atche# %& cu#t%$i0e1 pr%1uct# than in in1u#trie# pr%1ucing
c%$$%1it*-t*pe pr%1uct#!
11! T ' The e=i#tence %& univer#a nee1# create# #tr%ng pre##ure# &%r g%;a
integrati%n!
1+! T ' A tran#nati%na #trateg* $a(e# the $uti1%$e#tic #trateg* %;#%ete
12 T ' An e=p%rter #h%u1 u#e a %ca agent t% $ar(et it# pr%1uct# in %r1er t%
$ini$i0e c%#t#!
15 T ' 'ranchi#e agree$ent# have $%re #tringent rue# %n h%w t% 1% ;u#ine## than
icen#ing agree$ent#!
16 T ' One 1i#a1vantage %& &ranchi#e# i# the ina;iit* t% reai0e e=perience-curve
e&&ect#!
1: T ' <%int venture# are the ;e#t entr* $%1e &%r a c%$pan* pur#uing a g%;a
#trateg*!
1E T ' One a1vantage %& B%int venture# i# that it ena;e# c%$panie# t% engage in
g%;a #trategic c%%r1inati%n!
1F T ' E#ta;i#hing a wh%* %wne1 #u;#i1iar* in a &%reign $ar(et re)uire# a c%$pan*
t% #et up a c%$pete* new %perati%n in that %perati%n!
18! T ' -icen#ing $a(e# $%#t #en#e &%r a $utinati%na c%$pan* that wi#he# t%4
$aintain tight c%ntr% %ver it# %ver#ea# %perati%n#!
+9 T ' E#ta;i#hing a wh%* %wne1 #u;#i1iar* i# the %we#t-c%#t wa* %&
215
e=pan1ing %ver#ea#!
+1 T ' #%$e e=p%rting i# c%n#i#tent with a tran#nati%na #trateg*!
++ T ' Cr%##-icen#ing agree$ent# re1uce the ri#( %& an aiance partner
engaging in %pp%rtuni#$!
+2 T ' The %wer the ;arrier# t% entr*4 the $%re ac)ui#iti%n# ;ec%$e the &av%re1
$%1e &%r entering a new ;u#ine## area!
+5 T ' Ac)ui#iti%n# are pre&era;e t% new venture# i& an in1u#tr* i# 4in the ear*
gr%wth #tage %& the in1u#tr* i&e c*ce4
+6 T ' Ac)ui#iti%n# can genera* ;e e=ecute1 &at $%re )uic(* than an interna new
venture!
+: T ' The a1vantage %& interna venturing %ver ac)ui#iti%n# a# a $%1e entering a
new ;u#ine## area i# that interna venturing inv%ve# %wer ri#(#!
+E T ' Man* ac)ui#iti%n# &ai ;ecau#e the ac)uiring c%$pan* %vere#ti$ate# the
#*nergie# ;etween it# %perati%n# an1 th%#e %& the ac)uire1 c%$pan*
+F T ' A c%$pan* can increa#e the pr%;a;iit* %& #ucce## &%r an interna venture
;* c%n#tructing e&&icient-#cae $anu&acturing &aciitie# ahea1 %& 1e$an1
+8 T ' <%int venture# are a g%%1 aternative &%r c%$panie# that pre&er interna
new venture# t% ac)ui#iti%n# ;ut are he#itant t% c%$$it ;ecau#e %& c%#t# an1
ri#(#!
29 T ' Ghen a c%$pan* nee1# t% e=it an in1u#tr*4 a harve#t #trateg* i# genera*
pre&erre1 t% a 1ive#t$ent #trateg*!
21!T ' C%$panie# un1erg%ing a re#tructuring t*pica* %n* 1i#p%#e %& a##et# that
are unpr%&ita;e!
2+ Ac)ui#iti%n# are i(e* t% ;e pre&erre1 t% new venture# when!
a! Entr* ;arrier# are high
216
;! Entr* ;arrier# are %w!
c! The new ;u#ine## i# c%#e* reate1 t% the e=i#ting ;u#ine##!
