Strategic Functions and Functional StrategiesThe 9-M .docx

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

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

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

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

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

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

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

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

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

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9. Manipulating Function:
Stewardship StrategyUse Private ApproachUse Social
ApproachThe goal of the firm is to make profits & to increase
shareholder returnsThe goal of the firm is to further its mission,
continuously reviewed with the involvement of all
constituenciesShareholders give agency rights to the CEOs to
manipulate everybodyCEOs are trustees, who are committed to
sustainable developmentWilling to compromise on values, if it
adds to the bottom lineWilling to recognize new values,
enabling stakeholder inclusiveness
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ConclusionsMethod for understanding functional competencies
for differentiation and cost leadershipIdentify 3–5 core
activities in each of the 9 functionsAssess these activities on a
scale of 1 (cost-containing) to (5) differentiation-augmenting. If
the average of the 9-M functions is low, then it suggests that the
firm has cost leadership capability.If the average is high, then
the firm has a differentiation capability.
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Chapter 3
Building-Blocks of Business Strategies: Value Chains
Consider the case of the Switzerland-based Nestle, whose
mission is to provide a caring nest that offers good food and
good life to the consumers. As shown in Exhibit 3.1, Nestle as a
global corporation comprises of five major business groups:
culinary foods, beverages, confectionary, milk products and
nutrition. Within each of these business groups (firms), Nestle
links its resource transforming functions in very different ways,
and each of these ways reflect the personality and the
positioning of its specific brands. Historically, Nestle has been
known for its mass market appeal, with popular global brands
such as Maggi in culinary foods, Nescafe in beverages, Kitkat
in confectionary, Nestle in milk products, and Cerelac in (baby)
nutrition. However, its confectionary business group suffered
more than 25% drop in revenues in a five year period 2008-
2013, and the company as a whole suffered revenue drop during
2011-2013. To offset its market share losses, Nestle has sought
to aggressively promote linkages in the premium, luxury market
– that has been immune to the recession and has been growing
rapidly. In 2011, Nestle launched the premium Maisen Cailer

brand of customized confectionary for the online shoppers in
Switzerland – the customers can order Ecuador-sourced sampler
pack of five chocolates. After tasting, customers fill an online
survey to determine their chocolate personality, and are able to
order larger boxes, marrying their favored chocolate with
preferred fillings ranging from peppercorn and vanilla to
raspberry and verbena. A 16-piece 128 grams box of the
Maison Cailler chocolates costs 26 Swiss francs ($28.30). That
means these are priced at $220 per kilogram, or $100 per pound.
In the beverages group, Nestlé successfully created the luxury
home coffee business by launching its single-serving expresso-
maker Nespresso capsule in two countries in 1986. The capsule
was offered online in the 1990s and in boutique stores in 2002.
By 2012, it became a US$3.3 billion brand, with half its sales
coming from the Internet and more than 250 boutiques
worldwide. Nestlé already has tried its hand at other premium,
customized goods. Similarly in the nutrition group, Nestle
launched BabyNes formula milk capsules in 2011, which fit its
own $272 single-serving machine. In the culinary group, Nestle
has extended its Buitoni brand into the premium segment, by
launching a sub-brand Le Creazioni di Casa Buitoni in 2011. An
example of the innovative products in this sub-brand is the
extra-large, extra-creamy filled pasta, with a state-of-art
technology allowing pieces of ingredients, such as porcini
mushrooms and toasted almonds, to remain intact. Another
innovative linkage for this sub-brand includes a paper-based,
partly recyclable tray, which reduces the amount of plastic
normally required in packaging.
Source: Adapted from Doherty (2012) and Nestle (2011)
In the previous chapter, we examined the micro-foundations of
strategic advantage involving the process, structural and
behavioral characteristics of the capabilities of a firm and how

they are managed in dynamic environments. However, in
addition to developing foundational capabilities, strategists
need to also work on building-blocs of business strategies.
Value linkages among resource transforming functions within
and outside the boundaries of a firm, are its ‘building-blocs’ to
successful business strategies. As a matter of fact, these
building-blocs go on to form a firm’s strategic advantage in
various business domains. A value linkage describes the full
range of processes “required to bring a product or service from
conception, through the different phases of production
(involving a combination of physical transformation and the
input of various producer services), delivery to final consumers
and final disposal after use” (Kaplinsky and Morris 2001).
Firms may have several different types of value linkages, and
different firms tend to have different types of value linkages.
For instance, the value linkages for the traditional mass brands
of Nestle are fundamentally different from those for the new
premium brands, because they are targeted at a different
customer profile, and rely on different ingredients,
technologies, packaging, and delivery channels.
Value chain is a specific type of value linkage, which describes
the linear process of operational flow from design and sourcing
of inputs, to processing, marketing, and servicing of customers.
The Value chain hypothesis is concerned with the type of
investments a firm makes in its efforts to develop the most
competitive and sustainable value chains.
In this chapter, we will consider two distinct views on the value
chain hypothesis (the most important of the value linkages): the
Protection view and the Growth view. The Protection view
holds that firms making consistent and dedicated investments in
either differentiation capability or cost leadership capability are
likely to be better protected from competitive attacks. These
firms are more likely to generate stronger and more sustainable
competitive advantage. This view is based on a static view of

the environment, and assumes an inherent trade-off between
lower cost and higher value. The Growth view on the other
hand, holds that in dynamic environments, a strategy built on
investments in cost reduction or differentiation enhancement for
existing, known market spaces will only erode a firm’s strategic
advantage. In existing known market spaces, referred to as red
oceans, firms try to outperform their rivals to grab a greater
share of market. These red ocean market spaces are crowded,
and prospects for profits and growth are low. Conversely, an
integrated approach can allow the firm to create new demand,
instead of fighting for it. In this new yet unexplored space,
referred to as blue oceans, there is sufficient opportunity for
growth that is both profitable and rapid.
This chapter discusses the value chain hypothesis, and the
business strategies deriving from the two distinct views on this
hypothesis as mentioned earlier.
The Concept of Value Chain
Value chain is one of the most fundamental concepts in
strategy. Value chain is a chain of functional nodes along which
a firm exchanges and transforms its resources, and involves
design, production, marketing, delivery and support (Porter,
1985). As products in value chains are exchanged and
transformed, they flow downstream in a series of exchanges
among participants at each functional node that adds value and
costs. As we will see below, there are many different ways of
portraying a value chain, depending on the major functions of a
firm.
To analyze a value chain, one generally uses two major lenses:
a value lens or a design lens.
Through a value lens, one evaluates the overall cost and the
incremental value at each functional node. This allows in
eliminating or outsourcing functions associated with a negative
value-add, while simultaneously augmenting or insourcing

functions associated with a positive value-add. It allows
comparing a firm’s performance with that of its competitors, to
identify gaps in cost-effectiveness and value-added, and to
develop and execute plans to close the identified gaps. Exhibit
3.x illustrates how this is done using the example of two mobile
network operators – Vodafone and Orange.
Exhibit 3.x: Traditional Value Chain Analysis – Closing the
Competitive Performance Gaps
Vodafone
* 99% population * In-house *Own System * Own
branded and * Own portal
Coverage and other retail chains
* Distributors
Orange
* 99% population * In-house *Own System * Own
branded and * Own portal
Coverage and other retail chains
* Distributors
Source: Adapted from Peppard & Rylander (2006)
Through a design lens, one investigates the most appropriate
value and cost linkages for target customers. Practically
speaking, this value chain analysis proceeds by examining the
integrated functions of a firm comprising of activities such as
design, production, marketing, delivery and support. Strategies
for managing investments in value linkages aimed at improving
strategic advantage of a business are referred to as the
“Business-level strategies”.
Customers
Suppliers

