Strategic Functions and Functional StrategiesThe 9-M .docx

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Strategic Functions and Functional Strategies
The 9-M Model
Chapter 4
© Vipin Gupta, 2007
WMW
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Strategic FunctionsVarious areas of activities in an
organizationHR managementResearch and
developmentFinance/accountingMarketingNeeds to be
consistent with business strategy Must be balanced to contribute
to strategic intentMust be responsive to environmental changes
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Need for Integrated Model for Functional StrategiesResearch
shows that competitive advantage Does NOT differ by business
strategies of cost leadership vs. differentiationDOES differ by

consistency and match of selected business strategy with
organization activities and processes Use an integrated model of
9 functions for analysis, each represented by an ‘M’
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Aligning Functional Strategies9 functional strategies should be
integrated/aligned with mission based on
ConsistencyBalanceResponsivenesse.g., Mercedes-Benz
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Functional StrategiesManaging RelationshipsManaging
ResourcesManaging Growth
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Functional StrategiesManaging Relationships
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*Manpower Function:
Human Resource StrategyUse Low commitment
ApproachUse High commitment ApproachRecruitment of new

employees based on their talent and experienceAttitude &
cultural fit of new employees also important for teamwork &
flexibilityTraining focused on increasing on-the-job
performance of the employeesTraining oriented to help
employees understand broader business contextEmployee
relations: workers satisfied enough to make routine
contributionsEmployee relations: Provide workers with
autonomy, info, opportunity & authority to be self managing
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2. Materials Function:
Supply Chain StrategyUse Predictable ApproachUse Responsive
ApproachDeliver functional products: daily use typeDevelop
innovative products: fashion, technology, or knowledge
intensiveSupplier selection based on low costSupplier selection
based on agility (a range of versatile capabilities)Suppliers are

asked to fit into the production planningSuppliers are
encouraged to become internal consultants
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3. Marketing Function:
Customer Relationship Management StrategyUse Utilitarian
ApproachUse Interactive ApproachFocus on selling, delivering,
& servicing a product aggressivelyFocus on building repeat
purchase loyalty & word of mouth popularity“Pricing” is the
primary 4P of marketing to increase market share, economies of
scale, & capacity use“Positioning” is the primary 4P of
marketing to create an image of differenceLow-cost channels of
distributionUse service-intensive channels of distribution

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Functional StrategiesManaging Resources
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4. Methods Function:
Knowledge Management StrategyUse Specialized ApproachUse
Generalized ApproachTechnological followership – late
moversTechnological leadership – early movers or any time
revolutionizersProcess improvement without reinventing the
wheel: use brainstorming, employee suggestions, licensing, &
imitationObliterate & reengineer: use brain-stilling where
employees, vendors, customers, & competitors are partners in
innovationTechnology sourced pre-dominantly from outside, &
through passive involvement of the firmTechnology developed
pre-dominantly within the firm, or through active involvement
of the firm

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5. Machine Function:
Technology & Innovation Management StrategyUse Process
innovating ApproachUse Product innovating Approach

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6. Monetary Function:
Investment StrategyUse Budgetary ApproachUse Opportunity
ApproachBenchmarking norms based on best practice, industry,
or firm historyRely more on human judgment in teams &
coalitions of teamsBudgeting & discounted cash flow
techniques for financial planning & performance
monitoringStrategic intent, vision, mission, & goals guide the
planning & evaluation of objectives & actionsShort-term
horizon for performance evaluation & control, using operating
costs & other operating ratiosLong-term horizon for
performance evaluation & control, using more qualitative
measures

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Functional StrategiesManaging Growth
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7. Manufacturing Function:
Operations StrategyUse Asset-intensive ApproachUse Asset-
light (service) ApproachStandardized parts, designs & products,
created using sophisticated processes, technologies &
toolsCustomized parts, designs & products, created using simple
craft-based processes, techniques & toolsOperations rely on
machinery & on standardized procedures taught “Hamburger
University” style Operations rely on the intelligent use of
machinery & problem solving
Company with walls & mechanistic organizational
structuresCompany without walls & organic structures that can
be torn without disruption

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8. Motivating Function:
Leadership StrategyUse Transactional ApproachUse
Transformational ApproachReward/ Punishment for compliance
with leader expectationsInspirational: higher-order needs &
motivesDirective: emphasis on procedures, norms, rules,
controls, & directivesParticipative: employee participation &
involvementMicro-leadership: seek those who are willing to
carry the commandSuper-leadership: seek empowered self
leadership

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9. Manipulating Function:
Stewardship StrategyUse Private ApproachUse Social
ApproachThe goal of the firm is to make profits & to increase
shareholder returnsThe goal of the firm is to further its mission,
continuously reviewed with the involvement of all
constituenciesShareholders give agency rights to the CEOs to
manipulate everybodyCEOs are trustees, who are committed to
sustainable developmentWilling to compromise on values, if it
adds to the bottom lineWilling to recognize new values,
enabling stakeholder inclusiveness
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ConclusionsMethod for understanding functional competencies
for differentiation and cost leadershipIdentify 3–5 core
activities in each of the 9 functionsAssess these activities on a
scale of 1 (cost-containing) to (5) differentiation-augmenting. If
the average of the 9-M functions is low, then it suggests that the
firm has cost leadership capability.If the average is high, then
the firm has a differentiation capability.
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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:
1) 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
2) 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).
3) 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.
a) 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.
b) 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.
c) 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.
(a) 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.
(b) 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.
(c) 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:
a) 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.
b) 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.
c) 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:
a) 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.
b) 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.
c) 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):
a) 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.
b) 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.
c) 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:
a) Improvement: to invest in improving the capabilities to offer
better value to the customer groups
b) Scaling: to scale up the value that is meaningful to different
target customer groups
c) Innovations: to collaborate with other firms to develop
innovative combinations that elevate the customer experience
d) 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 2x2
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.
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Network equipment and spectrum
Infrastructure and operations
Billing
Retail distribution
Portals and resellers
Design
Production
Marketing
Support

Delivery
Inbound logistics
operations
Outbound logistics
marketing and sales
Service
PROS
* Knowledge (routines)
* Motivation (culture)
* Reputation (credibility)
CONS
* Diminishing returns
* DIminishing demand
* Competitive Interplay
Alternate target customers,
with alternate value factors

Reduce:
What factors should be reduced well below hte industry
standard?
Create:
What factors should be created that the industry has never
offered?
Raise:
What factors should be raised well above the industry standard?
Eliminate:
What factors should be eliminated from what hte industry has
taken for granted?
Cullinary Foods
Maggi
Le Creazioni di Casa Buitoni
Beverages
Nescafe

Nespresso
confectionary
Kitkat
Maisen Cailer
Milk products
Nutrition
Cerelac
Nestle Haagen Dazs
Babynes
Growth and Profit Impact of
Blue Ocean Strategy
Launches with Red Ocean Profit Impact Revenue Impact
Business Launch 31 62 86 Launches with Blue
Ocean Profit Impact Revenue Impact Business Launch
69 38 14 Cirque du Soleil Star peformers Animal
shows Aisle concessions Multiple show arenas Fun
and humor Thrills and danger Unique venue Theme

