Business Strategies based on Value Chain

Chapte r 7. Supporting Busine ss Strate gy through Functional Strate gie s

In 2015, India’s packaged fruits drink market was valued at Rs. 11 billio n (~US$200 millio n) .

Dabur held a 55% share of the market, followed by PepsiCo at 30%; up from 50% and 25%

res pectively a decade back. Fe wer than 20% of the people in India consume fruit juices as part

of th eir diet, as compared to ~40% who consumed bottled water and ~60% who co nsumed coffee

and soft drinks . Over the past decade, the market has grown by 15 -20% annually because of the

ris ing health -consc io us ness , and is expected to sustain that growth over the coming years. The

governme nt of India has set targets to triple the size of processed food sector, by increasing the

level of processing of perishables f rom 6% to 20%, and value addition from 20% to 35%, as a

way to raise farm incomes (Sharma, 2015) .

Dabur has been sourcing mass -produced l ychee, guava, grapes, and mango juices from

the domestic vendors, and orange, apple, and pineapple con centrates from the overseas suppliers.

To be more responsive to the consumer needs, Dabur has been buying fruits directly from

farmers since 2004 , and is process ing them in -house in a new plant it set -up in Siliguri, West

Bengal. It has also migrated to a flexib le production system to offer fruit in a variety of

specialized forms, such as juice, sauce, puree, smoothie, paste, and ketchup.

To grow its share of the overall market and grow even faster than the market, Dabur has

used customized Research and Developme nt to boost the share of the under -served institutio na l

segment in its total sales from a fourth in 2003 to a third now . Amit Burman, the then CEO of

Dabur, noted, ‘Often, products are created when our [institutio na l] buyers tell us a bout their

culinary problems, which could range from getting pre -chopped onions in bulk to mixing the

best juice and yoghurt smoothie. As we have the experience and the network, and there is ample

capacity availab le in the country, it is easy for us to off er solutio ns (Srinivas, 2003).’

More flexib le operations and sourcing system, and institutio na lly led marketing and

research effort has also help ed Dabur realize its strategic intent of becoming a leader in the

broader processed fruits mar ket, beyond just juices and concentrates.

In the previous chapter, we learnt about the thre e differe nt types of business strategies –

cost leadership, differentia tio n, and growth mindset (besides ‘focus’) . In addition to deciding

the overall strategy for their business, executives also need to develop and align functio na l core

competencies. Dabur ’s growth business strategy has required new compet encies in s upply chain,

research and developme nt, operations, and marketing. Each functio n relies on different and

specific techniques and technologies to achieve the common business objectives of cost

effic ie nc y , customer and quality differe ntiatio n, and innovatio n for growth .

Each of the three types of business strategies is often equally viable. In fact, o n average,

the two contrasting business strategies — cost leadership and differe ntiatio n in the Porter’s

framework — perform equally well (Gupta and Govindaraja n, 1984). Some firms still outperform

others because of their ability to develop appropriate supporting functio na l core competencies .

In doing so, the firms must deal with two challenges:

a) Business level strategy: First, business strategies need to be supported with appropria te

functio na l core competencie s. For instance, a firm with a business strategy of cost leadership

(such as a budget hotel or budget airline ) , may invest in technologi es that minimize the quality

assurance and training needs, simplify product designs to reduce the need f or specialized vendors

or machines, and simplify the customer servicing to efficie ntly deliver its products .

b) Micro foundatio ns: Second, structural and relationa l conditions need to be conducive to

promote the i ntended functio na l behaviors. For instance, some sort of centralized organiza tio na l

structure may help achieve the cost effic ie nc y busi ness objectives. Consider a case where a firm

offers promotiona l discounts to impleme nt a volume leadership strategy, but fails because it did

not also develop vendors and capacity to scale manufa cturing without compromising on quality.

W hen a higher central structure oversees all these functio ns, and fosters a culture of inter -

functio na l collaboratio n , these interactive functio na l behaviors are more likely to actualize .