Porter (1985) was the first to offer a classification of business-
level strategies using a value chain analysis, which is based on
three alternative generic sources of strategic advantage – value,
cost and focus. As illustrated in Exhibit 3.x, Porter’s framework
offered a model of how businesses receive materials as inputs,
add value to them through various functions, and sell value-
added products to customers.
Customers
Suppliers
In Porter’s framework, there are two broad categories in a
firm’s value chain: primary and secondary. Primary activities
are directly involved in transforming inputs into outputs,
delivery and after-sales support. Thus they include:
● inbound logistics—material handling and warehousing;
● operations—transforming inputs into the final product;
● outbound logistics—order processing and distribution;
● marketing and sales—communication, pricing and channel
management; and
● service—installation, usage guidance, maintenance, parts, and
returns.
The secondary or support activities are ones backing up the
primary activities, and include:
● procurement—purchasing of raw materials, supplies and other
consumable items as well as assets;
● technology development—research and development,
procedures and technological inputs
● human resource management—selection, promotion and

placement; appraisal; rewards; management development; and
labor/employee relations; and
● firm infrastructure—general management, planning, finance,
accounting, legal, government affairs and quality management.
The concept of value chain is not without limitations. It
assumes a sequential chain of activities in a physical world, for
transforming material inputs into products that have value at
each intermediate stage of process. Upstream suppliers provide
inputs that pass through the downstream to the next sequential
link, and eventually to the customer. Such a worldview is
appropriate for traditional manufacturing firms, operating in
fairly stable to moderately dynamic environments. Such a
worldview however, contributes to the commoditization of
functions by promoting similarities in what firms do. It takes a
static view of firm’s capabilities, target markets, and competitor
dynamics. It thus may obscure dynamic capabilities and a firm’s
ability to survive and grow a business by exploiting alternative
market opportunities.
Generic Sources of Strategic Advantage in Value Chains
One of the major purposes of Porter’s framework is to explicate
three generic sources of strategic advantage for the businesses
of a firm. Strategic advantage of any business derives from the
difference between the value it offers to customers and the cost
of creating that customer value. Therefore, the strategic
advantage of a business may derive from three generic sources:
1) Value, referred to as offering or differentiation advantage. If
customers perceive a product or service as superior, they are
willing to pay a premium relative to the price they will pay for
competing offerings. A firm may achieve differentiation
advantage by making investments that generate a
disproportionate increase in both the value accrued from the
customers as well as the proportion of this value it is able to
capture. This is illustrated in Exhibit 3.x

Exhibit 3.x: An illustration of how a firm may develop
differentiation advantage
Total Value
Firm’s share
Investment in a process (A)
$100
Original value accrued from customer (B)
$1000
$500 (50.0%)
New value accrued from customer (C)
$1150
$650 (56.5%)
Increased value accrued from customer (C-B=D)
$150
Increased value/ Investment (D/A)
$150/$100
= 1.5 > 1
2) Cost, referred to as operating or cost leadership advantage. If
a firm gains a cost advantage for performing activities in its
value chain at a cost lower than its major competitors, then it
has flexibility to undercut competitors and offer greater value
for money to its customers. A firm achieves cost leadership
advantage by making investments that improve the cost
structure of its value chain. This is illustrated in Exhibit 3.x
Exhibit 3.x: An illustration of how a firm may develop cost
leadership advantage
Total Value
Firm’s share
Investment in a process (A)

$100
Original value accrued from customer (B)
$1000
$500 (50.0%)
New value accrued from customer (C)
$750
$250 (33.3%)
Reduced value accrued from customer (B-C= D)
$250
Reduced cost from process investment (E)
$400
Net cost reduction benefits retained by the firm (E-D=F)
$150
Net benefits retained/ Investment (F/A)
$150/$100
= 1.5 > 1
For both the differentiation advantage and the cost leadership
advantage, investments may be made in one or more of the
primary or secondary activities. The advantage tends to be more
significant, when the impacted activity (or activities) accounts
for a substantial part of the value for the customers. Exhibit 3.x
illustrates this in the context of smartphone market.
Xiaomi and Lenovo of China and Micromax of India are the
leaders among the many emerging market firms that have
entered the smartphone market. These firms are growing rapidly
because of their capability to offer smartphones at a cost more
than a third less than the Apple’s iphone. They are using a
specialized chip designed for smartphones by MediaTek, a
Taiwanese semiconductor company based on in Hsinchu science

park, the Taiwanese Silicon Valley. Until 2011, MediaTek
designed chips only for the older feature phones. Its chips took
care of most of the design work, allowing its customers to
manufacture low-cost feature phones without having to spend
much time or money on research and development. These
feature phones available at dramatically low prices
revolutionized the mobile markets in emerging markets, such as
of China and India. In 2011, MediaTek introduced chips
designed for smartphones, allowing entry of many new
smartphone firms in the emerging markets.
A second major factor in the low-cost advantage of the new
entrants is Google’s Android operating system. Google offers
the open code for the Android operating system free of cost, as
it seeks to accrue value from the online ads when customers
search and consume Web content. As Google handles more
online advertising than any place else, a rising online tide
benefits its bottom line. Android accounts for more than 80% of
the smartphone market in terms of volumes, as mobile firms
such as Samsung have used it for high-end smartphones as well.
In 2008, Apple had the mobile marketplace to itself, but now it
is no longer the volume leader. The new entrants have targeted
emerging markets like China and India, where the demand for
expensive smartphones is more limited, as compared to the
demand for the lower cost smartphones. In 2011, after four
years of effort, Apple was selling only 10 million iPhones in
China. Xiaomi founded in 2011, was able to offer a smartphone
at a cost of only 2,000 yuan (US$327) – 37 percent of the cost
of an Apple iPhone in China. Like other low-cost mobile
handset providers, Xiaomi has razor-thin profit margins.
Apple, on the other hand, lacks strategic advantage relative to
the high-volume cost-conscious customers. Its advantage is
with the brand-conscious customers who value usability and
simplicity of design. Tim Cook, Apple’s CEO, said, “There’s a

segment of the market that really wants a product that does a lot
for them, and I want to compete like crazy for those
customers,…I’m not going to lose sleep over that other market,
because it’s just not who we are. Fortunately, both of these
markets are so big, and there are so many people that care and
want a great experience from their phone or their tablet, that
Apple can have a really good business.”
Source: Adapted from Einhort (2013) and Grobart (2013).
3) Focus, referred to as customizing or focus advantage. If a
firm links activities in a value chain to a highly specialized and
unique application or target market, then it may improve its
strategic advantage in that distinctive market niche. A firm
achieves focus advantage by making investments that customize
its activities for specialized purposes, to the exclusion of other
related yet more general purposes that the other firms may be
targeting. For instance, many luxury firms focus on small and
exclusive ultra-premium target market in Paris, because
presence in this target market is an important gateway to many
emerging markets, including Dubai, Mumbai, and Shanghai,
where luxury fashion-conscious upwardly mobile consumers
closely follow the trends in Paris deemed as the luxury fashion
capital of the world.
The focus advantage may be grounded either in differentiation
advantage (higher willingness of the customers to pay a value
premium), or in a cost leadership advantage (lower cost
structure of a firm). For instance, to stand apart in the tablet
market, some firms offer tablets for kids, while others offer
tablets that can be hanged in retail stores for displays. Both
these firms have invested in special-purpose design processes
(i.e. kid-focused or retail store-focused) for gaining a focus
advantage, as compared to other firms that offer general-
purpose tablets. Kids-targeting firms have also invested in cost
reducing production function, to assemble lower cost special-

purpose tablets that the parents find affordable for their kids,
while store-targeting firms have invested in value-enhancing
production function, to assemble premium special-purpose
tablets that the retail chains are willing to use for store displays
in place of the costlier LCD televisions.
The Protection View of Value Chain Hypothesis
As noted above, a firm may invest in its value chain to develop
three different types of generic advantages: value, cost, and
focus. How should it make this investment decision? Value
chain hypothesis is concerned with the type of investments a
firm should make to develop most competitive and sustainable
strategic advantage.
Conventionally, in static markets, firms have been most
concerned with the protection of their strategic advantage. As
noted in the previous chapter, firms may strive to protect their
advantage by investing in strengthening of isolating forces,
thereby making it even more difficult for other firms to copy or
substitute their valuable resources, capabilities, and core
competencies. According to Porter (1985), the most effective
way to do so is for firms to make consistent, persistent and
dedicated investments in either differentiation or cost
leadership, either broadly or in a focus area. The firms who seek
to invest in both cost leadership as well as differentiation
advantages are likely to be ‘stuck-in-the-middle”, and find it
difficult to protect and sustain their advantage. This view is
based on three implicit assumptions.
a) Knowledge processes/ routines assumption: firms who
strategically focus all their investments in either cost reduction
or in differentiation are likely to develop deep, strong
knowledge processes or routines to undergird their competitive
advantage, as compared to those who strive to do both.
b) Motivational processes/ culture assumption: firms who
strategically strive to promote either cost reduction or
differentiation only, are likely to develop deep, strong

