A – Z Strategy
Ackoff, Russell L: One of the early strategy gurus, Ackoff introduced rigor into strategic
planning. In his book, “A concept of corporate planning,” Ackoff mentions that there are some
aspects of the future about which we can be virtually certain. Here, companies can pursue
commitment planning. There are some aspects of the future about which we cannot be certain, but we
can be reasonably sure of what the possibilities are. Here, contingency planning is useful. A good
example is planning for a military invasion. Every possibility is identified and analyzed and a suitable
action plan prepared, because time is of the essence, once a possibility has become a reality. Finally,
there are some aspects of the future, which cannot be anticipated. Here, responsiveness planning can
be used, i.e. building flexibility into the organization.
(See Adaptive Planning)
Activity-Based Costing: Activity Based Costing (ABC) increases the accuracy of cost
information by linking overhead and other indirect costs to product or customer segments more
precisely. Traditional accounting systems distribute indirect costs on the basis of direct labor hours,
machine hours, or material costs. This leads to a distorted picture. Decisions about which product line
to invest in and which not to invest in, become difficult. ABC undertakes detailed economic analyses
of important business activities to improve strategic and operational decisions.
To build a system that will support ABC, companies should:
• Determine the key activities performed;
• Determine the cost drivers by activity;
• Determine overhead and other indirect costs by activity, using clearly identified cost drivers.
ABC can be used to:
Re-price products - Managers can analyze product profitability more accurately by combining
activity-based cost data with pricing information. This can result in the re-pricing or elimination of
unprofitable products. Managers can also estimate new product costs accurately.
Reduce cost - ABC identifies the components of overhead costs and other cost drivers. Managers can
reduce costs by decreasing the cost of an activity or the number of activities per unit.
Influence strategic and operational planning – ABC can facilitate target costing, performance
measurement for continuous improvement, and resource allocation based on projected demand and
infrastructure requirements. ABC can also assist a company in identifying/evaluating new business
(See Full Costing, Strategic Cost Management)
Adaptive Planning: This school of strategic planning, developed by Russell Ackoff, believes
that the principal value of planning lies not in the plans themselves but in the process of producing
them. Companies should try to put in place a system that will minimize the future need for
retrospective planning, i.e. planning aimed at removing deficiencies produced by past decisions. This
school classifies the future into three types: certainty, uncertainty and ignorance. When the future is
reasonably certain, commitment planning can be used. When the future is uncertain but we can be
reasonably sure of what the possibilities are, contingency planning can be used. Finally, there are
some aspects of the future that just cannot be anticipated. The only way to deal with such
uncertainties is by building responsiveness and flexibility into the organization. This is called
(See Russell Ackoff)
Adjacencies: A term coined by Chris Zook and James Allen1. These are the markets close to the
company’s core business. By identifying and exploiting these markets, companies can create a new
growth trajectory. Adjacencies essentially imply related diversification, i.e. moving into a new area
which has some resemblance to the core business and taking advantage of the existing competencies.
Adjacencies represent new growth opportunities which have a strong fit with the existing business.
(See Core Competence, Diversification)
Adjusted Present Value: The Net Present Value (NPV) is a popular method of evaluating an
investment decision. NPV involves estimating the cash flows expected from the project and
discounting them to the present value. NPV is, however, not suitable in some more complex
situations where risk is different for different cash flows. Adjusted Present value (APV) is a modified
version of NPV. APV uses different discount rates for different cash flows depending on the
associated risk. Higher the risk, higher the discount factor used.
(See Net Present Value)
Agency Theory: Probes the relationship between principals and agents. Principals appoint
agents to get the work done. The goals of principals usually differ from those of agents. This gives
rise to the agency problem.
For example, advertisers (principals) tend to emphasize sales goals and the cost-effectiveness of
marketing communications, whereas advertising agencies may be more inclined to think of creative
goals and attention-getting commercials. Professors of top Business Schools would like to spend most
of their time doing research and consultancy. But the owners expect these professors to spend more
time with students both in the classroom and outside.
Agency theory is a key concept in corporate governance. Professional managers often pursue
strategies that increase their personal payoffs at the expense of shareholders. For example, they may
grant themselves lavish perquisites including elegant corner offices, corporate jets, large staffs, and
extravagant retirement programs.
Managers also often tend to pursue growth at the cost of profitability. Shareholders generally want to
maximize earnings, as it results in stock appreciation. Since managers are typically compensated
more for sales than earnings growth, they tend to be enthusiastic about strategies like mergers and
acquisitions even when this enthusiasm is not really justified. Managers may also pursue
diversification opportunities that are not necessarily in line with the company’s best interests.
In other cases, managers may become complacent and allow things to drift. They may avoid risk
since they feel they are more likely to be fired for failure, than for mediocre performance. Executives
may be far less entrepreneurial than they should be. They may not make the bold moves that the
“Beyond the Core: Expand Your Market Without Abandoning Your Roots,” by Chris Zook, HBS Press, 2004;
“Profit From the Core: Growth Strategy in an Era of Turbulence” by Chris Zook and James Allen, Harvard
Business School Press, 2001; “Growth Outside the Core” by Chris Zook and James Allen, Harvard Business
Review, December 2003, pp 66-73.
One way to tackle the agency problem is to align the interests of managers with those of owners by
using appropriate incentives such as stock option and executive bonus plans. But ironically enough,
these schemes may also tempt managers to act against the best interests of the firm. For example, they
may manipulate the financial statements to increase earnings artificially.
(See Corporate Governance)
Alignment: A key factor in effective implementation of strategy. Most large organizations are
divided into business units which are out of synch and work at cross purposes. The challenge is to
coordinate the activities of these units and leverage their skills for the benefit of the organization as a
whole. Kaplan & Norton2 call this alignment.
By aligning the activities of its various business and support units, an organization can create
additional sources of value in various ways. Financial synergies can be generated through centralized
resource allocation and financial management. Value can also be created if corporate headquarters
can operate internal capital markets better than external market mechanisms and share knowledge
across business units, in a manner that would be difficult if the different units were independent
Customer synergy means enhancing customer relationships by offering a range of complementary
products and services from different business units. Corporations can leverage their multiple products
and services to create unique integrated solutions, resulting in customer satisfaction and loyalty that
less diversified and more focused organizations cannot match. Companies can also generate value by
delivering a value proposition consistently throughout their decentralized units. Cross selling to
specific customers can also generate value.
Internal process synergies can be created by generating economies of scale in activities such as
procurement, logistics, information technology and infrastructure. Sharing processes across units
generates economies of scale in such activities and helps cut costs. Centralized resources having
specialized expertise and knowledge in how to operate a key process or service can be leveraged. The
sharing of common philosophies, programs and competencies across business units can also generate
significant benefits. Expertise sharing can reduce the time to respond to customer needs and make the
company better equipped to exploit the emerging opportunities in the business environment.
Learning and growth synergies can be generated by developing and sharing critical intangible assets
including people, technology, culture and leadership. Corporate Headquarters can put in place
effective processes for developing intangible assets and promote the sharing of knowledge and best
practices throughout all its business and support units. New ideas can rapidly spread across the
enterprise and be assimilated by the business units in a manner that would be difficult, were they
independent entities. Growing leaders faster than competition can generate competitive advantage.
There are different ways of achieving alignment. One way is to start at the top and then cascade
down. Another way is to start in the middle, at the business unit level, before building a corporate
scorecard and map. Some companies launch an enterprise wide initiative right at the start. Others
conduct a pilot test at one or two business units before extending the scope to other enterprise units.
Alignment has four components: strategic fit, organization alignment, human capital alignment and
alignment of planning and control systems. Strategic fit exists when the internal performance drivers
“Alignment - Using the Balanced Score-card to create Corporate Synergies” by Robert S Kaplan and David P
Norton, Harvard Business School Press, 2006.
are consistent and aligned with the desired customer and financial outcomes. Organization alignment
explores how the various parts of an organization synchronize their activities to generate synergy.
Human capital alignment is achieved when employees’ goals, training and incentives become aligned
with business strategy. Planning and control systems alignment exists when management systems for
planning, operations and control are linked to strategy.
As Kaplan and Norton put it, “Strategy execution is not a matter of luck. It is the result of conscious
attention, combining both leadership and management processes to describe and measure the strategy,
to align internal and external organizational units with the strategy, to align employees with the
strategy through intrinsic and extrinsic motivation and targeted competency development programs
and finally, to align existing management processes, reports and review meetings, with the execution,
monitoring and adapting of the strategy.”
(See Balanced Scorecard)
Ansoff, Igor H: A famous strategy guru, Igor Ansoff developed the notion of corporate strategic
planning. He argued that any business needs to look at its resources, and align them with the business
environment. Ansoff's analytical tools such as competence grids, flow matrices, charts and diagrams
are popular in contemporary management literature. He used the term competitive advantage years
before Michael Porter.
