Answer the following in 200 words each:
a) Using value chain analysis, demonstrate your understanding of how Ryan Air achieves cost leadership in different parts of the value chain. Identify the risks Ryan Air faces due to its pure cost leadership strategy, using the types of risks given in the chapter and specific examples from the video.
b) Using the case Logging Dilemma and specific 9 M functions, explain the functional strategies that are most consistent with either the current technology or the alternative technology for Yakima-Olympia, along with justification.
c) What would you say is the business strategy of Yakima-Olympia (cost leadership or differentiation?) Which technology (current or alternative) is more appropriate given this business strategy? Suggest three alternative ways in which Yakima-Olympia may ensure the use of this appropriate technology.
video case study:https://www.youtube.com/watch?v=069y1MpOkQY
Self Study Tutorial – How to apply models in practice
Use materials I upload and I described to complete this discussion. 200 words each question.
Business Strategies based on Value Chain
Chapter 3 Building-Blocks of Business Strategies: Value Chains Consider the case of the Switzerland-based Nestle, whose mission is to provide a caring nest that offers good food and good life to the consumers. As shown in Exhibit 3.1, Nestle as a global corporation comprises of five major business groups: culinary foods, beverages, confectionary, milk products and nutrition. Within each of these business groups (firms), Nestle links its resource transforming functions in very different ways, and each of these ways reflect the personality and the positioning of its specific brands. Historically, Nestle has been known for its mass market appeal, with popular global brands such as Maggi in culinary foods, Nescafe in beverages, Kitkat in confectionary, Nestle in milk products, and Cerelac in (baby) nutrition. However, its confectionary business group suffered more than 25% drop in revenues in a five year period 2008-2013, and the company as a whole suffered revenue drop during 2011-2013. To offset its market share losses, Nestle has sought to aggressively promote linkages in the premium, luxury market – that has been immune to the recession and has been growing rapidly. In 2011, Nestle launched the premium Maisen Cailer brand of customized confectionary for the online shoppers in Switzerland – the customers can order Ecuador-sourced sampler pack of five chocolates. After tasting, customers fill an online survey to determine their chocolate personality, and are able to order larger boxes, marrying their favored chocolate with preferred fillings ranging from peppercorn and vanilla to raspberry and verbena. A 16-piece 128 grams box of the Maison Cailler chocolates costs 26 Swiss francs ($28.30). That means these are priced at $220 per kilogram, or $100 per pound. In the beverages group, Nestlé successfully created the luxury home coffee business by launching its single-serving expresso-maker Nespresso capsule in two countries in 1986. The capsule was offered online in the 1990s and in boutique stores in 2002. By 2012, it became a US$3.3 billion brand, with half its sales coming from the Internet and more than 250 boutiques worldwide. Nestlé already has tried its hand at other premium, customized goods. Similarly in the nutrition group, Nestle launched BabyNes formula milk capsules in 2011, which fit its own $272 single-serving machine. In the culinary group, Nestle has extended its Buitoni brand into the premium segment, by launching a sub-brand Le Creazioni di Casa Buitoni in 2011. An example of the innovative products in this sub-brand is the extra-large, extra-creamy filled pasta, with a state-of-art technology allowing pieces of ingredients, such as porcini mushrooms and toasted almonds, to remain intact. Another innovative linkage for this sub-brand includes a paper-based, partly recyclable tray, which reduces the amount of plastic normally required in packaging. Source: Adapted from Doherty (2012) and Nestle (2011) In the previous chapter, we examined the micro-foundations of strategic advantage involving the process, structural and behavioral characteristics of the capabilities of a firm and how they are managed in dynamic environments. However, in addition to developing foundational capabilities, strategists need to also work on building-blocs of business strategies. Value linkages among resource transforming functions within and outside the boundaries of a firm, are its ‘building-blocs’ to successful business strategies. As a matter of fact, these building-blocs go on to form a firm’s strategic advantage in various business domains. A value linkage describes the full range of processes “required to bring a product or service from conception, through the different phases of production (involving a combination of physical transformation and the input of various producer services), delivery to final consumers and final disposal after use” (Kaplinsky and Morris 2001). Firms may have several different types of value linkages, and different firms tend to have different types of value linkages. For instance, the value linkages for the traditional mass brands of Nestle are fundamentally different from those for the new premium brands, because they are targeted at a different customer profile, and rely on different ingredients, technologies, packaging, and delivery channels. Value chain is a specific type of value linkage, which describes the linear process of operational flow from design and sourcing of inputs, to processing, marketing, and servicing of customers. The Value chain hypothesis is concerned with the type of investments a firm makes in its efforts to develop the most competitive and sustainable value chains. In this chapter, we will consider two distinct views on the value chain hypothesis (the most important of the value linkages): the Protection view and the Growth view. The Protection view holds that firms making consistent and dedicated investments in either differentiation capability or cost leadership capability are likely to be better protected from competitive attacks. These firms are more likely to generate stronger and more sustainable competitive advantage. This view is based on a static view of the environment, and assumes an inherent trade-off between lower cost and higher value. The Growth view on the other hand, holds that in dynamic environments, a strategy built on investments in cost reduction or differentiation enhancement for existing, known market spaces will only erode a firm’s strategic advantage. In existing known market spaces, referred to as red oceans, firms try to outperform their rivals to grab a greater share of market. These red ocean market spaces are crowded, and prospects for profits and growth are low. Conversely, an integrated approach can allow the firm to create new demand, instead of fighting for it. In this new yet unexplored space, referred to as blue oceans, there is sufficient opportunity for growth that is both profitable and rapid. This chapter discusses the value chain hypothesis, and the business strategies deriving from the two distinct views on this hypothesis as mentioned earlier. The Concept of Value Chain Value chain is one of the most fundamental concepts in strategy. Value chain is a chain of functional nodes along which a firm exchanges and transforms its resources, and involves design, production, marketing, delivery and support (Porter, 1985). As products in value chains are exchanged and transformed, they flow downstream in a series of exchanges among participants at each functional node that adds value and costs. As we will see below, there are many different ways of portraying a value chain, depending on the major functions of a firm. To analyze a value chain, one generally uses two major lenses: a value lens or a design lens. Through a value lens, one evaluates the overall cost and the incremental value at each functional node. This allows in eliminating or outsourcing functions associated with a negative value-add, while simultaneously augmenting or insourcing functions associated with a positive value-add. It allows comparing a firm’s performance with that of its competitors, to identify gaps in cost-effectiveness and value-added, and to develop and execute plans to close the identified gaps. Exhibit 3.x illustrates how this is done using the example of two mobile network operators – Vodafone and Orange. Exhibit 3.x: Traditional Value Chain Analysis – Closing the Competitive Performance Gaps Vodafone * 99% population * In-house *Own System * Own branded and * Own portal Coverage and other retail chains * Distributors Orange * 99% population * In-house *Own System * Own branded and * Own portal Coverage and other retail chains * Distributors Source: Adapted from Peppard & Rylander (2006) Through a design lens, one investigates the most appropriate value and cost linkages for target customers. Practically speaking, this value chain analysis proceeds by examining the integrated functions of a firm comprising of activities such as design, production, marketing, delivery and support. Strategies for managing investments in value linkages aimed at improving strategic advantage of a business are referred to as the “Business-level strategies”. Customers Suppliers Porter (1985) was the first to offer a classification of business-level strategies using a value chain analysis, which is based on three alternative generic sources of strategic advantage – value, cost and focus. As illustrated in Exhibit 3.x, Porter’s framework offered a model of how businesses receive materials as inputs, add value to them through various functions, and sell value-added products to customers. Customers Suppliers In Porter’s framework, there are two broad categories in a firm’s value chain: primary and secondary. Primary activities are directly involved in transforming inputs into outputs, delivery and after-sales support. Thus they include: ● inbound logistics—material handling and warehousing; ● operations—transforming inputs into the final product; ● outbound logistics—order processing and distribution; ● marketing and sales—communication, pricing and channel management; and ● service—installation, usage guidance, maintenance, parts, and returns. The secondary or support activities are ones backing up the primary activities, and include: ● procurement—purchasing of raw materials, supplies and other consumable items as well as assets; ● technology development—research and development, procedures and technological inputs ● human resource management—selection, promotion and placement; appraisal; rewards; management development; and labor/employee relations; and ● firm infrastructure—general management, planning, finance, accounting, legal, government affairs and quality management. The concept of value chain is not without limitations. It assumes a sequential chain of activities in a physical world, for transforming material inputs into products that have value at each intermediate stage of process. Upstream suppliers provide inputs that pass through the downstream to the next sequential link, and eventually to the customer. Such a worldview is appropriate for traditional manufacturing firms, operating in fairly stable to moderately dynamic environments. Such a worldview however, contributes to the commoditization of functions by promoting similarities in what firms do. It takes a static view of firm’s capabilities, target markets, and competitor dynamics. It thus may obscure dynamic capabilities and a firm’s ability to survive and grow a business by exploiting alternative market opportunities. Generic Sources of Strategic Advantage in Value Chains One of the major purposes of Porter’s framework is to explicate three generic sources of strategic advantage for the businesses of a firm. Strategic advantage of any business derives from the difference between the value it offers to customers and the cost of creating that customer value. Therefore, the strategic advantage of a business may derive from three generic sources: Value, referred to as offering or differentiation advantage. If customers perceive a product or service as superior, they are willing to pay a premium relative to the price they will pay for competing offerings. A firm may achieve differentiation advantage by making investments that generate a disproportionate increase in both the value accrued from the customers as well as the proportion of this value it is able to capture. This is illustrated in Exhibit 3.x Exhibit 3.x: An illustration of how a firm may develop differentiation advantage Total Value Firm’s share Investment in a process (A) $100 Original value accrued from customer (B) $1000 $500 (50.0%) New value accrued from customer (C) $1150 $650 (56.5%) Increased value accrued from customer (C-B=D) $150 Increased value/ Investment (D/A) $150/$100 = 1.5 > 1 Cost, referred to as operating or cost leadership advantage. If a firm gains a cost advantage for performing activities in its value chain at a cost lower than its major competitors, then it has flexibility to undercut competitors and offer greater value for money to its customers. A firm achieves cost leadership advantage by making investments that improve the cost structure of its value chain. This is illustrated in Exhibit 3.x Exhibit 3.x: An illustration of how a firm may develop cost leadership advantage Total Value Firm’s share Investment in a process (A) $100 Original value accrued from customer (B) $1000 $500 (50.0%) New value accrued from customer (C) $750 $250 (33.3%) Reduced value accrued from customer (B-C= D) $250 Reduced cost from process investment (E) $400 Net cost reduction benefits retained by the firm (E-D=F) $150 Net benefits retained/ Investment (F/A) $150/$100 = 1.5 > 1 For both the differentiation advantage and the cost leadership advantage, investments may be made in one or more of the primary or secondary activities. The advantage tends to be more significant, when the impacted activity (or activities) accounts for a substantial part of the value for the customers. Exhibit 3.x illustrates this in the context of smartphone market. Xiaomi and Lenovo of China and Micromax of India are the leaders among the many emerging market firms that have entered the smartphone market. These firms are growing rapidly because of their capability to offer smartphones at a cost more than a third less than the Apple’s iphone. They are using a specialized chip designed for smartphones by MediaTek, a Taiwanese semiconductor company based on in Hsinchu science park, the Taiwanese Silicon Valley. Until 2011, MediaTek designed chips only for the older feature phones. Its chips took care of most of the design work, allowing its customers to manufacture low-cost feature phones without having to spend much time or money on research and development. These feature phones available at dramatically low prices revolutionized the mobile markets in emerging markets, such as of China and India. In 2011, MediaTek introduced chips designed for smartphones, allowing entry of many new smartphone firms in the emerging markets. A second major factor in the low-cost advantage of the new entrants is Google’s Android operating system. Google offers the open code for the Android operating system free of cost, as it seeks to accrue value from the online ads when customers search and consume Web content. As Google handles more online advertising than any place else, a rising online tide benefits its bottom line. Android accounts for more than 80% of the smartphone market in terms of volumes, as mobile firms such as Samsung have used it for high-end smartphones as well. In 2008, Apple had the mobile marketplace to itself, but now it is no longer the volume leader. The new entrants have targeted emerging markets like China and India, where the demand for expensive smartphones is more limited, as compared to the demand for the lower cost smartphones. In 2011, after four years of effort, Apple was selling only 10 million iPhones in China. Xiaomi founded in 2011, was able to offer a smartphone at a cost of only 2,000 yuan (US$327) – 37 percent of the cost of an Apple iPhone in China. Like other low-cost mobile handset providers, Xiaomi has razor-thin profit margins. Apple, on the other hand, lacks strategic advantage relative to the high-volume cost-conscious customers. Its advantage is with the brand-conscious customers who value usability and simplicity of design. Tim Cook, Apple’s CEO, said, “There’s a segment of the market that really wants a product that does a lot for them, and I want to compete like crazy for those customers,…I’m not going to lose sleep over that other market, because it’s just not who we are. Fortunately, both of these markets are so big, and there are so many people that care and want a great experience from their phone or their tablet, that Apple can have a really good business.” Source: Adapted from Einhort (2013) and Grobart (2013). Focus, referred to as customizing or focus advantage. If a firm links activities in a value chain to a highly specialized and unique application or target market, then it may improve its strategic advantage in that distinctive market niche. A firm achieves focus advantage by making investments that customize its activities for specialized purposes, to the exclusion of other related yet more general purposes that the other firms may be targeting. For instance, many luxury firms focus on small and exclusive ultra-premium target market in Paris, because presence in this target market is an important gateway to many emerging markets, including Dubai, Mumbai, and Shanghai, where luxury fashion-conscious upwardly mobile consumers closely follow the trends in Paris deemed as the luxury fashion capital of the world. The focus advantage may be grounded either in differentiation advantage (higher willingness of the customers to pay a value premium), or in a cost leadership advantage (lower cost structure of a firm). For instance, to stand apart in the tablet market, some firms offer tablets for kids, while others offer tablets that can be hanged in retail stores for displays. Both these firms have invested in special-purpose design processes (i.e. kid-focused or retail store-focused) for gaining a focus advantage, as compared to other firms that offer general-purpose tablets. Kids-targeting firms have also invested in cost reducing production function, to assemble lower cost special-purpose tablets that the parents find affordable for their kids, while store-targeting firms have invested in value-enhancing production function, to assemble premium special-purpose tablets that the retail chains are willing to use for store displays in place of the costlier LCD televisions. The Protection View of Value Chain Hypothesis As noted above, a firm may invest in its value chain to develop three different types of generic advantages: value, cost, and focus. How should it make this investment decision? Value chain hypothesis is concerned with the type of investments a firm should make to develop most competitive and sustainable strategic advantage. Conventionally, in static markets, firms have been most concerned with the protection of their strategic advantage. As noted in the previous chapter, firms may strive to protect their advantage by investing in strengthening of isolating forces, thereby making it even more difficult for other firms to copy or substitute their valuable resources, capabilities, and core competencies. According to Porter (1985), the most effective way to do so is for firms to make consistent, persistent and dedicated investments in either differentiation or cost leadership, either broadly or in a focus area. The firms who seek to invest in both cost leadership as well as differentiation advantages are likely to be ‘stuck-in-the-middle”, and find it difficult to protect and sustain their advantage. This view is based on three implicit assumptions. Knowledge processes/ routines assumption: firms who strategically focus all their investments in either cost reduction or in differentiation are likely to develop deep, strong knowledge processes or routines to undergird their competitive advantage, as compared to those who strive to do both. Motivational processes/ culture assumption: firms who strategically strive to promote either cost reduction or differentiation only, are likely to develop deep, strong motivational processes, or culture, to undergird their competitive advantage. A culture of cost leadership is likely to make it difficult to be an effective differentiator, and a culture of differentiation is likely to make it difficult to be an effective cost leader as well. Reputational processes/ credibility assumption: firms who strategically position themselves as capable