Creating Profit Through Alliances


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Creating Profit Through Alliances is the latest book of Alfred Griffioen. The book describes how alliances can add value to the competitive strategy that you have chosen and what arrangements are possible for the division of this value between you and your partner. The business rationale and financial mechanisms of ten basic forms of alliances are detailed and clarified.

The book contains cases of 15 companies and is written for those who are involved in initiating and managing alliances, ranging from board members and strategists to business development and alliance managers. The book is available as a PDF document that can be printed or read on an iPad or e-reader. You can only download it on

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Creating Profit Through Alliances

  1. 1. Alfred GriffioenCreating Profit Through AlliancesHow collaborative business models can contribute to competitive advantageFebruary 2011
  2. 2. Alfred GriffioenCreating Profit Through AlliancesHow collaborative business models cancontribute to competitive advantage
  3. 3. Creating profit through alliancesThe PDF version of this book can be downloaded forfree on a co-creator of this book! Comments, links andsuggestions for case studies can be sent© 2011 Alliance experts. Although the book can bedownloaded on our website, this copyright includesthe prohibition of any further publication of the bookor parts of it on the internet or in closed user groups.However, you are invited to quote up to 250 words orto use one figure in your own publications under thecondition that you mention the author, title andsource (Alfred Griffioen, Creating Profit ThroughAlliances, 978-90-816811-1-7
  4. 4. ForewordStrategic alliances can be a great source of Goods industry is entirely different from lifecycles incompetitive advantage. However, this only works if the electronics industry. How to split investments andeach partner has a clear understanding of its market, revenue in such a case? And which partner capturesand the market for the joint proposition offered by the extra brand value and is awarded the intellectualthe alliance, and if the two can devise a business property rights?model that benefits not only themselves but also thecustomer. Numerous alliances exist, and a variety of collaborative business models is called for. The pointOver the last several years I have been involved in is that few have been described. Therefore I welcomesetting up a large number of alliances that helped the authors initiative with this book. I hope and trustPhilips advance in technology, in efficiency, or in the that it will help companies embark on partnershipsway we meet our customers‟ needs. We sought much better prepared. In that way we may all enjoypartners outside our industry and created entirely new and innovative products and services, that wouldnew types of propositions, ones we could not have not see the light of day without collaboration, yetcreated just by ourselves. This has helped to create seem so obvious once they do.entry barriers for competitors: aside from meetingthe technology challenge, they would have to findtheir own fitting partners, and then together withthem agree to realise a new proposition….and then itstill needs to be jointly brought to market!Working with partners from different industries places Ivo Ruttenextra demands on an alliances business model. For Vice President Corporate Strategy and Alliancesinstance, the pace within the Fast Moving Consumer Royal Philips Electronics 3
  5. 5. ContentsIntroduction 51. Competitive strategy reviewed 7 Differentiation leads to profit 8 Decide where to differentiate in the value network 10 Decide how to differentiate: generic strategies and their current validity 152. Alliances as strategy accelerator 24 What competences do you have? – and need? 24 Alliances versus other sourcing methods 27 The process of forging an alliance 29 Ten forms of alliances 343. Creation of value 36 Increasing relevance for your customer 36 Developing a unique product 44 Creating cost advantages 49 From normal value to top value 52 Value of participating in a network 594. Distribution of value 63 General 63 Distribution agreement 66 Franchising 70 Aligning propositions and referral 71 Collaborative offering 73 Co-branding 75 Joint R&D 76 Technology licensing 79 Shared investment 80 Reciprocal hiring agreement 81 Unusual supplier risk 825. The formal agreement 83 Process 83 Contract or joint venture 84 Intellectual property 89 Four complicating factors 90 Termination of the alliance 95Conclusions 97Acknowledgements 98Literature 994
  6. 6. IntroductionWhy are some companies more successful than In this book I wish to guide you from the theoreticalothers and how can alliances contribute to this background of the creation of value to the moresuccess? I have spent the past few years researching practical considerations of forging an alliance,these questions, in search of practical answers. Its including the distribution of the newly created value.quite easy to perform analyses and to devise This book is written for those that are involved indescriptive structures; but what guidelines and forging and managing alliances, varying from boarddirectives can be extracted from scientific research members and strategists to business developmentand the operational experience of companies and alliance managers. The overall structure of theworldwide? chapters and paragraphs is shown in Figure 1.Chesbrough1 has formulated a definition of a Chapter 1 starts with the principles of creating valuebusiness model that is extremely useful to keep in for your company. The key to above average profits ismind when assessing the possibility of an alliance. differentiation. The concept of the value network – in contrast to the value chain – may help you decide where you want to differentiate yourself from the Business models create value* competition. Porter and Treacy & Wiersema are and capture a portion of that value significant contributors to strategies on how to * by defining a series of activities from raw differentiate. However, the availability of information materials to the final consumer and capital has increased tremendously over the last decade, and some of their assumptions no longer Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Competitive Alliances as Creation Distribution The formal strategy reviewed strategy accelerator of value of value agreement Additional Distribution agreement Differentiation Which competences value drivers Franchising Contract or leads to profit do you have? - and need? Proposition alignment Joint Venture Collaborative offering Decide where to Customer relevance Alliances versus Co-branding Intellectual differentiate in other sourcing property the value network Joint R&D methods Unique product Technology licensing Four complicating Decide how to The process of Shared investment factors differentiate: Cost advantages generic strategies forging an alliance Reciprocal hiring agreement Terminating the and their current Unusual supplier risk Ten types of alliances alliance validity Participating in a networkFigure 1. Overall structure of the book 5