Refined watching environment Artistic music and dance
Price0 0 0 0 6 6 9 9 9 9 8
Smaller Regional circus Star peformers Animal shows
Aisle concessions Multiple show arenas Fun and
humor Thrills and danger Unique venue Theme Refined
watching environment Artistic music and dance Price6 8
8 6 7 7 2 0 0 0 3 Strongest
National Circus Star peformers Animal shows Aisle
concessions Multiple show arenas Fun and humor Thrills
and danger Unique venue Theme Refined watching
environment Artistic music and dance Price8 9 9 8
8 8 3 0 0 0 4
2
1
Chapter 7. Supporting Business Strategy through Functional
Strategies
In 2015, India’s packaged fruits drink market was valued at Rs.
11 billion (~US$200 million).
Dabur held a 55% share of the market, followed by PepsiCo at
30%; up from 50% and 25%
respectively a decade back. Fewer than 20% of the people in
India consume fruit juices as part
of their diet, as compared to ~40% who consumed bottled water
and ~60% who consumed coffee
and soft drinks. Over the past decade, the market has grown by
15-20% annually because of the

rising health-consciousness, and is expected to sustain that
growth over the coming years. The
government of India has set targets to triple the size of
processed food sector, by increasing the
level of processing of perishables from 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 lychee,
guava, grapes, and mango juices from
the domestic vendors, and orange, apple, and pineapple
concentrates from the overseas suppliers.
To be more responsive to the consumer needs, Dabur has been
buying fruits directly from
farmers since 2004, and is processing them in-house in a new
plant it set-up in Siliguri, West
Bengal. It has also migrated to a flexible 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 Development to boost the share
of the under-served institutional
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
[institutional] buyers tell us about 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 available in the country, it is easy for us to offer
solutions (Srinivas, 2003).’
More flexible operations and sourcing system, and
institutionally led marketing and
research effort has also helped Dabur realize its strategic intent
of becoming a leader in the
broader processed fruits market, beyond just juices and
concentrates.
In the previous chapter, we learnt about the three different types
of business strategies –
cost leadership, differentiation, and growth mindset (besides
‘focus’). In addition to deciding
the overall strategy for their business, executives also need to
develop and align functional core
competencies. Dabur’s growth business strategy has required
new competencies in supply chain,
research and development, operations, and marketing. Each
function relies on different and
specific techniques and technologies to achieve the common
business objectives of cost
efficiency, customer and quality differentiation, and innovation
for growth.
Each of the three types of business strategies is often equally
viable. In fact, on average,
the two contrasting business strategies—cost leadership and
differentiation in the Porter’s
framework—perform equally well (Gupta and Govindarajan,

1984). Some firms still outperform
others because of their ability to develop appropriate supporting
functional core competencies.
In doing so, the firms must deal with two challenges:
a) Business level strategy: First, business strategies need to be
supported with appropriate
functional core competencies. For instance, a firm with a
business strategy of cost leadership
(such as a budget hotel or budget airline), may invest in
technologies that minimize the quality
assurance and training needs, simplify product designs to reduce
the need for specialized vendors
or machines, and simplify the customer servicing to efficiently
deliver its products.
2
b) Micro foundations: Second, structural and relational
conditions need to be conducive to
promote the intended functional behaviors. For instance, some
sort of centralized organizational
structure may help achieve the cost efficiency business
objectives. Consider a case where a firm
offers promotional discounts to implement a volume leadership
strategy, but fails because it did
not also develop vendors and capacity to scale manufacturing
without compromising on quality.
When a higher central structure oversees all these functions,

and fosters a culture of inter-
functional collaboration, these interactive functional behaviors
are more likely to actualize.
To resolve the above challenges, design of functional strategies
should be guided by three
principles:
(a) Consistency: Functional behaviors should be consistent with
the business objectives.
If the goal is to create a premium positioning, then the use of
low-end, discount distribution
channels may not be effective.
(b) Balance: Micro foundations are necessary to balance
functional behaviors, based on a
portfolio of inter-balancing core competencies across different
functions. If the goal is to realize
low cost leadership, manufacturing may seek to maintain zero
inventory levels; however, such
zero inventory levels could result in a loss of sales, decline in
the customer satisfaction, and
reduced economies of scale and profitability. Therefore, the
firm may need to invest in more
interactive vendor and customer relations, for more dynamic
information exchange about
demand and supply.
(c) Dynamism: Firms should be cautious in not inadvertently
turning their functional core
competencies into a source of rigidity and entropy. They
should foster a culture of learning and
functional dynamism, alert about changes in the environment. 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 situation,
the firm may need to improve its customer servicing, in order to
defend its overall low cost
focus, and accordingly adapt its functional level strategies. For
instance, consider how Daewoo
Motors balances the limitations of its supply chain, human
resources, and operations, by
adopting an unusually responsive customer servicing function:
it even accepts higher costs of
warranty to effectively implement its cost leadership strategy in
the car business:
Daewoo Motors deploys a cost leadership strategy in its
automotive business 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 satisfaction with the
quality of their cars, Daewoo cars
are not generally perceived as reliable as the 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 hygiene factor—in getting
the consumers to buy its cars. The warranty does not
differentiate 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 principles of consistency, balance, and
responsiveness, also help a firm
operating with a protectionist view of value chain, seeking only
either cost leadership advantage
or differentiation advantage, to migrate to a growth mindset
under more dynamic conditions. In
dynamic environments, a traditional cost-leader will find it
more difficult to ignore quality,
product image, and bases for differentiation. Similarly, a
differentiator will find it necessary to
3
also adopt an effective cost control, even though cost
containment was not a priority in the past.
Thus, a firm with a traditional business strategy of
differentiation will gain the dynamic
capability to leverage some low-cost functional strategies and
thereby transform from a
costescalating differentiator to a cost-effective differentiator. In
the 1990s, the premium car

maker, Mercedez Benz relied on cost containing functional
strategies for supporting its growth
strategy, after an earlier set of differentiation alone functional
strategies ended up creating highly
expensive products for which there was a very limited demand.
Mercedez business unit of Diamler-Benz traditionally followed
a business strategy of
differentiation. During the 1980s, Japanese firms rapidly
upgraded their capabilities to offer
viable products in the mid-range automotive market. In response
to losses in the mid-range
market, American firms started offering a variety of luxury-
oriented options in their vehicles to
make them attractive for the high-end customers. As a result,
demand for the high-end
differentiated Mercedez cars began shrinking.
Initially, Mercedez sought to habitually defend its competitive
position by using functional
strategies to enhance differentiation. This added differentiation
only raised the costs of the
vehicles, and made them too pricey for most customers. The
sales of Mercedez cars dropped
dramatically, even though the overall auto market was growing.
Thereafter, Mercedez decided to adopt new low-cost functional
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. The
more cost-effective, nevertheless distinctive, Mercedez cars
proved immensely 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, relational view, and growth view.
Resource-based view emphasizes the
role of resources (Wernerfelt, 1984; Rumelt, 1984, Penrose,
1959), knowledge (Nelson &
Winter, 1982; Arthur, 1994), core competencies (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 difficult for other firms to
substitute or imitate those resources (Rumelt, 1984).
Knowledge resources, in particular, tend to
be protected by isolating mechanisms, because uniquely varying
paths of firm experience
generate uniquely varying bundles of resources and uniquely
varying ways of combining and
codifying these resources for specific deployments (Nelson &
Winter, 1982). Firms develop
core competence for coordinating, communicating and
integrating their unique bundle of
resources and knowledge into a range of technological

applications for customer benefits,
thereby accruing increasing returns and competitive
differentiation (Prahalad & Hamel, 1990).
While finance per se may not result in competitive advantage,
firms leverage finance by
investing into dynamic capability for reconfiguring their
resource bundles in sync and with
agility to the changing, often in uncertain, complex, ambiguous
and discontinuous ways, threats
and opportunities in the environment (Teece, Pisano and Shuen,
1992).
Relational view (Dyer and Singh, 1986) emphasizes the role of
strategic relationships
with key stakeholders – employees, suppliers, and customers.
Even the rivals are co-opted using
a lens of value net collaboration, and become suppliers,
customers, or even extended employee
4
base striving to solve problems or pursue opportunities for
creating value together
(Brandenburger and Nalebuff, 1996).
Growth view emphasizes operational agility and resiliency of
firms in moving to,
protecting and upgrading structurally attractive positons
(Porter, 1996), leadership capacity for

managing change and enacting entrepreneurial mindset (Gupta,
Macmillan & Surie, 2004), and
mindful stewarding of the firm’s mission, vision and values for
responsible behaviors.
Managing resources, managing relationships, and managing
growth, then, are three
fundamental strategies for achieving enduring competitive
advantage for any firm. The objective
of this paper is to deconstruct these fundamental strategies into
specific functional strategies.
a) Managing three types of relationships – human resources
(manpower), supply chain
(materials), and customers (marketing),
b) Managing three types of resources – knowledge (methods),
technology and
innovation (machine), and investments (money),
c) Managing three levers of growth – operations (manufacturing
power), leadership
(motivating power), and stewardship (manipulating power).
Figure 4.1 illustrates the classification framework, which we
refer to as 9M model of
functional strategies.
A. Managing Relationships - Functions about the relationships
with workforce, vendors, and
customers