To resolve the above challenges, d esign of functio na l strategies should be guided by three

princip les:

(a) Consi sten cy : Functiona l behaviors should be consistent with the business objectives .

If the goal is to create a premium positioning, then the use of low -end, discount distributio n

channels may not be effective.

(b) Balance: Micro foundatio ns are necessary to balance functio na l behaviors, based on a

portfolio of inter -bala nc ing core competencies across differe nt functio ns. If the goal is to realize

low co st leadership, manufacturing may seek to mainta in zero inventory levels; however, such

zero inventory levels could result in a loss of sales, decline in the customer satisfactio n, and

reduced economies of scale and profitability. Therefore, the firm may ne ed to invest in more

interactive vendor and customer relations, for more dynamic informa tio n exchange about

demand and supply.

competencies into a source of rigid ity and entropy. They should foster a culture of learning and

functio na l dynamism, alert about changes in the environme nt. A firm which focuses on small

local business customers may observe changes in customer needs, when the customers become

bigger and global , and when new competitors enter with innovative products. In this situatio n,

the firm may need to improve its customer servic ing , in order to defend its over all low cost

focus , and accordingly adapt it s functio na l level strategies. For instance, consider how Daewoo

Motors balances the limita tio ns of its supply chain, human resources, and operations, by

adopting an unusua lly responsive customer servicing functio n: it even accepts higher costs of

warranty to effective ly imple me nt its cost leadership strategy in the car business:

Daewoo Motors deploys a cost leadership strategy in its automotive busine ss in the US. Its cars

are priced at least 10 –20% less than the competing cars in given market segments. While many

customers of Daewoo Motors report high satisfactio n with the quality of their cars, Daewoo cars

are not generally perceived as reliable as t he competing cars from the Japanese and American

firms. To give customers peace of mind, Daewoo offers an industry leading 10 -year warranty

that includes free roadside assistance. This warranty is a necessity — a hygie ne factor — in getting

the consumers to bu y its cars. The warranty does not differe ntiate Daewoo from its competitors

since the customers are not motivated to purchase Daewoo car primarily because of this

warranty. Instead, Daewoo customers are attracted by its low prices. The warranty serves to

balance the concerns about quality that are associated with cost -cutting strategy, and signals to

the customers that Daewoo is responsive to their concerns.

The guiding princip les of consistenc y, balance, and responsiveness, also help a firm

operating wi th a protectionist view of value chain, seeking only either cost leadership advantage

or differe ntiatio n advantage, to migrate to a growth mindset under more dynamic conditio ns. In

dynamic environme nts, a traditio na l cost -leader will find it more diffic ul t to ignore quality,

product image, and bases for differe ntia tio n. Similarly, a differentia t or will find it necessary to

also adopt an effective cost control, even though cost containme nt was not a priority in the past .

Thus, a firm with a traditiona l busi ness strategy of differe ntiatio n will gain the dynamic

capability to leverage some low -cost functio na l strategies and thereby transform from a

costescalating differentia tor to a cost -effective differe ntiator. In the 1990s, the premium car

maker, Mercedez B enz relied on cost containing functio na l strategies for supporting its growth

strategy , after an earlier set of differe ntiatio n alone functio na l strategies ended up creating highly

expensive products for which there was a very limited demand.

Mercedez bus iness unit of Diamler -Be nz traditio na lly followed a business strategy of

differe ntiatio n. During the 1980s, Japanese firms rapidly upgraded their capabilitie s to offer

viable products in the mid -range automotive market. In response to losses in the mid -ran ge

market, America n firms started offering a variety of luxury -orie nted options in their vehicles to

make them attractive for the high -end customers. As a result, demand for the high -end

differe ntiated Mercedez cars began shrink ing.

Initia lly, Mercedez s ought to habitually defend its competitive position by using functio na l

strategies to enhance differe ntiatio n. This added differentia tio n only raised the costs of the

vehicles, and made them too pricey for most customers. The sales of Mercedez cars dropped

dramatica lly, even though the overall auto market was growing.