  7. 7. hold. I therefore introduce three adjusted strategies that is, a joint venture. A practical arrangement forfor differentiation: creating customer relevance, intellectual property rights is suggested andhaving a unique product and – for the short term – complicating factors are discussed, such as aachieving cost advantages. partnership between two companies significantly different in size. And, finally, termination clausesChapter 2 introduces the concept of alliances from a should not be omitted.resource perspective. What competences do you needto successfully execute your strategy? Alliances are In my research I found that there is hardly any casecompared to other sourcing methods, and the process material available about the way alliances areof forging an alliance is described step by step. With structured financially. It therefore gives me greatreference to the definition of a partnership, ten types pleasure to include cases of 14 different companiesof alliances are presented. that were open and kind enough to disclose their working methods. In addition to these companies, IChapter 3 elaborates the three strategies for had off-the-record interviews with alliance managersdifferentiation introduced in Chapter 1. Exploring how of Oracle, Ebay, Cisco, Alcatel-Lucent and Thales.the ten types of alliances contribute to thesestrategies, the focus is on the added value of an I regard this book as a working document. It willalliance compared to direct investment. Two further therefore be available as a PDF document and ebook,aspects are described: additional value drivers such as with only a limited edition in print. It is likely that amarket dominance and recurrent turnover, and the new edition will be published in 2012, and I wouldvalue of participating in a network. therefore welcome further input in the form of new models and cases.Chapter 4 delves deeper into the financial structure ofeach type of alliance. Ways of splitting revenue and The downloadable version of the book will have acosts and of allocating intellectual property rights are broad margin for „virtual‟ sticky notes. These can offerdetailed for various situations. You can read this as a brief examples, suggestions for further reading, linkssort of cookbook for your own situation, and I suggest to Internet sites or even corrections. All readers areyou treat it accordingly: if you do not need a dessert, invited to share their knowledge. This way the bookjust skip the corresponding recipes. can also serve as a discussion document.Finally, Chapter 5 addresses some of the legal aspects Alfred Griffioenof forging an alliance. Most types of alliances can be January 2011arranged through a contract or a new legal entity, If you have any comments or additions, please email these to alfred.griffioen@ and I will post them as sticky notes in the document within a few weeks.6
  8. 8. 1. Competitive strategy reviewed focus more on making a profit, non-profit organisations are more likely to look at how to serve their customers or society better or cheaper, and dedicate extra resources to that. A study2 among 168 businesses shows what the most important factors are in order to be successful in a market. On the one hand, it is having the right resources, such as highly skilled people, protected knowledge, brand awareness or long-term contracts. On the other, it is having a highly distinctive strategy. These factors depend on each other: your knowledge and resources will largely determine your strategy. It turns out that your strategy is the most important factor for success in the market, followed by your resources and to a lesser extent the competition intensity. Your financial results are affected to similar extent byHow do you achieve growth, and how do you make a this success in the market and the power of yourprofit? That really is the question that is answered by suppliers. After all, if they take care of a major part ofyour business model: a description of what you as a your product or service, they can also claim part ofbusiness do, who your target is and how you earn your results.your money. The term became very popular duringthe late nineties, as every Internet start-up required a This chapter elaborates on the relationship betweenbusiness model. This does not exactly define what a strategy and profits. Key element in this isbusiness model is, but it does give some indication. differentiation from your competitors. The concept ofSo if you are asked "what is your business model?", the value network is introduced to be able to think ofyou could for instance say: Ive got a printing opportunities that are new to the market. Genericcompany that produces advertising copy with very strategies by Porter and Treacy & Wiersema areshort delivery times. reviewed to see how you can differentiate yourself in a sustainable way.The important thing is to think about the added valueof your business. Added value can be converted intoprofit, growth, security for your staff or extra benefitsfor your customers. Whereas businesses will perhaps 7
  9. 9. Differentiation leads to profit It is easy to perform worse than the average in your branch of industry, and a number of well-managedEvery branch of industry has its own characteristics businesses will certainly earn more than thatand, depending on supply and demand, their prices average. However, it will be difficult to earnare higher or lower. If you are looking to buy a new significantly more than the average if you cannot setcar, you will have plenty of choice and the margins of yourself apart from the competitors. As soon asthe dealer and supplier are small. If you are looking elements of your clientele, suppliers, method, etc.for someone to repair your central-heating boiler in become known, at least one of your competitors willthe middle of winter, supply is limited and prices are follow your example. This competition will againcorrespondingly high. reduce your advantage.There are a number of characteristics that lead to Southwest was the first airline company in the Unitedmore power for the demanding or for the supplying States to introduce the low-cost principle: no coffeeparty. Those characteristics are shown in Table 1. A or meals during the flight, having to check in againbalance between supply and demand leads to a for the next flight and no frequent flyer bonusmarket price. Balance between supply and demand schemes. In addition, everything was organised in(because often there will be only one dealer per car such a way that the aircraft turnaround time could bebrand in a city, and only a handful of installers per kept to a minimum. This enabled them to keep ticketregion) allows everyone to make a reasonable living. prices extremely low, and Southwest was veryIf there are too many suppliers, turnover drops and successful in doing so. In Europe, Easyjet and Ryanairsomeone will have to close his business. If the are the biggest followers.number of suppliers is too low, it wont be longbefore someone tries his luck and opens a new These days, every established airline company offersbusiness. If you are unlucky, you also have a cost short flights at low prices and they often have adisadvantage, such as standard shops in excessively subsidiary operating according to the same principle:expensive locations, or consultancy agencies with Singapore Airlines has Tiger Airways, Iberia hasoverpaid staff. In other words, with a standard Clickair. This means that competition has becomeproduct your profits will always remain limited. fierce in this market segment too. More power to the supplier of products or services More power to the buyer of products or services  The number of suppliers is limited, so there is  The number of buyers is limited, every buyer little competition represents a lot of turnover  There are many differences between suppliers, it  Where he buys his products is irrelevant to the is difficult to make a comparison buyer, product variations are small  To suppliers it is an unimportant product, they do  Suppliers are highly dependent on this product not depend on it and do not have to sell at loss and cannot afford to miss a sales opportunity  There are no substitutes  There are plenty of alternatives  It is difficult for the buyer to abandon or  It is difficult for the supplier to keep the products postpone his need in stock any longer and sell them later on.Table 1. Factors that determine where the power lies between supplier and buyer8
  10. 10. It is not as if certain branches of industry yield more such as lighters and cotton wool, and servicesreturn than others. This is on account of the investors. provided by hairdressers, smaller restaurants andAfter all, virtually every business needs capital: for cleaning companies.machines, for researchor for day-to-day monopoly with price in competition price monopolyoperational price skimming the marketmanagement. Asidefrom banks and the demand curve demand curve demand curveentrepreneurs directly,it is professional price of the profit profit competitor profitinvestors and - in the costs costs costscase of listed businesses- large groups of private numbers sold numbers sold numbers soldinvestors whostrengthen that capital. As soon as a branch of Figure 2. The effect of the demand curve with competition and in aindustry appears to yield a more favourable return on monopolythe invested capital in the long term, more investorswill plough their money into this. This supply of If you are selling a unique product, or if you know ofcapital will cause that branch of industry to grow, as another way to ensure customers choose you insteada result of which prices, and with that the profit of your competitor, you will have a kind of monopoly.margins, will fall. In that