motivational processes, or culture, to undergird their
competitive advantage. A culture of cost leadership is likely to
make it difficult to be an effective differentiator, and a culture
of differentiation is likely to make it difficult to be an effective
cost leader as well.
c) Reputational processes/ credibility assumption: firms who
strategically position themselves as capable of cost reduction or
differentiation are likely to develop deep, strong reputation, or
credibility, to undergird their competitive advantage. Customers
are likely to expect these firms to have the ability to
reconfigure processes to either achieve dramatic cost
reductions, or command dramatic value premiums. Whereas in
reality, the firms may have these abilities either in broad
domains (generic cost leadership or generic differentiation), or
in focus domains (focus cost leadership or focus
differentiation).
Thus, the Protection View postulates that firms that pursue
either differentiation or cost leadership business strategy will
outperform those who pursue a mixed or hybrid strategy
combining both. Overall, the Protection view offers a typology
of three pure business strategies for the firms to choose from
based on the three generic sources of strategic advantage
discussed earlier. These pure business strategies are: cost
leadership, differentiation, and focus. It is important to note
that focus is not a truly pure business strategy, because the
fundamental choice for the firms is either cost leadership or
differentiation, but for either of these, the firm may additionally
choose to focus on a specific set of customers.
(a) Cost leadership strategy is based on strategic concentration
and persistence of investments in linkages that reduce costs.
The strategy involves making a fairly standardized product,
combined with aggressive underpricing all rivals (Porter, 1980:
36). Standardized products are referred to as commodities,
because they are undifferentiated; when these products are
stripped down to bare functional basics, then they are referred

to as no-frill products. The strategy requires “heavy up-front
capital investment in state-of-the-art equipment” (Porter, 1980:
36), and is based on three major categories of cost reducing
efforts: (1) reducing unit manufacturing costs through higher
unit volume, efficient scale facilities, and experience curve; (2)
exercising strict cost control over engineered costs and on
exchanged costs (purchased inputs and logistics) ; and (3) a
discriminating approach to discretionary costs like R&D,
service, sales force, and advertising. When the strategy is based
on the reduction of unit manufacturing costs, engineering costs
and exchanged costs, then it may result in cut-throat price wars.
The cost leaders rely on some elements of discretionary costs to
aggressively build market share for their commodity-like
products.
For example, Sears has been historically known for its
customary dedication to cost control, offering value at a decent
price. But in the appliance business, it had to combine that with
a commitment to service in order to succeed (Rothschild, 1979:
95). Therefore, these discretionary costs allow cost leaders to
partially alleviate the customer price sensitivity for the
standardized products they offer.
Let’s consider another example: the sheet metal firms commit to
exceedingly tight technical specifications, delivery schedules,
and responsiveness in reordering, in order to gain preferred
marketing arrangements with the auto firms (Levitt, 1980). It is
imperative to note that persistence of cost-reducing efforts is
critical for a cost-leadership strategy.
A firm competing solely on the basis of differentiation
advantage may successfully use new product designs or process
technologies to reduce costs, at times below the industry
standards. Robust state technology in the TV Set industry
allowed firms to achieve both higher reliability and lower cost,
as compared to firms that used the older vacuum tube

technology (Porter, 1983: 482-503). However, one-time or ad
hoc cost reduction efforts do not constitute a cost leadership
strategy, which as a matter of fact requires a deep culture of
tight cost control.
(b) Differentiation strategy is based on strategic concentration
and persistence of investments in linkages that accrue value
premium. The strategy involves offering superior product
features to customers. In here, persistence of investments is
critical, as the features that differentiate a firm or some of its
product lines may no longer act as differentiators, if these
become industry standard.
In the 1920s, General Motor’s CEO Alfred Sloan merged many
smaller auto firms whose survival was threatened by the rapid
growth of Ford as a cost leader. GM then designed the
pioneering differentiation strategy of “a car for every purse and
purpose.” Sloan rationalized GM’s cars into five price-quality
segments, generating a hierarchy-of-models for the rising
economic status of the customers through their life. The young,
upwardly-mobile first-time customer was invited to choose the
moderately-priced Chevrolet, over the least-costly mass-
produced Ford. When the customer got promotion and some
more income, the first thing he did after buying a bigger house
for the family was to buy an Oldsmobile. The next step up
brought a Pontiac, then a Buick. At the top of the ladder, he
would acquire a Cadillac (Mantle, 1995). This strategy allowed
GM to displace Ford as a market leader, and to dominate the US
market until early 1980s with a total market share as high as
50%.
In Consumer Reports, for the model years through 1982, in non-
luxury full-sized, midsize, and compact cars categories, GM
scored first and second in virtually every year. These categories
of cars represented the biggest and most profitable segments of
cars in the U.S. Ford and Chrysler followed GM in introducing
cars for different segments, but because of their lower market

share were unable to match GM’s cost structure for the higher-
end segments - paradoxically earning GM a cost leader moniker
(Porter, 1980). But, over a period of time, as the features
offered by GM became an industry norm in the US, European
rivals out-differentiated GM by adding new premium luxury
features. Japanese rivals out-competed GM by adding features
that were standard on higher-end models into their base models
at low costs. This sharply eroded GM’s market share and pushed
it into red by the late 1980s, and forced it to find new ways to
differentiate.
(c) Focus strategy is based on strategic concentration and
persistence of investments in linkages specific to a specialized
domain, either for cost reduction or for differentiation.
Specialized domain may take a variety of forms, such as a niche
market or geographical segment, a niche distribution channel, a
niche workforce, a niche application or user need, and so on.
There are quite a few players whose specialized services or
products have been market differentiators; take the case of Wizz
Air, a specialist firm offering low fares and fast direct flights as
part of its focused cost leadership strategy. It operates in
Hungary, Bulgaria and Ukraine, and specializes in flying
Central and Eastern European job-seekers to UK and Ireland.
Car2Go is another specialist, which focuses on environmentally-
conscious customers who need a vehicle for short trips. It offers
small two-seat electric vehicles for very short-term rental by
reservation or on demand. Customers use a member card to
access a car and may leave it anywhere in the local service area.
As part of its focused differentiation strategy, it bundles
insurance, parking, and maintenance in its pricing, which can be
by the minute, hour, or day.
Note: in industries where many different firms compete as
specialists in different niches or where any one of the niches
grows rapidly, the firms pursuing a broader scope may
experience erosion in their strategic advantage. For instance, in
1955, Proctor & Gamble (P&G) introduced Crest toothpaste, as

the first in the industry to have therapeutic benefits. Crest had
fluoride that offered protection against dental cavities. The first
few years, Crest occupied a small niche, with only 8.8 percent
share of the US toothpaste market in 1958. P&G worked with
scientists at the Indiana University, with whom it had invented
the dental fluoride, to conduct twenty three separate studies to
demonstrate the therapeutic benefits of fluoride. In 1960, the
American Dental Association endorsed the effectiveness of
Crest as an effective anti-cavity agent. Within two years from
then on (i.e. by 1962), Crest’s market share in the U.S. surged
beyond 30% and remained around 35% for several decades
thereafter. In contrast, Colgate suffered a loss of its market
share to just around 20%, and was forced to lose its first-mover
advantage and to become a follower by adding fluoride and
repositioning itself from cosmetic to therapeutic segment.
Overall, the share of the cosmetic segment fell from about 70%
in 1960 to about 34% in 1970. In contrast, the share of the
therapeutic segment surged from about 15% in 1960 to about
58% in 1970 (Miskell, 2005).
Cost Leadership Strategy, Differentiation Strategy, and Firm
Performance
There are three different sub-hypotheses on the relationship
between cost leadership and differentiation strategies.
· Mutually-exclusive hypothesis: Porter (1980: 38) contends
that a differentiation strategy often requires a perception of
exclusivity, which is incompatible with high market share. He
further notes that a firm must make a choice among generic
strategies, otherwise it will become “stuck in the middle”
(Porter, 1985: 11). This is so because each generic strategy
requires a different culture, different resources, different
organizational structures, different management styles, and
radically different philosophies (Porter, 1985: 24, 99). For
instance, the Gap Corporation started with a flagship business
unit The Gap. To deepen its cost advantage, it developed a