1! The c%$pan* c%u1 n%t &in1 an aiance partner!
e! Entr* ;arrier# are high and the c%$pan* c%u1 n%t &in1 an aiance partner!
22 New venture# are i(e* t% ;e pre&erre1 t% ac)ui#iti%n# when!
a! Entr* ;arrier# are high!
;! E=it ;arrier# are high!
c! The new ;u#ine## i# c%#e* reate1 t% e=i#ting %perati%n#!
1! The c%$pan* nee1# $%re ca#h c%w# in it# p%rt&%i%!
e! The in1u#tr* i# in the $ature #tage %& the in1u#tr* i&e c*ce!
25! Ghich %& the &%%wing &act%r# $ight per#ua1e a c%$pan* t% &av%r ac)ui#iti%n# %ver
interna venturing a# the ;e#t $%1e &%r entering a new ;u#ine## areaH
a! The new ;u#ine## i# c%#e* reate1 t% e=i#ting %perati%n#!
;! The in1u#tr* t% ;e entere1 i# in the e$;r*%nic #tage %& 1eve%p$ent!
c! The c%$pan* i# prepare1 t% wait a nu$;er %& *ear# ;e&%re the new
;u#ine## ;egin# t% generate #igni&icant pr%&it#!
1! The c%$pan* i# prepare1 t% get inv%ve1 in high-ri#(@high-return
new %perati%n#!
e! The ;arrier# t% entering the target in1u#tr* are high!
26! '%r which %& the &%%wing in1u#tr* envir%n$ent# i# new venturing $%#t i(e* t% ;e
&av%re1 %ver ac)ui#iti%n# a# a $ean# %& entering a new ;u#ine## areaH
a An e$;r*%nic in1u#tr*
; An in1u#tr* in it# ater #tage# %& gr%wth
c! An in1u#tr* pa##ing thr%ugh the #ha(e%ut #tage
1! A $ature in1u#tr*
e A 1ecining in1u#tr*
2:! A c%$pan* c%n#i1ering entering an in1u#tr* that i# in the $ature #tage %& it# i&e c*ce
w%u1 genera* pre&er which %& the &%%wing entr* #trategie#H
a! Ac)ui#iti%n#
217
;! New venture#
c4 <%int venture#
1! -%ng -ter$ c%ntracting
e! Taper integrati%n
2E! Ac)ui#iti%n# are genera* pre&erre1 t% new venture# when a c%$pan* i# pur#uing
which %& the &%%wing #trategie#H
a! Diver#i&icati%n ;a#e1 %n tran#&erring c%$petencie#
;! Diver#i&icati%n ;a#e1 %n reai0ing ec%n%$ie# %& #c%pe
c! Unreate1 1iver#i&icati%n
1! '%cu#
e! Harve#t
2F!! Ac)ui#iti%n are %&ten &ai ;ecau#e %& p%%r
a! C%$$unicati%n
b4 T%% Much Pre-ac)ui#iti%n Screening4 Ghich Increa#e# The Ti$e It Ta(e# T%
Enter A Mar(et
c4 -arge Scae Entr*
1! Di&&erence# in C%rp%rate Cuture!
e! A O& The#e
28! Ghich %& the &%%wing i# not a rea#%n &%r the &aiure %& an ac)ui#iti%n t% generate the
gain# %rigina* e=pecte1 %& itH
a! P%%r p%#t ac)ui#iti%n integrati%n
;! Overe#ti$ati%n %& the p%tentia gain# t% ;e 1erive1 &r%$ #*nerg*
c! The high c%#t %& $a(ing ac)ui#iti%n#
1! -ac( %& pre-ac)ui#iti%n #creening
e! Overe#ti$ati%n %& the p%tentia c%#t# %& reai0ing #*nergie#
59 Ghat a1vantageC#D 1% B%int venture# have %ver new venture# a# a $ean# %&
e#ta;i#hing new ;u#ine## %perati%n#H
a! The c%$pan* $a* ;ene&it &r%$ the (n%w-h%w %& a B%int venture partner!