Part I – Managing Relationships
Managing Relationships with Workforce – Human Resources
Strategy
Manpower function includes decisions about talent acquisition
and acculturation, deployment
and development, & compensation and churn. Human resource
(HR) strategy entails managing
manpower function to support the business objectives.
Functionally, HR strategy is often
classified as high commitment or low commitment (Gupta,
2011). A high commitment HR
strategy is driven by an organizational culture of mutual
commitment among the firm and its
5
human resources. There is a commitment to deep learning about
the firm, and the attributes that
make the firm uniquely 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-
term experiences and dedicated relationships with those groups.
Conversely, a low commitment
HR strategy relies on securing freelance employees who bring
transferable skills and experience
with them. The emphasis is less on compensating employees

for their commitment to learn, but
for their demonstration of high performance.
Key elements of a high-commitment HR strategy include:
a) Talent acquisition and acculturation: To achieve deep
organizational learning, high
commitment HR strategy seeks high levels of mutual
commitment on part of both the hiring
managers as well as hired employees. Talent is acquired for
their potential commitment to
the firm, and willingness to embrace the corporate family and
its service excellence priority.
b) Talent deployment and development: High-commitment HR
strategy actualizes commitment
through flexible deployment of talent, and a carefully crafted
career development plan where
each employee is offered opportunity to develop, such as
through rotation across multiple
functions. This helps each employee to leverage the entire
portfolio of functional 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 functional core
competencies, each employee is
developed to be able to do so in a rapid, responsive and
decentralized manner. Employees
are trained extensively to be multi-task experts and are assigned
broadband job
classifications, so that there is no gap in service if anyone is

absent or decides to leave.
c) Talent compensation and churn: High commitment HR
strategy sustains commitment by
compensating for not only performance, but also accumulation
of firm-specific knowledge
and experience through years of dedicated service encompassing
multiple functions,
geographies, and product groups. To encourage high levels of
churn or mobility within the
firm, and low levels of attrition, employees are offered voice
and autonomy to be self-
managing; and are given the information, opportunity, and
authority to serve the customers
the best way possible.
Conversely, key elements of a low commitment HR strategy are
as follows:
a) Talent acquisition and acculturation: Talent is acquired for
the skills and experiences
employees bring with them, almost as if they are freelancers
who are offering their talent and
human capital. Firms achieve greatest cost efficiency 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 acculturation is for
the employees to be oriented about other members of the team
whose roles influence their
own efficiency, and with the structures such as the supervisors

or the specialists who have the
power to evaluate and decide the boundaries of each members’
role.
b) Talent deployment and development: Talent is deployed in
the roles that each individual
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
potentially new employees. Firm
makes minimal investments 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 compensation and churn: Talent is compensated based
on the match with the
requirements 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 available for similar
levels of market compensation, then the firm is unlikely to be
willing to pay the same
compensation to the current employee and expects the employee
to search for alternative jobs
that are more closely aligned with his or her specific skills and

experiences.
In India, many firms are using low commitment HR to support
their cost leadership
objectives in the initial prospecting at the bottom of the value
chain involving simple projects for
the customers, but then rapidly introducing high commitment
HR as they move up the value
chain taking on highly complex projects, for which talent is not
available in the outside labor
markets. A low commitment 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 volumes are from 30% of its territories;
therefore, it has decided on a two-tier
system. In the metros and mini- metros, where large volumes of
premium products are sold, it has
its own sales officers that support a differentiation advantage.
In Class II and smaller towns like
Meerut, where mostly lower-end products are 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 multinational
corporations in China. The study shows
the firms seeking a cost efficiency objective tended to use
short-term and temporary employment
and less educated workforce, offer less monetary compensation
to the employees, and rely more
on the managers and supervisors for making major decisions
and disciplining employees. In
contrast, the firms seeking differentiation business objectives
tended to use long-term and
continuing employment and more educated workers, give more
monetary compensation to the
employees, and involve workers in making major decisions.
Firms using a high commitment HR strategy are likely to invest
deeply in their human
resources to support their differentiation advantage and tend to
be highly protective of their
employees, as they 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, employees with greater
firm and product-specific skills and knowledge are likely to be
valued more, and enhanced
through continuous training, well-established career paths, and
performance appraisal and
feedback systems that foster employee development. A high

amount of employment security and
voice is likely to be offered to the employees to mitigate
turnover, minimizing the cost of
replacing workers and the knowledge they possess.
In contrast, firms using a low commitment HR strategy are
likely to take a market-
arbitraging freelancer approach to their human resources to
support their cost efficiency
advantage and develop a capacity to substitute talent or use
semi-skilled talent interchangeably.
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 organizations. Paul Osterman (1994) reported that
the high performance HR practices
are more likely to be adopted by firms engaged in the sectors
exposed to international
competition, employing more advanced technology, and
pursuing integrative competitive

strategies that combine quality and service dimensions 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 successful firms have relied increasingly on
freelance and contract knowledge
workers. In fact, this new world is being referred to as the
“gig” or “freelance” economy.
When the firms deploy freelance workforce in an organizational
and market culture of
low-commitment HR, the overall morale of both internal and
external workforce is likely to be
low and diminish with potential of high conflict. Conversely,
when the firms deploy freelance
workforce in an organizational and market culture of high
commitment HR, the overall morale of
both types of workforce is likely to be high and rise through
potential of collaboration and
enhanced success.
Building commitment in a Freelance Economy
Hiring freelancers as regular employees has become a cost-
effective solution for firms seeking to
sustain growth. Freelance employees bring specialization,
creativity and flexibility 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 engagement 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 acccomplishments on
social media. And, it is scalable at
very little cost. The firms are making freelancers participating
members of their organization,
including them in all communication and inviting them to all
team meetings. They are including
freelancers in employee recognition 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 also solicit
feedback from freelancers, in
order to discover new opportunities and to show they are valued
by the company.
Managing Relationships with Vendors - Supply Chain Strategy
Supply chain strategy involves managing the entire sequence of
materials, information, and
money flow from the suppliers to customers, with an emphasis
on the business objectives.
Functionally, supply chain strategy may be classified as
responsive vs. predictable. A
responsive supply chain strategy is driven by an organizat ional
culture that is agile, custom

configurable, and flexible. It engages mutual 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 willingness 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 transformation process in the value chain (Olhager,
2012). The decoupling point is where
a product takes on unique characteristics or specifications for a
specific customer or group of
customers. Because of the mutually collaborative relationship
between the firm and the
8
vendors, the firm is able to customize a larger proportion of the
value-added in an agile, flexible
way (Olhager, 20121).
Proactive demand management in responsive supply chains goes
beyond the typical
market offerings, reactive problem solving and recovery, and
even simple satisfaction of existing
customer satisfactions (Morash, 2001). Emphasis is on
becoming a part of the customer

organization as ‘internal 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
recognition 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-effectiveness in offering supplies
of rather standard specifications in
sufficient volumes and with short lead times. The firms may
have multiple vendors for the same
supplies, to ensure they are getting the most competitive
purchasing costs. Such a strategy
contributes to supply chains that are efficient, fast, and
predictable (Perez, 2013). Predictable
supply chain strategy emphasizes matching supply to
predictable demand as efficiently as
possible. 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 management.
These competencies allow the firms to offer efficient delivery
of reliable products and services at
competitive prices, with minimal difficulty and inconvenience

to the customers. The total cost
for the customer is reduced through lower costs of order
fulfillment, and through supply chain
time compression. The firms may establish computerized links
with major suppliers that share
information about their inventory levels. This allows suppliers
to adjust their production
schedule automatically, and helps the entire supply chain
become efficient (Gutterman, 2011).
The global supply chain best practices have traditionally
entailed being highly
responsive, but with an eye towards predictability. Morash and
Lynch (2002) surveyed about
4,000 firms in eleven industrialized nations from North
America, Western Europe, and East
Asia. Excellent firms in the study deployed highly responsive
supply chain strategy to support
customer service strategies. They did so by postponing
commitment to product form, assembly,
or forward movement, and intermittent acceleration and
deceleration of product flows to
synchronize product with changing customer requirements.
They, however, also built
predictability, through real-time order information systems;
collaborative planning and
forecasting; vendor-managed inventory; resident supplier
employees as buyers (known as just-in-
time II); flexible or agile manufacturing; 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,
Springer-Verlag Berlin Heidelberg
2 Morash E A. (2001). “Supply chain strategies, capabilities,
and performance.” Pp. 37-47, Transportation Journal,
41(1): 37-54.
9
Competing through Responsive Supply Chains that are
predictable
The retail market in India is becoming more organized. The new
retailers are striving for a
differentiated strategy to take away a significant share of
market away from the kirana stores—
the traditional mom-and-pop corner shops. Initially, most
sought to locate in premium shopping
malls, and project a modern image; however, that has not been
sufficient to justify their high
prices in a nation where the consumers are very value
conscious.
Traditionally, the consumer product companies in India serviced
all outlets in a territory—be it a