Ansoff's “Corporate Strategy: An analytical approach to business policy for growth and expansion”
(1987), mentions three classes of decisions: (a) strategic (the selection of the product/market mix); (b)
administrative (structure), and (c) operating (process). According to Ansoff, strategy should focus on
three fundamental issues:
• Definition of the firm’s core objectives
• Whether the firm should diversify and, if so, into what areas
• How the business should exploit and develop its new or existing market
The closer a business stays to its existing products and markets, the lower the risk. Introducing new
products into diversified markets carries the highest risk. Hence, the recommendation to stick to the
knitting. Ansoff showed this in a matrix form, with four possible strategies, depending on the
Old Products New Products
Old Markets Market Penetration Product development
New Markets Market Development Diversification
• Market penetration means increasing market share by encouraging current customers to buy
more, attracting customers of competitors or convincing non-users to use the product.
• Market development implies launching the current product in a new market by expanding
distribution channels, selling in new locations or identifying the potential users.
• Product development involves launching a new product in the current market by developing
new features, improving quality levels, etc.
• Diversification means moving beyond the current business. Concentric (related)
diversification involves developing new products for the same segment. Conglomerate
(unrelated) diversification involves developing new products for new markets.
Ansoff is also famous for:
• establishing corporate planning as a formal management process.
• popularizing SWOT analysis
• developing the idea of environmental scanning.
• repositioning ‘strategic planning’ as part of a continuing process rather than a once-a-year
(or less frequent) planning process.
• Articulating the various advantages and disadvantages of deliberate strategy versus emergent
• ‘Gap’ analysis – which looks at the gap between our aspirations and the likely outcome of
Ansoff’s seminal book ‘Corporate Planning’ has emphasized the need to break down the strategy
process into various steps:
• external analysis – understanding market opportunities and threats
• internal analysis – understanding strengths and weaknesses.
• choice (and our alternatives).
(See Strategic Options, SWOT Analysis)
Anti Takeover Strategy: A takeover means change of ownership and usually change of
management. The current management can resist the takeover bid in various ways:
• The Golden Parachute is a provision in a CEO's contract to ensure that he will get a large
bonus in cash or stock if the company is acquired.
• The supermajority is a defense that requires an overwhelming majority of shareholders to
approve of any acquisition. This makes a takeover much more unlikely.
• A staggered board of directors prolongs the takeover process by preventing the entire board
from being replaced at the same time. The terms are staggered so that some members are
elected say every two years, while others are elected every four years. The acquirer may not
want to wait four years for completely reconstituting the board.
• Dual-class stock allows company owners to hold on to voting stock, while the company
issues stock with little or no voting rights to the public. That way the new investors cannot
take control of the company.
• A poison pill refers to anything the target company does to make itself less valuable or less
desirable as an acquisition after the raid has begun. For example, high-level managers and
other employees may threaten to leave the company if it is acquired. A specific asset of a
company like the R&D center or a particular division may be sold off to another company, or
spun off into a separate corporation. A flip-in provision may allow current shareholders to
buy more stocks at a steep discount in the event of a takeover attempt. The flow of additional
cheap shares into the total pool of shares dilutes their value and voting power. A more drastic
poison pill involves deliberately taking on large amounts of debt.
Argyris, Chris: A social psychologist by training, Chris Argyris has done pioneering work on
how individuals respond to changing organizational situations and the impediments to organizational
learning. Argyris has done extensive research on learning in teams and drawn attention to the
problems created by defensive behavior. The cleverer the team is, the more difficult it becomes to
maintain openness to learning, and to avoid becoming defensive. Argyris describes the process
involved here as ‘double-loop learning’. While ‘single-loop learning’ involves doing existing things
better, ‘double-loop’ learning entails doing existing things in new ways or inventing new things.
Effectively, double-loop learning involves reframing problems and stepping outside existing mind-
sets. Argyris’ language is sometimes hard to understand. So he is often perceived as an esoteric rather
than a popular guru. But his ideas and thoughts are profound and continue to guide the functioning of
(See Organizational Learning)
Backward Integration: Moving along the value chain towards the inputs side. By producing
internally some or all of the inputs, the firm can benefit in various ways. The firm can avoid sharing
proprietary data with its suppliers. This can be an important factor if the exact specifications of the
component parts may reveal the key characteristics of the final product's design to the supplier.
Backward integration may result in inputs with closely controlled specifications, enabling the firm to
improve quality and differentiate its product. If the inputs are critical, backward integration helps the
firm to gain greater control of the value chain and to mitigate the high bargaining power of suppliers.
Some good examples of backward integration are India’s largest aluminium manufacturer Hindalco
setting up a power plant, Reliance moving into petroleum refining and Tata Steel setting up its own
township in Jamshedpur and mines and collieries in various parts of Orissa and Bihar.
(See Vertical Integration)
Balanced Scorecard: Designed by Robert Kaplan and David Norton, the Balanced Scorecard
provides a comprehensive set of objectives and performance measures to monitor a company’s
progress. These include:
• Financial performance (revenues, earnings, return on capital, cash flow);
• Customer value performance (market share, customer satisfaction, customer loyalty);
• Internal business process performance (productivity, quality, delivery, etc)
• Learning and Growth (Percent of revenue from new products, employee suggestions, rate of
improvement, employee morale, knowledge, turnover, use of best demonstrated practices).
The challenge in implementing the balanced scorecard lies in identifying the key metrics and
measuring them on an ongoing basis so that the firm can systematically achieve its objectives. Too
many metrics can make things complicated. So a few key metrics must be carefully chosen.
Bargaining Power of Buyers3: One of the forces in Porter’s Five Forces Model. The higher
the bargaining power of buyers, less attractive the industry. The bargaining power of buyers is high
under the following circumstances:
• Few buyers who purchase in large quantities.
Abstracted from the book “The essence of Competitive Strategy” written by David Faulkner and Cliff
Bowman, published by Prentice Hall of India in 2002.
• Low switching costs, resulting in low loyalty.
• Many relatively small sellers
• The item being purchased is not an important one for buyers, and they can take it or leave it.
• Buyers have a lot of information about competitive offers, which they can use for bargaining.
• There is a good possibility that buyers may decide to integrate backwards, i.e make the
product rather than buy it.
(See Five Forces Model)
Bargaining Power of Suppliers4: One of the forces in Porter’s Five Forces Model. Higher
the bargaining power of suppliers, the less attractive the industry. Bargaining power of suppliers tends
to be high under the following circumstances:
• The purchase is important to the buyer.
• Buyers face high switching costs.
• There are few alternative sources of supply
• Any particular buyer is not an important customer of the supplier
• There is a strong possibility that the supplier may integrate forward.
(See Five Forces Model)
Barnard, Chester: One of the first management thinkers to think differently from the then
gurus, Frederick Taylor and Max Weber. Barnard spent the whole of his career as a business
executive with the Bell Telephone Company. He wrote two influential books, The Functions of the
Executive (1938) and Organization and Management (1948). Barnard emphasized the importance of
communication and shared values in organizations.
Barnard excelled at organization-building skills. His tenure as CEO was marked by a sense of public
service and personal integrity that are almost unimaginable to many today. He showed exemplary
commitment to corporate welfare policies. For example, in 1933, at the height of the Depression,
Barnard announced a no-layoff policy choosing to reduce employees’ working hours instead.
Management authority, he realized, rested in its ability to persuade, rather than to command. The
challenge was to balance the inherent tension between the needs of individual employees and the
goals of an organization. He also recognized that much of the creative potential of an organization
lay in informal networks, not in the formal hierarchy. He understood the role of constructive conflict.
Barnard viewed the organization as a complex social system. The main challenge for management
was achieving cooperation among the groups and individuals to facilitate the achievement of
organizational goals, i.e. resolving the tension between achieving organizational goals and the need
for individuals to achieve personal goals. Organizational goals could not be accomplished unless the
leadership of the organization acknowledged individual aspirations and devised a means of helping
employees achieve them.
For Barnard, conventional incentive schemes were essentially, a self-fulfilling prophecy. Much before
Maslow, Barnard argued that beyond a certain level of equitable compensation, employees would not
necessarily be motivated by financial incentives. Bonuses and incentives only created a culture of
Abstracted from the book “The essence of Competitive Strategy” written by David Faulkner and Cliff
Bowman, published by Prentice Hall of India in 2002.
Barnard argued that management had to focus on the “strategic” few that would offer “the greatest
leverage over the outcomes of a particular decision”. He suggested that deciding what decisions not to
make was as important as which decisions to make. “The fine art of executive decision consists in not
deciding questions that are not now pertinent, in not deciding prematurely, in not making decisions
that cannot be made effective, and in not making decisions that others should make.” Here, Barnard
seemed to be in agreement with Peter Drucker.