case, you are free to determine at which price you wish to sell your product. That price comes with aA possible answer to the question on how to derive certain demand, which is how you can optimise yourprofit is offered by elementary microeconomic profits (second diagram). If you start off with a highertheory. This concerns the demand curve for a product price and then slowly bring it down, you can make anor service. If the price is high, the quantities sold will even bigger profit. This is known as skimming thebe small, and if the price is low, more products or market (third diagram). Apple sold the first iPhone forservices will be sold. This relationship is called the approximately 300 dollars, and then graduatelydemand curve. lowered the price.In a situation with competitors where everyone sells So it is vital to distinguish yourself from themore or less the same product, you have to go along competition, in other words, to create a smallwith the others. Because if your prices are higher monopoly. This principle is described by W. Chan Kimthan those of your competitor, everyone will go to and Renée Mauborgne in their book Blue Oceanhim, and if your prices are lower you will deprive Strategy3. Instead of competing on existing markets,yourself and the competitor may also lower his the so-termed red oceans where sharks fight eachprices. The price multiplied by the numbers sold is other for every morsel of food, you should findyour turnover, and if you deduct your costs from that yourself a piece of blue ocean without competitors,you are left with a (small) profit, as demonstrated in and build up your business there. They propose athe first diagram of Figure 2. This typically applies to practical method whereby - assuming an existingraw materials such as pig iron and diesel, objects product or service - you can look at which aspects you 9
  11. 11. may leave out, reduce, enhance or create. The Decide where to differentiate in theobjective is to develop a completely new market areawithout competitors. value networkThere are many search engines such as Google, but ithas achieved a level of name recognition everyoneelse can only dream of. Thanks to that namerecognition, Google draws lots of visitors, and so a lotof advertising revenue, and so a lot of opportunitiesto develop new services and, with that, new businessmodels.Who might be able to knock Google off its throne?Theres Ixquick, a search engine that was the first tobe awarded the European Privacy Seal, which deletessearch data after two days. Ixquick offers privacy thatyou cannot (or no longer) get from Google, and thatis what makes it stand out. However, Wikipedia toocould develop into a search system based on acompletely different business model, with volunteerskeeping th e knowledge up-to-date, while it yieldsmore relevant results because of manual selection.In short: successful businesses create new supply inthose product groups or markets where they are the In order to work up to a specific distinction, you needonly ones. They bring their business model in line an insight into the activities before and after you. Thiswith customer needs not yet fulfilled by others. This knowledge will help to identify unserved needs inis how they develop a small monopoly, enabling the market, which offer the potential for profitablethem to set the prices themselves and to maximise business. The value chain or, as we will see, thetheir profits accordingly. value network will help you with that. In addition, you need to know what you are really good at. The value chain is the succession of activities needed to supply a product or service to the ultimate consumer. To that end, the terms product column or business column are used. A generic value chain for a product is shown in Figure 3.10
  12. 12. would be presented asRaw material Wholesale part of a marketing Manufacturer Retail trade End user supplier trade framework that is trusted by the public.Figure 3. Generic value chain for a product Active promotion by family doctors would also help, as they often see hayThe value chain in its original setup is a highly fever patients about their complaints.simplified representation of reality. The concept isconvenient if you want a quick overview of a Only in some cases is having customer contact trulybusiness within its sector, but the value chain is not financially appreciated. If someone clicks on anusable for gaining an insight into new business advert next to the Google search results foropportunities. To that end, the concept must be mortgages or insurance, Google charges theaugmented with the four insights outlined below. advertiser multiple dollars. In the electricity and gas supply securing a new customer can cost up to 100 dollars and these costs are activated on the balance1. The value chain consists of more than goods sheet and depreciated over three years.and moneyThe concept seems simple: goods and services move 2. Primary and support activities in the chainthrough the chain from raw materials producer up to influence each otherthe consumer, in return for money. However, theeconomic truth is much more complex. Banks furnish If you work out the details of the value chain further,money for money, and insurers cover risks. you will distinguish different activities within one linkKnowledge streams also form an important part of (often one business). These activities influence eachthe economy in the form of patents, copyrights and other:databases. Experiences, ease and reputation addvalue as well. Finally, there are a lot of intangible  The decision of the purchasing department toassets such as goodwill, reputation, customer loyalty work with a far-away or nearby supplier directlyand community formation that are vital to a business, affects the logistics process.but are not made manifest in the traditional chain4.  The decision of the marketing department to focus on far-away or nearby customers willRelevance to your customer is one of the most affect shipment or delivery and the service.underestimated assets a business can have. Imagine  The personnel policy and investments inyou have developed a magnificent new pollen filter buildings and ICT networks of the businessthat can stand on your bedside table and do its job influence productivity.without making any noise. A lot of hay fever patients  Product development influences almost allcould benefit from this. However, if you were to offer activities.this under your own name, it takes a very long timefor the product to break through. Were the product tobe produced and distributed by Philips Healthcare, it 11
  13. 13. In addition, decisions within the link may affect product that a lot of consumers buy in the shop andactivities in other links: take home with them straight away. The microwave must be transported, taken out of its packaging,  The decision to use semi-finished products inspected, installed and tested, the user manual must instead of raw products leads to a shift in be read and the packaging must be disposed of. activities and perhaps also a choice of other suppliers. This may be more efficient for the All these activities harbour opportunities to add entire chain if the new supplier has a better value, without it costing substantial amounts of extra process for this than the company itself, or if the money. A delivery service is an obvious idea. A transport costs are drastically reduced as a result smaller box or a different type of packaging would of that. make it easier to carry and reduce waste. Three IKEA-  The way in which the product is packed directly type pictures on the box could immediately simplify affects the logistics process in the next link. the installation process. A well-designed operating  Introducing additional quality control to the display could render a user manual virtually operations could lead to extra costs in the own superfluous. And as soon as a seller of microwaves link, but will lead to large savings in subsequent starts promoting a certain model because he never links due to a lower amount of rejected receives any complaints about it, the price of that products. product could be increased by ten dollars.So links in the value chain and activities outside of it Another underestimated element of the value chaincannot be treated separately. Only when you look at at the consumer (but also at a companys purchasingthings more closely will you be able to see hidden department) is the effort made to come to ancosts and find a solution to that. In some