kirana shop, or a supermarket—through a specific distributor.
RPG Retail, a Chennai based firm,
found it hard to convince consumer product giants like
Hindustan 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
Premium. The things have changed so much that Hindustan
Lever Ltd even piloted a separate
distributor for all modern retail outlets (those with self-service
format) in 2003, observing:
‘These outlets need to be serviced differently… . 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 competing 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-batch supplies based on the hottest fashion
trends.
Zara Pioneers Predictable (Fast) Supply chain, that is
responsive
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 collections during the year. They take their inspiration
from many sources, including
extensive feedback from stores (both quantitative information
about the items sold and
qualitative information from store managers). Unlike other
leading apparel firms who typically
sell 2000-4000 different items every year, Zara is able to design
and offer 10,000 items every
year – appealing to a broader group of customers with unique
preferences. Purchased fabric 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,

arriving at the store within 2-3 days. Zara is able to replace
existing collections, and introduce a
new collection – 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-conscious
youth segment.
10
Source: http://www.nytimes.com/2012/11/11/magazine/how-
zara- grew-into-the-worlds-largest-
fashion-retailer.html;
http://www.investopedia.com/articles/markets/120215/hm-vs-
zara-vs-
uniqlo-comparing-business- models.asp
Managing Relationships with Customers - Customer
Management Strategy
Customer relationship management (CRM)) strategy involves
managing exchange with
customers and channel members. CRM strategy may be
classified as utilitarian vs. interactive
(Vilcox & Mohan, 2007). Utilitarian 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-shelf
products. The primary purpose is to “make a sale” now or soon,
and to address those needs of
the customers that can be most efficiently met with the
resources available to the firm. In such
spot market 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
utilitarian CRM strategy enables
firms to make their product development decisions based on
their process technology capabilities
– the capabilities to discover, develop, combine and integrate
resources cost-effectively. The
strategy demands low-cost channels of distribution, 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 utilization and
economies 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
organizational culture of designing
product experience based on an interactive communication with
the customers, and where the
customers also design their use experience based on the

interactive communication 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 communication 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-generating 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 emphasizes a
“pull approach”, where the firm
pulls all cylinders to offer a great experience to the customer
(Kohli and Jaworski, 1990). With
the rise of network organizations, interactive marketing has
gained prominence.
The case of Castrol illustrates the difference between the two
types of strategies in
practice.
Castrol is the world’s leading lubricant firm. It follows a
relationship-oriented interactive
customer exchange with its premium customers. It uses both

pre- and post- sales customer
engagement process that begins with joint dialog between the
Castrol and the customer teams,
and a survey of the customer plant-specific personalization
needed in the generic plant platform.
Based on this dialog and survey, personalized package of
solutions comprising of products and
services is developed and offered to the customers. The risks
to the customers are reduced as
Castrol works with its customers to diagnose their plant-specific
needs, build the solution, and
http://www.nytimes.com/2012/11/11/magazine/how-zara-grew-
into-the-worlds-largest-fashion-retailer.html
http://www.nytimes.com/2012/11/11/magazine/how-zara-grew-
into-the-worlds-largest-fashion-retailer.html
11
track the performance. In the long-term contract, assessment,
continuous improvement, and
closing the loop between the expectations and the performance
is built- in.
For its mass customers, Castrol follows a deal-oriented
utilitarian customer exchange. It has
invested in automating the sales and delivery processes; so that
these customers and the channel
partners are able to order the products and services they need
seamlessly with an assurance that
Castrol offers a competitive pricing on its products.

Source: Adapted from Hax (2002)
In global marketplaces, firms often combine image positioning
with 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 information about the firm and so are unable
to verify a firm’s claim of
quality unless they actually use the product. Thus, utilitarian
CRM by itself is likely to be
ineffective, unless grounded in the framework of interactive
CRM.
Building trust for utilitarian CRM through interactive strategy –
what next for Indian IT firms?
During the 1980s, the Indian information technology companies
built their early business models
by offering low cost programming power and business process
management capabilities to the
American firms. During the 1990s, the leading Indian IT firms
began sending their employees to
the US to work on-site with American businesses, in order to
build better understanding of the
client needs, organizational issues, and market conditions.
This helped them develop trust with
American clients, and move from lower value-adding utilitarian

positioning (referred often as
body-shopping or sweatshops) to higher value-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
analytics, robotics, and artificial
intelligence, as well as availability of cloud and software-as-
service on demand are enabling the
American businesses to rethink how technology could be used
to transform their business
models. The older model of Indian IT firms seeking to
understand from the American firms
what they want from the IT function, and then delivering 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 understanding of the
American context. Second, they are seeking to hire and train
new type of workforce in India,
who has both technical skills and knowledge of business
functions. They recognize the need to
evolve an interactive customer relations strategy focused more
on collaborative discovery of

issues and opportunities for technological interventions, and
backed by utilitarian IT solutions.
Source: http://knowledge.wharton.upenn.edu/article/dream-run-
indian-ended/
Part II – Managing Resources
Managing ‘Method’ Resources - Knowledge Management
Strategy
12
Knowledge management functional 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 management (KM) strategy is often classified as
specialized or codification (making
experiential knowledge explicit) vs. generalized or abstraction
(generalizing the explicit
knowledge) [Boisot, 1991]. Specialized KM strategy involves
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-usable
form to those who can apply that for serving the customers more
cost-effectively without
reinventing the wheel. It also entails embodying the specialized
knowledge into automated
systems, to support efficient and prompt applications. This type
of ‘applied” research and
development (R&D) uses ‘followership’, i.e. adoption of
appropriate proven, specialized external
and internal knowledge content to bring about process
efficiencies. Focus is on ‘exploitation’ of
existing specialized competencies, and incremental
improvement in these competencies.
Conversely, the generalized KM strategy is driven by an
organizational culture founded
on an abstract set of relationships and networks, as a way to
promote mutual understanding 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 members, 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
‘fundamental’ research and
development (R&D) integrates fresh, leading-edge knowledge
for ‘product innovations’. It gives
firms ‘leadership’ in the form of first-mover advantage, as they
become the first to bring a

product innovation to their customers. Even learning from
outside the firm is modified and
given an original form that offers added value to the customers.
To facilitate constant
‘exploration’ 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 thinking 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 Apple, Google, Amazon, and
Tesla, excel at
generalized KM strategy, developing agility for regularly
moving into entirely reconstructed new
business domains. They become successful in these new
domains, by using their specialized IT
knowledge such as about design (Apple), search (Google), sales
(Amazon), and sustainability
(Tesla). The older enduring global firms – such as those in the
pharmaceuticals 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 limitations
of over specialization, by
becoming adept at scanning of the environment to identify and
to form alliances with firms
having complementary specialized knowledge. At the same
time, they may extend the lifecycle

of existing product generations through improvements using a
highly-specialized KM strategy.
Pharmaceutical firms support their specialized KM through
complementary contracts
In the pharmaceuticals industry, the cost of bringing a new drug
to market averages $ 700
million. The firms in India generally lack resources to bring out
original drugs on their own.
However, many have created their names for original research
by participating in contract
research. The pharmaceutical 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 billion
in 1997 to $ 9.3 billion in 2001.
The Hyderabad-based, Rs. 2,590 million (~$ 55 million) Divi’s
Laboratories offers low cost
contract research on process design, validation, and
optimization for new drug candidates to
multinational firms such as Pfizer. Its specialization is in
helping eliminate harmful side effects
in a molecule, that otherwise has a high potential (Singh and