218
;! The c%$pan* can #hare the c%#t# an1 ri#( inv%ve1 in a new-venture
pr%Bect!
c! The c%$pan* $a* gain acce## t% c%$pe$entar* re#%urce# that i$pr%ve
the pr%;a;iit* %& #ucce##!
1! N%ne %& the#e
e! A %& the#e
51! <%int venture#
a! are an aternative t% new venture#!
;! are attractive when #pee1 i# i$p%rtant!
c! are attractive when entr* ;arrier# are high!
1! #h%u1 ;e 1%ne %n a #$a #cae!
e! A %& the#e
5+! Di#a1vantage# %& B%int venture# incu1e the &act that
a! venture partner# #hare c%ntr%
;! the* are n%t via;e in e$;r*%nic in1u#trie#!
c! the* have higher ri#(# than new venture#!
1! the* ta(e %nger t% reai0e a pr%&it than new venture#!
e! N%ne %& the#e
52! Ghich %& the &%%wing #tate$ent# i# false+
a! Ac)ui#iti%n# are pre&era;e t% B%int venture# when the new ;u#ine## i# unre-
ate1 t% the e=i#ting ;u#ine##!
;! Ac)ui#iti%n# are pre&era;e t% new venture# when #pee1 i# i$p%rtant!
c! <%int venture# are genera* pre&erre1 t% ac)ui#iti%n# when entr* ;arrier#
are high!
1! Ac)ui#iti%n# can ;e ;%th a rea#%n &%r c%rp%rate 1ecine an1 part %& a
turn
ar%un1 #trateg*!
e! New venture# are pre&erre1 t% ac)ui#iti%n# in the e$;r*%nic #tage %&
the in 1 u # tr* 1i&e c*ce!
219
Essay type 5"esti!ns BD= $ar/sC
55! Un1er what c%n1iti%n# $ight h%ri0%nta integrati%n ;e inc%n#i#tent with the g%a %&
$a=i$i0ing pr%&ita;iit*!
56! Un1er what c%n1iti%n# $ight c%ncentrati%n %n a #inge ;u#ine## ;e inc%n#i#tent
with the g%a %& $a=i$i0ing #t%c(h%1er weathH Gh*H
5:! Di#cu## H%w c%$panie# can u#e CaD pr%1uct 1i&&erentiati%n an1 C;D Capacit* c%ntr% t%
$anage rivar* an1 increa#e an in1u#tr*?# pr%&ita;iit*!
5E! Gh* are #tan1ar1# #% i$p%rtant in $an* high-tech in1u#trie#H Ghat are the
c%$petitive i$picati%n# %& thi#H
5F! Ghen w%u1 a c%$pan* 1eci1e t% change &r%$ a &uncti%na t% a $uti 1ivi#i%na
#tructureH
58! Ghat i# the reati%n#hip %& %rgani0ati%na #tructure4 c%ntr%4 an1 cutureH Give #%$e
e=a$pe# %& when an1 un1er what c%n1iti%n# a $i#$atch ;etween the#e c%$p%nent#
$ight ari#e!
220
STRATEGIC MANAGEMENT :7ractice paper
Instr"cti!ns
Thi# paper ha# three part#/ The* are true an1 &a#e )ue#ti%n#4 $utipe- ch%ice
)ue#ti%n#4 an1 e##a* t*pe )ue#ti%n! Atte$pt a! Thi# E=a$ ha# a t%ta %& 29 p%int#!
Tr"e@&a'se 5"esti!ns: Identi%y the c!rrect ans#er in the %!''!#ing >"esti!ns by
circ'ing the T !r &
1! T ' C%$pan* can charge a pre$iu$ price i& it per&%r$# vaue-creati%n &uncti%n# at
a %wer c%#t than it# c%$petit%r#!
+! T ' t%p $anage$ent i# c%n#i1ere1 part %& a c%$pan*?# in&ra#tructure!
