The **strategic triangle"

and business unit strategy

Kenichi Ohmae

Reduced to its essentials, business strategy deals with the

interplay of three forces: the corporation, the customer and
the competition. Based on that deceptively simple concept,
the model developed in this article is designed both as a
logical framework for strategy development and as a stimulus
and source of insights for the strategic thinker faced with the
challenge of devising ways in which the company can
differentiate itself effectively from its competitors,
capitalizing on its distinctive strengths to deliver better
value to its customers.

Over the past decade, quite a few new concepts of business strategy
have emerged. Good strategies, however, remain difficult to
develop, largely because strategy is so much easier to classify in
retrospect than to plan and create.

Although definitions of strategy are rarely both general enough to

be comprehensive and specific enough to he useful, there is little
quarrel about the criteria of good business strategies. Observation
tells us that they are characterized by: (1) clear market definition;
(2) a good match between corporate strengths and the needs of the
markets; and (3) superior performance, relative to competition, in
the key success factors of the business.

ln th(! formation of a good strategy at least three key players must

be taken into account, "the strategic 3Cs" - corporation, customer
and competition - which together form the strategic triangle (Exhi-
bit 1). All three are dynamic, living creatures with their own objec-
tives and wants. If what the customer wants doesn't match the needs
ofthe corporation, the latter's long-term viability may be at stake
Positive matching of the needs and objectives of the two parties
involved IS required for a lasting good relationship. But such
matt'hing is relative, and if the competition is able to offer a better
match, the corporation will be at a disadvantage over time

WINTER 1983
 The strategic triangle

In other words, the matching of needs between the customer and

the corporation must be not only positive, but better or stronger
than that between the customer and the competitor. When the
corporation's approach to the customer is identical to that ot the
competition, the customer cannot differentiate between them and
the result could be a price war, whic:h may satisfy the customer's
needs but not the corporation's. Strategy must then be defined in
terms of these three key players as an endeavor by a corporation to
differentiate itself positively from its competitors, using its relative
corporate strengths to better satisfy customer needs.

The strategic 3Cs

A natural conceptual unit for building a good business strategy
needs to have full freedom of operation vis-a-vis each of the three
key players.
With respect to the customer, it must l)e able to address the market
in total, not just its sections. If the strategic planning unit is too
narrowly defined - i.e., placed too low in the organization - it may
lack the authority to take a total market perspective. This will be
a handicap if the competitor's perspective takes in the entire needs
of the customer, including some that cannot be detected through
the limited lens of a business unit. For example, if a customer is

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 looking for integrated electronic components, the supplier who
otfers only a specialized switch will be at a disadvantage.

Fn terms ofthe corporation itself, the strategic planning unit needs

to encompass all the critical functions - which might range all the
way from procurement, design and engineering., manufacturing,
sales and marketing, to distribution and service - so as to be able
to respond with the maximum degree of freedom to the total needs
of the customer. This does not mean that the strategic business
unit, which is an operational unit, cannot share resources with
others. Tt simply means that in developing a good business unit
strategy, the corporation needs to address all the functional
asptscts of customer needs and competition. A conventional organ-
izational unit may not have every key function reporting to it,
but in strategic planning one needs to explore to its fullest the
possibility of utilizing the corporation's relative strengths to
achieve differi^ntiation from the competitor. Such differentiation
comes only from differences in functional strengths, singly or in
combination.

A manufacturer of air-conditionmg equipment, recognizing that it

could do little to strengthen its distribution and servicing network,
d(>veloped a line of sturdy, expensive units that did not easily break
clown. Bv.hig an (mgineering-oriented company, it could do this very
well. What it couldn't do, it turned out, was sell the product; in
fact, Jt failed to acbieve a sbare of even 1 percent. The reason was
simple: because the units were too heavy to be lifted by an ordinary
two^iiian instaliation crew, tbe distributors - who v/ere the real
decision makers when it came to brand selection - rejected tbe
product line completely. Instead of thinking tbrough the strategic
jmplications of all tht^ key functions, this manufacturer had
resorted prematurely to its favorite solution - engineering.