Barriers to Entry: One of the five forces in Porter’s Famous Five Forces model. Barriers to
entry are the obstacles that a firm must overcome to enter an industry. When high entry barriers exist
in an industry, competition is usually less intense and profitability tends to be high. On the other
hand, when entry barriers are low, new firms can enter the industry. While demand may not go up
immediately, they bring additional capacity along and reduce the overall level of profitability in the
industry. The barriers to entry can be tangible or intangible. Tangible barriers include capital, and
various kinds of physical assets like plant and machinery and infrastructure. Tangible barriers are
easier to replicate than intangible barriers, like brands, corporate reputation, customer loyalty and
relationships with vendors/distribution channels.
Barriers to entry may be high under the following circumstances:
Economies of Scale: If there are major cost advantages to be gained from operating on a large scale or
scope then new entrants will not find it easy.
Learning Curve: If low unit costs can be achieved by accumulated learning, inexperienced new
entrants will be at a unit cost disadvantage.
Knowledge & Skills: Access to process knowledge and particular skills can make entry difficult.
Customer Brand Loyalty: Customers may have preferred brands, or they may have strong
relationships with their existing suppliers. New entrants have to persuade customers that it is worth
incurring switching costs and move to the product of a new entrant.
Capital costs: High capital costs involved in setting up production facilities, R&D centers, dealer
networks and brand building will limit the number of potential entrants.
Distribution Channels: It is often difficult for a new player to break into an existing distribution
network. If all major distribution outlets are already closed to the new entrants, they may have to
make heavy investments in setting up their own direct distribution network.
High Switching Costs: High switching costs for customers constitute a barrier to entry.
Government Policy: Government may restrict licenses, issue exclusive franchises or establish
regulations that are troublesome and costly to implement.
Access to low-cost inputs: This may act as a barrier to entry if potential entrants do not have such
access to inputs which competitors enjoy.
(See Barriers to Imitation, Five Forces Model)
Abstracted from the book “The essence of Competitive Strategy” written by David Faulkner and Cliff
Bowman, published by Prentice Hall of India in 2002.
Barriers to Imitation: With innovations rapidly diffusing, the key to success in today’s
business environment is creating barriers to imitation. In general, tangible assets are easier to
replicate, compared to intangible resources. Thus brands create formidable barriers to imitation but
large factories can be easily replicated. Similarly, when a way of working is built into the company’s
culture, imitation becomes difficult. For example, just-in-time, in which Toyota is a master is less
about techniques and more about corporate philosophy and culture. That is why companies have
found it difficult to implement Just-in-Time even though so much has been written about it and
Toyota allows managers from all over the world to visit its factories.
(See Barriers to Entry, Five Forces Model)
Bartlett, Christopher A: Famous for his work on globalization and strategic management.
Bartlett is the author/coauthor of several books, including Managing Across Borders and
Individualized Corporation both coauthored with Sumantra Ghoshal. Managing Across Borders is
considered one of the best ever books written on business management and possibly the most
authoritative book on globalization. The book has been translated into several languages.
(See Sumantra Ghoshal, Globalization)
BCG Growth-Share Matrix: The Boston Consulting Group (BCG) has developed a matrix
to help companies analyze their product lines and businesses. The 2x2 matrix considers two factors,
market growth rate and the company's market share, as indicated below.
Market High Stars Question Marks
Low Cash Cows Dogs
Accordingly, the BCG matrix divides products/businesses into four categories:
• Stars: These high growth products in a fast growing market, need more resource
commitments. For a company like Satyam Computer Services, the ERP implementation
business is a star.
• Cash Cows: These are low growth, high market share products, where minimal investments
are envisaged. Indeed, cash cows provide the cash flows that support other businesses. The
soaps and detergents business is a cash cow for Hindustan Lever Ltd.
• Question Marks: These are low market share business units in high growth markets.
Investment is needed to build them into stars. The foods division of HLL falls in this category
as also the games business of Microsoft, and the retailing venture of Reliance. The long term
profitability of these businesses is by no means certain.
• Dogs: These are low growth and low market share businesses which generate just enough
cash to maintain themselves. They are businesses from which the company is likely to
withdraw in the near future. IBM thought the PC business was a dog and sold it to the
Chinese computer manufacturer, Lenovo.
Businesses evolve over time. According to the conventional product life cycle, question marks may
turn into stars, and become cash cows if the market growth falls, finally becoming dogs towards the
end of the cycle. It is, however, not necessary that businesses must evolve in this fashion. A star may
turn into a dog overnight if a disruptive technology emerges in an industry. That is what happened to
mini computers when PCs arrived. On the other hand, a cash cow can be converted into a star by
brand repositioning or by targeting a new customer segment. In India, Cadbury’s has attempted to
reposition its chocolates as products that can also be consumed by adults.
(See GE 9 Cell Planning Grid)
Beachhead Market: A market similar to a targeted strategic market but which provides a low
risk learning opportunity. For example, Austria/ Switzerland can be considered beachhead markets
for companies planning to enter Germany. Singapore is a beach head market for the Asian region.
Benchmarking: A process by which a company compares itself with another company, in the
same or different industry on how well it is faring on various parameters. Benchmarking helps
companies in setting stretch targets, improving the way of functioning and avoiding complacency.
(See Best Practices)
Best Practices: The most effective way to carry out a business activity or process. The term 'best'
is highly subjective, is context dependent and also seems to imply that no further improvements are
possible. Many people now prefer the term good practice. Best practices are often contextual. So
transferring them across organizations may not be as easy as it often looks. Sometimes even within an
organization, transfer of a best practice across departments/ functions can be a challenge. When best
practices are embedded in an organization’s culture, replication in another organization becomes very
(See Benchmarking, Barriers to Imitation)
Big Hairy Audacious Goals (BHAGS): A term coined by James C Collins and Jerry I
Porras in their well known book “Built To Last”. Visionary Companies set Big Hairy Audacious
Goals (BHAGS) that raise the bar and inspire people across all levels.
Examples of BHAGS include:
• Boeing’s decision to commit to a Boeing 707 or 747
• Walt Disney’s decision to create Disneyland
• Henry Ford’s declaration, “We will democratize the automobile”
• Dhirubhai Ambani’s ambition of constructing the world’s largest petroleum refinery.
A BHAG should be consistent with the company’s core ideology. It should be so clear and
compelling that it must require little or no explanation. It must get people excited and pumped up. A
BHAG should fall well outside the comfort zone. While it is important for people in the organization
to believe they can pull it off, it should require tremendous effort. A BHAG should be so bold and
compelling in its own right that even if the organization’s leaders disappeared, it would continue to
(See Core Ideology, Corporate Purpose)
Blue Ocean Strategy: Most companies focus on beating the competition. But according to W
Chan Kim and Renee Mauborgne, two of the most respected scholars today in the area of strategy, the
best way to beat the competition is to stop trying to beat the competition.
Markets can be divided into red oceans and blue oceans. Red oceans represent the known or existing
market space. Blue oceans denote the non existent or unknown market space. In red oceans, industry
boundaries are defined and accepted, and the basis for competing is known. Here, companies try to
grab market share from each other. As competition intensifies, both profitability and growth decline
and products become commodities. Blue oceans, in contrast, represent untapped markets, in which
the rules of the game are still not defined. There are highly profitable growth opportunities.
Although some blue oceans are created well beyond existing industry boundaries, most are created
from within red oceans by expanding existing industry boundaries. Identification of blue oceans
cannot be done by looking at the past. About 100 years back, many of today's industries, automobiles,
music recording, aviation, petrochemicals, health care, and management consulting were unheard of
or had just begun to emerge. Only 30 years back, industries like mutual funds, cell phones, gas-fired
electricity plants, biotechnology, discount retail, express package delivery, minivans, snowboards,
coffee bars, and home videos, did not exist in a meaningful way.
Blue ocean strategy is the result of a new mindset that moves the attention of companies away from
competitors to alternatives and from customers to non-customers. It involves changing the rules of the
game through the careful examination of factors that:
• can be eliminated.
• should be reduced well below the industry's standard.
• should be raised well above the industry's standard.
• should be created.
In most industries, a common definition tends to emerge of who the target buyers are and what value
they are looking for. Some industries compete principally on functionality. Other industries compete
largely on emotional appeal.
But what is often overlooked is that the appeal of most products or services is rarely intrinsic.
Through the way they have competed in the past, companies unconsciously shape buyers' ex-
pectations. Over time, functionally oriented industries may become more functionally oriented while
emotionally oriented industries may become even more emotionally oriented. In the process,
aspirations of customers may be ignored.