2! T ' The vaue a c%$pan* create# i# $ea#ure1 ;* the a$%unt that ;u*er# are
wiing t% pa* &%r a pr%1uct %r #ervice!
5! T ' In the vaue chain4 #upp%rt activitie# are th%#e inv%ve1 in the ph*#ica
creati%n %& the pr%1uct4 it# $ar(eting an1 1eiver* t% ;u*er#4 an1 it?# a&ter #ae#
#ervice!
6! T ' Mini$u$ e&&icient #cae i# the $ini$u$ a$%unt c%$panie# are wiing t%
pr%1uce %& a pr%1uct!
:! T ' -earning e&&ect# #ugge#t that unit c%#t 1ecine ;* a characteri#tic a$%unt
when a c%$pan* 1%u;e# it# %utput# &r%$ a pant!
E! T ' -earning e&&ect# are $%#t #u;#tantia &%r the a##e$;ing %& a c%$pe= new
pr%1uct!
F! T ' A&ter a c%$pan* reache# it# $ini$u$ e&&icient #cae %& %utputL it enc%unter#
#igni&icant 1i#ec%n%$ie# %& #cae!
8! T ' Pr%1ucing high v%u$e# awa*# give# a c%$pan* a c%#t a1vantage!
19! T ' &e=i;e $anu&acturing techn%%gie# ena;e# the c%$panie# t% pr%1uce #$a
;atche# %& high- )uaitie# cu#t%$i0e1 pr%1uct# at a c%#t that at %ne ti$e c%u1 %n*
;e achieve1 thr%ugh $a## pr%1ucti%n!
11! T ' An inver#e reati%n#hip e=i#t# ;etween unit c%#t# an1 cu#t%$er 1e&ecti%n
rate#!
1+! T ' Serving cu#t%$er# that #ta* with the c%$pan* %n* a #h%rt ti$e can %&ten
re#ut in a negative pr%&it per cu#t%$er!
221
12! T ' "ui1ing cu#t%$er can re#ut in %wer c%#t#!
15! T ' The i1ea ;ehin1 #e&-$anaging tea$# i# t% give $i11e $anage$ent $%re
c%ntr% %ver %wer-eve hiring an1 &iring 1eci#i%n#!
16! T ' T%p $anage$ent #h%u1 ta(e pri$ar* re#p%n#i;iit* &%r e#ta;i#hing $ea#ure#
%& )uait*!
1:! T ' re#earch #ugge#t# that %n* 29Y %& new pr%1uct inn%vati%n# generate pr%&it
when the* get t% the $ar(et pace!
1E! T ' Integrating RQD with $anu&acturing can en#ure that a c%$pan* 1%e# n%t
1eve%p a pr%1uct &%r which there i# itte 1e$an1!
1F! T ' In pr%Bect $anage$ent pr%Bect# are evauate1 a&ter the 1etai# %& the pr%p%#a
are w%r(e1 %ut in#tea1 %& when the i1ea# are pr%p%#e1!
18! T ' De#igning pr%1uct# that are ea#* t% $anu&acture increa#e# ;%th e&&icienc*
an1 )uait*!
+9! T ' One rea#%n wh* #% $an* new pr%1uct# &ai i# that4 ;ecau#e %& uncertaint*4 n%
%ne can rea* pre1ict what the &uture 1e$an1 &%r a new pr%1uct wi ;e!
M;LTI7LE C6OICE 5;ESTIONS
+1!The vaue c%ncept #ugge#t#
a! That the %n* pri$ar* activitie# a11 vaue t% a pr%1uct!
;! That the a&ter-#ae# #ervice# i# an i$p%rtant #upp%rt activitie#!
c! That a vaue-creati%n &uncti%n pa* a r%e in achieving #uperi%r )uait*4
e&&icienc*4 inn%vati%n an1 cu#t%$er re#p%n#ivene##!