Thereafter, Mercedez decided to adopt new low -cost functio na l strategies to support its new

focus on growth business strategy . It ventured outside Germany, where its cost of operations

were very high, and invested in the US for making less costly versions of Mercedez cars. Th e

more cost -effective , neverthe less distinctive, Mercedez cars proved imme nse ly attractive to a

larger group of customers (Gupta, 1998).

In the field of strategy, three major sources of competitive advantage are recognized –

resource -based view, relationa l view, and growth view. Resource -based view emphasize s the

role of resources ( Wernerfelt, 1984; Rumelt, 1984, Penrose, 1959 ), knowledge (Nelson &

Winter, 1982; Arthur , 1994), core competencie s (Prahalad & Hamel, 1990), and dynamic

capabilities (Teece, Pisano & Shuen, 1992). Resources become a source of enduring competitive

advantage through the presence of isolating mechanisms that make it diffic ult for other firms to

substitute or imitate those resources (Rumelt, 1984). Knowledge resources, in particular, tend to

be protected by isolating mechanisms, because unique ly varying paths of firm experience

generate unique ly varying bundles of resources and unique ly varying ways of combining and

codifying these resources for specific deployments (Nelson & Winter, 1982). Firms develop

core competence for coordinating, communica ting and integrating their unique bundle of

resources and knowledge into a range of technologica l a pplicatio ns for customer benefits,

thereby accruing increasing returns and competitive differe ntiatio n (Prahalad & Hamel, 1990).

While finance per se may not result in competitive advantage, firms leverage financ e by

investing into dynamic capability for reconfiguring their resource bundles in sync and with

agility to the changing, often in uncertain, complex, ambiguo us and discontinuo us ways, threats

and opportunitie s in the environme nt (Teece, Pisano and Shuen, 1992).

Relationa l view (Dyer and Singh, 1 986) emphasizes the role of strategic relationship s

with key stakeholders – employees, suppliers, and customers. Even the rivals are co -opted using

a lens of value net collaboratio n, and become suppliers, customers, or even extended employee

base strivin g to solve problems or pursue opportunitie s for creating value together

(B randenburger and Nalebuff , 1996).

Growth view emphasizes operational agility and resilie nc y of firms in moving to,

protecting and upgrading structurally attractive positons (Porter , 1996), leadership capacity for

managing change and enacting entrepreneuria l mindset (Gupta, Macmilla n & Surie, 2004), and

mindful stewarding of the firm’s missio n, vision and values for responsible behaviors.

Managing resources, managing relationships, and managing growth, then, are three

fundame nta l strategies for achieving enduring competitive advantage for any firm. The objective

of this paper is to deconstruct these fundame nta l strategies into specific functio na l strategies.

a) Managing three types of relationships – human resources (manpower), supply chain

(materia ls), and customers (marketing),

b) Managing three types of resources – knowledge (methods), technology and

innovatio n (machine), and investme nts (money),

c) Managing thr ee levers of growth – operations (manufacturing power), leadership

(motivating power), and stewardship (manipulating power).

Figure 4.1 illustra t es the classifica tio n framework, which we refer to as 9M model of

functio na l strategies.

A. Managing Relat ionships - Functions about the relationships with workforce, vendors, and

customers

Part I – M anaging Re lationships

Managing Relationships with Workforce – Human Resources Strategy

Manpower functio n includes decisions about talent acquisitio n and accultur atio n, deployment

and development, & compensatio n and churn . Human resource (HR) strategy entails managing

manpower functio n to support the business objectives . Functiona lly, HR strategy is often

classified as high commitme nt or low commitme nt (Gupta, 2011). A high commitme nt HR

strategy is driven by an organiza tio na l culture of mutual commitme nt among the firm and its

human resources . There is a commitme nt to deep learning about the firm , and the attributes that

make the firm unique ly successful . The goal is to develop a workforce that has special talent in

carefully serving the firm’s specific target customer groups, such as through a history of long -

ter m experiences and dedicated relationships with those groups. Conversely, a low commitme nt

HR strategy relies on securing freelance employees who bring transferab le skills and experience

with them. The emphasis is less on compensating employees for their commitme nt to learn, but

for their demonstratio n of high performance.