When companies are willing to challenge the conventional wisdom, they often find new market
space. In emotionally oriented industries, removing frills may create a fundamentally simpler, lower-
priced, lower-cost business model that customers would welcome. Conversely, functionally oriented
industries can often infuse commodity products with new life by adding a dose of emotion.
Swatch transformed the functionally driven budget watch industry into an emotionally driven fashion
statement. The Body Shop did the reverse, transforming the emotionally driven cosmetics business
into a functional, no-nonsense one.
(See Chan Kim, Renee Mauborgne, Value Innovation)
Bottom-of-the-pyramid: A term coined by the well known guru, C K Prahalad6. Till recently,
marketers ignored the people in the lower income groups, because of their low per capita purchasing
power. The current thinking is that people at the Bottom-of-the-pyramid comprise a huge market with
distinctive characteristics. By understanding these characteristics and tailoring the marketing mix
Prahalad C K. “Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits” Wharton School
suitably, companies have major opportunities to exploit this market. The Bottom-of-the-pyramid is
driven by factors like affordability, access and availability.
Affordability. The key to success at the bottom of the pyramid is affordability without sacrificing
acceptable levels of quality.
Access. Distribution patterns for products and services must take into account where the poor live as
well as their work patterns. Distribution networks must penetrate deeply into small towns and
villages. Most BOP consumers work the full day before they have enough cash to purchase the
necessities for that day. Stores that close at 5:00 PM have no relevance to them, as their shopping
begins after 7:00 PM. Further, BOP consumers cannot travel great distances. Stores must be easy to
reach, often within a short walk. This calls for effective penetration of the distribution network.
Availability. Often, BOP consumers make their purchase decision, based on the cash they have on
hand at a given point in time. They tend to buy for immediate consumption. Availability is a critical
factor in serving BOP consumers.
Brainstorming: A useful technique for generating new ideas when confronting an unfamiliar
situation or a problem. A group activity in which members are encouraged to speak freely, say the
first answer that strikes them about how to solve a problem, no matter how weird or absurd. Having
obtained as many ideas as possible, the group then examines each one in more detail to determine the
feasibility of implementation.
Brand Management: For companies across industries today, brands are becoming
increasingly important in the quest to gain competitive advantage. Brands symbolize trust, reputation
and quality. Brands are intangible assets that are not easy to imitate. The high valuation of many of
the successful companies today is on account of the brands they own. Brand management must be
considered an integral part of corporate strategy and not just the marketing function. No wonder, most
CEOs get personally involved in branding related matters.
Breakeven Analysis: Companies incur two kinds of costs, fixed costs which are incurred,
independent of the level of production and variable costs which vary with the level of output. The
breakeven point is the level of output at which the firm makes just enough profit to cover its
overheads. The difference between price and variable cost is called contribution. In the short run, a
firm may operate below the breakeven point just to recover part of the overheads. But in the long run,
the firm must operate above the breakeven point and fully recover its overheads, to justify its
Bureaucracy: Bureaucracy refers to the administrative execution and enforcement of rules. A
bureaucratic organization is characterized by standardized procedure, formal division of
responsibility, hierarchy, and impersonal relationships. Examples of everyday bureaucracies include
governments, armed forces and courts. Bureaucracies enforce order and discipline, especially while
handling routine matters. But beyond a point they can also frustrate employees. A key task of
managers in knowledge-based-organizations is to eliminate bureaucracy.
Business Ethics: Business ethics is a form of applied ethics that is concerned with the various
moral or ethical problems that can arise in a business setting; and any special duties or obligations
that apply to persons who are engaged in business. Ethics is a normative discipline, which involves
making specific judgments about what is right or wrong, about what ought to be done or what ought
not to be done. In some situations, if not all, what is right depends on the context. Many companies
have a code of ethics that helps employees understand what actions are acceptable and what are not.
(See Code of Ethics)
Business Forecasting: Business forecasting is an integral part of strategic planning. Various
types of forecasts are used by companies depending on the situation:
Economic Forecasts are published by governmental agencies and private economic forecasting firms.
A business can use these forecasts as a starting point.
Financial Forecasts include forecasts of financial variables such as the amount of external financing
needed, earnings and cash flows.
Sales Forecasts project future sales for the company's goods or services for a certain period.
Technological Forecasts estimate the rate of technological progress.
Qualitative forecasting approaches are based on judgment and opinion. These include Expert
opinions, Delphi and Consumer surveys. Quantitative approaches either crunch historical data (time
series analyses) or associative data (causal forecasts). Time series methods include Moving averages,
Exponential smoothing and Trend analysis. Causal forecasts include Simple regression, Multiple
regression and Econometric modeling. Quantitative models work well in a relatively stable
environment. In a highly volatile business environment, the qualitative approach based on human
intuition and judgment is more useful than number crunching.
The choice of a specific forecasting technique will depend on various factors like:
• the cost of developing the forecasting model,
• the relationships being forecasted,
• time horizon,
• degree of accuracy desired
• data availability
Business Model: The way a company runs its business. A company’s business model must
address three issues. Who are the customers? What are they looking for? How do we deliver the
products or services needed by customers better than how competitors can? These questions may look
simple. But it is the ability to address these questions well that determines the effectiveness of a
business model. Business model design implies making major trade offs, deciding which customer
segments not to serve, which activities not to do in-house, what kind of risks to avoid and so on.
Business model innovation, which goes far beyond process or product innovation, is essentially about
changing the rules of the game.
(See Process Innovation, Product Innovation, Value Chain)
Business Process Reengineering (BPR): BPR involves the radical redesign of core
business processes to achieve dramatic improvements in productivity, cycle times, and quality. In
BPR, companies start from scratch and redesign existing processes, to increase efficiency and to
deliver more value to the customer, often by reducing organizational layers and eliminating
unproductive activities. Functional organizations are transformed into cross-functional teams with a
strong process orientation. Information technology (IT) is used to improve data dissemination and
decision-making. BPR must be completed before a major IT intervention. Otherwise, the existing
inefficiencies will get amplified.
(See Process Innovation)
Business Risk: Refers to the degree of uncertainty associated with a firm’s sales volume and
price realization. This risk is core to the business. Market characteristics and the firm’s business
model together determine business risk. Business risk is not easy to quantify. Yet, companies should
try to go beyond qualitative statements and arrive at some numbers wherever possible.
(See Enterprise Risk Management)
Buy Back: When a firm has more capital than it needs, it may buy back shares from the market.
Buy backs are often viewed positively by the market because they signal that the company is prepared
to return cash to shareholders instead of frittering it away on unproductive investments or
meaningless diversification. Companies may also resort to buy backs when the management feels the
market is undervaluing the shares in relation to the intrinsic value.
Cadbury Committee Report: A standard reference point for any discussion on corporate
governance. Prominent institutions in London concerned about audit and regulatory issues following
a number of company collapses in the 1980s, set up a committee chaired by Sir Adrian Cadbury. To
keep under control, over-powerful chief executives or overenthusiastic executive management, the
committee's 1992 report advocated various checks and balances at the board level. These included:
• Wider use of independent non-executive directors;
• Establishment of an Audit Committee;
• Separation of the posts of Chairman and CEO;
• Use of a remuneration committee;
• Adherence to a detailed code of best practice
(See Corporate Governance)
Capacity Expansion: Growing an existing business often involves expansion of capacity, in
terms of plant, human resources, technological infrastructure, R&D facilities, etc. Any major capacity
expansion is a strategic decision that involves significant resource commitments and is often difficult
to reverse. So such a decision has to be made carefully.
Capacity expansion is often narrowly applied to manufacturing. But in many businesses, there is no
or little manufacturing. So, capacity needs to be understood in terms of the investments made in the
most critical area of the value chain. Thus, in the pharmaceutical industry, capacity has to be defined
in terms of scientific manpower and sales force. In a software development company, capacity has to
be understood in terms of the number of programmers employed. In a Business School, capacity may
be defined as the number of professors available to teach students.
According to Michael Porter, the decision to expand capacity has to take into account various factors:
Some of them are:
• Future demand.
• Future input prices.
• Likelihood of technological obsolescence.
• Probable capacity expansion by competitors.
• Future industry capacity and individual market shares.
The main risk in capacity expansion is the creation of excess capacity. When there is excess capacity,
competition intensifies as players try to increase capacity utilization and profits come down. Excess
capacity may result because of various reasons:
• Capacity often has to be added in lumps, not in incremental fashion.
• Economies of scale or significant learning curve can prompt indiscriminate capacity
• Long lead times in adding capacity may motivate firms to add capacity even when
future demand is uncertain.
• Changes in production technology may attract new firms even as older plants continue to
operate due to exit barriers.
• Equipment suppliers, through price cutting and attractive credit schemes, can lure
manufacturers into buying their products.
• Large buyers, by promising more business in future can tempt the suppliers to add capacity.