1! That $ateria# $anage$ent ha# a pri$ar* r%e!
e! A %& the#e
++!ZZZZZZZZZZZi# a pri$ar* activit* in the vaue chain
a! Materia# $anage$ent
;! Mar(eting
c! Re#earch an1 1eve%p$ent
1! Hu$an re#%urce#
e! C%$pan* in&ra#tructure
+2! Ghich %& the &%%wing i# n%t #upp%rt activit* in the vaue chainH
a! Hu$an re#%urce#
222
;! Re#earch an1 1eve%p$ent
c! Materia# $anage$ent
1! -ea1er#hip
e! Deiver*
+5! Str%ng ea1er#hip &r%$ t%p $anage$ent
a! I# pri$ar* in the vaue chain
;! I# nee1e1 t% attain #cae ec%n%$ie#
c! I# nee1e1 t% ;ui1 ;ran1 r%*at*
1! Can #hape the in&ra#tructure %& c%$pan*
e! I# pri$ar* activit* in the vaue chain an1 can #hape the in&ra#tructure %& the
c%$pan*
+6! A c%$pan* i# pr%&ita;e i&
a! It ha# $%re #trength# than wea(ne##e#
;! The vaue it create# e=cee1# the c%#t %& per&%r$ing vaue-creati%n
&uncti%n#!
c! It change# a pre$iu$ price
1! It# wea(ne##e# are c%n&ine1 t% the #upp%rt activitie# %& the vaue chain
e! A %& the#e
+:! Ghich %& the &%%wing i# n%t vaue creati%n activit*H
a! Inve#ting in &i=e1 a##et# in %r1er t% e#ta;i#h ;arrier# t% e=i#t
;! The intr%1ucti%n %& a1vance1 in&%r$ati%n #*#te$# techn%%g* t% ;etter
c%%r1inate the $anage$ent %& $ateria# within the c%$pan*
c! Pur#uing e=perience-curve ec%n%$ie# in %r1er t% e#ta;i#h a ;arrier t% new
entr*
1! Pur#uing new pr%1uct 1eve%p$ent #trategie#
e! Deve%ping w%r(-&%rce pan that $atche# &uture re)uire$ent# with the
#upp* %& per#%nne
+E! -earning e&&ect#
a! Re#ut in unit $anu&acturing c%#t# 1ecining ;* a certain a$%unt each ti$e
%utput i# 1%u;e1!
;! Re#ut in unit $anu&acturing c%#t# 1ecining ;* a certain a$%unt each ti$e
accu$uate1 %utput i# re1uce1!
223
c! Are $%re #igni&icant when c%$pe= #tep# in an a##e$;* pr%ce## are
repeate1
1! -ea1 t% ec%n%$ie# %& #cae!
+F! A c%$pan* #h%u1 av%i1 re*ing #%e* %n c%#t an1 a1vantage# achieve1
&r%$ ri1ing 1%wn the e=perience curve &%r a %& the &%%wing rea#%n# e=cept
a! Techn%%gica change can ren1er the %1 techn%%g* %;#%ete!
;! Other c%$panie# can achieve c%#t parit*!
c! High v%u$e 1%e# n%t nece##ari* re#ut in a c%#t a1vantage!
1! A11iti%na c%#t re1ucti%n# are har1 t% c%$e ;* when the v%u$e e=cee1#
the $ini$u$ e&&icient #cae CMESD!
e! A C%$pan* $u#t c%n#truct e&&icient #cae $anu&acturing ;e&%re it ha#
1e$an1!
+8! The c%ncept %& the e=perience curve #ugge#t# that
a! Manu&acturing c%#t# 1ecine ;* the #a$e a$%unt each ti$e a c%$pan*
1%u;e it# %utput!
;! Higher v%u$e# %& %utput awa*# give ri#e t% greater pant-eve ec%n%$ie#
%& #cae!
c! -earning e&&ect# per#i#t %ver %ng ti$e peri%1#!
1! C%#t# 1ecine ;* #%$e characteri#tic# a$%unt each ti$e accu$uate1
%utput i# 1%u;e1!
e! A %& the#e!