Handicapped by a relatively weak servicing network compared with

that of its dominant competitor, another company, which made
plain-paper copiers, developed a line of relatively service-free equip-
ment. Other features of its machines were no better than those of
the competition, but tbe company was able to increase its market
share ratber quickly by offering them at a slightly lower price.
Having recognized its functional weaknesses, this company suc-
cessfully (compensated for tbem by exploiting its strengths: engi-
neenng. manufacturing efficiency and quality control.

finally, as regards the competition, the strategic planner must be

ahle to see it m its totality. If tbe business unit, heing too narrowly

WIXTl'IR 1983
defined, perceives only one aspect of tbe competitor's operations -
e.g., its product offerings the planners may miss such critical
strategic elements as the competitor's R&D capabilities, shared
resources in procurement, manufacturing sales and services, or
other sources of profit, including all the other businesses in whicb
the competitor may be engaged.

Faced with a major worldwide shipbuilding crisis, Mitsubishi

Heavy Industries (MHI) has been able, for example, gradually to
shift its permanently employed excess shipbuilding manpower to its
other businesses and subsidiaries, such as automobiles, chemical
plants, power plants and other metal-forging and metal-bending
operations. Because its competitors lacked Mitsubishi's flexibility,
their shipbuilding became uneompetitive and unprofitable.

Defining a strategic planning unit

The strategic planning unit, then, is best establisbed at a level
where it can rather freely address: (1) all key segments of the
customer group having similar objectives; (2) all key functions of
the corporation, so that it ean deploy whatever functional expertise
is needed to establish positive differentiation from competition in
the eyes ofthe customer; and (8) all key aspects ofthe competitor,
so that the corporation can seize the advantage when opportunity
offers - and, conversely, so that the competitors will not be able to
catch the corporation off balance- by exploiting unsuspected
sources of strengtb.

All too often, strategies are developed for business units that are
too narrowly or too broadly defined. For example, a strategy for
'Tarm tractor engines" would be ineffective because the strategic
unit IS at too low a level in the organization to: (1) consider product
applications and customer groups other than farmers, or (2) cope
with new competitors who might enter the farm tractor market at
almost any time with a totally different product set of boundary
conditions. In contrast, a strategy for '^medical care" would exemp-
lify too broad a definition of a strategic business unit. Tt could
embrace equipment, service, hospitals, education, self-disciplme,
even social welfare. Each ofthe three key players - the strategic
3Cs - could consist of dozens of totally different elements with
different objectives and functions, making the interaction matrix
a nightmare of complexity.

Business unit definition always contains gray areas and room for
dispute. It is therefore advisable, halfway into the strategy develop-

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 ment process, when the basic parameters ofthe three key players
bave become c-lear, to reassess the legitimacy ofthe unit originally
chosen. Three key questions need to be asked:

• Are customer wants well defined and understood by the industry,

and is the market segmented so tbat differences in these wants
are treated differently?

Is the business unit equipped to respond functionally to the basic

wants and needs of customers in the defined segments?

' Do competitors have different sets of operating conditions that

could give them an unfair advantage over tbe business unit in
question?

]f the answers give reason to doubt the business unit's ability to

compete m the market, the next step is to redefine the business unit,
so as to increase its degrees of strategic freedom in meeting the
customer needs and competitive threats.

Customer-based strategies
In a fre(^ economy, any given market inevitably becomes hetero-
geneous, smc(^ eac-h customer group will tend to want a slightly
difterent service or product. Moreover, the corporation cannot
reach out to all customers with equal effectiveness, and therefore it
needs to distinguish the easily accessible customer groups from the
hard-to-reach ones. Finally, the competitor's abilities to respond to
customer needs and to cover different customer groups will differ
from those ofthe corporation. These are the reasons why the cor-
poration must segment the market in order to establish a strategic
edge over its competition. Fine structure within the customer group
offers the opportunity to establish this kind of differentiation.

There are two basic modes of market segmentation: hy customer

objectives and })y customer coverage. Of the two, the former often
l)ecomes tbe basis for creative and differentiated market segmenta-
tion. I or tbe smallest market segment that competition can suecess-
tully invade with a distinctive approach is a group of customers
sharing similar objectives - i.e., usnig the product in similar ways.