• In some industries, such as airlines, the firm which has the largest capacity may be able to
grab a disproportionately large chunk of the market.
• When there are several players in the market, they may all try to increase market
share, by increasing capacity.
• Firms often build more capacity than is needed in the initial stages when future prospects
• Excess capacity often results when firms overestimate the potential of their competitors and
want to preempt them by adding more capacity.
• Many manufacturing firms do not like to be left behind by competition and embark on a
regular process of capacity expansion.
• Tax incentives sometimes motivate manufacturers to invest in plant and equipment.
Capacity expansion can be used as a pre emptive strategy to lock up a major share of the market and
to discourage competitors from expanding and potential rivals from entering the industry. According
to Porter, a preemptive strategy is risky. It tends to succeed only under the following conditions:
• The expansion of capacity is large relative to market size.
• There are substantial economies of scale and learning curve advantages.
• The firm’s strategy looks credible in terms of availability of resources, technological
capabilities, past track record, etc.
• The firm announces its plans before competitors develop even a reasonable degree of
commitment to the process.
A preemptive strategy is unlikely to succeed when competitors pursue non economic goals, consider
the business to have strategic importance and are prepared to give up profits in the short run or have
equal or better staying power.
Capital Structure: The relative proportion of debt and equity used by the company to run the
business. Debt is borrowed capital and has to be returned to the investors in the short or medium term.
Debt costs less. But as interest and principal payments are mandatory, there might be a lot of strain on
cash flows especially in the early days of a company. Equity is more expensive. But it has to be
returned to investors only under exceptional circumstances. Companies must arrive at the appropriate
capital structure after making the necessary trade offs. For example, in technology businesses where
the markets tend to be volatile and the business risk tends to be high, it may be necessary to reduce
financial risk by having a large proportion of equity.
(See Financial Risk)
Cartel: Cartel is an illegal arrangement in which different market players come together and
collude to fix the price or share the market suitably by limiting competition. One of the most famous
cartels in business history has been the Organization of Petroleum Exporting Countries (OPEC)
Cash Cow: A business that generates more cash than what is required to maintain its earning
power. Such a business is expected to continue to generate cash without providing significant
opportunities for growth through reinvestment of profits. Cash flows from such a business can be
pumped into more promising ventures.
(See BCG Matrix)
Chandler, Alfred DuPont: One of the most well known business historians of our times,
Chandler explored the relationship between strategy and structure. He realized that the overload in
decision making at the top was indeed the reason for creating a new structure. This overload resulted
not from the larger size of the enterprise per se, but from the increasing diversity and complexity of
decisions that senior managers had to make.
Chandler argued that growth without structural adjustment could lead only to economic inefficiency.
As he wrote, “Unless new structures are developed to meet new administrative needs which result
from an expansion of a firm’s activities into new areas, functions, or product lines, the technological,
financial, and personnel economies of growth and size cannot be realized.”
Chandler’s book, “Scale and Scope,” which was published in 1990, provides several insights on the
evolution of the modern industrial enterprise. Chandler pointed out that major industrial corporations
clustered in industries in which high-technology production processes made it possible to exploit the
cost advantages of economies of scale and scope. These tended to be capital-intensive rather than
labor-intensive. In these industries, large-scale, low-cost producers operated at a much greater cost
advantage than smaller, labor-intensive producers. As these capital-intensive producers grew in scale
(volume), scope (diversification), and consequently, complexity, they also began to invest in their
own distribution networks. Over time, scale and scope demanded suitable changes in structure for
(See Economies of Scale, Economies of Scope, Organizational Design, Organizational Structure)
Change Management: In a rapidly changing business environment, organizations must learn
to adapt themselves quickly. Change is necessary to ensure survival, growth and profitability of' the
business enterprise. But change is difficult for many reasons. Change requires effort and a new
mindset. People find it difficult to adjust to changing status and power relationships. There is also a
tendency to avoid change as it might be interpreted as a tacit admission of the failure of past policies.
As Michael Porter mentions7, change is extraordinarily painful and difficult for any successful
In his book “The Competitive Advantage of Nations,” The Free Press, 1990.
organization. The past strategy becomes ingrained in organizational routines. Information that would
modify or challenge it is not sought or filtered out. As the past strategy becomes rooted in company
culture, suggesting change is equated with disloyalty. Successful companies often seek predictability
and stability. They become preoccupied with defending what they have. Supplanting or superseding
old advantages to create new ones is not considered until the old advantages are long gone. Change
often involves a sacrifice in financial performance and unsettling, organizational adjustments.
A clear corporate vision is the starting point in any major change management initiative. It helps
employees to understand why change is needed. That way, change can be introduced proactively
instead of being introduced as a fire fighting measure. Symbolic gestures tend to reinforce change by
telling employees that the management means business. To bring about change, it is also essential
that responsibilities are clearly allotted. Accountability puts pressure on individuals to move fast.
Metrics are also needed to track performance. Change initiatives must focus on a few critical areas to
prevent resources from being spread too thin.
Culture plays an important role in change management. Culture refers to the beliefs and values of
employees. People have set notions about what is to be done and how it should be done on the basis
of these beliefs and values. Culture is built up over a period of time and it cannot be changed
overnight. But strong leadership which sends out the right signals can hasten the process.
Christensen, Clayton M: Best known for his book, “The Innovator’ Dilemma”, Christensen’s
writings reflect highly insightful thinking on innovation and is a marked departure from conventional
wisdom. Christensen’s main argument is that successful companies lose their competitive edge over
time because they try to pamper existing customers by adding more features, instead of looking at
new customer segments which are looking for something simpler or cheaper, that has to be
necessarily delivered by a new business model. But, it is not easy for successful companies to take
actions which threaten their existing business model. This is what gives rise to the Innovator’s
Based on his research in a variety of industries, including computers, retailing, pharmaceuticals,
automobiles, and steel, Christensen shows how truly important, break-through innovations – or
disruptive technologies – are initially rejected by mainstream customers because they cannot
currently use them. This makes it difficult for firms with a strong focus on existing customers to find
new markets for the products of the future. Even as they let go these opportunities, more nimble,
entrepreneurial companies emerge to catch the next great wave of industry growth.
The Innovator’s Dilemma presents useful insights for dealing with disruptive innovation. These
insights can help managers determine when it is right not to listen to customers, when to invest in
developing lower-performance products that promise lower margins, and when to pursue small
markets at the expense of seemingly larger and more lucrative ones. “The Innovator’s Dilemma”
together with “The Innovator’s Solution” and “Seeing What is Next”, form a trilogy that is
compulsory reading for companies serious about innovating and creating value for their shareholders.
(See Innovation, Innovator’s Dilemma, S Curve in Technology Evolution, Technology Risk))
Clusters: In a globalized economy, companies can access capital, goods, information and
technology from all parts of the world. Thanks to faster methods of transportation and
communication, physical location has become less important. Yet, there are geographic
concentrations of industrial activities. For example, Silicon Valley in California is reputed for its
cluster of computer hardware and software companies. Even though it is a very expensive location,
many tech companies continue to perform their key value adding activities in this region.
Michael Porter8 uses the term “clusters” to describe geographical concentrations of interconnected
companies and institutions in a particular business. Clusters include suppliers of components,
machinery, services and institutions which provide specialized infrastructure. Sophisticated,
demanding customers who keep companies on their toes can also be considered a part of the cluster.
So can the local government, universities, research centres and think-tanks who play a vital role in
encouraging innovation and creating suitable conditions for more efficient value addition.
Clusters help in improving productivity, due to the superior quality of the local infrastructure. Other
aspects which give a location a head start over other centers include a high quality transportation
network, which facilitates fast and efficient movement of goods, availability of skilled, educated and
trained manpower, a sound legal system and favorable tax rates.
Many leather goods, footwear, apparel and accessories companies operate out of Italy because of the
country’s reputation for fashion and design. France is an important country for cosmetics, since it has
highly sophisticated customers. In a location with well-established marketing networks, companies
can also take advantage of referrals. Clusters help companies to improve as competition with rivals
keeps them on their toes. The presence of companies engaged in related value chain activities,
downstream and upstream, facilitates effective coordination even without vertical integration.
Proximity also builds a greater degree of trust among the various players.
The presence of demanding customers in a cluster motivates companies to innovate, while the
presence of competent suppliers and partners helps in bringing innovations to the market faster. A
company within a cluster can source what it needs much faster, closely involve suppliers and partners
in the product development process and obtain relevant technical and service support.
(See Comparative Advantage, Global Value Chain Configuration, Strategic Advantage)
Coase, Ronald: A British economist and the Clifton R. Musser Professor Emeritus of Economics
at the University of Chicago Law School, Coase graduated from the London School of Economics in
1931. He received the Nobel Prize in Economics in 1991. Coase is best known for two articles "The
Nature of the Firm" (1937), which introduces the concept of transaction costs to explain the size of
firms, and "The Problem of Social Cost" (1960), which suggests that well defined property rights can
overcome the problems of externalities.