29! The e=perience curve re&ect# the &act that $ar(et #hare i# a &uncti%n %&
pr%&ita;iit*
a! The arger a c%$pan*?# accu$uate1 v%u$e i# the $%re e=perience it ha#
in pr%1ucing an ite$ an1 the %wer it# unit c%#t# are %ver ti$e 4
;! The %nger a c%$pan* i# in ;u#ine##4 the arger it# $ar(et #hare i# ;ecau#e
%& c%#t re1ucti%n# achieve1 thr%ugh e=perience!
c! The c%$pan* i# a;e t% reai0e 1i#ec%n%$ie# %& #cae thr%ugh %wer c%#t# at
higher eve# %& $ar(et #hare!
1! Each ti$e $ar(et #hare i# 1%u;e14 unit c%#t 1ecine ;* #%$e characteri#tic
a$%unt!
224
21! Ghich %& the &%%wing i# a tactica #tep &%r getting 1%wn the e=perience
curve ahea1 %& c%$petit%r#H
a! Pre$iu$ pricing t% create an i$age %& uni)uene## in c%n#u$er#[ $in1!
;! Pur#uing a 1i#tinctive c%$petence in &%cu#e1 $ar(eting
c! U#ing aggre##ive pricing an1 pr%$%ti%n# t% e=pan1 #ae# v%u$e a# rapi1*
a# p%##i;e!
1! C%n#tructing a $anu&acturing pant %& e## than $ini$u$ e&&icient #cae!
e! Ma(ing the a##e$;* %& the pr%1uct a# c%$pe= a# p%##i;e4 ;ecau#e thi#
re#ut# in greater earning e&&ect#!
2+! Tra1iti%na $anu&acturing!
a! i# n% %nger u#e1!
;! re)uire# a tra1e%&& ;etween unit c%#t# an1 pr%1uct variet*!
c! ha# higher unit c%#t# than &e=i;e $anu&acturing!
1! pr%1uce# a variet* %& pr%1uct# in high v%u$e#!
e! ha# higher unit c%#t# than &e=i;e $anu&acturing an1 re)uire# a tra1e%&&
;etween unit c%#t# an1 pr%1uct variet*!
22! E=tre$e 1ivi#i%n %& a;%r an1 #peciai0ati%n i# c%n#i#tent with
a4 The attain$ent %& #cae ec%n%$ie#!
b4 Pr%1uct 1i&&erentiati%n!
c4 C%ntinu%u# earning e&&ect#!
&4 S$a ;atch pr%1ucti%n!
e4 "%th the attain$ent %& #cae %& ec%n%$ie# an1 #$a-;atch pr%1ucti%n!
25! Ghich %& the &%%wing i# n%t an a1vantage %& &e=i;e $anu&acturingH
a4 Cu#t%$i0ati%n!
b4 Rapi1 re#p%n#e!
c4 Superi%r e&&icienc*!
&4 I$pr%ve1 )uait* c%ntr%!
e4 G%%1 pr%Bect $anage$ent!
26! Ghich %& the &%%wing &uncti%n# i# re#p%n#i;e &%r 1eve%ping pr%ce##
inn%vati%n# t% increa#e e&&icienc*H
a4 T%p $anage$ent!
b4 Re#earch an1 1eve%p$ent!
225
c4 Materia# $anage$ent!
&4 Manu&acturing!
e4 Mar(eting!
/4
Essay Type 5"esti!ns
1! De&ine Strateg*!
+! Outine the pr%ce## %& #trateg* $anage$ent!
34 Di#cu## P%rter?# &ive &%rce# that #hape in1u#tr* c%$petiti%n
44 Gh* i# it i$p%rtant t% un1er#tan1 the 1river# %& pr%&ita;iit*4 a# $ea#ure1 ;*
the return %n inve#te1 capita
54 Gh* i# it 1i&&icut &%r a c%$pan* in %ne #trategic gr%up t% change t% a 1i&&erent
#trategic gr%up
226