Key elements of a high -commitme nt HR strategy include :

a) Talent acquisitio n and acculturatio n: To achi eve deep organiza tio na l learning , high

commitme nt HR strategy seeks high levels of mutual commitme nt on part of both the hiring

managers as well as hired employees. Talent is acquired for their potential commitme nt to

the firm, a nd willingness to embrace the corporate family and its service excelle nce priority.

b) Talent deployment and development: High -commitme nt HR strategy actualizes commitme nt

through flexib le deployment of talent, and a carefully crafted career developmen t plan where

each employee is offered opportunity to develop , such as through rotation across multip le

functio ns. This helps each employee to leverage the entire portfolio of functio na l core

competencies to develop a deeper learning of the value firm may add , and to actually design

and deliver this added value. Instead of having a higher central authority deciding how to

best integrate and combine various functio na l core competencies, each employee is

developed to be able to do so in a rapid, res ponsive and decentralized manner. Employees

are trained extensive ly to be multi -task experts and are assigned broadband job

classific atio ns, so that there is no gap in service if anyone is absent or decides to leave.

c) Talent compensatio n and churn : High commitme nt HR strategy sustains commitme nt by

compensating for not only performance, but also accumulatio n of firm -spec ific knowledge

and experience through years of dedicated service encompassing multip le functio ns,

geographies, and product groups. To en courage high levels of churn or mobility within the

firm, and low levels of attritio n, employees are offered voice and autonomy to be self -

managing; and are given the informatio n, opportunity, and authority to serve the customers

the best way possible .

Co nversely , key elements of a low commitme nt HR strategy are as follows:

a) Talent acquisitio n and acculturatio n: Talent is acquired for the skills and experiences

employees bring with them, almost as if they are freelancers who are offering their talent and

hu man capital. Firms achieve greatest cost effic ie nc y when they acquire a talent portfolio

comprising of employees whose skills complement one another, and who work together well

as a team, through fairly objective well -defined roles. The most critical acc ulturatio n is for

the employees to be oriented about other members of the team whose roles influe nce their

own efficie nc y, and with the structures such as the supervisors or the specialists who have the

power to evaluate and decide the boundaries of each m embers’ role.

b) Talent deployment and development: Talent is deployed in the roles that each individ ua l

employee can best perform based on his or her specific skill sets and experiences, given the

skill sets and experiences of other employees or even po tentia lly new employees. Firm

makes minima l investme nts in talent development, unless it is unable to find the talent of

required skills and experiences in its local market and hiring the talent from the global

market is either not feasible or not cost -effective.

c) Talent compensatio n and churn : Talent is compensated based on the match with the

requireme nts of the job, and based on the market range for performance of that job type. If

others whose skills and experiences are a better match for the job are availab le for simila r

levels of market compensatio n, then the firm is unlike ly to be willing to pay the same

compensatio n to the current employee and expects the employee to search for alternative jobs

that are more closely aligned with his or he r sp ecific skills and experiences.

In India, many firms are using low commitme nt HR to support their cost leadership

objectives in the initia l prospecting at the bottom of the value chain involving simple projects for

the customers, but then rapidly intro duc ing high commitme nt HR as they move up the value

chain taking on highly complex projects, for which talent is not availab le in the outside labor

markets. A low commitme nt human resource strategy has evolved to support lower costs — one

that relies on the temporary staffs, referred to as ‘pilot salesmen’, hired through the external

staffing consultants. Cadbury India, for instance, has 250 pilot salesmen on its payroll. About

75% of Cadbury’s volume s are from 30% of its territories; therefore, it has deci ded on a two -tier

system. In the metros and mini -me tros, where large volume s of premium products are sold, it has

its own sales officers that support a differentia tio n advantage. In Class II and smaller towns like

Meerut, where mostly lower -end products ar e sold, it deploys pilot salesmen at the front -line

level to support a cost leadership advantage (Pande and Kumar, 2003).