lower-end business unit Old Navy. To deepen its differentiation
advantage, it developed a higher-end business unit Banana
Republic. To improve its focus, it further created new business
units – The Gap for Men, The Gap for Women, and The Gap for
Children. Similarly, many airlines have a first-class product line
and an economy product line. For each of these product lines,
they offer different reservation numbers, customer service
counters, boarding times and procedures, seating, food and in-
flight service and entertainment.
· Lifecycle hypothesis: a second view is that at different phases
of product and organizational lifecycles, different strategies are
appropriate, depending on what will allow a firm to outpace its
competitors (Gilbert & Strebel, 1987). While a differentiation
strategy leads to a low-cost position in the later stage of a
product lifecycle due to an increase in sales volumes, the
learning curve, and economies of scale and scope (Hill, 1988), a
cost leadership strategy enables firms in their later
organizational lifecycle to develop a premium positioning using
their accumulated experiences and knowledge development. In
the 1990s, the Korean automaker, Hyundai was known to be a
cost leader, with its midsize Sonata car. During the 2000s,
Hyundai continuously improved its quality, and in 2008,
launched the moderately priced Genesis, costing $38,000. This
was followed by the Equus in 2010 within the $55,000 to
$60,000 range, at the low-end of the luxury segment. Hyundai
thus enjoyed a 20% annual growth in its revenues, and became
the fifth largest automaker in the world. In 2011, it repositioned
itself as “modern premium” – offering high-end features at
affordable costs for the mass-market consumers.
· Singularity hypothesis: a third view is that both cost reduction
and value addition are integral to any business strategy, and are
not distinct but singular. Businesses have only two generic
strategic choices: how much to differentiate and what scope to
decide (Mintzberg, 1988). In marketing, a differentiated product
is one that “is perceived by the customer to differ from its
competition on any physical or nonphysical product

characteristic including price (Dickson and Ginter, 1987: 4).
Mintzberg (1988) opines that cost leadership is just an element
of differentiation strategy in which the basis of differentiation
is not higher quality, but lower price. For instance, in the US,
within the economy segment of the hotel/motel industry, Motel
6 differentiates itself by positioning the brand with a claim of
offering “the lowest prices of any national chain” (Thomson and
Strickland, 2008).
Similarly, there are three different hypotheses on the
relationship between cost leadership and differentiation
strategies and a firm’s performance.
· Differentiation hypothesis: many scholars assert that firms
using differentiation strategy outperform those using a cost-
leadership strategy. Peters and Waterman (1982: 186) report
that high-performing firms tend to be focused more to customer
value than the cost “side of the profitability equation”. Thereby,
such companies “tend to be driven more by close-to-the-
customer attributes than by either technology or cost.”
· Equivalency hypothesis: Porter (1980: 35) asserts that cost
leadership and differentiation strategies offer an equally
successful and profitable path to strategic advantage. This may
be true in a highly cyclical economic environment. Cost leaders
tend to be better positioned to compete during economic
downturns, while differentiators often seek cost reduction to
avoid losses. For instance, during the economic downturn in the
late 2000s, Ohio-based Marco’s Pizza negotiated lower
transportation costs from the freight firms, and began
contracting with vendors situated near its distribution centers to
further reduce its logistics costs. It eliminated small pizza
boxes, and put small pizzas in Cheesy Bread boxes, to save
more than $150,000 across its 170 store chain. Similarly,
differentiators tend to be better positioned to compete during
economic upturns with customers having more discretionary
incomes. JetBlue Airways for example offers an economy class

service to fly between a few US cities, but has added features
such as new planes, on-board television, and leather seating to
achieve a high-load factor (i.e. average percentage of filled
seats) in economic upturns as well.
· Contingency hypothesis: firms from different nations may
have different capabilities for cost leadership vs. differentiation
advantage (Baack & Boggs, 2008). Firms operating in emerging
markets where the cost structures are lower, and a limited
percentage of customers have high purchasing power, cost
leadership strategy tends to be more profitable. In contrast,
firms operating from industrial markets where customers can
afford to be more discriminating, higher quality resources are
more accessible, and the differentiation strategy is more
profitable. For example, Baack & Boggs (2008) found that the
industrial market firms are less successful using cost leadership
strategy in China, which is an emerging market in world
economy.
Risks of Pure Business Strategies
Research shows a lack of support for the Protection view in
highly dynamic and turbulent markets. Firms that pursue only
cost leadership or differentiation, may not be as successful in
such markets because of the risks from the following three
factors:
a) Risks of diminishing returns: firms investing only in cost
reducing linkages eventually encounter the law of diminishing
returns, which states that, as one invests progressively in one
object alone (i.e. cost reduction), the cost reduction benefits
become regressive. In other words, the sum amount of cost
reduction generated will eventually become less than the
amount of investment made in building cost reducing process
capabilities.
b) Risks of diminishing demand: firms investing only in
differentiation enhancing linkages, eventually encounter the law
of diminishing demand, which states that as one invests
progressively in accruing a value premium (i.e. differentiation),

the willingness and the ability of the customers to accept that
value premium diminishes. In other words, the size of the
market interested in its products shrinks.
c) Risks of competitive interplay: firms investing in either one
of the factors, i.e. differentiation enhancing or cost reducing
linkages for their focus strategy, eventually encounter law of
competitive interplay as well, which states that as a firm gains
dramatic cost advantage over other firms, or commands
dramatic value premium over other firms, new set of firms are
inspired to challenge the firm’s rising monopoly. These new
firms in turn often ride on favorable macro market shifts, such
as technological breakthroughs or new customer segments. They
design, produce, deliver and/or service alternative products that
offer a different and better value to the customers, and render
the older firm’s cost or differentiation focus advantage
inconsequential. Or, they overcome isolating mechanisms, and
acquire relevant resources and capabilities through trade,
imitation, or substitution to offer similar products at a much
lower cost, with better differentiation, and/or with finer focus.
Exhibit 3.x illustrates how Lego – who has traditionally
invested only in differentiation – has suffered losses because of
the above risks.
Exhibit 3.x Lego’s Differentiation Faces a Challenge
The Lego offers construction blocks for children. Their blocks
are known for their bright colors, durability, good appearance,
uniformity, and highest quality parts. They have rights to
several exciting themes, including Star Wars, Harry Potter, and
Jurrasic Park, allowing them to offer several popular pieces and
sets. Its larger bricks aimed at younger children are compatible
with the smaller bricks targeted at the older children, allowing
its products to grow with children.
Several firms around the world have challenged Lego’s

monopolistic tendencies as a market leader, and its high product
prices. Lego has suffered both loss in market share as well as
losses, as the rivals have targeted customers whose priorities
include price factor as well. One of the most successful rivals is
Megabloks, a Canadian brand established in 1967. Its products
are of lower quality, are duller, but are offered at low costs –
some of them at one fourth the cost. It also has taken rights to
several popular themes. Its bricks work well on a small scale,
but are slightly misaligned on a large scale, creating structural
instability in large structures. Megabloks even has a line of
product whose pieces are compatible with the leading market
brand (i.e. Lego). Megabloks has enjoyed profitability and
growth, as the Courts have set aside Lego’s claim that
Megabloks has copied its studs and tubes interlocking brick
system because Lego’s patents on the design have long expired.
Source: Adapted from Thomas (2014).
Exhibit 3.x summarizes the pros and cons of the Protection
view.
Exhibit 3.x: Pros and Cons of the Protection View
Benefits of a Hybrid Business Strategy
Research shows that in highly dynamic markets, firms pursuing
a hybrid strategy, based on the integration of linkages for cost
leadership as well as differentiation, tend to outperform those
pursuing a pure strategy (Campbell-Hunt, 2000). This has been
found even for the small and medium enterprises, which tend to
use focus cost leadership or focus differentiation strategies
(Leitner & Guldenberg, 2010). Three factors may explain the
benefits of a hybrid business strategy in dynamic conditions:
a) Benefits of increasing demand: as firms invest in cost
reducing linkages, they gain an additional operating surplus. If
they invest this additional operating surplus in differentiation