countries, informed choice. This begins with focusing onfor example, electronics supplier Samsung outsources potential suppliers, finding information on themaintenance on printers to Microfix. This required a product, and taking a decision that can also belot of coordination between the department at explained to the partner or manager. The processSamsung with customer contact and the schedule of continues up to placing the order and making theMicrofix engineers. That is why it was decided to payment. A customer may perhaps spend more timeoutsource the entire process of making an making his purchase than you do in the sales process.appointment with the customer to Microfix,integrating customer contact and scheduling. This led Adding value is possible in this part of the processto efficiency on both sides. too. By being findable, having transparent sales material, offering tailor-made suggestions, collecting positive references and simplifying the ordering3. The value chain doesn’t end with delivery process, you can make it so much easier for the customer. A good example of this still is theThe value chain does not end with the delivery of the website, which gives you personalisedproduct or service to the consumer. Various activities tips each time you log in and which allows you totake place at the consumer as well, and this is where browse books.a lot of opportunities to create added value can becreated. Lets take the sale of a microwave. This is a12
  14. 14. 4. The value chain diverges and converges Supplier Consumer Supplier ClientThe value chain is not straight. Each product is made Consumerof components, and in order to run a business youneed various investments and services. Apart from Supplier Company Client Consumerstaff, a hairdresser also needs premises, chairs, washbasins, trimmers and hair care products. The services Supplier Client Consumerof the interior designer and the coffee machine alsocontribute to the value added by the hair dresser. Figure 4. A possible value network around a businessNaturally, a purchasers attention is mainly drawn to The next step is to quantify the identified streams.the largest expense items. For a steel plant, they will What percentage of your turnover can be found inbe the iron ore and coals. So you can be sure that the each buyer group and what percentage of purchasingnegotiations on the delivery contracts in this respect do your buyers spend? What are the most importantwill be fierce. But what about security services? The end products that your activities contribute to andsteel plant may not be interested in this, but the how important is your share in this? Are there anysecurity company is. costs up the chain that you can easily prevent?Not only does the value chain operate as a funnel, it Packaging costs are a good example of costs that canalso branches out. First, because a plant can often be reduced. A semi-finished product ismanufacture different products for different buyer packaged in a certain way because that is standard ingroups. But residual streams also have their value or the industry. This often is packaging that is cut openprice. Energy companies supply CO2 to market and thrown away. Why is that packaging notgardeners who use it to improve crop growth. By returned? At one point, the cable and plastic pipesseparating waste, some residual streams can be trade replaced the wooden reels with removablerecycled and processed or even sold at a lower price. steel reels. This substantially reduced the freight volume for the collection of reels.Use these four insights to look at your businessactivities in a wider context. We are no longer talking If you take the network of business activities thatabout the value chain, but your place in the value yields a certain product or service, you can - using thenetwork. right data - also reconstruct where the biggest profits on this product are made. This will of course notThe value network is in effect the diagram of the always be completely successful, but if you collectcomplexity within which a business and its activities information methodically, you will arrive at a certainoperate. You can start by drawing the value network insight as shown in Figure 5.around your business by looking at the mostimportant suppliers and buyer groups (see Figure 4).Who else supplies your buyers, and do your buyerssell on your product unmodified, in combination withother products or processed in another product? 13
  15. 15. System Weekly reports Storage/archiving Performance Supplier Supplier Accounting €5 Interface with bank overviews Management € 15 software €2 € 60 € 100 Creditors Supplier Company Client Consumer Accountant Audit Financial positions Security Turnover per Purchasing audit administration € 23 Purchasing € 30 Purchasing € 75 supplier Own costs € 22 Own costs € 20 Supplier Profit € 5 Profit € 8 Reporting Overviews Turnover per customer Marketing Purchasing € 3 software Analysis tools Turnover per product Own costs € 10 Profit € 10 AlarmsFigure 5. Analysis of where the profits in a value network can be Figure 6. Qualitative contributions in a value networkfound The objective of drawing a value network is to gainDrawing the value network also helps you to visualise insight. This insight should lead to recognising thesmaller contributions to an end product. Not every opportunity to structure a chain differently. It is bybusiness provides a product that the consumer can taking advantage of those opportunities that you canrecognise. Accounting software for instance is add value as a business. The supplier of accountinguntraceable, but the role of accounting software in a software may, for instance, also develop integratedgeneric process such as financial administration can reports if it emerges that these are important for thebe visualised, including contributions from other buyers of the financial administration.suppliers and the results for the differentdepartments and stakeholders (Figure 6).Eastcom SystemsEastcom Systems is a Singaporean company Management, targeting large companies like Fedex,established in 1992, as a vendor providing Citibank and Standard Chartered Bank. Suchproductivity solutions to help customers manage their companies generally have no overview of how muchtelecom expenditures. One of their main products money is wasted or overspent on telecom costs.was a call accounting solution to help companies to Eastcoms business model is to help these companiesanalyse their PABX telecom costs, e.g. by breaking manage and reduce their telecom costs. For largedown the call charges in terms of departments and global companies, telecom costs can reach as high asemployees and types of calls (internal, long-distance, 1 or 2% of their turnover.etcetera). In 2007 the management decided thatselling licenses only was not the way to stabilise Eastcom Systems can supply its software products asrevenue, which was declining due to competing licensed solutions or through a comprehensiveservices „through the Internet cloud‟. service for companies wanting to outsource this part of their cost management. The core of the product isThe company therefore chose to offer cost a business intelligence system with data miningmanagement services such as Telecom Expense14