Li (2003) investigated the relationship between HR strategies and business objectives,

using a sample of beverage and electronic multina tio na l corporations in China. The study shows

the firms seeking a cost effic ie nc y objective tended to use short -term and temporary employme nt

and less educated workforce, offer less monetary compensatio n to the employees, and rely more

on the manag ers and supervisors for making major decisions and disciplining employees. In

contrast, the firms seeking differe ntiatio n business objectives tend ed to use long -term and

continuing employme nt and more educated workers, give more monetary compensatio n to th e

employees, and involve workers in making major decisions.

Firms using a high commitme nt HR strategy are likely to invest deeply in their human

resources to support their differe ntiatio n advantage and tend to be highly protective of their

employees, as t hey may lose their unique firm -specific knowledge to their rivals should a critical

mass of their highly experienced employees were to be poached by their rivals. Such firms are

likely to behave like defenders (Miles and Snow, 1984). In such firms, emp loyees with greater

firm and product -specific skills and knowledge are likely to be valued more, and enhanced

through continuo us training, well -established career paths, and performance appraisal and

feedback systems that foster employee development. A hig h amount of employme nt security and

voice is likely to be offered to the employees to mitiga te turnover, minimiz ing the cost of

replacing workers and the knowledge they possess.

In contrast, f irms using a low commitme nt HR strategy are likely to take a market -

arbitraging freelancer approach to their human resources to support their cost effic ie nc y

advantage and develop a capacity to substitute talent or use semi -skilled talent intercha ngeab ly .

Such firms are likely to begin behaving like Prospectors (Miles and Snow, 1984). Such firms

may have stronger capacity to adopt new technologies or pursue new product -markets , using

talent hired from outside.

In the past, the global HR best practices were commonly referred to as the high

performance HR practices, because they reflect best practices adopted by the world’s most

successful organizatio ns. Paul Osterman (1994) reported that the high performance HR practices

are more likely to be adopted by firms engaged in the sectors exposed to internatio na l

competitio n, employing more advance d technology, and pursuing integrative competitive

strategies that combine quality and service dimensio ns as well as cost. In recent years, with the

rapid pace of technology change and the need for integrating diverse sources of knowledge,

world’s most s uccessful firms have relied increasingly on freelance and contract knowledge

workers. In fact, this new world is being referred to as the “gig ” or “freela nce ” economy.

When the firms deploy freelance workforce in an organiza tio na l and market culture of

low -commitme nt HR, the overall morale of both interna l and external workforce is li kely to be

low and diminish with potential of high conflict. Conversely, when the firms deploy freelance

workforce in an organiza tio na l and market culture of high commitme nt HR, the overall morale of

both types of workforce is likely to be high and rise t hrough potential of collaboratio n and

enhanced success.

Building commitment in a Freelance Economy

Hiring freelancers as regular employees has become a cost -effective solutio n for firms seeking to

sustain growth. Freelance employees bring specializa tio n, creativity and flexib ility to firms. It

is possible to hire such employees from around the world, at very short notices, without too

much cost. A big downside of freelance employees is their lack of familiarity with the company

and their low levels of engageme nt as a result . Many companies are now using technology to

train such employees. An elearning platform allows freelancers to connect remotely on their

mobile devices, and share their learning acccomplishme nts on social media. And, it is scalable at

very little cost. The firms are making freelancers participating members of their organiza tio n ,

includ ing them in all communicatio n and inviting them to all team meetings. They are includ ing

freelancers in employee recognitio n programs , featuring them in corporate newsletters and

giving them awards. They set regular meetings to provide feedback on challenges faced and

schedule time sensitive performance reviews. They als o solicit feedback from freelancers, in

order to discover new opportunitie s and to show they are valued by the company.

M anaging Re lationships with Ve ndors - Supply Chain Strate gy

Supply chain strategy involves managing t he entire sequence of materia ls, informa tio n, and

money flow from the supplier s to customer s, with an emphasis on the business objectives .