linkages, then they gain the added capacity of offering
differentiation to this target group. This improves their
competitiveness relative to both cost leaders as well as
differentiators. Such a strategy may also help focus-in on non-
consumers, if they find value in the more differentiated, yet
cost-effective, product offerings.
b) Benefits of increasing returns: as firms invest in
differentiation enhancing linkages, they gain deeper insights
and knowledge about the latent and unmet needs of the market.
By investing in cost reducing linkages as well, firms gain an
additional capability to serve these needs cost-effectively. This
in turn allows them to generate increasing returns on their
differentiated knowledge about a large group of customers.
c) Benefits of competitive priorities: firms that invest in both
cost-reducing as well as differentiation enhancing linkages,
benefit from the law of competitive priorities, which states that
when firms must decide among competing priorities under
conditions of resource constraints, then their decisions tend to
be guided by a sense of what priorities their target market puts
on cost reduction vs. differentiation enhancement. Thereby,
these firms develop a more flexible agile capability to monitor
and adapt to shifts in market priorities of different groups of
customers. The shifts may be more or less constant, for
instance, when the per capita income in an emerging market is
rising, or when the market of interest is in a protected industrial
market that is now subject to cost competition from the
emerging market rivals. Or, the shifts may be periodic, for
instance, when markets tend to be become cost-sensitive during
recession or differentiation-seeking during economic upturn.
Exhibit 3.x illustrates how British Airways has shifted
successfully from a differentiation strategy to a hybrid strategy,
and tapped the above three benefits. Similarly, McDonald’s has
shifted successfully from a cost leadership strategy to a hybrid
strategy.

Exhibit 3.x: British Airways and McDonald’s – Different Paths
to Hybrid Strategy
After 9/11, sensing greater customer priorities for lower prices,
British Airways – traditionally known for its differentiation
strategy – began investing in cost reducing efforts. It cut the
total number of planes in its portfolio, and ordered replacement
planes without special custom features. It limited menu choices
for the customers, cut fees for the agents, and eliminated 13,000
jobs. It passed on some of the cost-savings to its customers in
the form of lower fares; and invested the rest into new sources
of differentiation while also being attentive to costs. In a
meeting organized in the emerging luxury capital Dubai, its
business and first-class customers told that they looked for ‘re-
energization’, ‘comfort’, and ‘well-being’. Most importantly, on
long-haul flights, they wanted to have a good night’s sleep.
British Airways set the design challenge of creating a more
comfortable seating arrangement – the flat beds, without any
loss of seating capacity so that it could maintain its fares. Its
R&D team developed a unique new armchair style seat, which
transforms into a 6-foot, fully flat bed, that transformed the face
of business travel. The innovation was soon copied by Virgin,
Singapore and many other carriers, but BA followed up with
other innovations such as sophisticated entertainment options,
personal lockers, 10-inch flat screens and personal privacy to
their customers, without any added costs. Thus, it was able to
increase both its demand as well as returns.
On the other hand, in the late 2000s, sensing greater customer
priorities for healthy and gourmet food, McDonald’s –
traditionally known for its cost leadership strategy – began
investing in differentiation efforts. In 2008, it installed McCafe
coffee bars featuring cappuccinos, lattes, and gourmet coffee,
offering a value similar to that of high-end Starbucks but
without the same cost. It also invested in new product lines,
such as fresh, premium salads, again offering the same at low

costs. The move proved very successful, allowing McDonald’s
to improve its demand as well as returns in the US, as well as
internationally.
Source: Synaticsworld (2010)
With globalization and growing use of information and
communication technologies and knowledge analytics, many
firms are successfully deploying ‘focused hybrid’ strategy
combining cost leadership and differentiation advantages for
specific needs of the target customer groups. In dynamic
markets, some specific needs, such as sustainability
consciousness, wellness, or smart design, have quite broad-
based appeal. In these conditions, focus hybrid strategy can be
a door to rapid growth. Next we look into this growth view of
value chain hypothesis.
The Growth View of Value Chain Hypothesis
In dynamic markets, benefits of investing in isolating
mechanisms diminish, while the costs of protection rise. Firms
face competitive pressures from a more diverse types of rivals,
using more diverse alternative sets of resources, capabilities,
and core competencies. Growth, more so than protection of cost
leadership or differentiation advantage, becomes a more
attractive business strategy. Growth, as a business strategy,
requires executives to clearly articulate how it will help create
value in terms of the organizational purpose and mission. In
static markets, growth is related with greater economies of
scale, and generates efficiencies that contribute to higher
profitability. It is also related with greater economies of scope,
generating more differentiated value, and thereby higher
profitability. In dynamic markets, however, growth by itself
may not generate efficiencies or differentiated value. On the
contrary, efficient differentiated strategy may be a precondition
for growth to take place in the first place.
Before learning about how to go about growth strategy, it is

useful to first ask should the firms care about growth strategy in
dynamic markets. In dynamic markets, pressures of survival
often lead firms to compromise on social inclusion and
environmental impacts, in their pursuit of growth without any
intentional strategy. Sustainable growth strategy is based on
three pillars – economic, environmental, and social
sustainability. With continued growth in world’s population,
especially in developing nations, growth strategy is becoming
even more important to ensure that children, especially girls,
and mothers receive the care, nutrition, schooling, and
employment opportunities they need. It is also becoming
imperative that this growth be green, so that the environment is
not degraded and resources are not depleted to jeopardize the
current and future pursuit of growth strategy by the vulnerable
children of this world.
The countries where firms have prioritized on growth strategy
have seen dramatic reductions in poverty levels, and
improvements in living standards, on indicators such as literacy,
education, life expectancy, malnutrition, and infant, child, and
maternal mortality. Firms often find it difficult to sustainably
pursue growth strategy, because of market failures and
unfavorable valuation of green and inclusive efforts. Non-
market strategies involving government actors are estimated to
give a support of about $1 trillion annually in energy, water,
materials and food subsidies that encourage firm behavior of
negative environmental impact. If the same amount were
invested in promoting green growth strategies, economic returns
are likely to be about $3.7 trillion annually (McKinsey &
Company, 2011). Reporting requirements on environmental
performance, for instance, have helped firms in China,
Indonesia, the Philippines and Vietnam discover opportunities
for growth-enabling investments that move them from being
noncompliant to becoming compliant, and to do so at low or
even negative costs (The World Bank, 2012).

Approaches to sustainable growth strategy
Sustainable growth strategy is based on three major approaches
(see, for instance, Liabotis, 2007):
a) Capability approach: stop protecting the less viable, non-core
parts of business – the parts that are not valued by customers, or
are not at par with the competitors, or that do not support access
to new market opportunities.
b) Value approach: increase the value of the core parts of
business – transforming them to meet the different needs of
diverse customer groups cost-effectively using a common, a
customized, or even a personalized platform.
c) Opportunity approach: invest in discovering of new
opportunities adjacent to the core parts of business –
particularly through new collaborative efforts that enhance the
firm’s capacity to innovate and incubate new prototypes.
Urbany and Davis (2012) offer a three-circle model of growth
strategy, where they refer capability approach as the company
circle, value approach as the customer circle, and opportunity
approach as the competitor circle.
In the three-circle model, customer circle is the starting point of
formulating growth strategy. The firm begins by identifying a
target customer segment, and inquiring the attributes of firms
that affect family/ society/ customer choice. These are the
criteria customers use when evaluating the firms being
considered, and this evaluation is shaped by their family and
social network. Not all attributes are considered by all
customers. Some attributes are more important than others.
Customers may be grouped together in terms of the factors that
are most important in their decision making. For instance, in a
performance show, customers may seek a unique venue, theme,
refined watching environment, and artistic music and dance.
Some may also seek fun and humor, or even thrill and danger.
This helps firms define the context, and establish the value a
particular customer segment is seeking – this is what the
customers want.