Code of Ethics: Well managed companies take various steps to enforce high ethical standards
among employees. The Corporate Code of Ethics defines the company's core values and guiding
principles and often describes how employees are expected to behave in different circumstances.
Through a Corporate Code of Ethics, the firm can publicly display its commitment to high standards
of moral excellence.
(See Business Ethics)
Commoditization: As industries mature, the scope to differentiate reduces. The offerings of
different players begin to look increasingly alike. Price based competition intensifies. This
phenomenon is called commoditization. Companies can deal with commoditization in various ways.
One way is to wrap value added services around the core product. Differentiation of the core product
may be difficult but there may be scope to innovate in packaging, delivery, customer experience or
Porter, Michael E. “Clusters and the New Economics of Competition” Harvard Business Review, November-
December 1998, pp 77-90.
supply chain management. In the highly commoditized PC industry, Dell has succeeded largely
because of its excellence in supply chain management. Online auctions may look like a commodity
business but ebay has done well by building a community and providing a great customer experience.
A second way of preventing or reversing commoditization is to reposition the product. Repositioning
helps change the perceptions of customers and also in differentiating the product.
(See Blue Ocean Strategy, Differentiation)
Company Profile: A company must have a good understanding of its capabilities and expertise.
Effective strategies can be formulated only by developing the company profile accurately and
aligning it with corporate mission and environmental factors. One way to develop the company
profile is to examine each function and key components under each function critically. See table
Marketing Product range, Sales organization, Distribution network, pricing
strategy, after sales services etc.
Fund raising capabilities, Cost of capital, Tax planning, cost
Finance & Accounting
control, Costing system etc.
Raw material availability and costs, supplier relationships,
Inventory control systems, Sub contracting, etc.
Personnel Employees' skills, morale, Industrial relations, manpower turnover,
specialized skills, etc.
General management Structure, communication systems, control systems, culture,
decision making, strategic planning systems, etc.
(See Environment Analysis, SWOT Analysis)
Comparative Advantage: The ability to cut costs by the suitable location of value chain
activities. Global companies can realize comparative advantages by locating value chain activities in
cheaper locations. Some automobile companies have preferred to locate their assembly plants at
cheaper locations in Asia and Latin America, rather than North America or Europe. Many companies
trying to enter the European Union (EU), including Dell and Intel, have preferred to locate their
plants in Ireland, a cheaper location, compared to more developed countries such as France and
Germany. Texas Instruments has set up a software design subsidiary at Bangalore in India to access
the relatively low cost, highly skilled technical workers available locally. Many global companies
such as General Electric (GE) and Citigroup are locating their back office operations in India.
(See Strategic Advantage)
Competitive Advantage: The key message in Michael Porter’s theory of competitive strategy
is that firms must be able to create a defendable position in an industry, in order to cope successfully
with competitive forces and generate a superior return on investment. Superior performance within an
industry can be achieved through Cost leadership, Differentiation or Focus.
Cost leadership involves becoming the lowest cost producer in the industry by pursuing strategies
such as economies of scale, process automation, supply chain efficiency, etc. Differentiation means
being unique in the industry along some dimensions that are widely valued by buyers. Differentiation
can be on the basis of product, distribution, sales, marketing, service, image, etc. Focus means being
the best in a carefully chosen segment or group of segments.
Firms should pursue one of these strategies and take care not to get stuck in the middle. But care must
also be taken to maintain a proper balance between cost leadership and differentiation. Thus a cost
leader should not be seen to be offering distinctly inferior products, compared to rivals who are
competing on the basis of differentiation. A differentiator cannot afford to have a very high cost
structure. The costs should not exceed the price premium it receives from the buyers.
The sustainability of competitive advantage depends on three conditions. The first is the particular
source of the advantage. There is a hierarchy of sources of competitive advantage in terms of
sustainability. Lower-order advantages, such as low labor costs or cheap raw materials are relatively
easy to imitate. Higher-order advantages, such as proprietary process technology, product
differentiation, brand reputation and customer relationships are more durable. Higher-order
advantages involve more advanced skills and capabilities such as specialized and highly trained
personnel, internal technical capability and often close relationships with leading customers. Such
advantages also demand sustained and cumulative investment in physical facilities and specialized
The second determinant of sustainability is the number of distinct sources of advantage a firm
possesses. If there is only one advantage, competitors can more easily nullify this advantage. Firms
which sustain leadership over time, tend to proliferate advantages throughout the value chain.
The third, and most important basis for sustainability is constant improvement and upgrading. A firm
must keep creating new advantages at least as fast as competitors can replicate old ones. The firm
must improve relentlessly its performance against its existing advantages. This makes it more difficult
for competitors to nullify them.
In the long run, competitive advantage can be sustained only by expanding and upgrading sources and
by moving up the hierarchy to more sustainable types. To sustain competitive advantage, a firm may
have to destroy old advantages to create new, higher-order ones. A company must learn to exploit
industry trends and close off the avenues along which competitors may attack by making pre emptive
(See Cost Leadership, Competitive Strategy, Differentiation, Focus)
Competitor Analysis10: Analyzing competitors is an integral part of strategic planning.
Porter’s book, “Competitive Strategy,” gives various insights in this regard. In identifying current and
potential competitors, firms must consider several important variables:
• How do other firms define the scope of their market?
• How similar are the benefits offered by the products and services to those of other firms?
• How committed are other firms in the industry?
• What are the long-term intentions and goals of competitors?
Certain pitfalls must be avoided while doing competitor analysis. These include:
• Focusing on current and known competitors while ignoring potential entrants.
From, Porter, Michael E. “From competitive advantage to corporate strategy” Harvard Business Review, May-
June 1987, pp 43-59.
Drawn heavily from “Competitive Strategy: Techniques for Analyzing Industries and Competitors” by
Michael E Porter published by Free Press in 1980.
• Concentrating on large competitors while ignoring smaller players.
• Assuming that competitor behavior will not change with time.
• Misreading signals that may indicate a shift in the focus of competitors or a refinement of
their present strategies or tactics.
• Excessive focus on the tangible assets of competitors, while ignoring their intangible assets.
• Assuming that all the firms in the industry have the same constraints and opportunities.
• Getting too obsessed with outsmarting the competition, instead of focusing on customer
needs and expectations.
The first step in analyzing competition is to understand the goals of competitors, whether they are
satisfied with their current position, whether they are likely to change strategy and also how they will
react to competitor’s moves. Porter draws a distinction between threatening and non threatening
moves. Moves are non-threatening if competitors do not notice or are not concerned. In contrast,
threatening moves are taken seriously by rivals. Before making such moves, it is important to
estimate the likelihood, timing, effectiveness and extent of retaliation and assess whether the
retaliation can be countered effectively. The response of a firm which gives importance to
profitability is likely to be different from another, which emphasizes market share. Some strategic
moves can threaten certain competitors more than the others, given their goals. In that case, there is
greater likelihood of retaliation. The stated and unstated financial goals, capabilities and psyche of
competitors of the industry must be studied carefully.
Analysis of competitors' goals helps a firm to avoid retaliatory moves that can trigger off intense
rivalry. For instance, a move to gain market share from a firm divesting its business, would not
provoke any retaliation. On the other hand, rivalry may intensify if an attempt is made to grab market
share from a firm which is trying to build the business. A low cost producer is likely to respond very
aggressively to the price cutting moves of a competitor. On the other hand, a firm which focuses on
differentiation and customer loyalty is less likely to retaliate.
It is important to understand the capabilities and psyche of competitors thoroughly. These include the
competitor's beliefs about its relative position, historical and emotional identification with particular
products/policies, cultural factors, organizational values, the extent to which a competitor believes in
conventional wisdom, etc. Historical information on the competitors' past financial performance,
track record in the market place, areas of success, past reactions to strategic moves etc. can also be
very useful. It is also important to gain greater understanding about the top management, the types of
strategies that have worked for the management in the past, other businesses with which the top
management had been earlier associated, the events which have influenced top management in the
past, the technical background of the management, etc.
A firm, serious about a competitive move must communicate clearly that it is committed to the move
and has the necessary resources. Then rivals are more likely to resign themselves to the new position.
Similarly, if a firm says it loud and clear that it will react strongly to moves by competitors, it may be
able to deter them from making competitive moves. The greater the certainty with which the
competitor sees the commitment being honored, the greater the deterrent value of the commitment.
Competitors should understand that the firm has both the resources and resolve to carry out the
Based on all these considerations, a firm has to select its strategy. An ideal strategy would prevent
competitors from reacting. Such a situation arises when the legacy of the past makes some moves
very costly for competitors to counter. Small and new firms often have little stake in the strategies
practiced by industry leaders. These challengers can benefit substantially by pursuing strategies that
penalize competitors for their stake in these existing strategies.