  16. 16. functionalities. The revenue consists of licensing fees, We are looking for partners that are willing to investmonthly service fees or a percentage of the savings. in a long-term relationship with the CFO or any senior level managers who focus on operational P&L.Business development manager Peter Hum explains: Partners should see that we can help them set“As Telecom Expense Management is a niche market themselves apart.”and is designed for regional and globally focusedenterprises, we have to look beyond the borders of One of Eastcom‟s most important partners is inSingapore. We call ourselves a global company, and Malaysia. The partnership is formalised with an NDAhave arranged our presence in other countries and a partnership agreement. The partner does thethrough partners. Our overall strategy can be sales and system integration, Eastcom provides thecharacterised as customer intimacy, so we have to sales support, cost management technology, costwork closely with these partners to deliver a management domain knowledge, and technicalcustomised product to our clients. support. Revenue is shared, with the partner receiving a percentage of the contract value forThe value of the partnership for us lies in the Eastcom. There is a model for intercompany pricepartners network. We can add specific knowledge setting, in which every partner has to defend itsand our products. We have some protected markup.intellectual property and our business intelligencesystem is a result of many man-years of R&D and Eastcom maintains a partnership in Belgium as well,software developmental efforts.” with a company called Convergent Strategies. Peter Hum: “We are very closely aligned with ConvergentFinding the right partners is always difficult. Peter: Strategies, and the collaboration turned out to be“We see a lot of companies with a background in IT, useful for European companies with branches in Asiabut in most cases they have access to the potential or Asian companies with branches in Europe. Thiscustomers IT manager, and not the financial director. adds another dimension to our offering.”Decide how to differentiate: generic However, as accessibility to information and capital has increased strongly over the past 10 to 15 years,strategies and their current validity these strategies have lost part of their basis. In this section I will discuss which elements continue to offerIf you know where your opportunities in the market permanent competitive advantage.lie and what your strengths are, you have to dosomething in order to further differentiate yourself. Ifyou continue doing what you have always done, youwill get what you have always received (such as poor Generic strategiesprofits). Porter and Treacy & Wiersema are the most importantIn order to differentiate, various generic strategies authors that explain how you can flesh out yourwere developed during the previous century. distinctiveness in relation to the competition. In 15
  17. 17. addition, one of the most important models used indifferent to which strategy you should choose. Theirportfolio matrix of the Boston Consultancy Group. only guideline is that any choice has to be made with dedication. Pursuing two or three strategies at theThe Porter and Treacy & Wiersma concepts (see the same time will result in „middle of the road‟boxed text) both provide three strategies and are offerings.Porter Competitive Strategy Porter plots this in a spectrum, with the width of the customer focus on the vertical axis, and the choicePorter5 indicates that there are three successful between low costs and product differentiation on thegeneric strategies for achieving an above-average horizontal axis (Figure 7). He argues that if a businessprofit: fails to make a clear choice between one of the three options, it will be stuck in the middle. That makes  Supplying a (standard) product at the lowest sense, because if no choice has been made for a long cost, in order to achieve the highest margin in while, implementing the options will take a lot of relation to the market price. Porter calls this cost effort. To give a few examples: Ryanair pursues cost leadership. leadership, Rolex pursues product differentiation, and  Supplying a product that deviates from the with the CL75 Poppy cell phone, BenQ Mobile aims at standard: this renders a direct price comparison the trendy female, a typical focus strategy. impossible. Porter calls this the product differentiation strategy.  Supplying a clearly delineated group of Treacy & Wiersema’s Discipline of market leaders customers: the focus strategy. This enables you to meet the specific wishes of the customer In 1995, Michael Treacy and Fred Wiersema published group and to align your products and delivery the book "The discipline of market leaders" 6, subtitled accordingly. "Choose your customers, narrow your focus, dominate your market". The key message in their book is to Lowest costs Differentiation choose a clear direction for your business, and to subsequently have the discipline to concentrate on Broad focus just that direction. Product Cost differen- leadership Treacy & Wiersema, too, recognised three generic tiation directions for a business to be successful, which are to some extent comparable to those of Porter: „Stuck in the middle‟  Operational excellence: supplying a product at the best possible total costs, also taking into Focus strategy account the efforts to be made by a customer.Narrow focus The latter is the addition compared to cost leadership. McDonalds is a good example:Figure 7. Porters generic strategies for competitive advantage certainly not the cheapest supplier of16
  18. 18. hamburgers, but its formula offers short waiting Treacy & Wiersema indicate that each of the three times and, above all, a guarantee concerning aspects should be present at a minimum level, but the products quality. This saves the customer that you should differentiate with respect to one time in searching and trying out. By aspect only (see Figure 8). For instance, a consultancy standardising the business processes and even agency may decide to focus on a select customer the premises, McDonalds keeps its own costs group and offer it a tailor-made range of services down. (focus on customer intimacy). Nevertheless, it is still  Product leadership: supplying the best product. important to execute jobs efficiently and at This is not the same as product differentiation. reasonable rates (operational excellence) and to There is a host of suppliers of sports shoes, and introduce new knowledge or concepts on a regular their products differ to quite an extent. Only a basis (product leadership). company such as Nike manages to stay one step Product ahead with new innovations, such as the Nike Leadership Air, a new type of fastener or its collaboration with Apple.  Customer intimacy: adjusting your business operations around a certain customer group, and supplying it with all required products. This Minimum is similar to Porters focus strategy. An level important aspect in this respect is good customer relationship management and being able to adjust your products and services to their wishes. This strategy demands decentralisation of competencies in dealing with Operational Customer customers. Excellence Intimacy Figure 8. Three strategies according to Treacy & WiersemaA relatively limited study 7 among the 25 most Whereas Porter and Treacy & Wiersema provide tipsimportant American Internet companies provides us for individual business activities, the Bostonwith an initial picture of the success of each of the Consultancy Group matrix is particularly popular whenTreacy & Wiersema strategies. Among other things, making choices within a portfolio of activities. Thethe study looked at turnover development in the underlying assumption of this matrix is that havingyears 2005 and 2006. The group of companies with a several activities within a single company is a meanscustomer intimacy strategy and a product leadership to secure a more stable flow of income and that youstrategy both experienced an average annual growth can move money from one activity to the other.of 20%, while the companies with an operationalexcellence strategy experienced an annual growth of If a product is relatively new, the market for thatapproximately 8%. product will still have to grow, while the increase in production and distribution demands a lot of money. 17
  19. 19. Once a product has reached the maturity phase, the Due to the increasing availability of information, it ismarket will stabilise or shrink with it, and money also easier for smaller innovative businesses to offerbecomes available. In addition, the thought behind their services and to start competing with the largethe BCG matrix is the belief that if you are market established players. This promotes continued productleader, you can make more profit because you can rationalisation. By a simpler spread of technology, theachieve benefits of scale. number of competitors for a product grows quickly and prices drop. A good example of this is given inThe strength of the BCG model is its directional Figure 9, which concerns two reasonably comparablesimplicity: you use the money from the cash cows products: the video recorder and the DVD player. The(high market share, low growth) to finance the stars video recorder was developed during a period whengrow (high market share, high growth), you say information was exchanged relatively slowly, as agoodbye to the dogs and keep a close eye on the result of which competitors took longer to market aquestion marks (both low market share in low similar product. This was markedly different in thegrowth or high growth markets). This way the cash case of the DVD player9.flow is distributed within the corporation in the mostoptimal way. Price (€)Porters theory dates back to 1980, that of Treacy & 1500 Video recordersWiersema to 1995. The BCG portfolio matrix was first DVD-playersused in 1969. The fact that these models are stillbeing used proves their strength, but it is the 1000emerging information society that may not havechanged some economic laws, but has put them onedge. 