Functiona lly, supply chain strategy may be classified as responsive vs. predictable. A

responsive supply chain strategy is driven by an organiza t io na l culture that is agile, custom

configurab le, and flexib le. It engages mutua l co -development efforts on part of the firm and its

vendors, to learn about one another and to align capability development efforts. Vendors are

qualified based on their wil lingness to invest in specialized learning about the firm, and its

customers. The firm and its vendors seek to work very closely to develop high degree of

empathy about the needs of target customers, and to bring the decoupling point to near the start

of the transforma tio n process in the value chain (Olhager, 2012). The d ecoupling point is where

a product takes on unique characteristics or specifica tio ns for a specific customer or group of

customers. Because of the mutua lly collaborative relationship be tween the firm and the

vendors, the firm is able to customize a larger proportion of the value -added in an agile, flexib le

way (Olhager, 2012 1).

Proactive demand manageme nt in responsive supply chains goes beyond the typical

market offerings, reactive pr oblem solving and recovery, and even simple satisfactio n of existing

customer satisfactio ns (Morash, 2001) . Emphasis is on becoming a part of the customer

organiza tio n as ‘interna l consultants’, with high levels of ongoing help, support, and interactive

advisory services that help guide the customer to appropriate change and success. There is a

recognitio n that if the customers succeed, then everyone in the supply chain will grow; thus the

firm may seek to research the needs of not only the customers, but also of the customers’

customers (Morash, 2001) 2.

Conversely, a predicable supply chain strategy is a market arbitraging approach oriented

towards search for the most cost -effective ways of serving customer needs. Here suppliers are

qualified based on their cost -effective ness in offering supplies of rather standard specificatio ns in

suffic ie nt volume s and with short lead times. The firms may have multip le vendors for the same

supplies, to ensure they are getting the most competitive purchasing costs. Such a strategy

contributes to supply chains that are efficie nt, fast, and predictable (Perez, 2013) . Predictable

supply chain strategy emphasizes matching supply to predictable demand as efficie ntly as

poss ible. Managers may invest in business processes such as just -in-time inventory system, and

technology, such as computerized warehousing, to reduce the costs of material manageme nt.

These competencies allow the firms to offer effic ie nt delivery of reliabl e products and services at

competitive prices, with minima l diffic ulty and inconve nie nce to the customers. The total cost

for the customer is reduced through lower costs of order fulfillme nt, and through supply chain

time compression. The firms may establ ish computerized links with major suppliers that share

informatio n about their invento ry levels. This allows suppliers to adjust their production

schedule automatica lly, and helps the entire supply chain become effic ie nt (Gutterman, 2011).

The global s upply chain best practices have traditiona lly entail ed being highly

responsive, but with an eye towards predictability. Morash and Lynch (2002) surveyed about

4,000 firms in eleven industria lized nations from North America, Western Europe, and East

Asia. Excelle nt firms in the study deployed highly responsive supply chain strategy to support

customer service strategies. They did so by postponing commitme nt to product form, assembly,

or forward movement, and intermitte nt acceleratio n and deceleration of product flows to

synchronize product with changing customer requireme nts. They, however, also built

predictability, through real -time order informa tio n systems; collaborative planning and

forecasting; vendor -managed inventory; resident supplier employees as buyers (known as just -in-

time II ); flexib le or agile manufac turing; and locating suppliers’ production lines on the

customer’s premises (i.e., JIT III).

1 Olhager, J. (2012). “The Role of Decoupling Points in Value Chain Management” H. Jodlbauer et al. (eds .),

Modelling Value: Contributions to Management Science, Spri nger -Verlag Berlin Heidelberg 2 Moras h E A. (2001). “Supply chain s trategies , capabilities , and performance.” Pp. 37 -47, Trans portation Journal,

41(1): 37 -54.

Competing through Responsiv e Supply Chains that are predictable

The retail market in India is becoming more organized. The new retailers are striving for a

differe ntiated strategy to take a way a significa nt share of market away from the kirana stores —

the traditiona l mom -and -pop corner shops. Initia lly, most sought to locate in premium shopping

malls, and project a modern image; however, that has not been suffic ie nt to justify their high

pri ces in a nation where the consumers are very value conscious.