Surendar, 2003).
Managing ‘Machine’ Resources - Technology and Innovation
Management Strategy
Technology and innovation management (TIM) strategy is often
classified as process oriented
vs. product oriented (Edquist, Hommen & McKelvey, 20013).
Process oriented TIM strategy
seeks to achieve most efficient process combination of capital
and labor costs. When the unit
labor costs are high, this is done by investing in larger scale
capital-intensive technology and in
full 24x7 exploitation of this technology. When the unit
capital costs are high, the firm instead
deploys labor-intensive technologies that operate at smaller
scale without experiencing cost
escalation associated with the lack of economies of scale.
Historically, the American firms
achieved cost advantage in the global market using capital-
intensive technology. They
automated 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 information and other technologies in accounting, order
processing, and other

administrative and backroom support areas, to help understand
their cost structure, and to make
efforts to reduce variances and maintain control.
In contrast, product-oriented TIM strategy is driven by an
organizational culture seeking
to complexify the firm capacity to offer a more generalized
portfolio of services to its customers.
The information-enabled intelligent machines may be deployed
in the frontline customer-
oriented processes and activities, to help search, collate, and
gather new intelligence (for
instance, through internet, and through sensors). Tools, such
as loyalty programs and cards, for
instance, seek to collect data about their customers, and to
create innovative, differentiated
products, such as a continuous stream of information filtered to
the specific customer needs.
Information systems may help define micro-segments of
customer bases, based on complex
algorithms and extensive databases of the customer profiles.
They may help define and price
custom product configurations, and close the deal during their
first interaction with the client.
Design thinking and moonshot thinking (striving to find
imaginative solutions to seemingly
intractable problems) are being used by many firms today to
develop new product concepts.
In a global, competitive environment, process-oriented TIM
strategy is seen as a

‘Strategic necessity’ to generate cost savings (Powell and Dent-
Micallef, 1997). Short
development cycles make products more cost-effective,
supporting first mover advantages,
market size and share, tight controls, process investment, ease
of manufacture, and width of
product line. However, traditionally the winners have been
those who are first focused on raising
the wedge between costs and customer benefits, thereby
differentiating and supporting high
performance. For instance, a shift towards floor to electronic
trading at New York stock
exchange did generate cost efficiencies, but the deciding factor
in its success was how it
strategically positioned the stock exchange on a higher frontier
vis-à-vis other alternatives.
3 Edquist, C., L. Hommen, and M. McKelvey (2001).
Innovation and Employment: Process versus
Product Innovation. Cheltenham, Edward Elgar.
14
Using Product oriented TIM to Offer Customer Choice, and
Process Oriented TIM to offer Cost
Savings to Partners

The Chennai-based Apollo Hospital in India has ties with an
insurance company, 900 hospitals,
2,000 physicians, and numerous pharmacies across 50 cities of
India, all connected by a central
relational information system network. The hospital, or the
physician swipes a magnetic card
containing a patient identification number when a patient visits
to log on to a huge central server
that contains all relevant data, such as disease profile, and
insurance entitlements. The system
allows Apollo Hospital to offer more differentiated choice to
the patients through a wide network
of physicians, and hospitals. It is also the basis for Apollo
Hospital’s operational and
management consulting business. Each allied hospital pays it
between 3–5% of its annual
turnover as management fees; and between 3–7% of the project
cost on all hospital consulting
projects undertaken to better the facilities of its allied hospitals.
In turn, allied hospitals are able
to leverage Apollo’s centralized purchasing system to get
cheaper 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 technologies to offer
affordable solutions. Consider Airbnb.

Founded in 2009 with $25,000 credit card debt, in 2017, the
accommodations-rental platform
Airbnb is valued at $30 billion, with 1500 employees and 3
million rentals across the world in
65,000 cities and 192 countries. Airbnb owns no physical
assets, and yet is valued more 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 comparatively flat, Airbnb has
become the biggest hotelier of the world and is still growing
exponentially. The key to the
success of Airbnb has been investments in the digital process
technology, that has offered a
transparent and easy way for anybody to list their vacant houses
or rooms for short-term rentals,
and for the users to search and to review experiences of other
users with those properties. These
rentals are particularly attractive for those seeking affordable
options, when the top hotels are
sold out during busy events or seasons. Airbnb has augmented
this process oriented TIM, with
product oriented TIM that seeks to offer experiences that are
alternative to mass produced
tourism. For instance, its new app product in 2016 included an
innovative matching system
designed to understand travelers’ preferences and then match
them with the homes,
neighborhoods and authentic experiences and trips that meet
their needs.

Source: https://press.atairbnb.com/airbnb-launches-new-
products-to- inspire-people-to- live-there/
Managing ‘Monetary’ Resources – Investment Strategy
Investment strategy deals with the procedures and systems for
capital structure and capital
expenditure, liquidity levels, modes of raising capital, working
capital, and levels of profit
distribution and retention. This strategy is critically shaped by
the turbulence in environment
and other contingencies related with the choice of business
strategy (Shank and Govindarajan,
1993). Investment strategy is often classified as budget-
oriented vs. opportunity-oriented.
Budget-oriented investment strategy is driven by a goal to
achieve most efficient
investment allocation given the market constraints. Firms
establish budgets based on an
assessment of the historical, competitive, or technical standards
of costs, and expected unit
15
revenues under assumptions of specific market conditions.
Revenue and cost performance is
closely monitored against the budgets, and deviations are
investigated 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 investment
projects. A budget-oriented
investment strategy takes a market-arbitraging portfolio
manageme nt view of the firm – where
different activities of the firm are considered independent, with
few synergies and little need for
strategic coordination (Porter, 1987). In conglomerates that
have several unrelated business
portfolios, a budget-oriented strategy is often deployed.
In contrast, opportunity-oriented investment strategy is driven
by an organizational
culture seeking multiple new opportunities to add customer
value. Such a firm seeks to make
several rapid adjustments in its understanding of customer
preferences, which makes future
revenues and costs difficult to estimate. Under such strategy,
firms are likely to set aside funds
for supporting projects that explore new opportunities and seek
ways to add value for the
customers. Performance is likely to be evaluated on a longer
term horizon, using not only
financial measures, but also institutional control measures of
corporate reputation and the
prestige, focusing on transparency, diversity, and sustainability.
The emphasis is likely to be on

capital appreciation outcomes. The formal financial 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 mission,
vision, and goals — for
evaluating and monitoring strategic plans, capital expenditure
projects, and acquisition
proposals. An opportunity-oriented investment strategy takes
an activity sharing view of the
firm – where different activities of the firm are interconnected,
with substantial synergies and
need for strategic coordination. The synergies are often
exploited by specifying key
performance targets and strategic milestones that may not be
easy to quantify. Further, the
decisions based on these synergies require taking a long-term
perspective so that the
interdependence among the units could be developed and
exploited fruitfully.
A study by Nilsson (2002) showed that budget oriented
investment control is better
adapted with the business units following a cost leadership
strategy and a portfolio management
intent. In other words, budget oriented investment strategy
works better when there are few
linkages among different 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 synergies. On the

other hand, opportunity-oriented investment control is better
adapted with the business units
following a differentiation strategy and an activity sharing
intent. Nevertheless, over dependence
on other business units can limit a firm’s flexibility to manage
its costs.
16
Using Budget oriented Investment Control to Sustain low-cost
leadership
In 2002, the Rs. 62 billion diversified Mahindra Group of India
was suffering from a severe
recession. The Group had investments in 32 subsidiaries, with a
portfolio of unrelated businesses
including time-share resorts, and a realty business. M&M’s 18%
of assets were locked into the
shares of group companies, yielding 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 responsibilities of running the
businesses rested with the business heads. In December 2002,
the Chairman launched Project
Blue-chip.