of cost reduction or differentiation are likely to develop deep, strong reputation, or credibility, to undergird their competitive advantage. Customers are likely to expect these firms to have the ability to reconfigure processes to either achieve dramatic cost reductions, or command dramatic value premiums. Whereas in reality, the firms may have these abilities either in broad domains (generic cost leadership or generic differentiation), or in focus domains (focus cost leadership or focus differentiation). Thus, the Protection View postulates that firms that pursue either differentiation or cost leadership business strategy will outperform those who pursue a mixed or hybrid strategy combining both. Overall, the Protection view offers a typology of three pure business strategies for the firms to choose from based on the three generic sources of strategic advantage discussed earlier. These pure business strategies are: cost leadership, differentiation, and focus. It is important to note that focus is not a truly pure business strategy, because the fundamental choice for the firms is either cost leadership or differentiation, but for either of these, the firm may additionally choose to focus on a specific set of customers. Cost leadership strategy is based on strategic concentration and persistence of investments in linkages that reduce costs. The strategy involves making a fairly standardized product, combined with aggressive underpricing all rivals (Porter, 1980: 36). Standardized products are referred to as commodities, because they are undifferentiated; when these products are stripped down to bare functional basics, then they are referred to as no-frill products. The strategy requires “heavy up-front capital investment in state-of-the-art equipment” (Porter, 1980: 36), and is based on three major categories of cost reducing efforts: (1) reducing unit manufacturing costs through higher unit volume, efficient scale facilities, and experience curve; (2) exercising strict cost control over engineered costs and on exchanged costs (purchased inputs and logistics) ; and (3) a discriminating approach to discretionary costs like R&D, service, sales force, and advertising. When the strategy is based on the reduction of unit manufacturing costs, engineering costs and exchanged costs, then it may result in cut-throat price wars. The cost leaders rely on some elements of discretionary costs to aggressively build market share for their commodity-like products. For example, Sears has been historically known for its customary dedication to cost control, offering value at a decent price. But in the appliance business, it had to combine that with a commitment to service in order to succeed (Rothschild, 1979: 95). Therefore, these discretionary costs allow cost leaders to partially alleviate the customer price sensitivity for the standardized products they offer. Let’s consider another example: the sheet metal firms commit to exceedingly tight technical specifications, delivery schedules, and responsiveness in reordering, in order to gain preferred marketing arrangements with the auto firms (Levitt, 1980). It is imperative to note that persistence of cost-reducing efforts is critical for a cost-leadership strategy. A firm competing solely on the basis of differentiation advantage may successfully use new product designs or process technologies to reduce costs, at times below the industry standards. Robust state technology in the TV Set industry allowed firms to achieve both higher reliability and lower cost, as compared to firms that used the older vacuum tube technology (Porter, 1983: 482-503). However, one-time or ad hoc cost reduction efforts do not constitute a cost leadership strategy, which as a matter of fact requires a deep culture of tight cost control. Differentiation strategy is based on strategic concentration and persistence of investments in linkages that accrue value premium. The strategy involves offering superior product features to customers. In here, persistence of investments is critical, as the features that differentiate a firm or some of its product lines may no longer act as differentiators, if these become industry standard. In the 1920s, General Motor’s CEO Alfred Sloan merged many smaller auto firms whose survival was threatened by the rapid growth of Ford as a cost leader. GM then designed the pioneering differentiation strategy of “a car for every purse and purpose.” Sloan rationalized GM’s cars into five price-quality segments, generating a hierarchy-of-models for the rising economic status of the customers through their life. The young, upwardly-mobile first-time customer was invited to choose the moderately-priced Chevrolet, over the least-costly mass-produced Ford. When the customer got promotion and some more income, the first thing he did after buying a bigger house for the family was to buy an Oldsmobile. The next step up brought a Pontiac, then a Buick. At the top of the ladder, he would acquire a Cadillac (Mantle, 1995). This strategy allowed GM to displace Ford as a market leader, and to dominate the US market until early 1980s with a total market share as high as 50%. In Consumer Reports, for the model years through 1982, in non-luxury full-sized, midsize, and compact cars categories, GM scored first and second in virtually every year. These categories of cars represented the biggest and most profitable segments of cars in the U.S. Ford and Chrysler followed GM in introducing cars for different segments, but because of their lower market share were unable to match GM’s cost structure for the higher-end segments – paradoxically earning GM a cost leader moniker (Porter, 1980). But, over a period of time, as the features offered by GM became an industry norm in the US, European rivals out-differentiated GM by adding new premium luxury features. Japanese rivals out-competed GM by adding features that were standard on higher-end models into their base models at low costs. This sharply eroded GM’s market share and pushed it into red by the late 1980s, and forced it to find new ways to differentiate. Focus strategy is based on strategic concentration and persistence of investments in linkages specific to a specialized domain, either for cost reduction or for differentiation. Specialized domain may take a variety of forms, such as a niche market or geographical segment, a niche distribution channel, a niche workforce, a niche application or user need, and so on. There are quite a few players whose specialized services or products have been market differentiators; take the case of Wizz Air, a specialist firm offering low fares and fast direct flights as part of its focused cost leadership strategy. It operates in Hungary, Bulgaria and Ukraine, and specializes in flying Central and Eastern European job-seekers to UK and Ireland. Car2Go is another specialist, which focuses on environmentally-conscious customers who need a vehicle for short trips. It offers small two-seat electric vehicles for very short-term rental by reservation or on demand. Customers use a member card to access a car and may leave it anywhere in the local service area. As part of its focused differentiation strategy, it bundles insurance, parking, and maintenance in its pricing, which can be by the minute, hour, or day. Note: in industries where many different firms compete as specialists in different niches or where any one of the niches grows rapidly, the firms pursuing a broader scope may experience erosion in their strategic advantage. For instance, in 1955, Proctor & Gamble (P&G) introduced Crest toothpaste, as the first in the industry to have therapeutic benefits. Crest had fluoride that offered protection against dental cavities. The first few years, Crest occupied a small niche, with only 8.8 percent share of the US toothpaste market in 1958. P&G worked with scientists at the Indiana University, with whom it had invented the dental fluoride, to conduct twenty three separate studies to demonstrate the therapeutic benefits of fluoride. In 1960, the American Dental Association endorsed the effectiveness of Crest as an effective anti-cavity agent. Within two years from then on (i.e. by 1962), Crest’s market share in the U.S. surged beyond 30% and remained around 35% for several decades thereafter. In contrast, Colgate suffered a loss of its market share to just around 20%, and was forced to lose its first-mover advantage and to become a follower by adding fluoride and repositioning itself from cosmetic to therapeutic segment. Overall, the share of the cosmetic segment fell from about 70% in 1960 to about 34% in 1970. In contrast, the share of the therapeutic segment surged from about 15% in 1960 to about 58% in 1970 (Miskell, 2005). Cost Leadership Strategy, Differentiation Strategy, and Firm Performance There are three different sub-hypotheses on the relationship between cost leadership and differentiation strategies. Mutually-exclusive hypothesis: Porter (1980: 38) contends that a differentiation strategy often requires a perception of exclusivity, which is incompatible with high market share. He further notes that a firm must make a choice among generic strategies, otherwise it will become “stuck in the middle” (Porter, 1985: 11). This is so because each generic strategy requires a different culture, different resources, different organizational structures, different management styles, and radically different philosophies (Porter, 1985: 24, 99). For instance, the Gap Corporation started with a flagship business unit The Gap. To deepen its cost advantage, it developed a lower-end business unit Old Navy. To deepen its differentiation advantage, it developed a higher-end business unit Banana Republic. To improve its focus, it further created new business units – The Gap for Men, The Gap for Women, and The Gap for Children. Similarly, many airlines have a first-class product line and an economy product line. For each of these product lines, they offer different reservation numbers, customer service counters, boarding times and procedures, seating, food and in-flight service and entertainment. Lifecycle hypothesis: a second view is that at different phases of product and organizational lifecycles, different strategies are appropriate, depending on what will allow a firm to outpace its competitors (Gilbert & Strebel, 1987). While a differentiation strategy leads to a low-cost position in the later stage of a product lifecycle due to an increase in sales volumes, the learning curve, and economies of scale and scope (Hill, 1988), a cost leadership strategy enables firms in their later organizational lifecycle to develop a premium positioning using their accumulated experiences and knowledge development. In the 1990s, the Korean automaker, Hyundai was known to be a cost leader, with its midsize Sonata car. During the 2000s, Hyundai continuously improved its quality, and in 2008, launched the moderately priced Genesis, costing $38,000. This was followed by the Equus in 2010 within the $55,000 to $60,000 range, at the low-end of the luxury segment. Hyundai thus enjoyed a 20% annual growth in its revenues, and became the fifth largest automaker in the world. In 2011, it repositioned itself as “modern premium” – offering high-end features at affordable costs for the mass-market consumers. Singularity hypothesis: a third view is that both cost reduction and value addition are integral to any business strategy, and are not distinct but singular. Businesses have only two generic strategic choices: how much to differentiate and what scope to decide (Mintzberg, 1988). In marketing, a differentiated product is one that “is perceived by the customer to differ from its competition on any physical or nonphysical product characteristic including price (Dickson and Ginter, 1987: 4). Mintzberg (1988) opines that cost leadership is just an element of differentiation strategy in which the basis of differentiation is not higher quality, but lower price. For instance, in the US, within the economy segment of the hotel/motel industry, Motel 6 differentiates itself by positioning the brand with a claim of offering “the lowest prices of any national chain” (Thomson and Strickland, 2008). Similarly, there are three different hypotheses on the relationship between cost leadership and differentiation strategies and a firm’s performance. Differentiation hypothesis: many scholars assert that firms using differentiation strategy outperform those using a cost-leadership strategy. Peters and Waterman (1982: 186) report that high-performing firms tend to be focused more to customer value than the cost “side of the profitability equation”. Thereby, such companies “tend to be driven more by close-to-the-customer attributes than by either technology or cost.” Equivalency hypothesis: Porter (1980: 35) asserts that cost leadership and differentiation strategies offer an equally successful and profitable path to strategic advantage. This may be true in a highly cyclical economic environment. Cost leaders tend to be better positioned to compete during economic downturns, while differentiators often seek cost reduction to avoid losses. For instance, during the economic downturn in the late 2000s, Ohio-based Marco’s Pizza negotiated lower transportation costs from the freight firms, and began contracting with vendors situated near its distribution centers to further reduce its logistics costs. It eliminated small pizza boxes, and put small pizzas in Cheesy Bread boxes, to save more than $150,000 across its 170 store chain. Similarly, differentiators tend to be better positioned to compete during economic upturns with customers having more discretionary incomes. JetBlue Airways for example offers an economy class service to fly between a few US cities, but has added features such as new planes, on-board television, and leather seating to achieve a high-load factor (i.e. average percentage of filled seats) in economic upturns as well. Contingency hypothesis: firms from different nations may have different capabilities for cost leadership vs. differentiation advantage (Baack & Boggs, 2008). Firms operating in emerging markets where the cost structures are lower, and a limited percentage of customers have high purchasing power, cost leadership strategy tends to be more profitable. In contrast, firms operating from industrial markets where customers can afford to be more discriminating, higher quality resources are more accessible, and the differentiation strategy is more profitable. For example, Baack & Boggs (2008) found that the industrial market firms are less successful using cost leadership strategy in China, which is an emerging market in world economy. Risks of Pure Business Strategies Research shows a lack of support for the Protection view in highly dynamic and turbulent markets. Firms that pursue only cost leadership or differentiation, may not be as successful in such markets because of the risks from the following three factors: Risks of diminishing returns: firms investing only in cost reducing linkages eventually encounter the law of diminishing returns, which states that, as one invests progressively in one object alone (i.e. cost reduction), the cost reduction benefits become regressive. In other words, the sum amount of cost reduction generated will eventually become less than the amount of investment made in building cost reducing process capabilities. Risks of diminishing demand: firms investing only in differentiation enhancing linkages, eventually encounter the law of diminishing demand, which states that as one invests progressively in accruing a value premium (i.e. differentiation), the willingness and the ability of the customers to accept that value premium diminishes. In other words, the size of the market interested in its products shrinks. Risks of competitive interplay: firms investing in either one of the factors, i.e. differentiation enhancing or cost reducing linkages for their focus strategy, eventually encounter law of competitive interplay as well, which states that as a firm gains dramatic cost advantage over other firms, or commands dramatic value premium over other firms, new set of firms are inspired to challenge the firm’s rising monopoly. These new firms in turn often ride on favorable macro market shifts, such as technological breakthroughs or new customer segments. They design, produce, deliver and/or service alternative products that offer a different and better value to the customers, and render the older firm’s cost or differentiation focus advantage inconsequential. Or, they overcome isolating mechanisms, and acquire relevant resources and capabilities through trade, imitation, or substitution to offer similar products at a much lower cost, with better differentiation, and/or with finer focus. Exhibit 3.x illustrates how Lego – who has traditionally invested only in differentiation – has suffered losses because of the above risks. Exhibit 3.x Lego’s Differentiation Faces a Challenge The Lego offers construction blocks for children. Their blocks are known for their bright colors, durability, good appearance, uniformity, and highest quality parts. They have rights to several exciting themes, including Star Wars, Harry Potter, and Jurrasic Park, allowing them to offer several popular pieces and sets. Its larger bricks aimed at younger children are compatible with the smaller bricks targeted at the older children, allowing its products to grow with children. Several firms around the world have challenged Lego’s monopolistic tendencies as a market leader, and its high product prices. Lego has suffered both loss in market share as well as losses, as the rivals have targeted customers whose priorities include price factor as well. One of the most successful rivals is Megabloks, a Canadian brand established in 1967. Its products are of lower quality, are duller, but are offered at low costs – some of them at one fourth the cost. It also has taken rights to several popular themes. Its bricks work well on a small scale, but are slightly misaligned on a large scale, creating structural instability in large structures. Megabloks even has a line of product whose pieces are compatible with the leading market brand (i.e. Lego). Megabloks has enjoyed profitability and growth, as the Courts have set aside Lego’s claim that Megabloks has copied its studs and tubes interlocking brick system because Lego’s patents on the design have long expired. Source: Adapted from Thomas (2014). Exhibit 3.x summarizes the pros and cons of the Protection view. Exhibit 3.x: Pros and Cons of the Protection View Benefits of a Hybrid Business Strategy Research shows that in highly dynamic markets, firms pursuing a hybrid strategy, based on the integration of linkages for cost leadership as well as differentiation, tend to outperform those pursuing a pure strategy (Campbell-Hunt, 2000). This has been found even for the small and medium enterprises, which tend to use focus cost leadership or focus differentiation strategies (Leitner & Guldenberg, 2010). Three factors may explain the benefits of a hybrid business strategy in dynamic conditions: Benefits of increasing demand: as firms invest in cost reducing linkages, they gain an additional operating surplus. If they invest this additional operating surplus in differentiation linkages, then they gain the added capacity of offering differentiation to this target group. This improves their competitiveness relative to both cost leaders as well as differentiators. Such a strategy may also help focus-in on non-consumers, if they find value in the more differentiated, yet cost-effective, product offerings. Benefits of increasing returns: as firms invest in differentiation enhancing linkages, they gain deeper insights and knowledge about the latent and unmet needs of the market. By investing in cost reducing linkages as well, firms gain an additional capability to serve these needs cost-effectively. This in turn allows them to generate increasing returns on their differentiated knowledge about a large group of customers. Benefits of competitive priorities: firms that invest in both cost-reducing as well as differentiation enhancing linkages, benefit from the law of competitive priorities, which states that when firms must decide among competing priorities under conditions of resource constraints, then their decisions tend to be guided by a sense of what priorities their target market puts on cost reduction vs. differentiation enhancement. Thereby, these firms develop a more flexible agile capability to monitor and adapt to shifts in market priorities of different groups of customers. The shifts may be more or less constant, for instance, when the per capita income in an emerging market is rising, or when the market of interest is in a protected industrial market that is now subject