Traditio na lly, the consumer product companies in India serviced all outlets in a territory — be it a

kirana shop, or a supermarket — thro ugh a specific distributor. RPG Retail, a Chennai based firm ,

found it hard to convince consumer product giants like Hindusta n Lever to supply everyday use

products like toothpaste and soap to its FoodWorld stores directly. It gradually convinced the

corporate producers that more collaborative and responsive supply chains would allow it to move

more of their high -end products.

Now, RPG Retail gets its supplies directly from the corporate producers, and sells 14 –16% of all

Gillette Mach3s sold in Chennai, 10% of Surf Excel and Surf Automatic, and 10% of Nescafe

Prem ium. The things have changed so much that Hindusta n Lever Ltd even piloted a separate

distributo r for all modern retail outlets (those with self -service format) in 2003, observing:

‘These outlets need to be serviced differe ntly… . Their needs are different . And the selling skills

needed are of a higher order (Rajshekhar, 2004).’

In recent years, with the rise of technology, fast fashion or fast cycle supply chains have

become a key source of competitive advantage for many firms. Instead of co mpeting through

responsive supply chains that are predicable, this entail using predictable (fast) supply chains,

that are responsive . Zara of Spain pioneered fast fashion supply chains, that are built on the

concept of small -batc h supplies based on the hottest fashion trends.

Zara Pioneers Predictable (Fast ) Supply chain , that is responsiv e

The first Zara store was opened in Spain in 1975 and today Zara operates over 2.000 stores in

around 90 countries. Zara employs a creative team of over 200 designers, who produce many

new collectio ns during the year. They take their inspiratio n from many sources, includ ing

extensive feedback from stores (both quantitative informatio n about the items sold and

qualitative informa tio n from store managers). Unlike other leading apparel firms who typically

sell 2000 -4000 different items every year, Zar a is able to design and offer 10,000 items every

year – appealing to a broader group of customers with unique preferences. Purchased f ab ric is

cut, dyed and further processed in its own factories located mostly in Spain, Portugal and

Morocco. Sewing is subcontracted to small companies mostly in close proximity to its factories .

Slow fashion items, such as t -shirts, are outsourced to low -cost suppliers in select emerging

markets . The merchandize is shipped by trucks within Europe and by flight to other regions,

arr iving at the store within 2 -3 days. Zara is able to replace existing collectio ns, and introduce a

new collectio n – from design to delivery in stores - within 2 -4 weeks . Zara has become a fast

growing top 100 global brand, by offering affordable fashion to price and fashion -co nsc io us

youth segment.

Source: http://www. nytime s.co m/2012/11/11 /ma ga zine /how -zara -gre w -into -the -world s -la rgest -

fashion -reta ile r. html ; http://www. investoped ia. co m/artic le s/ma rke ts/120215 /hm -vs -za ra -vs-

uniqlo -co mparing -business -mode ls.asp

M anaging Re lationships with Custome rs - Custome r M anage me nt Strate gy

Customer relationship manageme nt (CRM)) strategy involves managing exchange with

customers and channel memb ers . CRM strategy may be classified as utilitaria n vs. interactive

(Vilcox & Mohan, 2007). Util itaria n CRM is a market arbitraging approach where the firms

offer their products on an as is basis , and the customers also seek standardized off -the -she lf

products. The primary purpose is to “make a sale” now or soon , and to address those needs of

the customers that can be most effic ie ntly met with the resources availab le to the firm. In such

spot m arket exchange, the firm takes the risk that their product will meet the needs of the buyer,

and the customer also takes the risk that this will be so. As long as the buyer needs are met, the

exchange might be repeatable, scalable, and ongoing. The ut ilitaria n CRM strategy enables

firms to make their product development decisions based on the ir process technology capabilities

– the capabilities to discover, develop, combine and integrate resources cost -effective ly . The

strategy demands low -cost channe ls of distributio n, and low -risk product and market

development activities. There is an emphasis on ‘push approach ’ based on aggressive promotions

and price discounts to augment demand to a level that will support full capacity utilizatio n and

economie s of scale. The products are phased out when the alternatives with similar or better

quality are found, or when the customer needs change.