Project Blue-chip replaced qualitatively selected performance
benchmarks like market share,
sales, and profits with two common quantitative measures of
performance—free cash flow (cash
after appropriating for investments and profits), and return on
capital employed (ROCE). It also
stopped the practice of allowing mid-year revision of the
budgets, and introduced the concept of
‘no-excuses budget’. The variable pay component of senior
management 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 price 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 capabilities and domestic environments have
expanded their
opportunities for adding value, firms in emerging markets are
increasingly adopting more
opportunity-oriented investment strategy. Consider the case of
India:
Using Opportunity oriented Investment Control to Differentiate
In 2003, American Express and IMA India surveyed changing
role of Chief Financial Officer
(CFO) in India. Over a six-year period since 1997, when the

survey was first conducted, the role
of the CFO has been transformed ‘from one relating to pure
finance to that of leadership, and
strategic decision-making.’ In 1997, 85% of the CFOs spent
most of their time on transaction
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 differentiated,
and to rely less on their 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 traditional role of
preserving the assets of the
organization and running a tight and effective finance 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 decision making.
In fact, the finance function itself is being considered by some
as a strategic business partner.”
(Deloitte, 2016: 18)
In recent years, the web has disrupted traditional investment
models. With the web, it is

possible to launch a business, to assemble capacity, and to
acquire customers, at a fraction of
what it cost in the 1990s. Demonetization of business models
has enabled firms such as
Craigslist, eBay and Amazon to scale with extraordinary speed
to become some the world’s
biggest companies. The new information-enabled technologies
are powering exponential cost
17
drops across every business function (Ismael, Malone & van
Geest 20144). 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 investment
strategy. These firms have most of their costs as variable, with
transparent low-cost pricing, and
they generate profits through massive scale, alternative
channels (such as membership fees or ad
revenues), and transformative purpose (typically some form of
democratized, collaborative

consumption).
Managing Growth through Manufacturing - Operations
Management Strategy
Manufacturing very broadly is a function engaged in managing
manufactured or man-made
assets. Operations management (OM) strategy seeks to leverage
assets, i.e. capabilities, of a firm
to drive competitive advantage (Skinner, 1969; Aranda, 2002).
The operations strategy may be classified as asset-intensive or
service-intensive (i.e. asset
light) (Aranda, 2002). Asset-intensive operations strategy
seeks to leverage under-valued fixed
assets that are based on market infrastructure and maintain
highly efficient operating or variable
costs. Note that these efficiencies do not arise from hiring of
lower cost workforce or sourcing
of lower cost inputs or distribution using lower cost channels
(which are instead associated with
human resource, supply chain, and customer exchange strategies
respectively). Rather they
emanate from an efficient exploitation 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 able to design
outputs using resources of more limited quality and quantity.
Efficiency in asset exploitation
arises from an operations strategy that is ‘designed to maximize
performance on a few success

criteria of strategic importance’ and a recognition that ‘a system
which is technologically
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 following three types of economies using a
common asset infrastructure.
• 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, yielding
them economies of
learning. After the World War II, Japanese firms pursued
predominantly this type of
cost economies. During the 1960s, Honda, for instance, priced
its motorcycles very
aggressively, yet was able to achieve positive cash flows and
sustainable growth because
of the cost improvements 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
20t h century, American firms pursued predominantly this type
of cost economies. They
invested in special purpose machinery and tools and specialized
workforce, to

manufacture specific standardized product lines in large
volumes.
• Economies of specialization and network: Third, firms may
organize the operations
process as a network, with teams of highly specialized
employees responsible for
different 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 Geest, Y. (2014) Exponential
Organizations: Why new organizations are
ten times better, faster, and cheaper than yours , Diversion
Books.
18
specialization and network. During the 20t h 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 specialization; each of
the three asset management strategies help firms achieve cost
efficiencies.

In contrast, service-intensive OM strategy is driven by an
organizational culture seeking to
achieve flexible operating capability. Flexibility is achieved
by recognizing the limitations of
technological constraints, and using reconfigurable information
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,
environmental and customer sensitivity and responsiveness.
More than a technical process,
flexibility emanates from an organic service-mindset, culture
and technology; which allows the
firms to offer a high level of service personalization and
customization to its target customers
using reconfigurable information-smart light assets. There are
many dimensions of service-
oriented OM strategy such as:
a) Service mindset: European firms have traditionally relied on
the professional ethics of the
members of guilds and professional trade organizations. This
has helped them with
crafts-oriented operations, where custom designs help achieve
higher value-added
through exclusive small-batch production.
b) Service culture: Japanese firms have traditionally relied on a
deep service culture to

engage its workforce and suppliers in the production 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 information processing and deep
data mining to configure
their products in a range of mixes and to a range of custom
specifications.
New insights on OM strategies have emerged as the firms have
faced shrinking product life
cycles, new technologies, educated knowledge workforce, and
global competitio n.
Unexpectedly, firms have been able to elevate minimum
benchmarks on multiple operations
criteria, as efforts to enhance one type of operational
competence have required firms to
cumulatively further competence in other operational areas as
well. A study by Ferdows and De
Meyer (1990) suggested that among the high performing
manufacturers, the improvements move
from quality to reliability, followed by flexibility (which they
take to include speed), and cost
efficiency. 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 flexibility, or else those efforts will not be as

sustainable or effective. On the
other hand, efforts to improve operating flexibility – a key
focus of service-intensive OM
strategy - should take place alongside continuing efforts to
improve quality and reliability.
As illustrated by the case of Fibres and Fabric international,
many emerging market firms
are using flexible service technology and forming partnerships
with foreign customers and
experts to bring flexible mind-set and culture to their
operations.
19
Adding value through service intensive OM
The Bangalore-based Fibres and Fabric International is going
against cost-conscious
manufacturing, and creating a differentiated niche by pioneering
flexible manufacturing system
in fashion garments. For this, it is not just buying technology,
but also augmenting its capabilities
for using technology. It uses imported high-tech machines, has
hired an Italian technician to help
accelerate lead times, and has set up a Rs. 60 million state-of-
the-art water recycling plant for
bagging eco-friendly buyers from the Netherlands, and
Germany. It commands an average price

of 14.43 euros on its sales of 2 million fashion denim jeans—
more than double the 7 euros
commanded by the Chinese manufacturers. It also successfully
entered the high- fashion jeans
market, commanding a premium on jeans retailing at 200 Euros
and above. Since in these
markets, inventory holding costs are high, most European
retailers prefer to deal with suppliers
who can replenish stocks in short lead times; its flexible
manufacturing system allows a lead
time of just two weeks—unheard of in China (Surendar and
Rajshekhar, 2004).
Managing Growth through Motivating Power – The Leadership
Strategy
Leadership strategy encompasses setting directions and overall
purpose, mission, and values of
the firm, as well as mobilizing, distributing, and redistributing
resources to support actions
aligned with the intended purpose mission, values, and direction
of the firm. It is often classified
as transactional vs. transformational (Burns, 1978; Bass, 1985).
Transactional leadership seeks to sub-divide overall direction of
the firm into very
specific objectives aligned with the specific competencies of
people and with specific resources
they have. Transactional leadership operates by not only
dividing the overall purpose into
objectives, but also conditioning the rewards, such as

compensation, bonus, and recognition of
employees on the accomplishment of these objectives – i.e.. for
compliance with the leader’s
expectations. The transactional leaders with extensive
experience in their jobs and with their
firms tend to be more familiar with the organization’s structure,
systems, processes, and people,
and are more effective in implementing cost leadership strategy.
The transactional emphasis
ensures economical processes and good value, while keeping
cost down, year after year, in every
activity, through standardized, repetitive processes and output.
The thrust is on capital
investment, as opposed to personnel development; employees
are not expected to have a high
level of decision- making.
There is very limited possibility of failure, 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), for instance, reconstructed the story of Honda’s success
in motorcycles during the 1960s
based on interviews with Honda managers and employees. He
uncovered the role of unintended
and unexpected learning while striving for a very transactional
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
efficient as they could be in using the
very limited resources they had been entrusted by the leaders.
So, they decided to use the
lightest bike resource for personal use, and the heaviest bike
resource for market development
use. However, when families were enamored by small-built
people riding the light bikes, Honda
received advance payments from American retailers to build
large volumes of those bikes.
20
In contrast, transformational leadership is driven by an
organizational culture seeking to
engage people with the overall purpose, mission, and values of
the organization. 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 commitment to
higher values, people are expected to go beyond their self-
interests, and work towards a long-
term vision of better future, leading by example, and inspiring
and developing others to bring
about change. Transformational leaders tend to bring new

visions, and are better supporters of
differentiation (Kathuria and Porth, 2003). The transformational
values of flexibility,
spontaneity, and employee participation 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 historical processes, systems,
and culture, it becomes
difficult for them to pursue a ‘new’ vision for the organization.
Similarly, if the firms live too
much in the world of imagination, they may be disconnected
with their historical and
contemporary reality and fail to actualize their dreams. Thus,
pragmatic leadership in today’s
world where we face immense social challenges of inclusion,
security and growth, requires more
than a process of positive imagination of transformational
processes, systems, and culture. It
also requires setting measurable micro milestones, so that
people are encouraged and rewarded
for identifying the obstacles for realizing that future state, and
clarify the path that explode the
existing cultural limits on what is possible. This path takes the
shape of ‘entrepreneurial
leadership’ for not only sustaining competitive advantages, but
also realizing the broader
mission, purpose, and values.