Segmentation by customer objectives, ln market segmentation the

key question is whether in fact different subgroups are pursuing
objectives that are sufficiently different to warrant the corpora
Mon s (or the comp(.titor's) offering differentiated services and

WI.VTER 1983
13
products. Obvious differences in age, race, profession, region,
family size, etc. may be the basis of segmentation but usually these
are merely convenient statistical classes rather than strategic seg-
ments. "Differences" per se are not good enough unless each seg-
ment has differentiable objectives that can be refiected in the way
the corporation approaches the market.

This is why it is so important to understand the fine shades of

customer wants. Purchase decision-making behavior often refiects
the degree of utility, quality, or luxury that particular customer
groups may demand at given price levels. The price-quality relation-
ship is important to a sophisticated customer, while price alone may
be more important to another. Since price elasticity (the tendency
of price increases to depress demand) exists in most markets, the
very size of the customer group is itself a function of the pricing
decision.

Frequently the customer applies quite specific criteria in evalu-

ating the value of a product or service, ranging from intang-
ibles such as glamor, ego satisfaction, luxury or brand image, to
tangible attributes such as performance, durability, running cost,
comfort, resale value, payment terms, spare-parts availability, or
sales and service facilities. An economically rational customer will
buy the product that offers him the most value based on tradeoff
calculations between the pros and cons of these tangible features;
and over the long haul, the corporation offering greater economic
value to the customer can usually work out tactics and logistics to
win out over competition. Since value to the customer will differ
according to customer wants, a comprehensive analysis ofthe val-
ues provided to different customer groups will often lead to
strategically meaningful segmentation.

Segmentation by customer coverage. Another mode of segmenting

the market may arise from the corporation's own circumstances.
Fven when a large group (or subgroup) of the customers share
identical wants and needs, the corporation's ability to serve them
all may he constrained by limited resources, by gaps m market
coverage relative to competition, or by the cost of serving a frag-
mented market at a price acceptable to the customers - who, it the
price were too high, could always go without or resort to an alter-
native: a radio instead of a TV set, a lead pencil instead of a ball-
point, taking a walk instead of a taxi.

This type of strategic segmentation normally emerges from a trade-

off study of marketing costs versus market coverage. Marketing

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 Matrix framework for strategic segmentation

Type I segmentation
by customer needs

Type II segmentation
by corporate coverage - region or channel

segments in which corporation currently operates

segments in which corporation can achieve positive differentiaiion

costs - which may include the costs of promotion to establish brand

awareness, sales activities, servicing networks, inventories to pro-
vide adequate delivery, physical distribution, commissions and
margin to stimulate dealers and distributors - are typically dictated
by the desired speed and depth of penetration into the target cus-
tomer group. There appears always to be a point of diminishing
return m the cost-versus-coverage relationship. The corporation's
task, therefore, is to optimize its range of market coverage, be it
geographical or channel, so that its cost of marketing w'ill be
advantageous relative to competition.

As pictured in Exhibit II, sophisticated companies often have a

clear matrix framework for strategic segmentation, distinguishing
the cut by customer needs (Type I) from the cut by their own
market-coverage capability (Type II). The crucial task here is to
ensure that the corporation can positively differentiate its products
or services from those of competition in each ofthe chosen segments
(heavy dots on brown tint in the matrix).

Resegmentation. In a fiercely competitive market, the corporation

and Its head-on competitors are likely to be dissecting the market i n

WINTER 1983
15
similar ways. Over the long run, therefore, the effectiveness of a
given strategic segmentation will tend to decline. In such a situa-
tion, it pays to pick a small group of key customers and reexamine
what it is that they are really looking for. In other words, to reseg-
ment the market in order to establish if it is possible to achieve
differentiahle advantages in meeting customers' needs.

We have already seen that there are two types of segmentation: the
first hy customer wants, the other by market coverage. Correspond-
ingly, market segments may shift as a result either of changes in
user objectives over time, or of changes - geographic or demo-
graphic - in the distribution ofthe user mix.