to cost competition from the emerging market rivals. Or, the shifts may be periodic, for instance, when markets tend to be become cost-sensitive during recession or differentiation-seeking during economic upturn. Exhibit 3.x illustrates how British Airways has shifted successfully from a differentiation strategy to a hybrid strategy, and tapped the above three benefits. Similarly, McDonald’s has shifted successfully from a cost leadership strategy to a hybrid strategy. Exhibit 3.x: British Airways and McDonald’s – Different Paths to Hybrid Strategy After 9/11, sensing greater customer priorities for lower prices, British Airways – traditionally known for its differentiation strategy – began investing in cost reducing efforts. It cut the total number of planes in its portfolio, and ordered replacement planes without special custom features. It limited menu choices for the customers, cut fees for the agents, and eliminated 13,000 jobs. It passed on some of the cost-savings to its customers in the form of lower fares; and invested the rest into new sources of differentiation while also being attentive to costs. In a meeting organized in the emerging luxury capital Dubai, its business and first-class customers told that they looked for ‘re-energization’, ‘comfort’, and ‘well-being’. Most importantly, on long-haul flights, they wanted to have a good night’s sleep. British Airways set the design challenge of creating a more comfortable seating arrangement – the flat beds, without any loss of seating capacity so that it could maintain its fares. Its R&D team developed a unique new armchair style seat, which transforms into a 6-foot, fully flat bed, that transformed the face of business travel. The innovation was soon copied by Virgin, Singapore and many other carriers, but BA followed up with other innovations such as sophisticated entertainment options, personal lockers, 10-inch flat screens and personal privacy to their customers, without any added costs. Thus, it was able to increase both its demand as well as returns. On the other hand, in the late 2000s, sensing greater customer priorities for healthy and gourmet food, McDonald’s – traditionally known for its cost leadership strategy – began investing in differentiation efforts. In 2008, it installed McCafe coffee bars featuring cappuccinos, lattes, and gourmet coffee, offering a value similar to that of high-end Starbucks but without the same cost. It also invested in new product lines, such as fresh, premium salads, again offering the same at low costs. The move proved very successful, allowing McDonald’s to improve its demand as well as returns in the US, as well as internationally. Source: Synaticsworld (2010) With globalization and growing use of information and communication technologies and knowledge analytics, many firms are successfully deploying ‘focused hybrid’ strategy combining cost leadership and differentiation advantages for specific needs of the target customer groups. In dynamic markets, some specific needs, such as sustainability consciousness, wellness, or smart design, have quite broad-based appeal. In these conditions, focus hybrid strategy can be a door to rapid growth. Next we look into this growth view of value chain hypothesis. The Growth View of Value Chain Hypothesis In dynamic markets, benefits of investing in isolating mechanisms diminish, while the costs of protection rise. Firms face competitive pressures from a more diverse types of rivals, using more diverse alternative sets of resources, capabilities, and core competencies. Growth, more so than protection of cost leadership or differentiation advantage, becomes a more attractive business strategy. Growth, as a business strategy, requires executives to clearly articulate how it will help create value in terms of the organizational purpose and mission. In static markets, growth is related with greater economies of scale, and generates efficiencies that contribute to higher profitability. It is also related with greater economies of scope, generating more differentiated value, and thereby higher profitability. In dynamic markets, however, growth by itself may not generate efficiencies or differentiated value. On the contrary, efficient differentiated strategy may be a precondition for growth to take place in the first place. Before learning about how to go about growth strategy, it is useful to first ask should the firms care about growth strategy in dynamic markets. In dynamic markets, pressures of survival often lead firms to compromise on social inclusion and environmental impacts, in their pursuit of growth without any intentional strategy. Sustainable growth strategy is based on three pillars – economic, environmental, and social sustainability. With continued growth in world’s population, especially in developing nations, growth strategy is becoming even more important to ensure that children, especially girls, and mothers receive the care, nutrition, schooling, and employment opportunities they need. It is also becoming imperative that this growth be green, so that the environment is not degraded and resources are not depleted to jeopardize the current and future pursuit of growth strategy by the vulnerable children of this world. The countries where firms have prioritized on growth strategy have seen dramatic reductions in poverty levels, and improvements in living standards, on indicators such as literacy, education, life expectancy, malnutrition, and infant, child, and maternal mortality. Firms often find it difficult to sustainably pursue growth strategy, because of market failures and unfavorable valuation of green and inclusive efforts. Non-market strategies involving government actors are estimated to give a support of about $1 trillion annually in energy, water, materials and food subsidies that encourage firm behavior of negative environmental impact. If the same amount were invested in promoting green growth strategies, economic returns are likely to be about $3.7 trillion annually (McKinsey & Company, 2011). Reporting requirements on environmental performance, for instance, have helped firms in China, Indonesia, the Philippines and Vietnam discover opportunities for growth-enabling investments that move them from being noncompliant to becoming compliant, and to do so at low or even negative costs (The World Bank, 2012). Approaches to sustainable growth strategy Sustainable growth strategy is based on three major approaches (see, for instance, Liabotis, 2007): Capability approach: stop protecting the less viable, non-core parts of business – the parts that are not valued by customers, or are not at par with the competitors, or that do not support access to new market opportunities. Value approach: increase the value of the core parts of business – transforming them to meet the different needs of diverse customer groups cost-effectively using a common, a customized, or even a personalized platform. Opportunity approach: invest in discovering of new opportunities adjacent to the core parts of business – particularly through new collaborative efforts that enhance the firm’s capacity to innovate and incubate new prototypes. Urbany and Davis (2012) offer a three-circle model of growth strategy, where they refer capability approach as the company circle, value approach as the customer circle, and opportunity approach as the competitor circle. In the three-circle model, customer circle is the starting point of formulating growth strategy. The firm begins by identifying a target customer segment, and inquiring the attributes of firms that affect family/ society/ customer choice. These are the criteria customers use when evaluating the firms being considered, and this evaluation is shaped by their family and social network. Not all attributes are considered by all customers. Some attributes are more important than others. Customers may be grouped together in terms of the factors that are most important in their decision making. For instance, in a performance show, customers may seek a unique venue, theme, refined watching environment, and artistic music and dance. Some may also seek fun and humor, or even thrill and danger. This helps firms define the context, and establish the value a particular customer segment is seeking – this is what the customers want. The second step in the three-circle model is to establish the customer perception of the company attributes, i.e. the company circle. Note that the company circle here represents what attributes customers believe the firm offers, not what attributes are actually offered by the firm or are believed by the firm as its offer. The third step is to establish the customer perception of the competitor attributes, i.e. the competitor circle. Doing so helps reveal how many of a firm’s positive attributes may be shared by the competitors, or how the firm may not have many of the competitor positive attributes. The overlap and distinctiveness in the attributes among the three circles then helps a firm discover the points of parity (overlap among the three circles – represented by A in Figure 3.x), its points of difference (overlap only between the customer circle and the company circle – represented by B in Figure 3.x), and the competitor’s points of difference (overlap only between the customer circle and the competitor circle). Going deeper, these also help a firm discover the points of non-value (overlap only between the company circle and the competitor circle) – these are the attributes that might have been of value to the customers in the past, but are no longer so. The firm is also able to identify its points of negative value or inequity (non-overlapping company attributes), and competitor’s points of negative value (non-overlapping competitor attributes). These are the attributes customers are dissatisfied about – such as difficult to access, low reputation, and complex venue. Industry-wide dissatisfiers fall under the overlapping company and competitor circles. Figure 3.x: The Three Circles Model of Growth Strategy Source: Urbany and Davis (2012) Finally, digging even deeper, the firm is able to identify the ‘white space’ – the non overlapping attributes in the customer circle. It is the value desired by the customers that is not being served (or not being served effectively) by either the firm or its competitor. These needs may be currently known or unknown (latent). Focusing on this white space opens up new uncontested market opportunity for the firm. As we learnt in the previous chapter, the firm also needs to conduct an internal assessment of its own company attributes, and of the competitor attributes, in order to determine its points of distinctiveness and commonality in the industry. For sustainable growth, the firm needs to invest in the points of distinctiveness that are of value to the customers, and disinvest from those that are not. It also needs to invest in the points of unmet potential in the white space. Note that a firm may not have the resources, the capabilities, or the core competencies inside its organization to cost-effectively develop the attributes in the unmet needs white space. Sustainable growth strategy, in this case, is based on developing collaborative networks, going beyond the industry boundaries. For instance, a theater firm may be a greater collaborator for complementing a firm’s capability in circus shows, to fulfill the possibly unmet customer needs of artistic performance in a circus show. By doing so, a firm goes beyond its own value chain, or even the industry’s value chain, and invests in developing linkages with the value chains of firms that have complementary sets of capabilities – the capabilities that could be integrated or combined together with those of the firm into innovations that elevate the customer experience. What should a firm do if other firms are unwilling or unable to collaborate, or if making such collaboration work requires unusual investment of time and resources of the firm? In that case, the firms may consider an option to strategically acquire those firms, or if that is not feasible, seek to acquire the critical resources that will enable offering the value desired by the customers in the most cost-effective manner. To summarize, firms have four major ways to pursue an organic, sustainable growth strategy in relation to their existing customers: Improvement: to invest in improving the capabilities to offer better value to the customer groups Scaling: to scale up the value that is meaningful to different target customer groups Innovations: to collaborate with other firms to develop innovative combinations that elevate the customer experience Strategic acquisitions: to acquire other firms that have complementary resources, in case the collaborative innovations option is not cost-effective or feasible. Blue Ocean Strategy – Going beyond the white space of existing customers In a global environment, where about 80% of the world’s population is waiting to be connected fully with the global markets, truly dramatic growth opportunity is not with the existing customers of a firm, but with the non-customers – the entirely new groups of customers not being served by it or its industry competitors. Kim and Mauborgne (2005) refer to this space as a blue ocean opportunity – where firms at least have some water to themselves. This space is contrasted from the one associated with current customers, which is referred to as ‘Red oceans.’ In Red Oceans, firms compete vigorously with their rivals, seeking to outsmart others and copy their moves. Therefore, it becomes difficult for the firms to truly sustain their growth, once they have done all reasonable efforts to meet the unserved or under-served needs of their target customers. From that point, the only sustainable growth option is to reach out to unserved or under-served customer groups, who are not currently being served by any firm in the industry. Doing so allows a firm to enhance its differentiation, while also improving its cost position. In a study of profit and growth impacts of product launches of 108 companies (Kim and Mauborgne, 2005) have found 86% of firms were aimed at competing in red oceans. As shown in Exhibit 3.x, the other 14% were aimed at creating blue oceans, and they accounted for 38% of total revenues and 61% of total profits. Kim and Mauborgne (2005) suggest using the Four Actions framework (illustrated in Exhibit 3.x) to formulate the blue ocean strategy; they are as follows: 1. Start with an offering experiencing a red-ocean scenario in relation to a particular target group of customers, and particular factors of value. 2. Find an alternative target group of customer, that may currently be using less desired alternatives or be a non-customer, who does not care about some of the current factors of value, but cares of some other factors. 3. Design a new product that eliminates, or reduces well below market standards, factors of value of less interest to new target customers. This step unlocks and eliminates costs that are not of much interest to these customers. 4. Increase the new product range by creating entirely new, or raise well above market standards the existing one, enhancing factors of value of more interest to new target customers. Exhibit 3.x: Four Action Steps to Blue Ocean Strategy Once value factors (attributes) have been identified for a new group of customers, to implement steps 3 and 4, Kim, and Mauborgne (2005) provide two additional tools. A 2×2 Eliminate-Reduce-Raise-Create Table for the value factors, and a Strategy Canvas that maps the value factors. Each value factor is assigned a performance rating from 0 to 10 (0-2 = very low; 3-4 = low; 5-6 = medium; 7-8 = high; 9-10 = very high), and mapped as a curve on the Strategy Canvas. These performance ratings can also be mapped against one or more baselines, such as the original curve and/or the curves of the strongest competitors. Exhibit 3.x illustrates how Cirque de Soleil successfully implemented a blue ocean strategy in the circus market. In Exhibit 3.x, the strategy is portrayed on the Eliminate-Reduce-Raise-Create Table, and Exhibit 3.x shows the Strategy Canvas for the same. Exhibit 3.x: Cirque de Soleil Leaps Forward into a Blue Ocean In the 1980s, traditional circus market was experiencing a red-ocean scenario, in relation to its children target market. Cirque de Soleil decided to focus on an alternative target group, i.e. adult audience that had abandoned traditional circus. This group of non-customers was using alternative forms of entertainment, such as sporting events and home entertainment systems, that were relatively inexpensive and on the rise. This group did not value two of the key factors of differentiation that were an industry standard in the traditional circus market – animals and star performers, but problematic for the participating firms. The traditional circus industry was facing increasing pressures from the animal rights groups for their treatment of animals, and management of animals was becoming very costly. It also had to fight to retain a diminishing number of individual star performers, with fame for their thrilling and dangerous stunts. The acts of jokers, with knack for fun and humor, were also becoming banal. Cirque du Soleil designed a new product – circus theatre, which eliminated the animals and high-priced concessions, and reduced the importance of individual stars – the three very high cost elements. It augmented this new product by introducing an entirely new form of entertainment based on the intellectual sophistication of theatre shows that combined dance, music and athletic skill – thus furthering its differentiation appeal for both circus customers and non-customers. Each show, like a theater production, had its own unique theme and storyline; allowing customers to return to the show more frequently. Instead of requiring multiple show venues to be near to the customers, it was now possible to have limited number of unique show venues where the customers were willing to come. This blue ocean strategy using a hybrid focus approach helped Cirque du Soleil gain a significant strategic advantage and grow very rapidly by redefining circus. Source: Adapted from Kim and Mauborgne (2005) Exhibit 3.x: Eliminate-Reduce-Raise-Create Table of Value Factors for Cirque du Soleil Eliminate Start Performers Animal Shows Aisle concession sales Multiple show arenas Raise Unique venue Reduce Fun and humor Thrill and danger Create Theme Refined watching environment Artistic music and dance Exhibit 3.x: Mapping Value Factors for Cirque du Soleil as a Curve on a Strategy Canvas Assignment: Choose a real product that is already on the market (such as tablet), brainstorm the value factors of the product and develop the Strategy Canvas. To summarize, the Growth view of Value Chain, as represented by the three-circle model or the blue-ocean strategy, holds that in dynamic environments, a strategy built on investments in cost reduction or differentiation enhancement for existing, known market spaces will only erode a firm’s strategic advantage. In existing known market spaces, referred to as red oceans, firms try to outperform their rivals to grab a greater share of market. These red ocean market spaces are crowded, and prospects for profits and growth are low. Conversely, an integrated approach can allow the firm to create new demand, instead of fighting for it. In this new yet unexplored space, referred to as blue oceans, there is sufficient opportunity for growth that is both profitable and rapid. Concluding comments Traditional value chain analysis, represented by the seminal work of Porter (1985), was motivated by the strategic emphasis on protection. The goal was to sustain a firm’ strategic advantage by protecting its foundations; this in turn meant creating a condition where the competitors aren’t able to attack the firm, what it does, and how it does that. The fundamental guiding principle in business strategy was to target as much of the target market as possible, as that alone would enable a firm to generate greatest economies of scale for achieving least cost, or cost leadership position in the market. Alternatively, the firm having the largest target market will have the deepest understanding of for what the customers are willing to pay a premium, allowing them to attain differentiation advantage. Of course, not all firms could be the largest, and attain either the least cost or meaningful differentiation position for this large group. For the firms who could not viably attain the goal of being the best or meaningfully different, Porter suggested the focus strategy. The idea was for the firm to find largest possible market niche, where it could viably achieve least cost leadership or differentiation advantage. In other words, if a firm could not be largest or sufficiently different, then it needed to be small enough to escape the attention of the larger rivals to have a sustainable advantage. The new growth-based view of the value chain hypothesis does not necessarily require a firm to seek a cost leadership or differentiation advantage. Starting point of the growth-based view is not the firm capability that needs to be protected somehow, but the market opportunity that has not yet been discovered or exploited. Though the inside-firm value chain may not hold the resources, capabilities or core competencies to pursue this market opportunity, firm may still be successful if it is able to find complementary linkages between its own value chain and the value chains of other firms who do have the resources, capabilities, or core competencies that would allow exploiting the market opportunity. Besides a firm’s capability and market opportunity, the growth-based view also emphasizes on the stakeholder value. Existing customers are an obvious stakeholder, but it is important for the firms not to limit their opportunity based on the needs of existing customers alone. Rather, they may create even greater value for an entirely new set of customers, who are non-customers for the industry currently. To identify appropriate set of customers, it is important for the firms to also consider their own constituent stakeholders – such as the values and the aspirations of their current or potential new investors, leaders, employees, vendors, and community members. Once the firm identifies appropriate target customers to unlock its growth potential, it is important to be conscious of the need to be as cost-effective as possible, and to be as unique as possible. If a firm is not concerned about cost-effectiveness, then it would not accrue as much value for the target customers or for itself to support further growth or other priorities. If a firm is not concerned about being unique, then it would not be as attractive to the target customers and will not be as successful in realizing its strategic intent. Cost leadership and differentiation, then, is more of an aspirational goal and guiding principle for the firms pursuing the growth business strategy. It is not the foundation for their business strategy, nor is the foundation of the success or failure of their business strategy. Thus, the Growth view represents an additional type of generic source of strategic advantage for firms, which is different from the other three types covered in the first part of this chapter – cost, value and focus. References: Campbell-Hunt, C.C. (2000), What have we learned about generic competitive strategy? 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Business Strategies based on Value Chain