Transformation leadership is based on the values of
collaboration, 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 themselves. So, the
learning by one bird is quickly
and efficiently shared among the entire flock. On the other
hand, the male robin has a territorial
temperament, and does not allow other birds of the species to
come close. Hence, there is no
sharing between robins. Transformational leadership fosters
collaborative social propagation
amongst the blue jays; it allows them to enjoy the cream, and to
grow healthy (Fisher and Hinde,
1949).
Traditionally, fostering collaborative teams required significant
leadership effort;
therefore, transformational leadership in organizations was
generally associated with premium
positioning and differentiation strategy. However, digital
technologies have remarkably

reduced the cost of collaboration across global borders and
across different stakeholder groups.
New age transformational leadership has been focused on
democratization of access, as
illustrated by the ride sharing (Uber), accommodation sharing
(Airbnb), channel sharing (ebay)
firms. In India, Patanjali has emerged in a very short time as
the largest consumer products
firm, through transformational leadership of spiritual and yoga
teacher Baba Ramdev. Baba
Ramdev has been passionate about using traditional ayurvedic
and other knowledge of India to
21
take away domestic market for consumer products from the
multinational firms, and this passion
has offered the inspirational power for Patanjali to scale and
expand in multiple categories.
Managing Growth through Manipulating Power – The
Stewardship Strategy
Manipulating power very broadly is the ability of firms to be a
player in a community deriving
from the legitimacy and accountability of their strategic
behavior. Stewardship strategy accounts
for the resources arbitraged by a firm from the constituents with
whom it has a range of

relationships, and offers legitimacy that the firm has deployed
these resources effectively
achieving growth that accrues incremental value for all
constituents 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
fiduciary obligation firms have is to
their stockholding investors. In the agency theory, the
stockholders privately bear financial risk
in exchange for giving fiduciary rights on the organization’s
resources to the strategists, and
therefore have the power to take direct control of the
organization 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 organizations that do not structure
their internal resource allocation,
activities, and behaviors in ways that maximize private
efficiency. The stakeholders are viewed
as part of an environment that a firm should manipulate to
assure cost savings, revenues, profits,
and ultimately returns to stockholders. For instance, a firm
might adopt total quality
management as part of its strategy to increase sales volumes. In
the process, the firm would seek
to significantly 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 commitment to improved worker and supplier
relations (Shawn and Wicks, 1999).
Similarly, a firm invests in environment friendly technologies
only if the customers are willing to
pay additional for the products, that they would not otherwise,
or if the government would
impose fines that are larger than the costs of these investments.
Philanthropic activities, when
undertaken, are just like any other cost of doing business—they
are cost of co-opting various
stakeholders so that the business is allowed to serve, and
maximize private returns for the
stockholders. Put differently, under the agency theory, the
principles of relating with the
stakeholders are defined purely in terms of their private
economic value for the stockholders at a
given time, and decisions are re-evaluated on an ongoing basis
for their private economic
benefits and costs to the firm.
On the other hand, the Social stewardship strategy is driven by
an organizational culture
grounded in trusteeship theory, which holds that the boundaries
of fiduciary obligation extend to
other stakeholders also. In the trusteeship theory, manipulating
function is endogenous to the
organization, and is based on the intrinsic worth of the
principles and moral commitments 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
identifies 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
influence, quite independent of the stakeholders’ instrumental
value to its profitability. The
broader socially responsible stakeholder interests are the basic
foundations on which a firm seeks
to construct its unique identity, positioning, and strategic intent.
22
In the trusteeship theory, resource allocation 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 stakeholders, 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—which 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 materials. Additional benefits include safer
working conditions for employees. The
firm may also be able to create a distinctive eco-friendly image
that appeals to customers
(Shrivastava, 1995).
In the age of social media, the society has multiple tools, eyes,
ears, minds, and voices, to
uncover disingenuous attempts of firms to manipulate its
members, for the private benefit of few
private investors. A significant 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
communities. Firms who demonstrate an
authentic commitment 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, Financial
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 Strategies to Support Business
Strategies

As a summary, it is useful to consider the different ways
functional strategies may be used to
support the business strategies of cost leadership and
differentiation.
The firms can use functional strategies in three ways to support
their cost leadership strategy:
a) Discovery capability: Discovery of the functional resources
that could be used by the
firms most cost-effectively to serve their target customer
demand.
b) Development competence: Development of a network of the
providers of functional
resources inside and outside the firm boundaries, who
complement each other’s
capability in enabling the firms to cost-effectively serve their
target customer demand
c) Deployment capability: Technological, organizational, and
social structures, processes,
and behaviors that promote timely and efficient exchange of
information with the
providers of functional resources about their target customer
demand
The firms following a differentiation strategy are concerned less
about cost-effectively
serving their target customer demand, and more about accruing
value-addition for their
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 efficient exchange of
information about their target
customer demand, they emphasize ongoing understanding of the
overall value their target
customers seek, and effective exchange of this knowledge with
the providers of
functional resources.
Micro foundations play an important role in how functional
strategies might support business
strategies, including the other strategies of focus and growth
discussed previously.
23
Micro-foundations of Functional Strategies
Structural, relational and behavioral factors play an important
role in the design of appropriate
functional strategies, and in the relationship of functional
strategies with business strategies.

Structural factors: Organizational structures play an important
role in the ability of the firms to
coordinate the discovery, development and deployment of
functional competencies. The
organizational structures may take several different
characteristics – such as “mechanistic”
versus “organic”, “tall” versus “flat”, “centralized” versus
“decentralized” and
“standardization” versus “mutual adjustment”. Centralized
organizational structures are ones
where strategic decisions are taken centrally, these structures
allow for tight control of costs, and
tend to foster cost efficiency related functional competencies.
Functional organizational
structures are ones where senior executives are in charge of
different functional resources; these
structures support development of deep functional
competencies. Conversely, when the 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-linkages among
various functions, product-based organizational structures tend
to be favored.
The firms may also decide to use different structures for
organizing different functions.
Gutterman (2011: 4), for instance, observes, “Traditionally,
manufacturing functions in the US
tended to have a tall hierarchy with centralized decision making
and relied heavily on

standardized procedures. The result was a relatively
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 structure 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 innovation process.”
However, structures can also constrain the type of functional
capabilities – for instance,
Japanese firms put many American manufacturers out of
business, when they developed more
service-oriented operations by flattening the hierarchy, and
empowering employees on the
product line to discover decentralized opportunities for mutual
adjustment and accumulate
capabilities to deliver broad variety through continuous
improvement or kaizen. Similarly,
during the late 2000s, many customer-facing employees in the
U.S. financial services sector
abused their autonomy and used false or dubious documentation
to write mortgages.
Organizational structures can shape several different types of
linkages between functional
and business strategies (Golden and Ramanujam, 1985):
(a) No linkage (or Administrative Linkage): In many owner-led
organizational structures,
strategic functions play a predominantly administrative role,

and react to the emergent needs of
the organization without regard to its business strategy. For
instance, in India, traditionally
stewarding strategy has had no clear linkage with business
strategies, as firms have invested in
charitable causes either because of the owner priorities or the
tax deduction for charitable causes.
(b) One-way linkage (or Hierarchical Linkage): In firms that
rely on a multi-divisional
organizational structure organized around business units.,
business strategies are established and
managed by general managers and senior executives of the firm.
The lower-level functional
managers may have limited if any influence on the business
strategies set by their bosses. On the
other hand, some organizational structures may give special
powers to particular functions. For
instance, when operations function has special powers, firms
tend to develop strong cost-
effective capabilities to perform their business strategy even in
premium segments. But when
24
marketing function has special powers, firms tend to develop
strong customer empathy and
responsiveness capabilities, even when they are operating in
price-sensitive segments.