If the user's objectives are changing over time, the corporation must
think about offering a different product and/or services. By offering
differentiated products that will have a stronger appeal to the new
breeds of customer than to the old, the corporation can take advan-
tage ofthe forces at work, so as to grow faster and more profitably
than the competition. For example, small town cars were intro-
duced by Honda, Fiat and other European car companies for custo-
mers whose cost-benefit objectives had changed from high-speed
travel and/or prestige to convenience, economy and utility.

If distribution of the user mix is alttsring over time as a result of

changes in demographic factors, distribution channels, customer
size and the like, the appropriate strategic response will be a shift in
the allocation of corporate resources and/or a change in the abso-
lute level of resources committed in the business. Otherwise, the
growth of a market segment in which the company is relatively
weak can result in a severe loss of total market share.

Structural changes are usually slow, incremental processes, imper-

ceptible from year to year to those inside the business. A definite
trend is likely to emerge only over a period of several years. It is
therefore critical in strategic planning to analyze changes m the
relative importance of market segments over a rather extended
period of time. If significant changes have occurred, the next step is
to analyze the forces at work and extrapolate them just far enough
into the future to ensure that the company is "reading" the en-
vironment slightly ahead of its competition. A precipitous change
in the boundary conditions of the market caused by government
action or an economic discontinuity such as the energy crisis, may
call for a major change in strategy, and/or timely action to preempt
new opportunities that have opened up.

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 -iovv kev vary by

Sample industries
Key function for success To increase profit To gain share
Raw materiafs sourcing Uranium Petroleum
Production facilities Shipbuilding,
(economies of scale) Shipbuilding,
steelmaking steelmakmg
Design Aircraft Aircraft, Hi-Fi
Production technoiogy Soda, Semiconductors
semiconductors
Application engineering Microcomputers LSI, microprocessors
Sales force (qualityx quantity) Electronic cash registers Automobiles
Distribution network Beer Films,
home appliances
Servicing Elevators Commercial
vehicles - e.g , taxis

Corporate-based strategies
A company that analyzes its customers and competitors, hut fails to
strengthen the functions that are critical for success in the indus-
try, is like a staff-dominated military with weak soldiers. Unlike
customer-based strategies, corporate-based strategies are func-
tional m nature. They aim to maximize the corporation's strengths
relative to competition in key functional areas.

Once customers' needs and objectives are analyzed and understood

corporate strategy will normally he designed to meet them in the
most cost-effective way. But competition will soon discover what
the corporation is doing and follow suit. When this happens, the
way to survive and stay profitable is to he much stronger than the
competition in the key functions. These, of course, differ not only
from industry to industry, but with respect to the strategic objective
(share or profit) sought, as Exhibit III indicates.

For example, m a commodity component market such as switches

timers and relays, both market share and profitability are heavily
influenced hy product range. An ordinary engineer who is designing
circ'uitry normally reaches for the thickest catalog with the richest
product selection. In this industry, therefore, the manufacturer
with a wide selection can collect more share points with only a

WINTER 1983
17
 •:i; ; 1 Shifting human resources as key functions
change along a prodiict s life cycle

Life-cycle
phase

Yield; Pncing ;
productivity value
improvement engineering

meager sales force. This double advantage over companies in the

opposite situation (few selections, hence lower sales effectiveness)
explains why company performance in this kind of business tends to
be polarized. To compete in an industry where the key success fac-
tor is breadth of product range, the basic functional strengths re-
quired are in design engineering and manufacturing: on the one
hand, the ability to develop many product lines with fewer people
than the competition; on the other, superior plant layouts and labor
skills in order to produce many different product types and sizes
without augmenting fixed costs.

In some industries, the key functions are extremely dynamic. For

example the key to survival in the semiconductor industry is the
ability to shift emphasis rapidly from one area of functional exper-
tise to another. Constant investment m R&D facilities, manufac-
turing engineering, productivity improvement and quality control
is too costly; what needs to be strengthened is not each of these
functions per se, but rather the corporation's ability to shift the
resources, both capital and human, required m each functional area
in accordance with the rapid change m the key functions that takes
place in the course of a given product's life cycle (bxhibit IV).