(See Competitive Strategy)
Competitive Strategy: Thanks to Michael Porter, companies today have a considerable
amount of knowledge on how to take offensive or defensive actions to compete effectively in an
industry. For Porter, the essence of competitive strategy formulation is understanding the industry
structure and relating the company to its environment.
Industries differ widely in the nature of competition and opportunities for sustained profitability. The
structural attractiveness of an industry depends on five factors, which form Porter’s famous Five
• The entry of competitors. How easy or difficult is it for new entrants to enter the business?
• The threat of substitutes. How easily can the company’s product or service be substituted?
• The bargaining power of buyers. How strong is the position of buyers?
• The bargaining power of suppliers. How strong is the position of sellers?
• The rivalry among the existing players. Is there intense competition among the existing
The second central concern in strategy is position within an industry. Some positions are more
profitable than others, regardless of what the average profitability of the industry may be.
At the heart of positioning is competitive advantage. In the long run, firms succeed relative to their
competitors if they possess sustainable competitive advantage. There are two basic types of
competitive advantage: lower cost and differentiation. Lower cost is the ability of a firm to design,
produce and market a comparable product more efficiently than its competitors. Differentiation is the
ability to provide unique and superior value to customers in terms of product quality, special features,
after-sale service, etc. Differentiation allows a firm to command a premium price which leads to
superior profitability, provided costs are comparable to those of competitors.
It is difficult, though not impossible, to achieve lower cost and differentiation simultaneously relative
to competitors. So a trade off is involved. However, any successful strategy must pay close attention
to both types of advantage while excelling in one. A low-cost producer must offer acceptable quality
and service to avoid having to give discounts, while a differentiator’s cost position must not be so far
above that of competitors as to offset its price premium.
A key variable in positioning is competitive scope. A firm must choose the range of product varieties
it will produce, the distribution channels it will employ, the types of buyers it will serve, the
geographic areas in which it will sell, and the array of related industries in which it will also compete.
Most industries are segmented, with distinct product varieties, multiple distribution channels and
several different types of customers. These segments have frequently differing needs. Serving
different segments requires different strategies and calls for different capabilities. Competitive scope
is also important because firms can sometimes gain competitive advantage by exploiting
interrelationships by competing in related industries through sharing of important activities or skills.
Both industry structure and competitive position are dynamic. Industries can become more or less
attractive over time, as barriers to entry or other elements of industry structure change. Industry
attractiveness and competitive position can also be shaped by a firm. Successful firms not only
respond to their environment but also attempt to influence it in their favor.
See Michael Porter’s, “The Competitive Advantage of Nations,” The Free Press, 1990.
Achieving competitive advantage requires a firm to make choices. If a firm is to gain advantage, it
must choose the type of competitive advantage it seeks to attain and the scope within which it can be
(See Competitive Advantage, Generic Strategies)
Concentration Ratio: A measure of the degree of competition in an industry. Thus the four
firm concentration ratio is the percentage of the market accounted for, by the top four players.
(See Herfindal Index, Oligopoly)
Concentric Diversification: Diversification into related areas. A less risky strategy compared
to conglomerate diversification. The new business may be related to the existing business in terms of
product, technology or both.
Conglomerate Diversification: Diversification into unrelated areas. Firms sometimes enter
a new business simply because it represents the most promising investment opportunity available.
The main concern here is the profit generating capacity of the new venture and financial synergies.
For instance, businesses with sales patterns moving in opposite trends may balance each other. It is
widely accepted that related diversification is more likely to succeed than conglomerate
diversification. The key, of course lies in understanding what is related and what is not.
Contestability: The degree to which firms can enter or leave an industry. Contestability provides
a measure of the effect of potential competition in an industry. Perfect contestability implies there are
no barriers to entry. In the early 1980s, the economist W J Baumol pointed out that perfect
contestability could yield the results of perfect competition in a market, even without having a large
number of small firms. The airline industry is generally held up as an example of a reasonably
(See Barriers to Entry)
Contingency Planning: The development of a management plan that uses alternative
strategies to ensure the success of a project even in the event of things going wrong. Essentially, it
means preparing for highly uncertain situations.
(See Adaptive Planning, Russell Ackoff)
Contract Manufacturing: Production on behalf of a client who owns the design and brand
name. Contract manufacturing helps a company gain access to capacity in a cost effective way. On
the other hand, the contract manufacturer does not have the burden of marketing the product and
handling end customers.
Co-opetition: 'Co-opetition', a word coined by Ray Noorda (the founder of Novell), is defined
by Brandenburger and Nalebuff as a new mindset that combines cooperation and competition.
Cooperation generally leads to an expansion of the cake and competition to a slicing up of the cake.
Both cooperation and competition are necessary. An exclusive focus on competition ignores the
potential for expanding the market or creating new profitable forms of enterprise. A 'co-opetition'
mindset actively looks for ways to change and expand the business, as well as newer and better ways
(See Dynamic Capabilities, Process Networks, Strategic Alliances)
Core Competence: A term coined by C K Prahalad and Gary Hamel 12. A core competence is a
bundle of skills and technologies that enable a company to provide superior value to customers. A
core competence is effectively a company's specialized capability to create unique customer value.
This capability is largely embodied in the collective knowledge of its people and the organizational
procedures that shape the way employees interact. Over time, investments made in facilities, people
and knowledge that strengthen core competencies, create sustainable sources of competitive
A core competence should not be equated with a single skill or discrete technology. If a company
identifies too many competencies, it is probably referring to discrete skills. At the same time, if it
identifies only one or two competencies, the level of aggregation is too broad. Typically, a firm may
have between five and 15 core competencies.
Skills which are a pre-requisite for becoming an industry player, should not be confused with core
competencies. A core competence is also not a physical asset. For instance, a factory, a distribution
channel, brand or patent cannot be referred to, as a core competence. The ability to manage these
assets may, however, be a core competence.
A core competence should:
• Provide significant and appreciable value to customers, relative to competitor offerings;
• Be difficult for competitors to imitate or procure in the market;
• Enable a company to move into new markets or to develop new technologies.
Core competencies are not product specific. They can and should be leveragable to create new
products/ services. Indeed, a core competence is truly core when it forms the basis for entry into new
product lines/ businesses. Sony's core competence in miniaturization has enabled it to develop a range
of popular consumer products. Reliance Industries' core competence in project management has
enabled it to complete many complicated projects that span across industries ahead of schedule. The
Aditya Vikram Birla group has a similar competence.
By understanding core competencies, a firm can identify which businesses to strengthen and which to
divest. Identification of core competencies can also lead to greater clarity on potential entrants into
the industry who may be using similar core competencies to make other products.
To sustain competitive advantage, competencies need to score well on four dimensions:
Appropriability: The degree to which the profits earned by a competence can be appropriated by
someone other than the firm in which the profits were earned. The lower the appropriability of the
asset, the more sustainable the profits.
Durability: How durable is the competence as a source of profit? Shortening product and technology
life cycles make most competencies less durable than they were, a decade earlier.
Transferability: The easier it is to transfer the core competencies and resources, the lower the
sustainability of its competitive advantage.
In their book, “Competing for the Future,” Harvard Business School Press, 1994.
Replicability: If it is possible, by appropriate investment or by purchasing a similar asset for a
competitor, to construct a nearly identical set of capabilities, the competitive advantage is not
Examples of core competence
Company Core Competency Products
Sharp/Toshiba Flat screen display Lap Top Computers, Television;
Sony Miniaturisation Personal Audio
Federal Express Logistics Management Courier Services
Walmart Logistics Management Discount Retailing
Motorola Wireless communication Cellular Phones
Ranbaxy Labs Reverse Engineering Generic drugs
Honda Combustion Engineering Motor Cycles, Cars, Generators
Gujarat Ambuja Energy Management Cement
Some management scholars feel that core competence has several limitations. It is more useful in
explaining why something has gone right or wrong and less useful in predicting what will be right or
wrong. For instance, Clayton Christensen, the innovation guru, feels that core competence is too
internally focused. Instead of asking what they are good at, companies must ask what customers
value. Accordingly, they must develop new competencies when circumstances demand, instead of
continuing to exploit existing ones. Prahalad, himself, has warned of core competencies becoming
core rigidities. A dramatic structural change in an industry can substantially reduce the value of a core
competence. That is why, it is important to assess the value of a core competence by the benefits it
generates for customers rather than the technicalities underlying the core competence.
Core Ideology: A term coined by Collins and Porras in their book “Built to Last”. Core Ideology
describes an organization’s identity that transcends all changes related to its relevant environment.