Corporate Strategy in a Global Economy Session 4: Business Strategies Based on Value Chain Recall from the first session that a major tension in business-level strategy is whether it should be resource-driven or market-driven. In the second and the third sessions, we explored the content of strategic advantage in terms of the role of resources and of markets. In the fourth session, we will explore a range of options that are available to the firms when strategizing based on both resources and markets. In the opening case, Nestle as a global corporation has five major business groups – culinary foods, beverages, confectionary, milk products and nutrition; in each, Nestle links its resource transforming functions in very different ways, reflecting the personality and the positioning of its specific brands. Since 2008, Nestle has suffered market share losses, as it operates primarily in the mass markets where the customers suffered employment and income losses become of the economic recession. To offset its losses, Nestle has sought to aggressively promote linkages in the premium, luxury market – that has been immune to the recession and has been growing rapidly. For instance, to revive its beverages business, it launched Nespresso – a single-serving expresso-maker capsule in the select European markets, to complement its mass global brand Nescafe. Nespresso stretches and builds on its existing beverage resources, and addresses market issues by targeting new segments. Its new luxury beverage business has required new value linkages internally and externally. The internal and external value linkages constitute meso-foundations of strategic advantage. According to the value chain hypothesis, the primary value linkages should be organized as a sequential chain, for instance, design, produce, market, deliver and support. Strategies for manipulating value linkages for improving strategic advantage of a business are referred to as the “Business-level strategies” In Porter’s framework, the functions in a firm’s value chain are grouped into two broad categories of activities: primary and secondary. Primary activities are directly involved in transforming inputs into outputs and in delivery and after-sales support, and include inbound logistics, operations, outbound logistics, marketing and sales, and service, i.e. installation, usage guidance, maintenance, parts, and returns. Support activities are involved in supporting primary activities, and include procurement, technology development, human resource management, and firm infrastructure, i.e. general management, planning, finance, accounting, legal, government affairs and quality management. One of the major purposes of Porter’s framework is to explicate three generic sources of strategic advantage for the businesses of a firm – value, cost and focus. Value implies if customers perceive a product or service as superior, they are willing to pay a premium relative to the price they will pay for competing offerings. Cost implies if a firm gains a cost advantage for performing activities in its value chain at a cost lower than its major competitors, then it has flexibility to undercut competitors and offer greater value for money. Focus implies if a firm links activities in a value chain to a highly specialized and unique application or target market, then it may improve its strategic advantage in that distinctive market niche. In the opening case, for Nestle, Nescafe builds on cost advantage, while Nespresso seeks to offer a premium value advantage and does so by focusing on select European markets. There are two views on the value chain hypothesis – consistency and blue ocean. According to the consistency view, the firms that make consistent, persistent and dedicated investments in “value” differentiation or “cost” leadership, either broadly or in a “focus” area, are likely to generate stronger and more sustainable competitive advantage. The Blue Ocean view on the other hand holds that a strategy built on an integrated approach will position the firm in strategically advantageous uncontested space. In other words, consistency view states that a firm must choose to offer low costs or great value, while the blue ocean view says that the firm must offer both low costs as well as great value. The consistency view is based on three implicit assumptions. First, knowledge processes or routines assumption, i.e. the firms who strategically concentrate all their investments in either cost reduction or in differentiation are likely to develop deep, strong knowledge processes, or routines, to undergird their competitive advantage, as compared to those who strive to do both. Second, motivational processes or culture assumption, i.e. the firms who strategically strive to promote either cost reduction or differentiation only are likely to develop deep, strong motivational processes, or culture, to undergird their competitive advantage. Finally, reputational processes or credibility assumption, i.e. the firms who strategically position themselves as capable of cost reduction or differentiation are likely to develop deep, strong reputation, or credibility, to undergird their competitive advantage. The Consistency View offers a typology of three pure business strategies, based on the three generic sources of strategic advantage: Cost leadership strategy, which involves making a fairly standardized product, combined with aggressive underpricing all rivals. Differentiation strategy, which involves offering superior product features to customers. And, focus strategy, where specialized domain may take a variety of forms, such as a niche market or geographical segment, a niche distribution channel, a niche workforce, a niche application or user need, and so on. The consistency view offers three different sub-hypotheses on the relationship between cost leadership and differentiation strategies. First, Mutually-exclusive hypothesis, calling for a firm to make a choice among generic strategies, otherwise it will become “stuck in the middle.” Second, Lifecycle hypothesis, holding that at different phases of product and organizational lifecycles, changing conditions enable change in generic strategies and the firms who embrace this change outpace their competitors. Third, singularity hypothesis, asserting that both cost reduction and value addition are integral to any business strategy, and are not distinct but singular – i.e. cost is one variable in the overall differentiation strategy. There are three different sub-hypothesis on how generic strategies are related to firm performance. First, differentiation hypothesis: some scholars assert that the firms using differentiation strategy in a market outperform those using a cost-leadership strategy. Second, equivalence hypothesis. Porter (1980) asserts that cost leadership and differentiation strategies offer an equally successful and profitable path to strategic advantage. This may be true in a highly cyclical economic environment, as cost leaders perform better in downturns and differentiators in upturn, thus averaging equivalent performance over time. Third, contingency hypothesis. Firms from different nations may have different capabilities for cost leadership vs., differentiation advantage. Firms from the emerging markets tend to compete using a cost leadership strategy, while those from the industrial markets rely more on the differentiation strategy. Research shows a lack of support for the Consistency view in highly dynamic and turbulent markets – here the firms that focus on only cost leadership, differentiation, and/or focus may not be as successful because of the risks from the following three risk factors. First, risks of diminishing returns, i.e. as firms invest more and more in one objective such as cost reduction, it becomes more and more difficult to achieve further cost efficiencies. Second, risks of diminishing demand, i.e. as firms invest more and more in one objective such as differentiation, it becomes less and less attractive to a larger mass market. For instance, only a few people are able to afford dinner at a seven star hotel. Third, risks of competitive interplay, i.e. as firms capture a larger share of the market, other firms are attracted to find other strategies. In dynamic markets, the firms that integrate linkages for cost leadership, differentiation, and focus tend to be more successful because of the following three benefit factors. First, benefits of increasing demand, i.e. when firms apply cost efficiencies for adding unique value, a larger group of customers is attracted. Second, benefits of increasing returns, i.e. when learn how to add value for the customers, and are able to do so without adding significant costs, they accrue greater operating surplus. Third, benefits of competitive priorities, i.e. when firms are sensitive to both value and costs, they are more likely to support and discover out-of-box solutions. The Blue Ocean view is a powerful framework for analyzing opportunities for both cost reduction and value differentiation. Kim and Mauborgne (2005) characterize cut-throat target markets as ‘Red oceans’, where the sharks compete mercilessly. Blue ocean strategy, in contrast, refers to the creation by a firm of a new, uncontested market space that makes competitors irrelevant and that creates new consumer value often while decreasing costs. This strategy is designed using four actions framework. Start by identifying alternative group of customers that do not care about the key value factors offered presently. Then, examine opportunities to Reduce, Create, Raise and Eliminate. First, what factors should be reduced well below the industry standard? Second, what factors should be created that the industry has never offered? Third, what factors should be raised well above the industry standard? Fourth, what factors should be eliminated from what the industry has taken for granted? Each value factor is assigned a rating from 1 to 10, for the present and for the proposed, or for the rival firms and for the focal firm. These value factors are then mapped on a Strategy Canvas. For instance, Cirque du Soleil designed a new product – circus theatre, which eliminated from the conventional circus industry model the animals and high-priced concessions, and reduced the importance of individual stars – the three very high cost elements. It augmented this new product by introducing an entirely new form of entertainment based on the intellectual sophistication of theatre shows that combined dance, music and athletic skill – thus furthering its differentiation appeal for both circus customers and non-customers. In fast changing environments, firms often use bricolage to construct blue oceans. Bricolage refers to using whatever resources are available to offer a valuable solution to the customers. Monster Mini Golf, for instance, couples a miniature golf course with the thrills of a haunted house, to offer a unique experience and attract new types of customers to golfing. A major limitation of the traditional value chain analysis is that it takes a static view of capabilities and markets, and thus contributes to the commodification of the functions, by promoting similarities in what firms do. It tends to ignore how the capabilities of firms for different activities might shift, under alternative market dynamics, corporate strategies, or target markets. The video cases on Coca Cola highlight three primary activities that underpin its strategic advantage – these are inbound and outbound logistics, and marketing and sales. Coca Cola asserts value in these functions through innovative vendor management and strategic partnerships, customer service excellence, product offering based on deep market knowledge, and techniques such as customer relationship management and enterprise resource planning. If other firms wish to learn from Coke’s success, should they prioritize the same value factors, and assert value in a similar way? What other value factors might be important to target new sets of customers? The case materials on Nintendo Wii show how Wii offered a new strategy canvas. In 2006, Wii became a market leader by emphasizing a unique gaming experience, simplicity and lower price (compared to Sony and Microsoft) to break down barriers for new customers who were not interested in hard core gaming. However, Sony and Microsoft followed by entering the new space opened by Nintendo. Nintendo has not been able to find another blue ocean, and has introduced a Wii U console that reverts back to the original market space. Why has Nintendo not been able to construct another blue ocean, or sustain its first-mover advantage in the blue ocean space it created? Is Nintendo using consistency hypothesis, in reviving again its focus strategy targeted at hard core game users? 5
Business Strategies based on Value Chain
1 Chapte r 7. Supporting Busine ss Strate gy through Functional Strate gie s In 2015, India’s packaged fruits drink market was valued at Rs. 11 billio n (~US$200 millio n) . Dabur held a 55% share of the market, followed by PepsiCo at 30%; up from 50% and 25% res pectively a decade back. Fe wer than 20% of the people in India consume fruit juices as part of th eir diet, as compared to ~40% who consumed bottled water and ~60% who co nsumed coffee and soft drinks . Over the past decade, the market has grown by 15 -20% annually because of the ris ing health -consc io us ness , and is expected to sustain that growth over the coming years. The governme nt of India has set targets to triple the size of processed food sector, by increasing the level of processing of perishables f rom 6% to 20%, and value addition from 20% to 35%, as a way to raise farm incomes (Sharma, 2015) . Dabur has been sourcing mass -produced l ychee, guava, grapes, and mango juices from the domestic vendors, and orange, apple, and pineapple con centrates from the overseas suppliers. To be more responsive to the consumer needs, Dabur has been buying fruits directly from farmers since 2004 , and is process ing them in -house in a new plant it set -up in Siliguri, West Bengal. It has also migrated to a flexib le production system to offer fruit in a variety of specialized forms, such as juice, sauce, puree, smoothie, paste, and ketchup. To grow its share of the overall market and grow even faster than the market, Dabur has used customized Research and Developme nt to boost the share of the under -served institutio na l segment in its total sales from a fourth in 2003 to a third now . Amit Burman, the then CEO of Dabur, noted, ‘Often, products are created when our [institutio na l] buyers tell us a bout their culinary problems, which could range from getting pre -chopped onions in bulk to mixing the best juice and yoghurt smoothie. As we have the experience and the network, and there is ample capacity availab le in the country, it is easy for us to off er solutio ns (Srinivas, 2003).’ More flexib le operations and sourcing system, and institutio na lly led marketing and research effort has also help ed Dabur realize its strategic intent of becoming a leader in the broader processed fruits mar ket, beyond just juices and concentrates. In the previous chapter, we learnt about the thre e differe nt types of business strategies – cost leadership, differentia tio n, and growth mindset (besides ‘focus’) . In addition to deciding the overall strategy for their business, executives also need to develop and align functio na l core competencies. Dabur ’s growth business strategy has required new compet encies in s upply chain, research and developme nt, operations, and marketing. Each functio n relies on different and specific techniques and technologies to achieve the common business objectives of cost effic ie nc y , customer and quality differe ntiatio n, and innovatio n for growth . Each of the three types of business strategies is often equally viable. In fact, o n average, the two contrasting business strategies — cost leadership and differe ntiatio n in the Porter’s framework — perform equally well (Gupta and Govindaraja n, 1984). Some firms still outperform others because of their ability to develop appropriate supporting functio na l core competencies . In doing so, the firms must deal with two challenges: a) Business level strategy: First, business strategies need to be supported with appropria te functio na l core competencie s. For instance, a firm with a business strategy of cost leadership (such as a budget hotel or budget airline ) , may invest in technologi es that minimize the quality assurance and training needs, simplify product designs to reduce the need f or specialized vendors or machines, and simplify the customer servicing to efficie ntly deliver its products . 