The second step in the three-circle model is to establish the
customer perception of the company attributes, i.e. the company
circle. Note that the company circle here represents what
attributes customers believe the firm offers, not what attributes
are actually offered by the firm or are believed by the firm as
its offer.
The third step is to establish the customer perception of the
competitor attributes, i.e. the competitor circle. Doing so helps
reveal how many of a firm’s positive attributes may be shared
by the competitors, or how the firm may not have many of the
competitor positive attributes.
The overlap and distinctiveness in the attributes among the
three circles then helps a firm discover the points of parity
(overlap among the three circles – represented by A in Figure
3.x), its points of difference (overlap only between the customer
circle and the company circle – represented by B in Figure 3.x),
and the competitor’s points of difference (overlap only between
the customer circle and the competitor circle). Going deeper,
these also help a firm discover the points of non-value (overlap
only between the company circle and the competitor circle) –
these are the attributes that might have been of value to the
customers in the past, but are no longer so. The firm is also
able to identify its points of negative value or inequity (non-
overlapping company attributes), and competitor’s points of
negative value (non-overlapping competitor attributes). These
are the attributes customers are dissatisfied about – such as
difficult to access, low reputation, and complex venue.
Industry-wide dissatisfiers fall under the overlapping company
and competitor circles.
Figure 3.x: The Three Circles Model of Growth Strategy
Source: Urbany and Davis (2012)

Finally, digging even deeper, the firm is able to identify the
‘white space’ – the non overlapping attributes in the customer
circle. It is the value desired by the customers that is not being
served (or not being served effectively) by either the firm or its
competitor. These needs may be currently known or unknown
(latent). Focusing on this white space opens up new uncontested
market opportunity for the firm.
As we learnt in the previous chapter, the firm also needs to
conduct an internal assessment of its own company attributes,
and of the competitor attributes, in order to determine its points
of distinctiveness and commonality in the industry. For
sustainable growth, the firm needs to invest in the points of
distinctiveness that are of value to the customers, and disinvest
from those that are not. It also needs to invest in the points of
unmet potential in the white space.
Note that a firm may not have the resources, the capabilities, or
the core competencies inside its organization to cost-effectively
develop the attributes in the unmet needs white space.
Sustainable growth strategy, in this case, is based on developing
collaborative networks, going beyond the industry boundaries.
For instance, a theater firm may be a greater collaborator for
complementing a firm’s capability in circus shows, to fulfill the
possibly unmet customer needs of artistic performance in a
circus show. By doing so, a firm goes beyond its own value
chain, or even the industry’s value chain, and invests in
developing linkages with the value chains of firms that have
complementary sets of capabilities – the capabilities that could
be integrated or combined together with those of the firm into
innovations that elevate the customer experience.
What should a firm do if other firms are unwilling or unable to
collaborate, or if making such collaboration work requires
unusual investment of time and resources of the firm? In that
case, the firms may consider an option to strategically acquire

those firms, or if that is not feasible, seek to acquire the critical
resources that will enable offering the value desired by the
customers in the most cost-effective manner.
To summarize, firms have four major ways to pursue an organic,
sustainable growth strategy in relation to their existing
customers:
a) Improvement: to invest in improving the capabilities to offer
better value to the customer groups
b) Scaling: to scale up the value that is meaningful to different
target customer groups
c) Innovations: to collaborate with other firms to develop
innovative combinations that elevate the customer experience
d) Strategic acquisitions: to acquire other firms that have
complementary resources, in case the collaborative innovations
option is not cost-effective or feasible.
Blue Ocean Strategy – Going beyond the white space of existing
customers
In a global environment, where about 80% of the world’s
population is waiting to be connected fully with the global
markets, truly dramatic growth opportunity is not with the
existing customers of a firm, but with the non-customers – the
entirely new groups of customers not being served by it or its
industry competitors. Kim and Mauborgne (2005) refer to this
space as a blue ocean opportunity – where firms at least have
some water to themselves. This space is contrasted from the one
associated with current customers, which is referred to as ‘Red
oceans.’ In Red Oceans, firms compete vigorously with their
rivals, seeking to outsmart others and copy their moves.
Therefore, it becomes difficult for the firms to truly sustain
their growth, once they have done all reasonable efforts to meet
the unserved or under-served needs of their target customers.
From that point, the only sustainable growth option is to reach
out to unserved or under-served customer groups, who are not
currently being served by any firm in the industry. Doing so
allows a firm to enhance its differentiation, while also

improving its cost position.
In a study of profit and growth impacts of product launches of
108 companies (Kim and Mauborgne, 2005) have found 86% of
firms were aimed at competing in red oceans. As shown in
Exhibit 3.x, the other 14% were aimed at creating blue oceans,
and they accounted for 38% of total revenues and 61% of total
profits.
Kim and Mauborgne (2005) suggest using the Four Actions
framework (illustrated in Exhibit 3.x) to formulate the blue
ocean strategy; they are as follows:
1. Start with an offering experiencing a red-ocean scenario in
relation to a particular target group of customers, and particular
factors of value.
2. Find an alternative target group of customer, that may
currently be using less desired alternatives or be a non-
customer, who does not care about some of the current factors
of value, but cares of some other factors.
3. Design a new product that eliminates, or reduces well below
market standards, factors of value of less interest to new target
customers. This step unlocks and eliminates costs that are not of
much interest to these customers.
4. Increase the new product range by creating entirely new, or
raise well above market standards the existing one, enhancing
factors of value of more interest to new target customers.
Exhibit 3.x: Four Action Steps to Blue Ocean Strategy
Once value factors (attributes) have been identified for a new
group of customers, to implement steps 3 and 4, Kim, and
Mauborgne (2005) provide two additional tools. A 2x2
Eliminate-Reduce-Raise-Create Table for the value factors, and
a Strategy Canvas that maps the value factors. Each value factor

is assigned a performance rating from 0 to 10 (0-2 = very low;
3-4 = low; 5-6 = medium; 7-8 = high; 9-10 = very high), and
mapped as a curve on the Strategy Canvas. These performance
ratings can also be mapped against one or more baselines, such
as the original curve and/or the curves of the strongest
competitors.
Exhibit 3.x illustrates how Cirque de Soleil successfully
implemented a blue ocean strategy in the circus market. In
Exhibit 3.x, the strategy is portrayed on the Eliminate-Reduce-
Raise-Create Table, and Exhibit 3.x shows the Strategy Canvas
for the same.
Exhibit 3.x: Cirque de Soleil Leaps Forward into a Blue Ocean
In the 1980s, traditional circus market was experiencing a red-
ocean scenario, in relation to its children target market. Cirque
de Soleil decided to focus on an alternative target group, i.e.
adult audience that had abandoned traditional circus. This group
of non-customers was using alternative forms of entertainment,
such as sporting events and home entertainment systems, that
were relatively inexpensive and on the rise. This group did not
value two of the key factors of differentiation that were an
industry standard in the traditional circus market – animals and
star performers, but problematic for the participating firms. The
traditional circus industry was facing increasing pressures from
the animal rights groups for their treatment of animals, and
management of animals was becoming very costly. It also had to
fight to retain a diminishing number of individual star
performers, with fame for their thrilling and dangerous stunts.
The acts of jokers, with knack for fun and humor, were also
becoming banal.
Cirque du Soleil designed a new product – circus theatre, which
eliminated the animals and high-priced concessions, and
reduced the importance of individual stars – the three very high

cost elements. It augmented this new product by introducing an
entirely new form of entertainment based on the intellectual
sophistication of theatre shows that combined dance, music and
athletic skill – thus furthering its differentiation appeal for both
circus customers and non-customers. Each show, like a theater
production, had its own unique theme and storyline; allowing
customers to return to the show more frequently. Instead of
requiring multiple show venues to be near to the customers, it
was now possible to have limited number of unique show
venues where the customers were willing to come. This blue
ocean strategy using a hybrid focus approach helped Cirque du
Soleil gain a significant strategic advantage and grow very
rapidly by redefining circus.
Source: Adapted from Kim and Mauborgne (2005)
Exhibit 3.x: Eliminate-Reduce-Raise-Create Table of Value
Factors for Cirque du Soleil
Eliminate
Start Performers
Animal Shows
Aisle concession sales
Multiple show arenas
Raise
Unique venue
Reduce
Fun and humor
Thrill and danger
Create
Theme
Refined watching environment
Artistic music and dance
Exhibit 3.x: Mapping Value Factors for Cirque du Soleil as a
Curve on a Strategy Canvas