Core ideology consists of two notions: Core Purpose – the organization’s reason for being – and Core
Values – essential and enduring principles that guide an organization, its behaviors and actions.
(See Corporate Purpose, Corporate Values)
Core Values: Core values are the basic or central values of an organization. They serve to guide
the company and have a profound influence on how people in that organization think and act. As long
as actions are aligned with core values, no external justification is required. These core values define
the organization in terms of what it is and what it does and give the organization an unique identity.
In other words, core values provide the glue that holds an organization together. Core values are an
organization's essential and enduring tenets that should not be compromised for financial gain or
short-term expediency. Even during hard times, the values should not be diluted. These values should
undergo modification only in the most exceptional situations.
(See Core Ideology, Corporate Purpose, Culture)
Corporate Governance: Corporate governance has been a hot issue in recent years. The
series of corporate scandals involving Enron & WorldCom in the US, Parmalat in Italy, etc., has
alarmed stakeholders. In India too, corporate governance is attracting a lot of attention.
Corporate governance is the subject that deals with the responsibilities of senior managers, directors
and shareholders. Directors are expected to safeguard the interests of shareholders by monitoring the
actions of managers. But time and again, directors have not been able to impose necessary checks and
balances. That explains why boards have come for sharp criticism and independent directors have
become so important.
In the United Kingdom, the importance of good corporate governance came into the public domain
after a series of corporate collapses and scandals in the 1980s and 1990s. The functioning of boards
was criticized and the importance of independent, impartial non-executive directors was highlighted.
Following the publication of the Cadbury committee report in 1992, a code of best practices was
established. Although it is voluntary, all listed companies are expected to comply with it. Since the
Cadbury report, a number of other committees have established best practices in specific areas like
In the US, the Sarbanes Oxley Act 2002 (SOX) has been framed to enhance and enforce corporate
accountability, transparency and disclosures in all the activities and transactions the company
undertakes. SOX requires the CEO and the CFO of a publicly listed company to certify in the Annual
Report that all the disclosures made are accurate and true.
In India too, various codes of corporate governance have been formulated through committees like
the Kumara Mangalam Birla committee on corporate governance (2000). This report has made
various recommendations, both mandatory and non-mandatory for publicly listed companies with
respect to the structure and composition of the board, the audit committee, the remuneration
committee, accounting and financial reporting standards, functions of the management and
shareholders' rights. For instance, the company's half-yearly declaration of financial performance
including a summary of the significant events in last six months must be sent to each shareholder.
(See Agency Theory)
Corporate Image: Corporate image refers to the way the business of an organization is
perceived by the investors and customers. A positive corporate image represents a major intangible
asset. For example, the Tatas have successfully leveraged their positive image to enter various
businesses. Corporate image is shaped by an organization’s history, its beliefs and philosophy, its
ownership, its people, the personality of its leaders, its values and its strategies. Public relations play
an important role in building a company’s image by explaining what the organization stands for, to
the stakeholders. A company’s advertisements, statements made by the leaders, relations with
stakeholders and the website all contribute to image building. The financial community, business
community, consumers, other ‘thought’ leaders, top managers, employees, shareholders and the
government must all be kept in mind, while shaping the corporate image.
Corporate Philanthropy: Corporate philanthropy refers to the involvement of business firms
in charitable activities through contributions in the form of time, money, goods, or services.
Corporate philanthropy is not merely about spending money. It is also about getting the best returns
and the best results for the money spent and involving the larger community, especially NGOs. One
of the best examples of corporate philanthropy is the Bill Gates and Melinda Gates foundation which
has taken up various laudable initiatives across the world, especially to improve healthcare in poor
(See Corporate Social Responsibility)
Corporate Purpose: As defined by Collins and Porras in their book, “Built to Last”, corporate
purpose is the organization's fundamental reason for existence. The primary aim of corporate purpose
is to guide and inspire the company. The corporate purpose should not be confused with specific
goals or business strategies. Two companies could have a very similar purpose but operate in
different ways in different businesses. A visionary company continues to pursue, but never really
reaches its purpose. As Walt Disney once remarked, "Disneyland will never be completed, as long as
there is imagination left in the world."
Unilever's corporate purpose states13:
• Unilever's mission is to add vitality to life. We meet everyday needs for nutrition, hygiene
and personal care with brands that help people feel good, look good and get more out of life.
• Our deep roots in local cultures and markets around the world give us our strong relationship
with consumers and are the foundation for our future growth. We will bring our wealth of
knowledge and international expertise to the service of local consumers – a truly multi-local
• Our long-term success requires a total commitment to exceptional standards of performance
and productivity, to working together effectively, and to a willingness to embrace new ideas
and learn continuously.
• To succeed also requires, we believe, the highest standards of corporate behaviour towards
everyone we work with, the communities we touch, and the environment on which we have
(See Core Ideology, Mission, Vision)
Corporate Renewal: Because of organizational inertia and inflexibility, many companies
continue to bet on the strategies that have worked in the past, taking customers and competitors for
granted. Corporate renewal implies proactive change management that involves both tightening belts
from time to time and inspiring employees with a powerful vision. Leaders must set stretch targets for
their employees and constantly encourage them to question the basic assumptions of the business. At
the same time, they must move people in a clear direction through an inspiring vision.
Organizations need to renew themselves continuously as the external environment changes. But they
often do not do so, persisting zealously with what has succeeded in the past. Managers have a
tendency to support structures, systems and decisions that have ensured the company's success in the
past. This tendency is reinforced by a belief that customers are captive and competitors are weak.
Great organizations facilitate renewal, by setting stretch targets and articulating a powerful vision that
encourages people not to see themselves in terms of the past, but in terms of the future potential. They
go beyond the task of ensuring alignment of existing resources to providing new challenges. They
create organizational disequilibrium. And most importantly, within the turmoil, they are willing to
make choices and commitments to new options and opportunities.
(See Corporate Restructuring)
Corporate Restructuring: Over time, as the industry structure changes and markets evolve,
the internal profile of an organization may need a major revamp. Corporate restructuring refers to the
Adapted from Unilever Website.
various actions involved in realigning the organization in the light of emerging market trends. This
may include a new organizational structure, divestment of unviable businesses, alteration of capital
structure, reduction of headcount and outsourcing of non core activities. Change management is often
a key ingredient of corporate restructuring.
(See Change Management, Corporate Renewal)
Corporate Social Responsibility (CSR): For any medium sized or large company,
society is an important stakeholder. Though companies are primarily guided by the profit motive,
they cannot act without considering the larger interests of society.
Several years ago, the famous economist, Milton Friedman argued that the social responsibility of a
business is to make profits. Friedman was clear that corporate actions motivated by anything other
than shareholder wealth maximization threatened the well being of shareholders. Today, that view is
considered somewhat extremist. Most businesses accept that they have a responsibility towards
society. A responsive corporate social policy may not only enhance a firm's long-term viability but
also preempt restrictive government regulations.
Ardent supporters of CSR argue that, when a company behaves responsibly, there is a direct impact
on the bottom line. Some CSR activities do have tangible economic benefits. Expenses incurred on
CSR are often tax deductible. Some socially responsible practices such as recycling of water may
even generate cost savings and, as a result, increase profits. For example, recycling may reduce input
costs and pollution simultaneously. Corporate philanthropy can also lead to intangible benefits such
as goodwill. However, there is no guarantee that CSR will automatically lead to an improvement in
profitability, especially in the short run. At the same time, there is a wide acceptance that CSR will
generate a positive impact in the long run.
(See Corporate Philanthropy)
Corporate Venturing: This occurs when a large firm decides to invest in a smaller, but
promising venture. Corporate venturing provides an alternative way of generating growth and tapping
expertise that would otherwise take time to develop. Corporate venturing enables a company to
develop products to expand the core business, to enter new industries or markets, or to develop
breakthrough technologies that could substantially change the industry. Corporate venturing can be
done by taking a passive, minority position in an outside business, by taking an active interest in an
outside company, by building a new business as a stand-alone unit or by building a new business
inside the existing firm, with independent management.
Cost Leadership: A strategy that focuses on making the operations more efficient and cutting
costs wherever possible. It may result from scale/scope efficiencies, tight overhead control, careful
selection of customers, standardization and automation. Cost leadership aims at having the lowest
costs in a market. This makes the company best placed to survive a price war and generates the
highest margins if a price war does not occur. Gujarat Ambuja has pursued this strategy in the Indian
cement industry. The largest retail chain in the world, Wal-Mart also believes in cost leadership.
TISCO has been a cost leader in the Indian steel industry.
(See Generic Strategy)
Controlling costs systematically can lead to competitive advantage in industries where price is an
important factor. If a company offers a standard product or service at a lower cost when compared to
This term is taken heavily from “The Essence of Strategic Management” written by Clief Bowman, published
by Prentice Hall of India, 1990.