2 b) Micro foundatio ns: Second, structural and relationa l conditions need to be conducive to promote the i ntended functio na l behaviors. For instance, some sort of centralized organiza tio na l structure may help achieve the cost effic ie nc y busi ness objectives. Consider a case where a firm offers promotiona l discounts to impleme nt a volume leadership strategy, but fails because it did not also develop vendors and capacity to scale manufa cturing without compromising on quality. W hen a higher central structure oversees all these functio ns, and fosters a culture of inter – functio na l collaboratio n , these interactive functio na l behaviors are more likely to actualize . To resolve the above challenges, d esign of functio na l strategies should be guided by three princip les: (a) Consi sten cy : Functiona l behaviors should be consistent with the business objectives . If the goal is to create a premium positioning, then the use of low -end, discount distributio n channels may not be effective. (b) Balance: Micro foundatio ns are necessary to balance functio na l behaviors, based on a portfolio of inter -bala nc ing core competencies across differe nt functio ns. If the goal is to realize low co st leadership, manufacturing may seek to mainta in zero inventory levels; however, such zero inventory levels could result in a loss of sales, decline in the customer satisfactio n, and reduced economies of scale and profitability. Therefore, the firm may ne ed to invest in more interactive vendor and customer relations, for more dynamic informa tio n exchange about demand and supply. (c) Dynamism : Firms should be cautious in not inadvertently turning their functio na l core competencies into a source of rigid ity and entropy. They should foster a culture of learning and functio na l dynamism, alert about changes in the environme nt. A firm which focuses on small local business customers may observe changes in customer needs, when the customers become bigger and global , and when new competitors enter with innovative products. In this situatio n, the firm may need to improve its customer servic ing , in order to defend its over all low cost focus , and accordingly adapt it s functio na l level strategies. For instance, consider how Daewoo Motors balances the limita tio ns of its supply chain, human resources, and operations, by adopting an unusua lly responsive customer servicing functio n: it even accepts higher costs of warranty to effective ly imple me nt its cost leadership strategy in the car business: Daewoo Motors deploys a cost leadership strategy in its automotive busine ss in the US. Its cars are priced at least 10 –20% less than the competing cars in given market segments. While many customers of Daewoo Motors report high satisfactio n with the quality of their cars, Daewoo cars are not generally perceived as reliable as t he competing cars from the Japanese and American firms. To give customers peace of mind, Daewoo offers an industry leading 10 -year warranty that includes free roadside assistance. This warranty is a necessity — a hygie ne factor — in getting the consumers to bu y its cars. The warranty does not differe ntiate Daewoo from its competitors since the customers are not motivated to purchase Daewoo car primarily because of this warranty. Instead, Daewoo customers are attracted by its low prices. The warranty serves to balance the concerns about quality that are associated with cost -cutting strategy, and signals to the customers that Daewoo is responsive to their concerns. The guiding princip les of consistenc y, balance, and responsiveness, also help a firm operating wi th a protectionist view of value chain, seeking only either cost leadership advantage or differe ntiatio n advantage, to migrate to a growth mindset under more dynamic conditio ns. In dynamic environme nts, a traditio na l cost -leader will find it more diffic ul t to ignore quality, product image, and bases for differe ntia tio n. Similarly, a differentia t or will find it necessary to 3 also adopt an effective cost control, even though cost containme nt was not a priority in the past . Thus, a firm with a traditiona l busi ness strategy of differe ntiatio n will gain the dynamic capability to leverage some low -cost functio na l strategies and thereby transform from a costescalating differentia tor to a cost -effective differe ntiator. In the 1990s, the premium car maker, Mercedez B enz relied on cost containing functio na l strategies for supporting its growth strategy , after an earlier set of differe ntiatio n alone functio na l strategies ended up creating highly expensive products for which there was a very limited demand. Mercedez bus iness unit of Diamler -Be nz traditio na lly followed a business strategy of differe ntiatio n. During the 1980s, Japanese firms rapidly upgraded their capabilitie s to offer viable products in the mid -range automotive market. In response to losses in the mid -ran ge market, America n firms started offering a variety of luxury -orie nted options in their vehicles to make them attractive for the high -end customers. As a result, demand for the high -end differe ntiated Mercedez cars began shrink ing. Initia lly, Mercedez s ought to habitually defend its competitive position by using functio na l strategies to enhance differe ntiatio n. This added differentia tio n only raised the costs of the vehicles, and made them too pricey for most customers. The sales of Mercedez cars dropped dramatica lly, even though the overall auto market was growing. Thereafter, Mercedez decided to adopt new low -cost functio na l strategies to support its new focus on growth business strategy . It ventured outside Germany, where its cost of operations were very high, and invested in the US for making less costly versions of Mercedez cars. Th e more cost -effective , neverthe less distinctive, Mercedez cars proved imme nse ly attractive to a larger group of customers (Gupta, 1998). In the field of strategy, three major sources of competitive advantage are recognized – resource -based view, relationa l view, and growth view. Resource -based view emphasize s the role of resources ( Wernerfelt, 1984; Rumelt, 1984, Penrose, 1959 ), knowledge (Nelson & Winter, 1982; Arthur , 1994), core competencie s (Prahalad & Hamel, 1990), and dynamic capabilities (Teece, Pisano & Shuen, 1992). Resources become a source of enduring competitive advantage through the presence of isolating mechanisms that make it diffic ult for other firms to substitute or imitate those resources (Rumelt, 1984). Knowledge resources, in particular, tend to be protected by isolating mechanisms, because unique ly varying paths of firm experience generate unique ly varying bundles of resources and unique ly varying ways of combining and codifying these resources for specific deployments (Nelson & Winter, 1982). Firms develop core competence for coordinating, communica ting and integrating their unique bundle of resources and knowledge into a range of technologica l a pplicatio ns for customer benefits, thereby accruing increasing returns and competitive differe ntiatio n (Prahalad & Hamel, 1990). While finance per se may not result in competitive advantage, firms leverage financ e by investing into dynamic capability for reconfiguring their resource bundles in sync and with agility to the changing, often in uncertain, complex, ambiguo us and discontinuo us ways, threats and opportunitie s in the environme nt (Teece, Pisano and Shuen, 1992). Relationa l view (Dyer and Singh, 1 986) emphasizes the role of strategic relationship s with key stakeholders – employees, suppliers, and customers. Even the rivals are co -opted using a lens of value net collaboratio n, and become suppliers, customers, or even extended employee 4 base strivin g to solve problems or pursue opportunitie s for creating value together (B randenburger and Nalebuff , 1996). Growth view emphasizes operational agility and resilie nc y of firms in moving to, protecting and upgrading structurally attractive positons (Porter , 1996), leadership capacity for managing change and enacting entrepreneuria l mindset (Gupta, Macmilla n & Surie, 2004), and mindful stewarding of the firm’s missio n, vision and values for responsible behaviors. Managing resources, managing relationships, and managing growth, then, are three fundame nta l strategies for achieving enduring competitive advantage for any firm. The objective of this paper is to deconstruct these fundame nta l strategies into specific functio na l strategies. a) Managing three types of relationships – human resources (manpower), supply chain (materia ls), and customers (marketing), b) Managing three types of resources – knowledge (methods), technology and innovatio n (machine), and investme nts (money), c) Managing thr ee levers of growth – operations (manufacturing power), leadership (motivating power), and stewardship (manipulating power). Figure 4.1 illustra t es the classifica tio n framework, which we refer to as 9M model of functio na l strategies. A. Managing Relat ionships – Functions about the relationships with workforce, vendors, and customers Part I – M anaging Re lationships Managing Relationships with Workforce – Human Resources Strategy Manpower functio n includes decisions about talent acquisitio n and accultur atio n, deployment and development, & compensatio n and churn . Human resource (HR) strategy entails managing manpower functio n to support the business objectives . Functiona lly, HR strategy is often classified as high commitme nt or low commitme nt (Gupta, 2011). A high commitme nt HR strategy is driven by an organiza tio na l culture of mutual commitme nt among the firm and its 5 human resources . There is a commitme nt to deep learning about the firm , and the attributes that make the firm unique ly successful . The goal is to develop a workforce that has special talent in carefully serving the firm’s specific target customer groups, such as through a history of long – ter m experiences and dedicated relationships with those groups. Conversely, a low commitme nt HR strategy relies on securing freelance employees who bring transferab le skills and experience with them. The emphasis is less on compensating employees for their commitme nt to learn, but for their demonstratio n of high performance. Key elements of a high -commitme nt HR strategy include : a) Talent acquisitio n and acculturatio n: To achi eve deep organiza tio na l learning , high commitme nt HR strategy seeks high levels of mutual commitme nt on part of both the hiring managers as well as hired employees. Talent is acquired for their potential commitme nt to the firm, a nd willingness to embrace the corporate family and its service excelle nce priority. b) Talent deployment and development: High -commitme nt HR strategy actualizes commitme nt through flexib le deployment of talent, and a carefully crafted career developmen t plan where each employee is offered opportunity to develop , such as through rotation across multip le functio ns. This helps each employee to leverage the entire portfolio of functio na l core competencies to develop a deeper learning of the value firm may add , and to actually design and deliver this added value. Instead of having a higher central authority deciding how to best integrate and combine various functio na l core competencies, each employee is developed to be able to do so in a rapid, res ponsive and decentralized manner. Employees are trained extensive ly to be multi -task experts and are assigned broadband job classific atio ns, so that there is no gap in service if anyone is absent or decides to leave. c) Talent compensatio n and churn : High commitme nt HR strategy sustains commitme nt by compensating for not only performance, but also accumulatio n of firm -spec ific knowledge and experience through years of dedicated service encompassing multip le functio ns, geographies, and product groups. To en courage high levels of churn or mobility within the firm, and low levels of attritio n, employees are offered voice and autonomy to be self – managing; and are given the informatio n, opportunity, and authority to serve the customers the best way possible . Co nversely , key elements of a low commitme nt HR strategy are as follows: a) Talent acquisitio n and acculturatio n: Talent is acquired for the skills and experiences employees bring with them, almost as if they are freelancers who are offering their talent and hu man capital. Firms achieve greatest cost effic ie nc y when they acquire a talent portfolio comprising of employees whose skills complement one another, and who work together well as a team, through fairly objective well -defined roles. The most critical acc ulturatio n is for the employees to be oriented about other members of the team whose roles influe nce their own efficie nc y, and with the structures such as the supervisors or the specialists who have the power to evaluate and decide the boundaries of each m embers’ role. b) Talent deployment and development: Talent is deployed in the roles that each individ ua l employee can best perform based on his or her specific skill sets and experiences, given the skill sets and experiences of other employees or even po tentia lly new employees. Firm makes minima l investme nts in talent development, unless it is unable to find the talent of required skills and experiences in its local market and hiring the talent from the global market is either not feasible or not cost -effective. c) Talent compensatio n and churn : Talent is compensated based on the match with the requireme nts of the job, and based on the market range for performance of that job type. If 6 others whose skills and experiences are a better match for the job are availab le for simila r levels of market compensatio n, then the firm is unlike ly to be willing to pay the same compensatio n to the current employee and expects the employee to search for alternative jobs that are more closely aligned with his or he r sp ecific skills and experiences. In India, many firms are using low commitme nt HR to support their cost leadership objectives in the initia l prospecting at the bottom of the value chain involving simple projects for the customers, but then rapidly intro duc ing high commitme nt HR as they move up the value chain taking on highly complex projects, for which talent is not availab le in the outside labor markets. A low commitme nt human resource strategy has evolved to support lower costs — one that relies on the temporary staffs, referred to as ‘pilot salesmen’, hired through the external staffing consultants. Cadbury India, for instance, has 250 pilot salesmen on its payroll. About 75% of Cadbury’s volume s are from 30% of its territories; therefore, it has deci ded on a two -tier system. In the metros and mini -me tros, where large volume s of premium products are sold, it has its own sales officers that support a differentia tio n advantage. In Class II and smaller towns like Meerut, where mostly lower -end products ar e sold, it deploys pilot salesmen at the front -line level to support a cost leadership advantage (Pande and Kumar, 2003). Li (2003) investigated the relationship between HR strategies and business objectives, using a sample of beverage and electronic multina tio na l corporations in China. The study shows the firms seeking a cost effic ie nc y objective tended to use short -term and temporary employme nt and less educated workforce, offer less monetary compensatio n to the employees, and rely more on the manag ers and supervisors for making major decisions and disciplining employees. In contrast, the firms seeking differe ntiatio n business objectives tend ed to use long -term and continuing employme nt and more educated workers, give more monetary compensatio n to th e employees, and involve workers in making major decisions. Firms using a high commitme nt HR strategy are likely to invest deeply in their human resources to support their differe ntiatio n advantage and tend to be highly protective of their employees, as t hey may lose their unique firm -specific knowledge to their rivals should a critical mass of their highly experienced employees were to be poached by their rivals. Such firms are likely to behave like defenders (Miles and Snow, 1984). In such firms, emp loyees with greater firm and product -specific skills and knowledge are likely to be valued more, and enhanced through continuo us training, well -established career paths, and performance appraisal and feedback systems that foster employee development. A hig h amount of employme nt security and voice is likely to be offered to the employees to mitiga te turnover, minimiz ing the cost of replacing workers and the knowledge they possess. In contrast, f irms using a low commitme nt HR strategy are likely to take a market – arbitraging freelancer approach to their human resources to support their cost effic ie nc y advantage and develop a capacity to substitute talent or use semi -skilled talent intercha ngeab ly . Such firms are likely to begin behaving like Prospectors (Miles and Snow, 1984). Such firms may have stronger capacity to adopt new technologies or pursue new product -markets , using talent hired from outside. In the past, the global HR best practices were commonly referred to as the high performance HR practices, because they reflect best practices adopted by the world’s most 7 successful organizatio ns. Paul Osterman (1994) reported that the high performance HR practices are more likely to be adopted by firms engaged in the sectors exposed to internatio na l competitio n, employing more advance d technology, and pursuing integrative competitive strategies that combine quality and service dimensio ns as well as cost. In recent years, with the rapid pace of technology change and the need for integrating diverse sources of knowledge, world’s most s uccessful firms have relied increasingly on freelance and contract knowledge workers. In fact, this new world is being referred to as the “gig ” or “freela nce ” economy. When the firms deploy freelance workforce in an organiza tio na l and market culture of low -commitme nt HR, the overall morale of both interna l and external workforce is li kely to be low and diminish with potential of high conflict. Conversely, when the firms deploy freelance workforce in an organiza tio na l and market culture of high commitme nt HR, the overall morale of both types of workforce is likely to be high and rise t hrough potential of collaboratio n and enhanced success. Building commitment in a Freelance Economy Hiring freelancers as regular employees has become a cost -effective solutio n for firms seeking to sustain growth. Freelance employees bring specializa tio n, creativity and flexib ility to firms. It is possible to hire such employees from around the world, at very short notices, without too much cost. A big downside of freelance employees is their lack of familiarity with the company and their low levels of engageme nt as a result . Many companies are now using technology to train such employees. An elearning platform allows freelancers to connect remotely on their mobile devices, and share their learning acccomplishme nts on social media. And, it is scalable at very little cost. The firms are making freelancers participating members of their organiza tio n , includ ing them in all communicatio n and inviting them to all team meetings. They are includ ing freelancers in employee recognitio n programs , featuring them in corporate newsletters and giving them awards. They set regular meetings to provide feedback on challenges faced and schedule time sensitive performance reviews. They als o solicit feedback from freelancers, in order to discover new opportunitie s and to show they are valued by the company. M anaging Re lationships with Ve ndors – Supply Chain Strate gy Supply chain strategy involves managing t he entire sequence of materia ls, informa tio n, and money flow from the supplier s to customer s, with an emphasis on the business objectives . Functiona lly, supply chain strategy may be classified as responsive vs. predictable. A responsive supply chain strategy is driven by an organiza t io na l culture that is agile, custom configurab le, and flexib le. It engages mutua l co -development efforts on part of the firm and its vendors, to learn about one another and to align capability development efforts. Vendors are qualified based on their wil lingness to invest in specialized learning about the firm, and its customers. The firm and its vendors seek to work very closely to develop high degree of empathy about the needs of target customers, and to bring the decoupling point to near the start of the transforma tio n process in the value chain (Olhager, 2012). The d ecoupling point is where a product takes on unique characteristics or specifica tio ns for a specific customer or group of customers. Because of the mutua lly collaborative relationship be tween the firm and the 8 vendors, the firm is able to customize a larger proportion of the value -added in an agile, flexib le way (Olhager, 2012 1). Proactive demand manageme nt in responsive supply chains goes beyond the typical market offerings, reactive pr oblem solving and recovery, and even simple satisfactio n of existing customer satisfactio ns (Morash, 2001) . Emphasis is on becoming a part of the customer organiza tio n as ‘interna l consultants’, with high levels of ongoing help, support, and interactive advisory services that help guide the customer to appropriate change and success. There is a recognitio n that if the customers succeed, then everyone in the supply chain will grow; thus the firm may seek to research the needs of not only the customers, but also of the customers’ customers (Morash, 2001) 2. Conversely, a predicable supply chain strategy is a market arbitraging approach oriented towards search for the most cost -effective ways of serving customer needs. Here suppliers are qualified based on their cost -effective ness in offering supplies of rather standard specificatio ns in suffic ie nt volume s and with short lead times. The firms may have multip le vendors for the same supplies, to ensure they are getting the most competitive purchasing costs. Such a strategy contributes to supply chains that are efficie nt, fast, and predictable (Perez, 2013) . Predictable supply chain strategy emphasizes matching supply to predictable demand as efficie ntly as poss ible. Managers may invest in business processes such as just -in-time inventory system, and technology, such as computerized warehousing, to reduce the costs of material manageme nt. These competencies allow the firms to offer effic ie nt delivery of reliabl e products and services at competitive prices, with minima l diffic ulty and inconve nie nce to the customers. The total cost for the customer is reduced through lower costs of order fulfillme nt, and through supply chain time compression. The firms may establ ish computerized links with major suppliers that share informatio n about their invento ry levels. This allows suppliers to adjust their production schedule automatica lly, and helps the entire supply chain become effic ie nt (Gutterman, 2011). The global s upply chain best practices have traditiona lly entail ed being highly responsive, but with an eye towards predictability. Morash and Lynch (2002) surveyed about 4,000 firms in eleven industria lized nations from North America, Western Europe, and East Asia. Excelle nt firms in the study deployed highly responsive supply chain strategy to support customer service strategies. They did so by postponing commitme nt to product form, assembly, or forward movement, and intermitte nt acceleratio n and deceleration of product flows to synchronize product with changing customer requireme nts. They, however, also built predictability, through real -time order informa tio n systems; collaborative planning and forecasting; vendor -managed inventory; resident supplier employees as buyers (known as just -in- time II ); flexib le or agile manufac turing; and locating suppliers’ production lines on the customer’s premises (i.e., JIT III). 