500The accessibility of information and capital 0If there is one development that, during the past fewyears, has been dominant in the way in which Figure 9. Price development of video recorders andconsumers and businesses do business, it is the DVD playersimmensely improved accessibility of information.Consumers, purchasing companies and government These developments force providers of products andinstitutions are now much more aware of what is for services to concentrate on those activities in whichsale, and it is becoming increasingly easier for them they can stand out, and for which they can maintainto compare products and suppliers. It only takes a that distinctiveness for a longer period of time. If acouple of mouse-clicks and telephone calls with product is relatively easy to copy, such as a DVDsuppliers from all over the world to meet their player, prices will drop fast and it will be difficult todemands. Online searches and even online auctions recoup the investment.are steadily replacing relationship-based sales8.18
  20. 20. A second major development is the change in flows self-evident, and synergy between products becomesof capital. During the twentieth century, the objective so much more important.of virtually every business was growth. Growthenabled them to achieve benefits of scale, it made a So how to make a profit in such a transparent world,lucrative position as market leader possible, and given the fact that:above all: the business growth and the relatedinvestments were a sensible way of reinvesting the  the availability of information is growing;profits that were made. The only thing that left the  the payback period of new products has to becompany was a bit of dividend. increasingly shorter, and;  shareholders and financers are increasinglyAs the financial sector globalised, it became easier to critical to invest their money in the mostinvest profits from one business in the other if the lucrative activities.latter yielded a better profit or had a lower riskprofile. During the past few years, transparency has Early in this section, I indicated that the chances ofincreased under pressure from large private profits are linked to achieving differentiation frominvestment funds (some of whom are activist your competitors. That is why I will study theshareholders), making it possible to decide per different options provided by Porter and Treacy &business activity rather than per business whether or Wiersema in that respect, and evaluate them againstnot to invest. The added value of a holding or head the help they provide in a transparent is a permanent point of discussion.Seen from the investor‟s side, new opportunities arise 1. Focus strategy (Porter) and Customer Intimacyas well. Through the internet it is possible to lend (Treacy & Wiersema)small amounts of money to entrepreneurs inemerging countries; real estate funds like the With the focus strategy of Porter and customerCanadian Homburg frequently run marketing intimacy as defined by Treacy & Wiersema it is allcampaigns to sell their bonds. There are various about being relevant to the customer, despite thenetworks for so-called „business angels‟, mainly fact that you do not sell unique products.seasoned entrepreneurs who invest amounts from25,000 dollars up to millions in start-up companies A good example is private banking: specialist banksand help them with advice and new business offer their customers a permanent account managerrelations. who has an overview of all the financial affairs of a customer and who can also offer a solution toAll these developments make it is easier to attract everything. Private banks offer a wide range ofcapital on the basis of a good idea. Active investors normal products such as mortgages, investmentdetermine in which activity they invest and which accounts and insurance, but they mould this into anknowledge and expertise must be combined. As a integrated package for the customer.result, it is specialist organisations rather than largebusinesses that become leaders in the new economy. Knowledge of the customer and the relationship withAs such, the internal reinvestment of money in a customer are hard to copy. Additionally, the habitsaccordance with the BCG portfolio matrix is no longer and way of doing business with that customer may 19
  21. 21. become interwoven. Private banks may have a small try to bring this to their attention. You will not begroup of customers, but to those customers they are relevant until that what you promise is exactly in linehighly relevant. with the needs of that one particular buyer at that time.Customer intimacy could also be construed morewidely as a thorough knowledge of what a customer Brands are the carriers of customer relevance. This isgroup is concerned with or what needs they have. For owing to the various functions of a brand, of whichexample, Live Nation is a market leader when it recognisability is the most important. Users willcomes to organising rock concerts. All they do really attribute certain values and features to a brand,is bring artists, venues and visitors together, but they partly based on advertisements, and fill in the rest ofmanage to do this in such a way that many of the the picture with their previous experiences withconcerts are sold out. products and services offered under that brand.I therefore propose to replace the terms focus Being relevant to a market is a sustainablestrategy and customer intimacy with the term competitive advantage, whether it is a small group tocustomer relevance. Customer relevance is the whom you are very important or a large group thatextent to which you are important to customers, values you for certain aspects. Customer relevance isknow how to appeal to them and to catch their linked to your business name or brand name and canattention. It is that attention that makes it possible to be protected by committing your most importantsell products and services. Because of customer staff, by sharing customer and market knowledge inrelevance, customers opt to also buy standard protected databases, and by translating thisproducts or services from you, instead of from your knowledge into the right combination of products andcompetitors (Figure 10). services.The big difference between customer intimacy and If a business targets the market under various namescustomer relevance is that the latter is argued from brands, then you need to assess the relevance perthe perspective of the customer, and as such goes brand. Thus, to most customers Unilever may not beone step further. Today, a lot of businesses have a relevant as a company, whereas brands such assuitable range of products for their buyers, and they Lipton or Dove may well be. The three strategies of The three directions of What happened in the Michael Porter (1980) Treacy & Wiersema (1995) internet age? Current validity  Customer intimacy: There are many suppliers Customer relevance: Focus strategy: having a complete of f ering with a broad of f ering. being seen as relevant targeting on a niche f or specif ic customer groups Customers can choose by your customer groupFigure 10. Development of differentiation on customer focus20