Assignment: Choose a real product that is already on the market
(such as tablet), brainstorm the value factors of the product and
develop the Strategy Canvas.
To summarize, the Growth view of Value Chain, as represented
by the three-circle model or the blue-ocean strategy, holds that
in dynamic environments, a strategy built on investments in cost
reduction or differentiation enhancement for existing, known
market spaces will only erode a firm’s strategic advantage. In
existing known market spaces, referred to as red oceans, firms
try to outperform their rivals to grab a greater share of market.
These red ocean market spaces are crowded, and prospects for
profits and growth are low. Conversely, an integrated approach
can allow the firm to create new demand, instead of fighting for
it. In this new yet unexplored space, referred to as blue oceans,
there is sufficient opportunity for growth that is both profitable
and rapid.
Concluding comments
Traditional value chain analysis, represented by the seminal
work of Porter (1985), was motivated by the strategic emphasis
on protection. The goal was to sustain a firm’ strategic
advantage by protecting its foundations; this in turn meant
creating a condition where the competitors aren’t able to attack
the firm, what it does, and how it does that. The fundamental
guiding principle in business strategy was to target as much of
the target market as possible, as that alone would enable a firm
to generate greatest economies of scale for achieving least cost,
or cost leadership position in the market. Alternatively, the firm
having the largest target market will have the deepest
understanding of for what the customers are willing to pay a
premium, allowing them to attain differentiation advantage. Of
course, not all firms could be the largest, and attain either the
least cost or meaningful differentiation position for this large
group. For the firms who could not viably attain the goal of

being the best or meaningfully different, Porter suggested the
focus strategy. The idea was for the firm to find largest possible
market niche, where it could viably achieve least cost
leadership or differentiation advantage. In other words, if a firm
could not be largest or sufficiently different, then it needed to
be small enough to escape the attention of the larger rivals to
have a sustainable advantage.
The new growth-based view of the value chain hypothesis does
not necessarily require a firm to seek a cost leadership or
differentiation advantage. Starting point of the growth-based
view is not the firm capability that needs to be protected
somehow, but the market opportunity that has not yet been
discovered or exploited. Though the inside-firm value chain
may not hold the resources, capabilities or core competencies to
pursue this market opportunity, firm may still be successful if it
is able to find complementary linkages between its own value
chain and the value chains of other firms who do have the
resources, capabilities, or core competencies that would allow
exploiting the market opportunity.
Besides a firm’s capability and market opportunity, the growth-
based view also emphasizes on the stakeholder value. Existing
customers are an obvious stakeholder, but it is important for the
firms not to limit their opportunity based on the needs of
existing customers alone. Rather, they may create even greater
value for an entirely new set of customers, who are non-
customers for the industry currently. To identify appropriate set
of customers, it is important for the firms to also consider their
own constituent stakeholders – such as the values and the
aspirations of their current or potential new investors, leaders,
employees, vendors, and community members.
Once the firm identifies appropriate target customers to unlock
its growth potential, it is important to be conscious of the need
to be as cost-effective as possible, and to be as unique as

possible. If a firm is not concerned about cost-effectiveness,
then it would not accrue as much value for the target customers
or for itself to support further growth or other priorities. If a
firm is not concerned about being unique, then it would not be
as attractive to the target customers and will not be as
successful in realizing its strategic intent. Cost leadership and
differentiation, then, is more of an aspirational goal and guiding
principle for the firms pursuing the growth business strategy. It
is not the foundation for their business strategy, nor is the
foundation of the success or failure of their business strategy.
Thus, the Growth view represents an additional type of generic
source of strategic advantage for firms, which is different from
the other three types covered in the first part of this chapter –
cost, value and focus.
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to create uncontested market space and make the competition
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longitudinal study of Austrian SMEs, Small Business
Economics, 35, pp. 169-89.
Liabotis, B. (2007). Three Strategies for Achieving and
Sustaining Growth, Ivey Business Journal, July/August 2007,
Accessed http://iveybusinessjournal.com/publication/three-
strategies-for-achieving-and-sustaining-growth/
Mantle, J. (1995). Car Wars: Fifty Years of Backstabbing,
Infighting, and Industrial Espionage in the Global Market. NY:
Arcade Publishing.
McKinsey and Company. 2011. “Resource Revolution: Meeting
the World’s Energy, Materials,
Food, and Water Needs.” McKinsey Global Institute.

Mintzberg, H. (1988). Generic strategies: Toward a
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Advances in strategic management (Vol. 5). Greenwich, CT: JAI
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Miskell, P. (January 17, 2005). How Crest Made Business
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http://hbswk.hbs.edu/archive/4574.html
Nestle (2011). Buitoni targets foodies with new premium range,
Press Release,
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foodies-with-new-premium-range
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Network equipment and spectrum
Infrastructure and operations
Billing
Retail distribution
Portals and resellers
Design
Production
Marketing
Support

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

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

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

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

rising health-consciousness, and is expected to sustain that
growth over the coming years. The
government of India has set targets to triple the size of
processed food sector, by increasing the
level of processing of perishables from 6% to 20%, and value
addition from 20% to 35%, as a
way to raise farm incomes (Sharma, 2015).
Dabur has been sourcing mass-produced lychee,
guava, grapes, and mango juices from
the domestic vendors, and orange, apple, and pineapple
concentrates from the overseas suppliers.
To be more responsive to the consumer needs, Dabur has been
buying fruits directly from
farmers since 2004, and is processing them in-house in a new
plant it set-up in Siliguri, West
Bengal. It has also migrated to a flexible production system to
offer fruit in a variety of
specialized forms, such as juice, sauce, puree, smoothie, paste,
and ketchup.
To grow its share of the overall market and grow even
faster than the market, Dabur has
used customized Research and Development to boost the share
of the under-served institutional
segment in its total sales from a fourth in 2003 to a third now.
Amit Burman, the then CEO of
Dabur, noted, ‘Often, products are created when our
[institutional] buyers tell us about their
culinary problems, which could range from getting pre-chopped
onions in bulk to mixing the
best juice and yoghurt smoothie. As we have the experience and

the network, and there is ample
capacity available in the country, it is easy for us to offer
solutions (Srinivas, 2003).’
More flexible operations and sourcing system, and
institutionally led marketing and
research effort has also helped Dabur realize its strategic intent
of becoming a leader in the
broader processed fruits market, beyond just juices and
concentrates.
In the previous chapter, we learnt about the three different types
of business strategies –
cost leadership, differentiation, and growth mindset (besides
‘focus’). In addition to deciding
the overall strategy for their business, executives also need to
develop and align functional core
competencies. Dabur’s growth business strategy has required
new competencies in supply chain,
research and development, operations, and marketing. Each
function relies on different and
specific techniques and technologies to achieve the common
business objectives of cost
efficiency, customer and quality differentiation, and innovation
for growth.
Each of the three types of business strategies is often equally
viable. In fact, on average,
the two contrasting business strategies—cost leadership and
differentiation in the Porter’s
framework—perform equally well (Gupta and Govindarajan,

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

and fosters a culture of inter-
functional collaboration, these interactive functional behaviors
are more likely to actualize.
To resolve the above challenges, design of functional strategies
should be guided by three
principles:
(a) Consistency: Functional behaviors should be consistent with
the business objectives.
If the goal is to create a premium positioning, then the use of
low-end, discount distribution
channels may not be effective.
(b) Balance: Micro foundations are necessary to balance
functional behaviors, based on a
portfolio of inter-balancing core competencies across different
functions. If the goal is to realize
low cost leadership, manufacturing may seek to maintain zero
inventory levels; however, such
zero inventory levels could result in a loss of sales, decline in
the customer satisfaction, and
reduced economies of scale and profitability. Therefore, the
firm may need to invest in more
interactive vendor and customer relations, for more dynamic
information exchange about
demand and supply.
(c) Dynamism: Firms should be cautious in not inadvertently
turning their functional core
competencies into a source of rigidity and entropy. They
should foster a culture of learning and
functional dynamism, alert about changes in the environment. A
firm which focuses on small