1 Olhager, J. (2012). “The Role of Decoupling Points in Value Chain Management” H. Jodlbauer et al. (eds .), Modelling Value: Contributions to Management Science, Spri nger -Verlag Berlin Heidelberg 2 Moras h E A. (2001). “Supply chain s trategies , capabilities , and performance.” Pp. 37 -47, Trans portation Journal, 41(1): 37 -54. 9 Competing through Responsiv e Supply Chains that are predictable The retail market in India is becoming more organized. The new retailers are striving for a differe ntiated strategy to take a way a significa nt share of market away from the kirana stores — the traditiona l mom -and -pop corner shops. Initia lly, most sought to locate in premium shopping malls, and project a modern image; however, that has not been suffic ie nt to justify their high pri ces in a nation where the consumers are very value conscious. Traditio na lly, the consumer product companies in India serviced all outlets in a territory — be it a kirana shop, or a supermarket — thro ugh a specific distributor. RPG Retail, a Chennai based firm , found it hard to convince consumer product giants like Hindusta n Lever to supply everyday use products like toothpaste and soap to its FoodWorld stores directly. It gradually convinced the corporate producers that more collaborative and responsive supply chains would allow it to move more of their high -end products. Now, RPG Retail gets its supplies directly from the corporate producers, and sells 14 –16% of all Gillette Mach3s sold in Chennai, 10% of Surf Excel and Surf Automatic, and 10% of Nescafe Prem ium. The things have changed so much that Hindusta n Lever Ltd even piloted a separate distributo r for all modern retail outlets (those with self -service format) in 2003, observing: ‘These outlets need to be serviced differe ntly… . Their needs are different . And the selling skills needed are of a higher order (Rajshekhar, 2004).’ In recent years, with the rise of technology, fast fashion or fast cycle supply chains have become a key source of competitive advantage for many firms. Instead of co mpeting through responsive supply chains that are predicable, this entail using predictable (fast) supply chains, that are responsive . Zara of Spain pioneered fast fashion supply chains, that are built on the concept of small -batc h supplies based on the hottest fashion trends. Zara Pioneers Predictable (Fast ) Supply chain , that is responsiv e The first Zara store was opened in Spain in 1975 and today Zara operates over 2.000 stores in around 90 countries. Zara employs a creative team of over 200 designers, who produce many new collectio ns during the year. They take their inspiratio n from many sources, includ ing extensive feedback from stores (both quantitative informatio n about the items sold and qualitative informa tio n from store managers). Unlike other leading apparel firms who typically sell 2000 -4000 different items every year, Zar a is able to design and offer 10,000 items every year – appealing to a broader group of customers with unique preferences. Purchased f ab ric is cut, dyed and further processed in its own factories located mostly in Spain, Portugal and Morocco. Sewing is subcontracted to small companies mostly in close proximity to its factories . Slow fashion items, such as t -shirts, are outsourced to low -cost suppliers in select emerging markets . The merchandize is shipped by trucks within Europe and by flight to other regions, arr iving at the store within 2 -3 days. Zara is able to replace existing collectio ns, and introduce a new collectio n – from design to delivery in stores – within 2 -4 weeks . Zara has become a fast growing top 100 global brand, by offering affordable fashion to price and fashion -co nsc io us youth segment. 10 Source: http://www. nytime s.co m/2012/11/11 /ma ga zine /how -zara -gre w -into -the -world s -la rgest – fashion -reta ile r. html ; http://www. investoped ia. co m/artic le s/ma rke ts/120215 /hm -vs -za ra -vs- uniqlo -co mparing -business -mode ls.asp M anaging Re lationships with Custome rs – Custome r M anage me nt Strate gy Customer relationship manageme nt (CRM)) strategy involves managing exchange with customers and channel memb ers . CRM strategy may be classified as utilitaria n vs. interactive (Vilcox & Mohan, 2007). Util itaria n CRM is a market arbitraging approach where the firms offer their products on an as is basis , and the customers also seek standardized off -the -she lf products. The primary purpose is to “make a sale” now or soon , and to address those needs of the customers that can be most effic ie ntly met with the resources availab le to the firm. In such spot m arket exchange, the firm takes the risk that their product will meet the needs of the buyer, and the customer also takes the risk that this will be so. As long as the buyer needs are met, the exchange might be repeatable, scalable, and ongoing. The ut ilitaria n CRM strategy enables firms to make their product development decisions based on the ir process technology capabilities – the capabilities to discover, develop, combine and integrate resources cost -effective ly . The strategy demands low -cost channe ls of distributio n, and low -risk product and market development activities. There is an emphasis on ‘push approach ’ based on aggressive promotions and price discounts to augment demand to a level that will support full capacity utilizatio n and economie s of scale. The products are phased out when the alternatives with similar or better quality are found, or when the customer needs change. Conversely, interactive CRM strategy is driven by an organizatio na l culture of designing product ex perience based on an interactive communicatio n with the customers, and where the customers also design their use experience based on the interactive communicatio n with the firms. In such interactive market exchange, the firm as well as the customer make joint efforts to ensure that the product experience will be the best possible. The interactive strategy goes beyond efforts to sell, deliver and service a product using customer transactions. It relies on careful selection of target markets, dependable product development processes, interactive market communica tio n programs, and responsive delivery processes. The firm strives to build and leverage resources and processes necessary to deliver the value customers desire, is willing to adapt these value -ge ne rating processes as market conditions change, and is proactive in developing future products that will tap latent needs going beyond the customer expectations and expressed needs (Narver and Slater, 1990). It emphasize s a “pull approach”, where the fir m pulls all cylinde rs to offer a great experience to the customer (Kohli and Jaworski, 1990). With the rise of network organizatio ns, interactive marketing has gained promine nce. The case of Castrol illustra tes the dif ference between the two types of strategies in practice. Castrol is the world’s leading lubricant firm. It follows a relationship -orie nted interactive customer exchange with its premium customers. It uses both pre – and post – sales customer engageme nt process that begins with joint dialog between the Castrol and the customer teams, and a survey of the customer plant -specific personaliza tio n needed in the generic plant platform. Based on this dialog and survey, personalized package of solutions comprising of produc ts and services is developed and offered to the customers . The risks to the customers are reduced as Castrol works with its customers to diagnos e the ir plant -specific needs, build the solution, and 11 track the performance . In the long -term contract , assess ment, continuo us improve me nt, and closing the loop between the expectations and the performance is built -in. For its mass customers, Castrol follows a deal -oriented utilita ria n customer exchange. It has invested in automating the sales and delivery process es; so that the se customers and the channel partners are able to order the products and services they need seamlessly with an assurance that Castrol offer s a competitive pricing on its products. Source : Adapte d from Hax (2002) In global marketplaces, firms often combine image positioning wit h price positioning, to build customer confidence that their deal is based on real cost capability. The firms seeking to offer deals is particularly prone to the “ lemons problem ”. This problem implies customers have limited interactive informatio n about the firm and so are unable to verify a firm’s claim of quality unless they actually use the product . Thus, utilitaria n CRM by itself is likely to be ineffec tive, unless grounded in the framework of interactive CRM. Building trust for utilitarian CRM through interactiv e strategy – what nex t for Indian IT firms ? During the 1980s , the Indian informa tio n technology companies built their early business models by offering low co st programmin g power and business process manageme nt capabilitie s to the American firms. During the 1990s , the leading Indian IT firms began sending their employees to the US to work on -site with America n businesses , in order to build bette r understand ing of the client needs, organiza tio na l i ssues, and market conditio ns. This helped them dev elop trust with American clients, and move from lower val ue -adding utilitaria n positioning (referred often as body -shopping or sweatshops) to higher val ue -adding interactive positioning. During the 2010s, the Indian IT firms have faced growing criticism for replacing American workers with lower value adding Indian workforce. Data analytic s, robotics, and artific i a l intellige nce, as well as ava ilab ility of cloud and software -as-service on demand are enabling the American businesses to rethink how technology could be use d to transform their business models. The older model of Indian IT firms seeking to understand from the America n firms what they want from the IT functio n, and then d elivering a low -cost IT solution , is becoming less effective. The emerging model requires IT vendors to partner with business or marketing heads to identify areas where IT might add value, e.g. analyzing whether online ads are paying off. The Indian IT firms are seeking to respond in two ways. First, they are acquiring local IT operations in the US, staffed with American workforce, who have better understand ing of the American context . Second, they are seeking to hire and train new type of workforce in India, who has both technica l skills and knowledge of business functio ns. They recogni ze the need to evolve an interactive customer relations strategy focused more on collaborative discovery of issues and opportunities for technologica l interventio n s, and backed b y utilitaria n IT solutio ns. Source : http://kno wle dge . wha rto n. upe nn.e du/a rticle /dre am -run -india n -e nde d/ Part II – M anaging Re source s Managing ‘Method’ Resources – Knowledge Management Strategy 12 Knowledge manageme nt functio na l strategy encompasses managing knowledge in different parts of a firm’s value chain, as well as in the value chain system going beyond the firm’s boundaries . Knowledge manageme nt (KM) strategy is often classified as specialized or codificatio n (making experientia l knowledge explicit) vs. generalized or abstraction (generalizing the explicit knowledge) [Boisot, 1991]. Specialized KM strategy involve s discovering useful knowledge, encoding and storing that into shared repositories, and retrieval of specialized knowledge that others have contributed ( Hansen, Nohria, & Tierney , 1999). Such a strategy focuses on pushing the specialized knowledge of the world, industry, and people’s experiences in readily -usab le form to those who can apply that for serving the customers more cost -effective ly without reinventing the wheel. It also entails embodying the specialized knowledge in to automated systems, to support effic ie nt and prompt applicatio ns. This type of ‘applied” research and development (R&D) uses ‘followership’ , i.e. adoption of appropriate proven, specialized external and interna l knowledge content to bring about process effic ie nc ies. Focus is on ‘exploitatio n’ of existing specialized competencies, and increme nta l improveme nt in these competencies . Conversely, the generalized KM strategy is driven by an organizatio na l culture founded on a n abstract set of relationsh ips and networks, as a way to promote mutual understand ing of the shared context and co -creation of new knowledge ( Hayes and Walsham , 2003) . The emphasis is not on transferring of knowledge, but on engaging the knowledge creation capability of the member s, so that they are able to consider ways of adding greater value for the customer as they share and apply the knowledge. This type of ‘basic’ or ‘funda me nta l’ research and development (R&D) integrates fresh, leading -ed ge knowledge for ‘product innovatio n s’. It gives firms ‘leadership’ in the form of first -move r advantage , as they become the first to bring a product innovatio n to the ir customers . Even learning from outside the firm is modified and given an origina l form that offers added value to the cus tomers. To facilitate consta nt ‘exploratio n’ of new value addition ideas, firms encourage creativity in generating new knowledge and in developing deep relations with – or even acquiring – entities that have the capability to generate knowledge of value to the customers. Design think ing and hack -a-thons are deployed by the firms seeking to generate and combine knowledge in new ways. The new age global firms , such as A pple, Google, Amazon, and Tesla, excel at general ized KM strategy, developing agility for regularly moving into entirely reconstruc ted new business domains . They become successful in these new dom ains, by using their specialized IT knowledge such as about design (Apple), search (Googl e), sales (Amazon), and sustainab ility (Tesla). The older enduring global firms – such as those in the pharmaceutica ls industry (see box below), tend to rely more on specialized KM strategy, to manage cost as well as speed for preempting competitive attacks. They overcome the limitatio ns of over specializatio n , by becoming adept at scanning of the environme nt to identify and to form allia nces with firms having complementary specialized knowledge . At the same time, they may extend the lifecyc le of existing product generations thr ough improveme nts using a highly -spec ia lized KM strategy. Pharmaceutical firms support their specialized KM through complementary contracts In the pharmaceutica ls industry, the cost of bringing a new drug to market averages $ 700 millio n. The firms in India generally lack resources to bring out origina l drugs on their own. However, ma ny have created their names for origina l research by participating in contract research. The pharmaceutic a l product development consists of several process stages, and the contract research firms can help lower the cost and time of specific process stages. As a result, 13 the world R&D outsourcing market has grown from $ 5.4 billio n in 1997 to $ 9.3 billio n in 2001. The Hyderabad -based, Rs. 2,590 millio n (~$ 55 millio n) Divi’s Laboratories offers low cost contract research on process design, validatio n, and op timizatio n for new drug candidates to multinatio na l firms such as Pfizer. Its specializa tio n is in helping elimina te harmful side effects in a molecule, that otherwise has a high potential (Singh and Surendar, 2003). Managing ‘Machine’ Resources – Tec hnology and Innovation Management Strategy Technology and innovatio n manageme nt (TIM) strategy is often classified as process oriented vs. product oriented (Edquist, Hommen & McKelvey, 2001 3). Process oriented TIM strategy seeks to achieve most effic ie nt process combinatio n of capital and labor costs. When the unit labor costs are high, this is done by investing in larger scale capital -inte nsive technology and in full 24×7 exploitatio n of this technology. When the unit capital c osts are high, the firm instead deploy s labor -intensive technologie s that operate at smalle r scale without experienc ing cost escalation associated with the lack of economies of scale. Historica lly, the American firms achieved cost advantage in the global market using capital -inte nsive technology. They automate d repetitive work using cost -effective machinery to displace costly labor. After the World War II, Japanese firms faced capital shortages, and so invested in labor -intensive technologies that achieved lower costs even without large scale. In either case, the firms today deploy informa tio n and other technologies in accounting, order processing, and other administrative and backroom support areas , to help understand their cost structure, and to m ake efforts to reduce variances and mainta in control. In contrast, product -oriented TIM strategy is driven by an organizatio na l culture seeking to complexify the firm capacity to offer a more generalized portfolio of services to its customers. The i nformatio n -e nab led intellige nt machines may be deployed in the frontline customer – oriented processes and activitie s, to help search, collate, and gather new intellige nce (for instance, through internet, and through sensors). Tools, such as loyalty progr ams and cards, for instance, seek to collect data about their customers , and to create innovative, differentia ted products, such as a continuo us stream of informatio n filtered to the specific customer needs. Informatio n systems may help define micro -segme nts of customer bases, based on complex algorithms and extensive databases of the customer profiles . They may help define and price custom product configura tio ns, and close the deal during their first interactio n with the client. Design think ing and moonshot thinking (striving to find imagina tive solutio ns to seemingly intractable problems) are being used by many firms today to develop new product concept s. In a global, compet itive environme nt, process -oriented TIM strategy is seen as a ‘Strategic necessity ’ to generate cost savings (Powell and Dent -Micalle f, 1997). Short development cycles make products more cost -effective, supporting first mover advantages, market size and sh are, tight controls, process investme nt, ease of manufac ture, and width of product line. However, traditiona lly the winner s have been those who are first focused on raising the wedge between costs and customer benefits , thereby differe ntiating and supporting high performance. For instance, a shift towards floor to electronic trading at New York stock exchange did generate cost effic ie nc ie s, but the deciding factor in its success was how it strategica lly positioned the stock exchange on a higher frontier vis -à-vis other alternat ive s. 3 Edquist , C., L. Homme n, a nd M. McKe lve y (2001 ). Innova tion a nd Employme nt : Proce ss ve rsus Prod uct Innova tion . Cheltenham, Edward Elgar. 