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 st

Mari<etsize

WINTER 198,3
19
The secret of many Japanese corporations' success is their ability
to sequence the improvement of functional competence. In the 195()s
and early 1960s, many of them invested heavily, m terms of both
money and talented people, in manufacturing engineering. Their
production technology, together with the advantage of their then
cheap labor, was their principal source of strength. At this stage,
their investments in K&D and overseas marketing were minor; they
relied on imported technology and trading firms, respectively.
Later, they shifted their emphasis to quality control and product
design capabilities. Today they are very active in basic research and
direct marketing. At each phase they have been able to generate the
money to reinvest in improving the next generation of functional
strengths. Fxhibit V illustrates this Japanese approach.

Organizing to win
Functional strategies should be clearly distinguished from opera-
tional improvements and from programs designed to improve par-
ticular organizational units, such as engineering, purchasing or
marketing. Their object is not to solve the operating problems of a
particular department hut to strengthen the specific functional
performance required to succeed in a given industry. To be sure,
responsibility for this function may currently be assigned to a cer-
tain organizational unit; hence, functional strategy may fall under
an existing department in some companies. But this is by no means
always the case.
Consider the example of Casio, a manufacturer of pocket calcula-
tors. Most of its competitors are organized around the traditional
functions of engineering, manufacturing and marketing and have
gone in heavily for vertical integration - for example, through
ownership of dedicated integrated circuit production facilities.
Casio, in contrast, even today remains basically an engineering,
marketing and assembly company, with very little investment in
production facilities and sales channels. Its strength is fiexibility.
Recognizing its competitors' inability to introduce new products
rapidly, Casio has adopted a strategy of accelerating and shortening
product life cycles. Its functional strategy is to integrate design
and development into marketing so that consumer desires are
analyzed hy those closest to the market and quickly converted
into engineering blueprints. Because Casio has this function so
well developed, it can afford to obsolete its new products quickly,
putting Its competitors - all organized vertically on the assumption
of a one- to two-year life cycle for this type of product - at a severe
disadvantage.

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 As this example suggests, the best approach to developing a func-
tional strategy is to ignore organizational division to begin with,
and instead develop a detailed understanding of customers and
competitors in order to identify the functions that are critical to
success. The next question is whether tbe existing organizational
units, individually or collectively, are performing these key func-
tions better than the competition; and, if not, what needs to be done
to provide a competitive edge. In some cases, the final solution may
entail a basic organizational change. In others, it may suffice to
assign a few added responsibilities to existing departments, or to
improve certain management processes significantly.

Building in cost-effectiveness
If tbe first objective of functional strategies is to achieve superior
strength m a k(^y function, the second is to design and deliver the
most cost-effective functions. This can be accomplished in three
ways. The first is by reducing costs more determinedly than the
competition. Tbe second is by exercising greater selectivity in terms
of orders accepted, products offered, or functions to be performed ~
m other words, cherry-picking the high-impact operations, so that
as others are eliminated functional costs will drop faster than does
saies revenue. The third method is by sharing the function with
other businesses, or even with other companies, in order to obtain
the same functional performance at much lower cost, and thus to
gam a critical advantage over competitors who do not have similar
business arrangements.

Typical examples of shared resources are the "pooled-sales-force"

and account^manager concepts seen in sales organizations. In a
business where customer relationships and/or frequency and den-
sity of calls are more important than specific product knowledge
these are effective means of sharing a sales force among different
product/business units. If the competitor's saies force is organized
around individual business units, he will find it hard to satisfy the
conflicting requirements of high market coverage and low sales cost.

Experience indicates that there are many situations where sharing

rc-sources m one or more basic subfunctions of marketing can be
advantageous. This is true of service, financing, promotion and
advertising, and physical distribution; the only clear exception
seems to be product planning.

Outside of marketing, shared resources are often observed in R&D

m the torm of technical licensing and joint development. Where the

WINTER 1983
21
key function does not lie in technology, or where technology cannot
be monopolized, licensing is usually a more sensible way of lowering
development costs. When development costs are exceptionally high,
transnational R&D efforts may even be undertaken to remain com^
petitive in the worldwide market. Aircraft (the Airbus), atomic
reactors (the BWR consortium comprising GE, Hitachi, ASEA and
Toshiba), and offshore drilling (in the North Sea and the Yellow
Sea) are good examples.