  22. 22. 2. Product differentiation (Porter) and Product 3. Cost Leadership (Porter) and OperationalLeadership (Treacy & Wiersema) Excellence (Treacy & Wiersema)The difference between the product differentiation The main difference between cost leadership andstrategy and product leadership - as Treacy & operational excellence lies in the fact that withWiersema emphasise - lies in not introducing a operational excellence the customers efforts inproduct different from the rest just once, but to buying, using or maintaining the product are alsostructure your organisation in such a way that you taken into consideration. Both Porter and Treacy &can introduce a distinctive product time and again. As Wiersema attribute competitive advantage to havingsuch, they acknowledge the fact that new products the lowest price or the lowest overall costs.too can be copied and become obsolete. Cost advantages may arise in different ways: throughDifferentiation in the sense of offering a different (or scale, by completing the learning curve quicker thanthe best) product may at times bring advantages, but someone else, by having the right suppliers orgiven the speed at which products are copied, it is partners, or by having a tightly-run business. Theyoften not a sustainable competitive advantage. can be significant and may form a good source ofProduct leadership is sustainable, provided you profit. The question is to what extent this type ofcontinue to invest in new knowledge, protect that advantage is sustainable in a world where knowledgeknowledge with patents as much as possible, and can be shared on retaining your most important productdevelopers and product managers. Scale size that, according to the Boston Consulting Group, can only be achieved by being market leader,Apart from that, a product these days should not just is also possible by collaborating, or by outsourcingbe different or better, but it should have a your production process to a party that is familiardifferentiation that can be communicated clearly and with that line of business. This will help you completetransparently. This means that this strategic direction the learning curve faster. The suppliers and partnersmust be refined further as: (continuously) having a of your competitor also want to work with you andunique product or unique service (Figure 11). vice versa, and they may even introduce innovations to you first, rather than The three strategies of The three directions of What happened in the to others. Michael Porter (1980) Treacy & Wiersema (1995) internet age? Current validity  Product dif ferentiation: Product leadership: The enormous diversity of (Continuously) having Other economic factors having a better product continuously introducing new products products makes it hard to stand out unique products also play a role: economic growth,Figure 11. Development of differentiation on product inflation, exchange rate movements and trade restrictions may lead toIn the event a business has a broad portfolio, the sudden shifts in the cost pattern. A lot of marketscriterion is that the majority of turnover is generated experience a status quo for a number of years, onlyby unique products or services. Having a single niche to descend into a price war later. In this day and age,product is not enough: the remainder of your cost-based strategies are therefore no longerportfolio will still experience price competition. sustainable by definition (Figure 12). 21
  23. 23. The three strategies of The three directions of What happened in the He has studied the Michael Porter (1980) Treacy & Wiersema (1995) internet age? Current validity correlation between the  financial results for each Operational excellence: Cost advantage is easily Cost leadership: having the lowest total costs, copied or leveled down. No sustainable strategy of these strategies. having the lowest costs including costs of your client Scale can be bought Campbell-Hunt discovered that two ofFigure 12. Development of differentiation on costs those generic strategies have a positive effect on profitability: he defines them as Innovation andThis is not to say, incidentally, that operational operations leadership and Leadership in broadexcellence or the quest for lower costs is quality and sales. The Cost efficiency strategy has aunnecessary. On the contrary, for a lot of businesses significant negative effect on profitability. The mainit is a condition for their existence. However, it no components of these strategies are outlined in thelonger is a means to permanently differentiate Table 2.yourself. Today, operational excellence is acommodity: something we simply need. The innovation and operations leadership strategy mainly seems to focus on marketing new specialMcDonalds and the German discounter Aldi are often products (described earlier as unique products) atcited as successful examples of operational high prices. The leadership in broad quality and salesexcellence. These businesses operate extremely ties in nicely with the term customer relevance. Thisefficiently, without a doubt. In addition however, Aldi is about brand awareness and being highly capable ofoffers its customers a very transparent guarantee of serving a wide group of customers with a lot ofquality at a low price, and McDonalds also has a products.strong brand name and the promise that you willalways get the same product. So having the lowest Another conclusion drawn by Campbell-Hunt is thatcosts is not all that matters. Supermarket chain Tesco these strategies do not exclude each other, whereasproves that cost leadership can go hand in hand with Porter for instance claims that combining a Costoffering a wide range of products. leadership strategy with a Product differentiation strategy will lead to being stuck in the middle. Innovation and operations leadership on the oneThe three strategies and their profitability hand and leadership in broad quality and sales on the other each affect profitability in their own way. ThisThe relationship between a companys strategy and would suggest that a business can successfully try toactual profitability has been the subject of a large develop unique products and become relevant to itsnumber of scientific studies. The most important market at the same time.studies carried out before 2000 have been combinedin a meta-analysis by Colin Campbell-Hunt10. From The conclusions of Campbell-Hunt, as well as thethese seventeen studies he distils six generic research about the Treacy & Wiersema strategiesstrategies, each with components (such as a high cited earlier, are based on averages. Individualprice, a lot of advertising or operational efficiency) companies in stable markets, oligopolies or marketsthat are often used in combination with each other. with high entry barriers might have reasonable to22
  24. 24. excellent profits. On the other hand, even if a entering into an alliance. It is only as an overallcompany does not pursue a low price strategy, cost strategy that it will prove less sustainable and lessadvantages will hardly be rejected. profitable than being relevant to your customer or having a unique product.Therefore, in the continuation of this book, creatingcost advantages will be treated as a valid reason for Innovation and operations Leadership in broad quality and Cost efficiency leadership sales High prices Promotion Efficiency through: New products Large sales organisation - new products Special products Quality of service - low prices Operational efficiency Product width - advertising Width of the target groupTable 2. Strategies as defined by Campbell-Hunt 23
  25. 25. 2. Alliances as strategy accelerator What competences do you have? – and need? Alliances are an important means to obtain new competences for your organisation. However, the choice to enter into an alliance should arise out of the strategy of the company. With the strategy in mind, the first question should be: what competences do you already have? And which do you still need? An internal analysis to assess your own competences should result in a list of strong and weak points. The necessary information can be derived from various sources:  an analysis of your market share or sales figures;  customer satisfaction surveys; but it can also be illuminating to ask your customers why theyIn the first chapter we discussed the relationship choose to purchase from you, and to ask non-between strategy and profitability. However, strategy customers what you need to do to persuadecan only be executed with the right resources: them to make that choice;people, knowledge, machines, brand names or shops.  differences as compared to your competitors, forIn case not all resources are available for the strategy instance in terms of company resources,you have chosen, forging an alliance could be a way products, distribution, personnel qualifications,to obtain them. or the quality of your marketing;  improvements that you are implementing inThis chapter is about the decision to choose for a your company, or deteriorations as a result ofstrategic collaboration. With the value engineering personnel turnover.model, you can select which competences can bestbe obtained through an alliance and which not. The When identifying your strong points, there is alwaysprocess of forging an alliance is summarised and to the risk of being insufficiently critical. The Resourcemake things clearer, the definition of a partnership is Based View11 can then prove useful, by subjectingintroduced. The chapter closes with list of ten each strong point to the following questions:common forms of alliances, which will be elaboratedin Chapters 3 and 4.24