14 Using Product oriented TIM to Offer Customer Choice, and Process Oriented TIM to offer Cost Sav ings to Partners The Chennai -based Apollo Hospital in India has ties with an insuranc e company, 900 hospitals, 2,000 physicia ns, and numerous pharmacies across 50 cities of India, all connected by a central relationa l informa tio n system network. The hospital, or th e physic ia n swipes a magnetic card containing a patient identificatio n number when a patient visits to log on to a huge central server that contains all relevant data, such as disease profile, and insuranc e entitle me nts. The system allows Apollo Hospital to offer more differe ntiated choice to the patients through a wide network of physic ia ns, and hospitals. It is also the basis for Apollo Hospital ’s operational and manageme nt consulting business. Each allied hospital pay s it between 3 –5% of its annual tur nover as manageme nt fees; and between 3 –7% of the project cost on all hospital consulting projects undertaken to better the facilities of its allied hospi tals. In turn, allied hospitals are able to leverage Apollo’s centralized purchasing system to get che aper rates for equipment, and other medical supplies (Dhawan, 2000). In recent years, many firms are becoming successful on the basis of process oriented TIM , by discovering new ways of deploying technologie s to offer affordable solutions . Consider Airbnb. Founded in 2009 with $25,000 credit card debt, in 2017, the accommodatio ns -re nta l platform Airbnb is valued at $30 billio n , with 1500 employees and 3 millio n rentals across the world in 65,000 cities and 19 2 countries. Airbnb owns no physical assets, and yet is valued m ore than four times than Hyatt Hotels, the global hospitality firm which has 45, 000 employees spread across 600 franchised properties. And while Hyatt ’s business is comparative ly flat, Airbnb has become the big gest hotelier of the world and is still growing exponentia lly. The key to the success of Airbnb has been investme nts in the digita l process technology, that has offered a transparent and easy way for anybody to list their vacant houses or rooms for short -term renta ls, and for the users to search and to review experiences of other users with those properties . These rentals are particula rly attractive for those seeking a ffordable options, when the top hotels are sold out dur ing busy events or seasons. Airbnb has augmented this process oriented TIM, with product oriented TIM that seeks to offer experiences that are alternative t o mass produced tourism. For instance, its new app product in 2016 included an innovative matching system designed to understand travele rs’ preferences and then match them with the homes, neighborhoods and authentic experiences and trips that meet their needs. Source: https://press.a ta irb nb.co m/a irb nb -la unc hes -ne w -prod ucts -to-insp ire -peop le -to-live -there/ M anaging ‘M one tary’ Re source s – Inve stme nt Strate gy Investme nt strategy deals with the procedures and systems for capital structure and capital expenditure, liquid ity levels, modes of raising capital, working capital, and levels of profit distributio n and retention. This strategy is critically shaped by the turbulence in environme nt and other continge nc ies related with the choice of business strategy (Shank and Govindaraja n, 1993). Investme nt strategy is often classified as budget -oriented vs. opportunity -orie nted. Budget -oriented investme nt strategy is driven by a goal to achieve most efficie nt investme nt allocatio n given the market constraints. Firms esta blish budgets based on an assessment of the historica l, competitive, or technical standards of costs, and expected unit 15 revenues under assumptio ns of specific market conditio ns. Revenue and cost performance is closely monitored against the budgets, and de viatio ns are investiga ted very tightly using period short -term reports. Budgetary standards are augmented with operating control measures of cost, quality and reliability performance. This allows the firm to rely on the budgeting and discounted cash flow techniques for monitoring performance of investme nt projects. A budget -oriented investme nt strategy takes a market -arbitraging portfolio manageme nt view of the firm – where differe nt activities of the firm are considered independent, with few synergies and little need for strategic coordinatio n (Porter, 1987). In conglome rate s that have several unrelated business portfolios, a budget -oriented stra tegy is often deployed. In contrast, opportunity -orie nted investme nt strategy is driven by an organiza tio na l culture seeking multip le new opportunities to add customer value. Such a firm seeks to make several rapid adjustments in its understand ing of customer preferences, which makes future revenues and costs diffic ult to estimate. Under such strategy, f irms are likely to set aside funds for supporting projects that explore new opportunities and seek ways to add value for the customers. Performance i s likely to be evaluated on a longer term horizon, using not only financ ia l measures, but also institutio na l control measures of corporate reputation and the prestige, focusing on transparency, diversity, and sustainab ility. The emphasis is likely to be on capital appreciation outcomes. The formal financ ia l planning and accounting control tools, such as the budget and capital expenditure based on discounted cash flows, are less useful. The firm must rely more on strategy forming and defining missio n, vi sion, and goals — for evaluating and monitoring strategic plans, capital expenditure projects, and acquisitio n proposals. An opportunity -orie nted investme nt strategy takes an activity sharing view of the firm – where different activitie s of the firm are i nterconnec ted, with substantia l synergies and need for strategic coordinatio n. The synergies are often exploited by specifying key performance targets and strategic milesto nes that may not be easy to quantify. Further, the decisions based on these syner gies require taking a long -term perspective so that the interdepende nce among the units could be developed and exploited fruitfully. A study by Nilsson (2002) showed that budget oriented investme nt control is better adapted with the business units following a cost leadership strategy and a portfolio manageme nt intent. In other words, budget oriented investme nt strategy works better when there are few linkages a mong differ e nt business activities. Its downside is that over a period of time, lack of activity sharing can limit the ability of the firm to benefit from cost saving synergie s. On the other hand, opportunity -orie nted investme nt control is better adapted with the business units following a differe ntiatio n strategy and an activity sharing intent . Nevertheless, over dependence on other business units can limit a firm’s flexib ility to manage its costs . 16 Using Budget oriented Inv estment Control to Sustain low -cost leadership In 2002, the Rs. 62 billio n diversified Mahindra Group of India was suffering from a severe recession. The Group had investme nts in 32 subsidiaries, with a portfolio of unrelated businesses includ ing time -share resorts, and a realty business. M&M’s 18% of assets were locked into the shares of group companies, yield ing just 5.6%, and its own stock price had fallen to an all -time low of Rs. 50 in September 2001. The Group Chairman, Anand Mahindra, operated as a venture capitalist responsible for allocating capital, while the day -to-day responsibilitie s of running the businesses rested with the business heads. In December 2002, the Chairman launched Project Blue -chip. Project Blue -chip replaced qualitative ly selected performance benchmarks like market share, sales, and profits with two common quantitative measures of performance — free cash flow (cash after appropriating for investme nts and profits), and return on capital employed (ROCE). It also stopped the practice of allowing mid -year revisio n of the budgets, and introduced the concept of ‘no -excuses budget’. The variable pay component of senior manageme nt was attached to the Blue -chip goal, so that capital is allowed to flow to the project with the highest returns, regardless of where the surpluses were generated. Within a year, the pri ce of the M&M share surged to Rs. 390.25 from Rs. 112.55 at the end of 2002 (Dhawan and Byotra, 2004). As the improved capabilitie s and domestic environme nts have expanded their opportunities for adding value , firms in emerging markets are increasingly adopt ing more opportunity -orie nted investme nt strategy . Consider the case of India : Using Opportunity oriented Inv estment Control to Differ entiate In 2003, American Express and IMA India surveyed changing role of Chief Financia l Officer (CFO) in India. Over a six -year period since 1997, when the survey was first con ducted, the role of the CFO has been transformed ‘from one relating to pure finance to that of leadership, and strategic decision -mak ing.’ In 1997, 85% of the CFOs spent most of their time on transactio n processing and control; now that is down to 45%. The time spent on strategy has increased from 36% in 1997 to 48% in 2003, mostly because of a greater emphasis on strategic planning. This shift is indicative of a growing attempt by the Indian companies to become more differe ntiated, and to rely less on thei r low labor cost advantages (Jayaram, 2003). Twenty years later, in 2016, Deloitte Survey of CFOs in India reiterated these trends, “Today’s CFOs are not only performing their traditiona l role of preserving the assets of the organiza tio n and run ning a tight and effective financ e operation but are also performing the role of strategists and contributing towards deciding on the direction of the business. Research also supports the view that CFOs are being involved in more strategic and top level de cision making. In fact, the finance functio n itself is being considered by some as a strategic business partner.” (Deloitte, 2016: 18) In recent years, t he web has disrupted traditio na l investme nt models. With the web, it is possible t o launch a business, to assemble capacity, and to acquire customers, at a fraction of what it cost in the 1990s. Demonetiza tio n of business models has enabled firms suc h as Craigslist, eBay and Amazon to scale with extraordinary speed to become some the world’s biggest companies. The new informatio n -enab led technologies are powering exponentia l cost 17 drops across every business functio n (Ismael, Malone & van Geest 2014 4). It has now become possible to share resources across activities , and to leverage third party resources, seamlessly. Amazon for instance shares its web platform for selling products directly to customers, as well as allowing the third -party vendors to sell to those customers. Thus, many firms are successfully offering affordable products and services to the customers, using opportunity oriented investme nt strategy. These firms have most of their costs as variable, with transparent low -cost pricing, and they generate profits through massiv e scale , alternative channels (such as membership fees or ad revenues) , and transformative purpose (typically some form of democratized, collaborative con sumptio n) . M anaging Growth through M anufacturing – Ope rations M anage me nt Strate gy Manufacturing ve ry broadly is a functio n engaged in managing manufactured or man -made assets. Operations manageme nt (OM) strategy seeks to leverage assets, i.e. capabilitie s, of a firm to drive competitive advantage (Skinner, 1969; Aranda, 2002). The operations strate gy may be classified as asset -intensive or service -inte nsive (i.e. asset light) (Aranda, 2002) . Asset -intensive operations strategy seeks to leverage under -valued fixed assets that are based on market infrastruc ture and mainta in h ighly effic ie nt operating or variable costs. Note that these effic ie nc ies do not arise from hiring of lower cost workforce or sourcing of lower cost inputs or distributio n using lower cost channels (which are instead associated with human resource, supply chain, and customer exchange strategies respectively). Rather they emanate from an efficie nt exploitatio n of the assets and infrastructure traded from the market, so that the firm is able to transform a set of inputs into outputs in less time, or is abl e to design outputs using resources of more limited quality and quantity. Effic ie nc y in asset exploitatio n arises from an operations strategy that is ‘designed to maximize performance on a few success criteria of strategic importance ’ and a recognitio n that ‘ a system which is technologica lly constrained cannot perform superbly on every measure’. (Skinner, 1969) . Firms tend to focus on customers with similar needs, and on products and services with similar process design, in order to generate the follow ing three types of economies using a common asset infrastruc ture. • Economies of learning: First, as firms work on the same assets, they may gain experience and learning about what process work and what don’t, yield ing them economies of learning. After the World War II, Japanese firms pursued predomina ntly this type of cost economies. During the 1960s, Honda, for instance, priced its motorcycle s very aggressive ly, yet was able to achieve positive cash flows and sustainab le growth because of the cost im proveme nts associated with its learning curve (Boston Consulting Group, 1975). • Economies of scale: Second, firms may automate the process through special -purpose assets, which yield economies of scale or enduring savings in variable costs. During the 20 th century, American firms pursued predominantly this type of cost economies. They invested in special purpose machinery and tools and specialized workforce, to manufac ture specific standardized product lines in large volumes. • Economies of specializ atio n and network: Third, firms may organize the operations process as a network, with teams of highly specialized employees responsible for differe nt parts of asset operation, and with different firms in the network also responsible for different product groups each requiring specialized assets; thus accruing economies of 4 Malone, M., Ismail, S. & van Gees t, Y. (2014) Exponential Organizations: W hy new organizations are ten times better, faster, and cheaper than yours , Diversion Books. 18 specializa tio n and network. During the 20 th century, German firms pursued primarily this type of cost economies. Japanese OM strategy is referred to as lean production; the America n OM strategy is referred to as mass production; and German OM strategy is referred to as network specializatio n; each of the three asset manageme nt strategies help firms achieve cost effic ie nc ie s. In contrast, service -inte nsive OM st rategy is driven by an organizatio na l culture seeking to achieve flexib le operating capability. Flexib ility is achieved by recognizing the limita tio ns of technologica l constraints, and using reconfigurab le informa tio n smart light assets for discovering the values of priority to the customers. Flexibility is also achieved by focusing on general purpose goals and values that resonate with a broad group of customers, such as social, environme nta l and customer sensitivity and responsive ness. More than a t echnical process, flexib ility emanates from an organic service -mind set, culture and technology; which allows the firms to offer a high level of service personalizatio n and customiza tio n to its target customers using reconfigurab le informatio n -smart light a ssets. There are many dimensio ns of service – oriented OM strategy such as: a) Service mindset: European firms have traditio na lly relied on the professiona l ethics of the members of guilds and professiona l trade organizatio ns. This has helped them with craf ts-oriented operations, where custom designs help achieve higher value -added through exclusive small -batc h production. b) Service culture : Japanese firms have traditiona lly relied on a deep service culture to engage its workforce and suppliers in the pro duction of a large variety of products, customized to the specific needs of the customers. c) Service technology: American firms in recent years have relied on innovative service technologies using effective informa tio n processing and deep data mining to c onfigure their products in a range of mixes and to a range of custom specificatio ns. New insights on OM strategies have emerged as the firms have faced shrink ing product life cycles, new technologie s, educated knowledge workforce, and global competitio n. Unexpectedly, firms have been able to elevate minimum benchmarks on multip le operations criteria, as efforts to enhance one type of operational competence have required firms to cumula tive ly further competence in other operational areas as well. A s tudy by Ferdows and De Meyer (1990) suggested that among the high performing manufac ture rs, the improve me nts move from quality to reliability, followed by flexib ility (which they take to includ e speed), and cost effic ie nc y. Thus, they suggest that efforts to reduce operating costs – a key focus of asset – intensive OM strategy – should take place alongside continuing efforts to improve quality, reliability and flexib ility, or else those efforts will not be as sustainab le or effective. On the other hand, effo rts to improve operating flexib ility – a key focus of service -inte nsive OM strategy – should take place alongside continuing efforts to improve quality and reliability. As illustra ted by the case of F ibres and Fabric internatio na l, many emerging market fi rms are using flexib le service technolo gy and forming partnership s with foreign customers and experts to bring flexib le mind -set and culture to their operations. 19 Adding v alue through serv ice intensiv e OM The Bangalore -based Fibres and Fabric Internatio na l is going against cost -conscious manufac tu ring, and creating a differe ntiated niche by pioneering flexib le manufac turing system in fashio n garments. For this, it is not just buying technology, but also augmenting its capabilities for using technology. It uses imported high -tech machine s, has hired an Italian technicia n to help accelerate lead times, and has set up a Rs. 60 millio n state -of-the -art water recycling plant for bagging eco -friendly buyers from the Netherlands, and Germany. I t command s an average price of 14.43 euros on its sales of 2 mi llio n fashion denim jeans — more than double the 7 euros commanded by the Chinese manufac ture rs. It also successfully entered the high -fashio n jeans market, command ing a premium on jeans retailing at 200 Euros and above. Since in these markets, inventory hol ding costs are high, most European retailers prefer to deal with suppliers who can replenish stocks in short lead times; its flexib le manufacturing system allows a lead time of just two weeks — unheard of in China (Surendar and Rajshekhar, 2004). M anagin g Growth through M otivating Powe r – The Le ade rship Strate gy Leadership strategy encompasses setting directions and overall purpose, missio n, and values of the firm, as well as mobilizing, distributing, and redistributing resources to support actions aligne d with the intended purpose missio n, values, and direction of the firm. It is often classified as transactio na l vs. transformatio na l (Burns, 1978; Bass, 1985). Transactio na l leadership seeks to sub -divide overall direction of th e firm into very specific objectives aligned with the specific competencies of people and with specific resources they have. Transactiona l leadership operates by not only dividing the overall purpose into objectives, but also conditio ning the rewards, suc h as compensatio n, bonus, and recognitio n of employees on the accomplishme nt of these objectives – i.e.. for complia nce with the leader’s expectations. The transactiona l leaders with extensive experience in their jobs and with their firms tend to be more familiar with the organizatio n’s structure, systems, processes, and people, and are more effective in imple me nting cost leadership strategy. The transactiona l emphasis ensures economica l processes and good value, while keeping cost down, year after year, i n every activity, through standardized, repetitive processes and output. The thrust is on capital investme nt, as opposed to personnel development; employees are not expected to have a high level of decision -mak ing. There is very limited possibility of fai lure, or need to learn by trial and error, since the primary goal is to motivate members to fully draw on competencies and resources they already have. The teams may still learn, but this learning is vicarious, unplanned, and tactical. Pascale (1984), f or instance, reconstructed the story of Honda’s success in motorcycles during the 1960s based on intervie ws with Honda managers and employees. He uncovered the role of uninte nded and unexpected learning while striving for a very transactiona l approach – Honda’s employees in the US entrusted with market development began riding their lightest motorcycle for personal chores in the Los Angeles market. The US customers were known to prefer the heavier motorcycle and Honda’s employees needed to be as cost eff ic ie nt as they could be in using the very limited resources they had been entrusted by the leaders. So, they decided to use the lighte st bike resource for personal use, and the heaviest bike resource for market development use. However, when families wer e enamored by small -b uilt people riding the light bikes, Honda received advance payments from American retailers to build large volumes of those bikes. 