While the sharing of resources can significantly lower specific func-

tional costs, it does sacrifice the advantages of concentration on a
specific business and/or market segment. Competition may attack
this vulnerability by taking a more customized approach and offer-
ing more sophisticated marketing approaches or better customer
service in certain regions or segments. In particular, they may
cherry-pick the lucrative segments and/or businesses. Hence, any
company that chooses to share resources in order to lower certain
functional costs needs to have a very alert group of strategists m
charge of market and competitive analyses.

Competitor-based strategies
Strong and sustained differentiation vis-a-vis competitors, the core
of competitor-based strategies, can bt; achieved as a result of a sub-
stantial advantage either in market coverage or in winning ratio
deriving from any of a number of possible sources (Exhibit VI).
These may range from more convenient outlet locations - i.e., a
denser distribution network - to a superior product image (whether
merited or not). Once a corporation achieves a positive advantage
over competitors in its functional capability to respond to customer
needs, it may choose to persistently exploit this advantage in de-
signing its strategy against certain competitors.

Take the case of Sony. For a long time, Sony enjoyed a superior
quality image in the United States which enabled it to price its color
TVs much higher than the competition. In Japan, however, this was^
not the case, and Sony products were priced at parity with those of
Matsushita (Panasonic) and others. Much the same situation pre^
vailed in the case of Honda's passenger cars (Civic, Accord and
Prelude) But hoth Sony and Honda invested more heavily m public
relations and promotion, and managed these functions more care-
fully than did their competitors. The resulting image difference
was reflected in price, enabling botb companies to outsell then-
competitors with equivalent product performance.

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 Possible sources of competitive differentiation

Total market Causes of leakage Possible areas Possible causes

of difference
Product range • Engineering fifixibility
• Vlanufacluring technology

Customer • Image/reputation
initiatives
Distribution • Network density
Sales force • Disciplined call pattern

Product • Performance and/ur

price, availability
Sales force • Training
Service • iniage/cost/performance
Finance • Payment terms

Relationship Cijptive arrangement

Useful definitions:
Share of market= D-|- E Product range =
Winning ratio = D / ( C + D )

- Market coverage = C + D + E
Creani-skimmmg factor= ^ a ^ _ ^_
shareof market (C/D + 1) (E/D + 1)

As the case of t:he Swiss watch industry reminds us, a strategy built
on image can be risky and needs to be constantly monitored. More-
over, an image differential may not travel across national bound-
aries because of differences in culture and in mass-media structure.
When product performance and mode of distribution are difficult to
differentiate, however, image may be the only source of positive
differentiation. Kirin, for example, continues to dominate the
Japanese beer industry with a market share of 62 percent, even
though blind tests have consistently indicated that consumers are
unable to distinguish beer brands by taste. Kirin adopted an aggres-
sive advertising strategy to take advantage of t:his very point,
stressing the theme: "You can't explain why, but somehow it's
Kirin." Somehow, the suggestion has worked.

A company can (dioose to fight on its real functional strengths

Recognizing that servict^ is a critical factor in the forklift trucks
business, Toyota chose it as their major battleground and built an

WINTER 1983
23
awesome service network that enables it to dispatch a service car to
any part of Japan within two hours. Despite Toyota's rather con-
ventional product and pricing schen:ies, its share of this service-
hungry industry continues to climb. This important strategic deci-
sion entailed very high fixed costs so high that Toyota's sub-
critical competitors cannot afford to match its investment.

Needless to say, positive differentiation alone does not automatic-

ally amount to a good strategy. The advantage it confers must be
persistently deployed over competitors who are unable to close the
gap and will therefore be losers in the combat for customers.

A good strategy will always view these three elements of the stra-
tegic triangle in perspective and will seek to optimize their inter-
relationships. All else being equal, the company that best manages
the dynamics of the strategic triangle over the long run stands the
best chance of victory in the battle for market share and profit.

Thi.- a c t i e l e is r t ' p r i n t . ' d l^

i9S:.; i s ^ u e o i ' t l u ' lu/rnpean
>,\ VViiliani H c i n e n i a n n Ltd

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