  26. 26.  Is it a valuable strength? The ability to build the customers but only against high costs, and perfect carriages became worthless once someone else can do so more efficiently, then it automobiles captured the market. makes sense to seek a partner. This is illustrated by  Can the strength be utilised within your the value-engineering model12 (Figure 14). business context? Knowledge of microbiology may be valuable, rare and hard to imitate, but  Components of your product or service with a quite useless within a simple production firm. low customer value and low costs (for instance  Is the strength rare? Is it something only your the transport packaging) can best be purchased. company is capable of, or is it a basic  Components with a high customer value but prerequisite for market operation? relatively low costs for you should certainly be  Is the strength inimitable? Distribution through developed and supplied by your own company. the Internet is not a particular feat any more, For example, right now it would not make sense now that everyone can open an online shop for Apple to have the user interface of their within a day. iPods and iPhones developed by a third party.  Components with a low customer value andDepending on how you score on this list, you may be high costs for you had better be left out of yourin a situation of competitive parity (equivalence), or product or service. As an example: a ten-yearof having a temporary competitive advantage, or of warranty on a watch which most customers willhaving a durable competitive advantage. Figure 13 tire of in five years and replace with a new one.offers an illustration.  For components with a high customer value and high costs for you, it is worthwhile looking at a Organisable partner: this party may have a better Inimitable Valuable understanding of the customers need, or be Rare able to produce or distribute the component more cheaply, and can thus deliver more value-  Knowledge of Competitive parity automotive technology for-money.    Familiar brand name Temporary competitive advantage Value for    Customers can track Temporary competitive the customer courier on the Internet advantage Use as Partnership   Prestigious customers Competitive parity selling point Outsource high    Patented packaging Durable competitive technology advantageFigure 13. Resource based view assessment low Procure RemoveIt is important for companies to focus on the areas inwhich they truly deliver value-for-money. If you canconvert competences into value for the customer, and low highyou can do so at relatively low costs, then youre Costsbetter off keeping these competences under your Figure 14. What activities to perform in-house and which to haveown roof. But if the competences deliver value for another party perform? 25
  27. 27. Particularly for a component of your product or what you ask for, so nothing new. In a partnershipservice that is important to your customer, a you set a common goal with high customer value,partnership delivers greater value than a purchasing and then seek the right resources to achieve that.relationship. In a purchasing relationship you getLogistics ExecutiveLogistics Executive is part of Logistics Recruitment to employees individually you get different andSolutions, an international specialist in Executive sometimes conflicting messages than when talking toSearch and Recruitment for Logistics & Supply Chain them in a group because they are very loyal to theirmanagement. The company has around 40 boss. The bosses, on the other hand, want to beemployees, its own offices in six countries and has a challenged and this is a role an outsider can play.”database of around 70,000 candidates. Darryl Judd,Vice President Global Strategy, explains what role Whereas the normal recruitment business processpartnerships play in his organisation. only pays when a candidate is hired, the model for this more consultative method works more to the“The usual executive search process can be a highly advantage of the executive search agency. One thirdtransactional one, based on a job description that is of the total fee, which can add up to 30 or 40% of ansent to a several different intermediaries. With the annual salary, is paid when starting the search.vast majority of executive searches paid on a Another third is paid when a candidate is found andretained basis, you must deliver results and ensure the last third is paid when the candidate is hired.that a suitable candidate pool is identified from a Other business activities such as benchmarking,global perspective. The opposite applies for lower organisational design and talent managementlevel roles, where payment is made once a candidate activities are charged on a hourly or project basis.has been hired. Logistics Executive‟s recruitment activities involve aWe try to arrive at a more collaborative approach number of partners in various countries such as Japan,with our customers and, initially, leave out the job Vietnam, Korea and China. Darryl explains: “We havedescription component. We discuss which no footprint in Japan but we do have internationalcompetences are missing in the organisation, why clients with operations there. For us it is relativelythere is a vacancy, as well as the organisation‟s easy to find expats in Japan but difficult to find localcurrent management structure. This leads to a better candidates. That is why we collaborate with localunderstanding of what is required in terms of suitable partners; in a country like Japan it is difficult for us toabilities to complete the assignment. set up an office due to language barriers and cultural differences. In India, on the other hand, the costs forTo take part in this type of dialogue, business setting up an office are lower and English is widelyconsultants need to be experienced enough to add spoken. So we have our own office in Mumbai.value in this field, and customers must have enoughconfidence in them to open up. In organisations in The fact that we work with partners does not affectAsia you need to start at the right level. When talking our customers; our fee structure remains the same.26
  28. 28. We divide the activities among our partners and they Which of us will conduct the meetings and finalare paid for their specific tasks. In most cases, negotiations is decided upon on a case-by-case basis.Logistics Executive takes care of the front end withthe customer and the partner is responsible for the We guarantee our customers a retention period ofback end with the candidates. If a partner proposes a two to twelve months. If the candidate leaves withincandidate who is already in our database but had not that timeframe we will repeat the process for free.been noticed by us yet, the partner is paid in full. However, out of 900 placements a year, this only comes up two or three times.”Alliances versus other sourcing  By outsourcing these activities to parties that possess the right competences. But then themethods question is, can your competitors not do the same, or have they not already done so?  By taking over a company that has the right market position or the right products. But then the question is, why have your investors not already taken their money from your firm and invested it in the other party?  Entering into an alliance with such a firm, and partly combining your people and resources, sharing your knowledge, and approaching your clients with a broader offer. The option you choose depends on a number of preconditions that occur in any market:  the time available to bring a new product to market;  the extent of investment and whether a firm can afford it;  the acceptable measure of risk. Direct investment in development activities orTo introduce new competences in your organisation, broader marketing requires a lot of time, certainly if itthere are generally four options to choose from: calls for new competences. Outsourcing is quicker, but requires additional resources due to overhead  By investing in the training of personnel or by and your suppliers profit margin. Both run the risk of hiring the right people and deploying them in investing in a client group that barely responds or in either portfolio management and marketing a product that fails to succeed. communication, or in product development. 27