local business customers may observe changes in customer
needs, when the customers become
bigger and global, and when new competitors enter with
innovative products. In this situation,
the firm may need to improve its customer servicing, in order to
defend its overall low cost
focus, and accordingly adapt its functional level strategies. For
instance, consider how Daewoo
Motors balances the limitations of its supply chain, human
resources, and operations, by
adopting an unusually responsive customer servicing function:
it even accepts higher costs of
warranty to effectively implement its cost leadership strategy in
the car business:
Daewoo Motors deploys a cost leadership strategy in its
automotive business in the US. Its cars
are priced at least 10–20% less than the competing cars in given
market segments. While many
customers of Daewoo Motors report high satisfaction with the
quality of their cars, Daewoo cars
are not generally perceived as reliable as the competing cars
from the Japanese and American
firms. To give customers peace of mind, Daewoo offers an
industry leading 10-year warranty
that includes free roadside assistance. This warranty is a
necessity—a hygiene factor—in getting
the consumers to buy its cars. The warranty does not
differentiate Daewoo from its competitors
since the customers are not motivated to purchase Daewoo car

primarily because of this
warranty. Instead, Daewoo customers are attracted by its low
prices. The warranty serves to
balance the concerns about quality that are associated with cost-
cutting strategy, and signals to
the customers that Daewoo is responsive to their concerns.
The guiding principles of consistency, balance, and
responsiveness, also help a firm
operating with a protectionist view of value chain, seeking only
either cost leadership advantage
or differentiation advantage, to migrate to a growth mindset
under more dynamic conditions. In
dynamic environments, a traditional cost-leader will find it
more difficult to ignore quality,
product image, and bases for differentiation. Similarly, a
differentiator will find it necessary to
3
also adopt an effective cost control, even though cost
containment was not a priority in the past.
Thus, a firm with a traditional business strategy of
differentiation will gain the dynamic
capability to leverage some low-cost functional strategies and
thereby transform from a
costescalating differentiator to a cost-effective differentiator. In
the 1990s, the premium car

maker, Mercedez Benz relied on cost containing functional
strategies for supporting its growth
strategy, after an earlier set of differentiation alone functional
strategies ended up creating highly
expensive products for which there was a very limited demand.
Mercedez business unit of Diamler-Benz traditionally followed
a business strategy of
differentiation. During the 1980s, Japanese firms rapidly
upgraded their capabilities to offer
viable products in the mid-range automotive market. In response
to losses in the mid-range
market, American firms started offering a variety of luxury-
oriented options in their vehicles to
make them attractive for the high-end customers. As a result,
demand for the high-end
differentiated Mercedez cars began shrinking.
Initially, Mercedez sought to habitually defend its competitive
position by using functional
strategies to enhance differentiation. This added differentiation
only raised the costs of the
vehicles, and made them too pricey for most customers. The
sales of Mercedez cars dropped
dramatically, even though the overall auto market was growing.
Thereafter, Mercedez decided to adopt new low-cost functional
strategies to support its new
focus on growth business strategy. It ventured outside Germany,
where its cost of operations

were very high, and invested in the US for making less costly
versions of Mercedez cars. The
more cost-effective, nevertheless distinctive, Mercedez cars
proved immensely attractive to a
larger group of customers (Gupta, 1998).
In the field of strategy, three major sources of competitive
advantage are recognized –
resource-based view, relational view, and growth view.
Resource-based view emphasizes the
role of resources (Wernerfelt, 1984; Rumelt, 1984, Penrose,
1959), knowledge (Nelson &
Winter, 1982; Arthur, 1994), core competencies (Prahalad &
Hamel, 1990), and dynamic
capabilities (Teece, Pisano & Shuen, 1992). Resources become
a source of enduring competitive
advantage through the presence of isolating mechanisms that
make it difficult for other firms to
substitute or imitate those resources (Rumelt, 1984).
Knowledge resources, in particular, tend to
be protected by isolating mechanisms, because uniquely varying
paths of firm experience
generate uniquely varying bundles of resources and uniquely
varying ways of combining and
codifying these resources for specific deployments (Nelson &
Winter, 1982). Firms develop
core competence for coordinating, communicating and
integrating their unique bundle of
resources and knowledge into a range of technological

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

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

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

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

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

or the specialists who have the
power to evaluate and decide the boundaries of each members’
role.
b) Talent deployment and development: Talent is deployed in
the roles that each individual
employee can best perform based on his or her specific skill sets
and experiences, given the
skill sets and experiences of other employees or even
potentially new employees. Firm
makes minimal investments in talent development, unless it is
unable to find the talent of
required skills and experiences in its local market and hiring the
talent from the global
market is either not feasible or not cost-effective.
c) Talent compensation and churn: Talent is compensated based
on the match with the
requirements of the job, and based on the market range for
performance of that job type. If
6
others whose skills and experiences are a better match for the
job are available for similar
levels of market compensation, then the firm is unlikely to be
willing to pay the same
compensation to the current employee and expects the employee
to search for alternative jobs
that are more closely aligned with his or her specific skills and

experiences.
In India, many firms are using low commitment HR to support
their cost leadership
objectives in the initial prospecting at the bottom of the value
chain involving simple projects for
the customers, but then rapidly introducing high commitment
HR as they move up the value
chain taking on highly complex projects, for which talent is not
available in the outside labor
markets. A low commitment human resource strategy has
evolved to support lower costs—one
that relies on the temporary staffs, referred to as ‘pilot
salesmen’, hired through the external
staffing consultants. Cadbury India, for instance, has 250 pilot
salesmen on its payroll. About
75% of Cadbury’s volumes are from 30% of its territories;
therefore, it has decided on a two-tier
system. In the metros and mini- metros, where large volumes of
premium products are sold, it has
its own sales officers that support a differentiation advantage.
In Class II and smaller towns like
Meerut, where mostly lower-end products are sold, it deploys
pilot salesmen at the front-line
level to support a cost leadership advantage (Pande and Kumar,
2003).
Li (2003) investigated the relationship between HR strategies

and business objectives,
using a sample of beverage and electronic multinational
corporations in China. The study shows
the firms seeking a cost efficiency objective tended to use
short-term and temporary employment
and less educated workforce, offer less monetary compensation
to the employees, and rely more
on the managers and supervisors for making major decisions
and disciplining employees. In
contrast, the firms seeking differentiation business objectives
tended to use long-term and
continuing employment and more educated workers, give more
monetary compensation to the
employees, and involve workers in making major decisions.
Firms using a high commitment HR strategy are likely to invest
deeply in their human
resources to support their differentiation advantage and tend to
be highly protective of their
employees, as they may lose their unique firm-specific
knowledge to their rivals should a critical
mass of their highly experienced employees were to be poached
by their rivals. Such firms are
likely to behave like defenders (Miles and Snow, 1984). In
such firms, employees with greater
firm and product-specific skills and knowledge are likely to be
valued more, and enhanced
through continuous training, well-established career paths, and
performance appraisal and
feedback systems that foster employee development. A high

amount of employment security and
voice is likely to be offered to the employees to mitigate
turnover, minimizing the cost of
replacing workers and the knowledge they possess.
In contrast, firms using a low commitment HR strategy are
likely to take a market-
arbitraging freelancer approach to their human resources to
support their cost efficiency
advantage and develop a capacity to substitute talent or use
semi-skilled talent interchangeably.
Such firms are likely to begin behaving like Prospectors (Miles
and Snow, 1984). Such firms
may have stronger capacity to adopt new technologies or pursue
new product-markets, using
talent hired from outside.
In the past, the global HR best practices were commonly
referred to as the high
performance HR practices, because they reflect best practices
adopted by the world’s most
7
successful organizations. Paul Osterman (1994) reported that
the high performance HR practices
are more likely to be adopted by firms engaged in the sectors
exposed to international
competition, employing more advanced technology, and
pursuing integrative competitive

strategies that combine quality and service dimensions as well
as cost. In recent years, with the
rapid pace of technology change and the need for integrating
diverse sources of knowledge,
world’s most successful firms have relied increasingly on
freelance and contract knowledge
workers. In fact, this new world is being referred to as the
“gig” or “freelance” economy.
When the firms deploy freelance workforce in an organizational
and market culture of
low-commitment HR, the overall morale of both internal and
external workforce is likely to be
low and diminish with potential of high conflict. Conversely,
when the firms deploy freelance
workforce in an organizational and market culture of high
commitment HR, the overall morale of
both types of workforce is likely to be high and rise through
potential of collaboration and
enhanced success.
Building commitment in a Freelance Economy
Hiring freelancers as regular employees has become a cost-
effective solution for firms seeking to
sustain growth. Freelance employees bring specialization,
creativity and flexibility to firms. It
is possible to hire such employees from around the world, at
very short notices, without too

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