20 In contrast, t ransforma tio na l leadership is driven by an organiza tio na l culture seeking to engage p eople with the overall purpose, missio n, and values of the organizatio n. It offers freedom or autonomy for people to develop and refine their competencies and to invest in resources and technologies, as needed, to further the overall purpose. Through a commitme nt to higher values, people are expected to go beyond their self -inte rests, and work towards a long – term vision of better future , leading by example, and inspiring and developing others to bring about change. Transformatio na l leaders tend to bri ng new visions, and are better supporters of differe ntiatio n (Kathuria and Porth, 2003). The transforma tio na l values of flexib ility, spontaneity, and employee participatio n are consistent with the mission of the prospector and analyzer business strategies, who are constantly searching and developing new market opportunities (Guthrie and Olian, (1991). If the firms are trapped by their historica l processes, systems, and culture, it becomes diffic ult for them to pursue a ‘new’ vision for the organi za tio n. Similarly, if the firms live too much in the world of imaginatio n, they may be disconnected with their historica l and contemporary reality and fail to actualize their dreams. Thus, pragmatic leadership in today’s world where we face immense soc ial challenges of inclusio n, security and growth, requires more than a process of positive imagina tio n of transformatio na l processes, systems, and culture. It also requires setting measurable micro milesto nes, so that people are encouraged and rewarded for identifying the obstacles for realizing that future state, and clarify the path that explode the existing cultura l limits on what is possible. This path takes the shape of ‘entrepreneuria l leadership’ for not only sustaining competitive advantages, but a lso realizing the broader missio n, purpose, and values. Transformatio n leadership is based on the values of collabor atio n , cohesion, and adaptability , as underlined by an interesting story of milk bottles. In the early 1900s, cap -less milk bottles were used in Europe. Two garden birds — the blue jay, and the robin — used to sip cream from the bottles. After world War I, tin foil caps were used on bottles. The blue jays learnt to peck the caps open to sip the cream, but the robin could not. Scholars found that blue jays move in flocks of 14 to 15 birds, and continue parenting till their young ones were old enough to take care of themse lves. So, the learning by one bird is quickly and effic ie ntly shared among the entire flock. On the other hand, the male robin has a territoria l temperament, and does not allow other birds of the species to come close. Hence, there is no sharing between ro bins. Transforma tio na l leadership fosters collaborative social propagation amongst the blue jays; it allow s them to enjoy the cream, and to grow healthy (Fisher and Hinde, 1949). Traditio na lly, fostering collaborative teams required significa nt leadership effort; therefore , transforma tio na l leadership in organizatio ns was generally associated with premium positioning and differe ntiatio n strategy. However, digita l technologies have remarkably reduced the cost of collaboratio n across global borders and across differe nt stakeholder groups. New age transformatio na l leadership has been focused on democratizatio n of access , as illustra ted by the ride sharing (Uber) , accommodati o n sharing (Airbnb ), channel sharing (ebay) firms. In I ndia, Patanjali has emerged in a very short time as the largest consumer products firm, through transformatio na l leadership of spiritua l and yoga teacher Baba Ramdev . Baba Ramdev has been passionate ab out using traditiona l ayurvedic and other knowledg e of India to 21 take away domestic market for consumer products from the multina tio na l firms , and this passion has offered the inspiratio na l power for Patanjali to scale and expand in multip le categories . M anaging Growth through M anipulating Powe r – The Ste wardship Str ate gy Manipula ting power very broadly is the ability of firms to be a player in a community deriving from the legitimac y and accountability of their strategic behavior. Stewardship strategy accounts for the resources arbitraged by a firm from the constitue nts with whom it has a range of relationships, and offers legitimac y that the firm has deployed these resources effective ly achieving growth that accrues incrementa l value for all constitue nts as well. Stewardship strategy may be classified as private or social. Private stewardship strategy is grounded in the agency theory, which holds that the only fiduc iary obligatio n firms have is to their stockhold ing investors . In the agency theory, the stockholders privately bear financ ia l risk in exchange for giving fiduc iary rights on the organiza tio n’s resources to the strategists , and therefore have the power to take direct control of the organiza tio n if they believe the strategists are not working in their best interest. Stockholders, supported by the force of the legal system and the markets, punish the organizatio ns that do not structure their interna l resource allocatio n, activities, and behaviors in ways that maximize private effic ie nc y. The stakeholders ar e viewed as part of an environme nt that a firm should manipulate to assure cost savings, revenues, profits, and ultimate ly returns to stockholders. For instance, a firm might adopt total quality manageme nt as part of its strategy to increase sales volumes . In the process, the firm would seek to signific a ntly improve its relationships with two key stakeholders: workers, and suppliers. However, if the firm does not enjoy improved sales through greater quality initiatives, it would withdraw its commitme nt to improved worker and supplier relations (Shawn and Wicks, 1999). Similarly, a firm invests in environme nt friend ly technologie s only if the customers are willing to pay additiona l for the products, that they would not otherwise, or if the governme nt would impose fines that are larger than the costs of these investme nts. Philanthrop ic activities, when undertaken, are just like any other cost of doing business — the y are cost of co -opting various stakeholders so that the business is allowed to serve, and maxim ize private returns for the stockholders . Put differe ntly, under the agency theory, the principles of relating with the stakeholders are defined purely in terms of their priv ate economic value for the stockholders at a given time, and decisions are re -eva luated on an ongoing basis for their priv ate economic benefits and costs to the firm . On the other hand, the Social stewardship strategy is driven by an organizatio na l culture grounded in trusteeship theory, which holds that the boundaries of fiduciary o bligatio n extend to other stakeholders also. In the trusteeship theory, manipula ting functio n is endogenous to the organiza tio n, and is based on the intrinsic worth of the principle s and moral commitme nts about how to relate with the stakeholders. The firm is not guided by the desire to use stakeholders primarily to maximize private profits and returns for the shareholders. It does not follow only those values that appear to be of private advantage to the stockholders. Instead, the firm first identifie s its values (and all the stakeholders for whom this value is oriented) , and then seeks to pursue strategies that help it actualize or add those values . The firm is guided by the social, i.e. broader, impact of its decisions on all its target stakeholders, and strives to foster a positive influe nc e, quite independent of the stakeholders’ instrume nta l value to its profitability. The broader socially responsible stakeholder interests are the basic foundatio ns on which a firm seeks to construct its unique identity, positioning, and strategic intent. 22 In the trusteeship theory, resource allocatio n is guided by the concern for increasing the overall social value of the resource endowments, since such increase enables increasing amount of resources for all the stakehol ders, irrespective of their share. For instance, a firm may respond to the community concerns for ecology by being proactive. It may design its products for disassembly — whic h increases useful life of the product and enables easy disassembly and recycling; such products are also eco -friendly because they use material in the form of products, and recycled materia ls. Additiona l benefits include safer working conditions for employees. The firm may also be able to create a distinc tive eco -friendly image that app eals to customers (Shrivasta va, 1995). In the age of social media, the society has multip le tools, eyes, ears, minds, and voices, to uncover disinge nuo us attempts of firms to manipula te its members, for the private benefit of few private investors. A sig nifica nt gulf has emerged between the most powerful private investors, who tend to be very wealthy, and the other members of the society, who tend to be predominantly from limited resources families and communitie s. Firms who demonstrate an authentic com mitme nt to improving social benefit cost ratios of resources arbitraged by them are likely to find it easier to also be able to accrue greater private value. For instance, Financia l Times introduced a FTSE4Good index comprising stocks of companies with a trusteeship theory of action , and this index has been found to outperform other broad -based indices (Mukerjea, 2003). Summary: Using Functional Strate gie s to Support Busine ss Strate gie s As a summary, it is useful to consider the differe nt ways functio n a l strategies may be used to support the business strategies of cost leadership and differe ntiatio n. The firms can use functio na l strategies in three ways to support their cost leadership strategy: a) Discovery capability: Discovery of the functio na l resou rces that could be used by the firms most cost -effective ly to serve their target customer demand. b) Developme nt competence: Developme nt of a network of the providers of functio na l resources inside and outside the firm boundaries, who compleme nt each oth er’s capability in enabling the firms to cost -effective ly serve their target customer demand c) Deployme nt capability: Technologica l, organiza tio na l, and social structures, processes, and behaviors that promote timely and efficie nt exchange of informa ti o n with the providers of functio na l resources about their target customer demand The firms following a differe ntiatio n strategy are concerned less about cost -effective ly serving their target customer demand, and more about accruing value -additio n for thei r customers. a) Instead of seeking to add value by generating savings on their products for the customers, they seek to add value by offering services that make the products more valuable for the customers. b) Instead of prioritizing on timely and efficie nt exchange of informa tio n about their target customer demand, they emphasize ongoing understand ing of the overall value their target customers seek, and effective exchange of this knowledge with the providers of functio na l resources. Micro foundat io ns play an important role in how functio na l strategies might support business strategies, includ ing the other strategies of focus and growth discussed previously. 23 M icro -foundatio ns of Functional Strate gie s Structural, relationa l and behavioral factors play an important role in the design of appropriate functio na l strategies, and in the relationship of functio na l strategies with business strategies. Structural factors: Organizatio na l structures play an important role in the ability of the firms to coordinate the discovery , developme nt and deployment of functio na l competencies. The organiza tio na l structures may take several differe nt characteristics – such as “mechanistic ” versus “organic ”, “tall” versus “flat”, “centr alized ” versus “decentralized ” and “standardizatio n” versus “mutua l adjustment”. Centralized organizatio na l structures are ones where strategic decisions are taken centrally, these structures allow for tight control of costs, and tend to foster cost effic ie nc y related functio na l competencies. Functiona l organiza tio na l structures are ones where senior executives are in charge of differe nt functio na l resources; these structures support development of deep functio na l competencie s. Conversely, when th e firms need to develop responsive approaches, decentralized structures that distribute power to employees tend to be more effective. Also, when firms need to promote inter -linka ges among various functio ns, product -based organiza tio na l structures tend to be favored. The firms may also decide to use different structures for organizing differe nt functio ns. Gutterman (2011: 4), for instance, observes, “Traditio na lly, manufa cturing functio ns in the US tended to have a tall hierarchy with centralized decis ion making and relied heavily on standardized procedures. The result was a relative ly mechanistic structure that fit well with the production line approach to the pace of work. On the other hand, effective R&D is more likely to occur with an organic stru cture with a minimum of hierarchy and tolerance for decentralized decision making that empowers skilled engineers and scientists to use and trust their skills and knowledge when solving problems that arrive in the course of the innovatio n process.” Howeve r, structures can also constrain the type of functio na l capabilities – for instance, Japanese firms put many American manufacturers out of business, when they developed more service -orie nted operations by flattening the hierarchy, and empowering employees on the product line to discover decentralized opportunities for mutua l adjustment and accumula te capabilities to deliver broad variety through continuo us improve me nt or kaizen. Similarly, during the late 2000s, many customer -fac ing employees in the U.S. financ ia l services sector abused their autonomy and used false or dubious documentatio n to write mortgages. Organizatio na l structures can shape several differe nt types of linkages between functio na l and business strategies ( Golden and Ramanuja m, 1985): (a) No linkage (or Administra tive Linkage): In many owner -led organiza tio na l structures, strategic functio n s play a predomina ntly administra tive role, and react to the emergent needs of the organizatio n without regard to its business strategy. For instance, in India, traditiona lly stewarding strategy has had no clear linkage with business strategies, as firms have invested in charitable causes either because of the owner prioritie s or the tax deduction for charitable causes. (b) One -way linkage (or Hierarch ica l Linkage): In firms that rely on a multi -d ivisio na l organiza tio na l structure organized around business units., business strategies are established and managed by general managers and senior executives of the firm. The lower -leve l functio na l managers may have limited if any influe nce on the business strategies set by their bosses . On the other hand, some organizatio na l structures may give special powers to particular functio ns. For instance, when operations functio n has special powers, firms tend to develop strong cost – effective capabilities to perform their business strategy even in premium segments. But when 24 marketing functio n has special powers, firms tend to develop strong customer empathy and responsiveness capabilities, even when they are ope rating in price -sensitive segments. (c) Two -way linkage (or Sequential Linkage): In project -based organiza tio ns, b oth business and functio na l strategists work collaborative ly on differe nt projects . For instance, to support short -term and relative ly simp le projects, the firms may rely on freelancers using a low commitme nt human resource strategy. As the firm builds a track record of success with its customers and gain trust, it may be able to secure more complex projects requiring greater value addition and responsiveness. That may encourage the firm to offer longer -term employee contracts, using a higher commitme nt human resource strategy. (d) Multi -way linkage (or Dynamic Linkage): In transnatio na l organiza tio na l structures, functio na l and busine ss strategies may be designed interactive ly to dynamica lly frame country – by -country growth objectives . For instance, investme nts in an emerging market business m ay help a firm gain cost -effective functio na l competencies, which could then become a basis fo r expanding into additiona l price -sensitive markets as well as in making differe ntiatio n positioning more cost -effective on a global basis. Relationa l & Behaviora l Factors . Organizatio na l cultures also play an important role in the relationa l and beha vioral patterns of functio na l resources, and therefore the dynamics of functio na l strategies. The organiza tio na l cultures may take several characteristic s, such as ‘power distance’, ‘uncertainty avoidance’, ‘group collectivism’, ‘generalized collectivism ’, ‘gender egalitaria nism’, ‘humane orientatio n’, ‘assertiveness’, ‘future orientatio n’, and ‘performance orientatio n’ (House et al, 2004) . For instance, the firms seeking to promote service -orie nted operations functio n may nurture the cultura l values of ‘gender egalitaria nism’, ‘future orientatio n’, and ‘performanc e orientatio n’, and actively reduce ‘power distance’ and ‘uncertainty avoidance’. They may do so by establishing behavior -based performance evaluatio n system, and by promoting new relations through collaboratio n with marketing partners who have these desired cultura l practices. As noted previously, organizatio na l cultures and mindsets are critical factors in the ability of a firm to pursue growth business strategy, or to successfully exec ute a focus business strategy. In order to identify opportunities for shaping functio na l mindsets, the firms need to first establish their existing baseline of competencies in each functio na l area. This can be done using a functio na l resource scorecard . The functio ns are classified in three categories – managing relationships (workforce, vendors, customers), managing resources (knowledge, technology, finance), and managing growth (operating, leading and stewarding). As illustrated in Figure 4.2, a functio na l resource scorecard evaluates both types of functio na l competencies of the firm across the nine functio ns the left side competencies support the cost effic ie nc y capability, while the right side competencies support the differe ntiatio n capability . The evaluatio n may be made against competitive best -in-class standards, or against historica l performance of the firm, or using subjective absolute ratings. 25 Figure 4.2 : Functional Re source score card using the 9-M M ode l Strategic Functions Functional Strategy Cost Efficiency Differentiation 1. Manpower Human Resource Low commitment High commitment 2. Material Supply Cha in Predictable Responsive 3. Method Knowledge Specialized Generalized 4. Money Investment Budget ary Opportunity 5. Manufacturing Operations Asset -intensive Service intensive 6. Machine Technology & Innovation Process oriented Product oriented 7. Marketing Customer Utilitarian Interactive 8. Motivating Leadership Transactional Transfor mational 9. Manipulating Stewarding (Accounting) Private Social The aggregate level of functio na l competencie s is one indicator of the opportunity for growth. 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