(c) Two-way linkage (or Sequential Linkage): In project-based
organizations, both
business and functional strategists work collaboratively on
different projects. For instance, to
support short-term and relatively simple projects, the firms may
rely on freelancers using a low
commitment 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 commitment human resource strategy.
(d) Multi-way linkage (or Dynamic Linkage): In transnational
organizational structures,
functional and business strategies may be designed interactively
to dynamically frame country-
by-country growth objectives. For instance, investments in an
emerging market business may
help a firm gain cost-effective functional competencies, which
could then become a basis for
expanding into additional price-sensitive markets as well as in
making differentiation positioning
more cost-effective on a global basis.
Relational & Behavioral Factors. Organizational cultures also
play an important role in the
relational and behavioral patterns of functional resources, and
therefore the dynamics of
functional strategies. The organizational cultures may take

several characteristics, such as
‘power distance’, ‘uncertainty avoidance’, ‘group collectivism’,
‘generalized collectivism’,
‘gender egalitarianism’, ‘humane orientation’, ‘assertiveness’,
‘future orientation’, and
‘performance orientation’ (House et al, 2004). For instance,
the firms seeking to promote
service-oriented operations function may nurture the cultural
values of ‘gender egalitarianism’,
‘future orientation’, and ‘performance orientation’, and actively
reduce ‘power distance’ and
‘uncertainty avoidance’. They may do so by establishing
behavior-based performance
evaluation system, and by promoting new relations through
collaboration with marketing
partners who have these desired cultural practices.
As noted previously, organizational cultures and mindsets are
critical factors in the ability
of a firm to pursue growth business strategy, or to successfully
execute a focus business strategy.
In order to identify opportunities for shaping functional
mindsets, the firms need to first establish
their existing baseline of competencies in each functional area.
This can be done using a
functional resource scorecard. The functions 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 functional resource scorecard evaluates both types of
functional competencies of the firm
across the nine functions the left side competencies support the
cost efficiency capability, while
the right side competencies support the differentiation
capability. The evaluation may be made
against competitive best-in-class standards, or against historical
performance of the firm, or
using subjective absolute ratings.
25
Figure 4.2: Functional Resource scorecard using the 9-M Model
Strategic Functions Functional Strategy
Cost Efficiency Differentiation
1. Manpower Human Resource Low commitment High
commitment
2. Material Supply Chain Predictable
Responsive
3. Method Knowledge Specialized
Generalized

4. Money Investment Budgetary
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 functional competencies is one indicator
of the opportunity for growth.
The ratio of the aggregate level of functional competencies, as
well as each of the functional
competencies, is an indicator of the direction of possible
growth. For instance, if cost efficiency
capability is greater than the differentiation capability, then the
firm has an opportunity to grow
its differentiation capability, as well as to grow new businesses
based on its cost leadership
capability.
For instance, Matsushita of Japan has a 250-year mission in
1932 to produce an
inexhaustible supply of goods that is affordable to all; true to

this mission, Matsushita has been
focused on cost leadership competencies, though it has a long
way to accomplish its mission.
The use of functional resource scorecard can help identify
opportunities for further growth. It
may not be possible for the firm to sustainably generate new
growth using an emphasis only on
cost leadership strategy. It may have to also invest in
differentiation capability, to promote new
types of structures, relations, and behaviors, which it can then
deploy for exploring new ways of
generating cost efficiencies. Reliance on traditional
approaches alone is not sufficient to sustain
cost leadership in a global, competitive environment.
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and size in engineering
consulting firms’, International Journal of Service Industry
Management, 13(3): 263-285.
Clark, K.B. (1996), ``Competing through manufacturing and the
new manufacturing paradigm: is
manufacturing strategy passé?’’, Production and Operations
Management, 5(1); 42-58.

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Gutterman, A.S. (2011). Organizationa l Management and
Administration: A Guide for
Managers and Professionals. Thomson Reuters/West.
Hayes, M.; Walsham, G. (2003). "Knowledge sharing and ICTs:
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Organizational Learning and
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Hansen, M.T., Nohria, N. and Tierney, T. (1999), ``What’s your
strategy for managing
knowledge?’’, Harvard Business Review, March-April, pp. 106-
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Perez, H.D. (2013). Supply chain strategies: Which one hits the
mark?, Supply Chain Quarterly.
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http://www.supplychainquarterly.com/topics/Strategy/20130306
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strategies-which-one- hits-the-mark/

Sharma, R.K. (March 18, 2015). Health concerns driving mega
burst in fruit juice market,
FNBnews, http://www.fnbnews.com/Top-News/Health-
concerns-driving-mega-burst- in-fruit-
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Vilcox, M. W., & Mohan, T. O. (2007).Contemporary issues in
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mega-burst-in-fruit-juice-market
http://www.fnbnews.com/Top-News/Health-concerns-driving-
mega-burst-in-fruit-juice-market
Chapter 4 Strategic Functions and Functional Strategies � ��
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Yakima-Olympia Corporation, a multibillion-dollar forest
products company in the US needs to
decide technology for logging operations in its 450,000 acres of
Virginia timberlands. Yakima-
Olympia Corporation is a vertically integrated enterprise,
engaged in all activities from research-
intensive farms to wholesale and retail distribution of paper and

solid wood products. It, however,
outsources logging which is very burdensome for its employees,
and is done more economically
by logging subcontractors.
There are two harvesting systems for logging. The first system,
currently being used by its
subcontractors, includes a feller-buncher and skidder. This
technology is oriented towards cutting
down and moving maximum volume of trees in shortest possible
time; in the process it puts great
pressure on both the land as well as the workers who have to
respond to the brute force of
technology. A feller-buncher is a large machine that has a big
cutter on the end of a mechanical
arm. This cutter is called a ‘head’. The head holds the tree
while it cuts the tree at the stump. The
head can hold several trees at once, depending upon the size of
the trees. The feller-buncher
places the trees in small piles, which are then pulled by a
‘skidder’ to the landing where the major
limbs are taken out of the trees using the hand-held chain saw
called a ‘slasher’. The crane then
loads the logs onto flatbed trucks for transport to wood yards.
Here, Yakima-Olympia sorts
the logs, and cut them into segments for sawmills, plywood
mills, or pulp mills, depending on the
quality and species of the trees.
The alternative system combines a ‘processor’ with a
‘forwarder’. These are referred to as
‘cut-to-length’ systems. A processor is a large machine with a
computerized system that carefully
selects, grabs, fells, precisely de-limbs, and smoothly cuts trees
to specified lengths, and drops the
sections in piles. There are no chainsaws involved. A forwarder

then used computer-programmed
sequences to pick up the logs, to carry them to the roadside, and
to load them onto trucks
destined directly for specific processing mills. The technology
is oriented towards cutting only the
mature trees based on the specific needs of the processing mills;
thus the land is conserved, and
so is the effort of the manpower involved, who works safely and
cleanly from air-conditioned
machines.
The processor-forwarder technology involves a significantly
larger upfront investment, a
heavier reliance on high-skilled workforce, more complex
maintenance issues, and more complex
job task; but it avoids the need for sorting at the woodyard for
Yakima-Olympia. The competitors
of Yakima-Olympia Corporation do not necessarily stand to
gain from the processor-forwarder
technology because they use low value logs for pulp mills.
Yakima-Olympia instead uses high
value logs for sawmills and plywood mills, and so is more
concerned with the damage to its trees,
and to the stem, and the high cost of managing the badly cut
limbs. Its strategy is to differentiate
based on planting and growing genetically improved trees that
will yield a wood mix with a
superior average value at maturity. Further, if the current
technology were to continue, in ten
years, the company’s timberland would yield only about 80% of
the high grade logs needed by its
sawmills and plywood mills. On the other hand, with the
alternative technology, the company
would be able to meet a higher percentage of its needs because
of a more precise cutting of the
trees, thereby saving more than $ 5 million in purchased logs

each year.
* Based on Shank, J.K. and Govindarajan, V. (1992), Strategic
Cost Analysis of Technological Investments,
Sloan Management Review, 34(1): 39–51,
http://www.dsisd.k12.mi.us/mff/Products/ToMarket.htm
(accessed on June 5, 2004).
�� Business Policy and Strategic Management: Concepts
and Applications
The returns to the loggers are virtually identical for using both
the technologies. Therefore,
the logging contractors are not willing to make a switch to the
processor-forwarder technology,
even though Yakima-Olympia is willing to offer long-term
contract guarantees.
��
��
1. What are the implications of the current technology vs
alternative technology on
various functional strategies, in particular (a) human resource
strategy, (b) supply chain
strategy, (c) operations strategy, (d) customer relations strategy,
and (e) fiduciary
strategy?
2. Given the business strategy of Yakima-Olympia, which
technology is more supportive
of the appropriate functional strategies?
3. What should Yakima-Olympia do?

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