Conversely, interactive CRM strategy is driven by an organizatio na l culture of designing

product ex perience based on an interactive communicatio n with the customers, and where the

customers also design their use experience based on the interactive communicatio n with the

firms. In such interactive market exchange, the firm as well as the customer make joint efforts

to ensure that the product experience will be the best possible. The interactive strategy goes

beyond efforts to sell, deliver and service a product using customer transactions. It relies on

careful selection of target markets, dependable product development processes, interactive

market communica tio n programs, and responsive delivery processes. The firm strives to build

and leverage resources and processes necessary to deliver the value customers desire, is willing

to adapt these value -ge ne rating processes as market conditions change, and is proactive in

developing future products that will tap latent needs going beyond the customer expectations and

expressed needs (Narver and Slater, 1990). It emphasize s a “pull approach”, where the fir m

pulls all cylinde rs to offer a great experience to the customer (Kohli and Jaworski, 1990). With

the rise of network organizatio ns, interactive marketing has gained promine nce.

The case of Castrol illustra tes the dif ference between the two types of strategies in

practice.

Castrol is the world’s leading lubricant firm. It follows a relationship -orie nted interactive

customer exchange with its premium customers. It uses both pre - and post - sales customer

engageme nt process that begins with joint dialog between the Castrol and the customer teams,

and a survey of the customer plant -specific personaliza tio n needed in the generic plant platform.

Based on this dialog and survey, personalized package of solutions comprising of produc ts and

services is developed and offered to the customers . The risks to the customers are reduced as

Castrol works with its customers to diagnos e the ir plant -specific needs, build the solution, and

track the performance . In the long -term contract , assess ment, continuo us improve me nt, and

closing the loop between the expectations and the performance is built -in.

For its mass customers, Castrol follows a deal -oriented utilita ria n customer exchange. It has

invested in automating the sales and delivery process es; so that the se customers and the channel

partners are able to order the products and services they need seamlessly with an assurance that

Castrol offer s a competitive pricing on its products.

Source : Adapte d from Hax (2002)

In global marketplaces, firms often combine image positioning wit h price positioning, to

build customer confidence that their deal is based on real cost capability. The firms seeking to

offer deals is particularly prone to the “ lemons problem ”. This problem implies customers have

limited interactive informatio n about the firm and so are unable to verify a firm’s claim of

quality unless they actually use the product . Thus, utilitaria n CRM by itself is likely to be

ineffec tive, unless grounded in the framework of interactive CRM.

Building trust for utilitarian CRM through interactiv e strategy – what nex t for Indian IT firms ?

During the 1980s , the Indian informa tio n technology companies built their early business models

by offering low co st programmin g power and business process manageme nt capabilitie s to the

American firms. During the 1990s , the leading Indian IT firms began sending their employees to

the US to work on -site with America n businesses , in order to build bette r understand ing of the

client needs, organiza tio na l i ssues, and market conditio ns. This helped them dev elop trust with

American clients, and move from lower val ue -adding utilitaria n positioning (referred often as

body -shopping or sweatshops) to higher val ue -adding interactive positioning.

During the 2010s, the Indian IT firms have faced growing criticism for replacing American

workers with lower value adding Indian workforce. Data analytic s, robotics, and artific i a l

intellige nce, as well as ava ilab ility of cloud and software -as-service on demand are enabling the

American businesses to rethink how technology could be use d to transform their business

models. The older model of Indian IT firms seeking to understand from the America n firms

what they want from the IT functio n, and then d elivering a low -cost IT solution , is becoming less

effective. The emerging model requires IT vendors to partner with business or marketing heads

to identify areas where IT might add value, e.g. analyzing whether online ads are paying off.

The Indian IT firms are seeking to respond in two ways. First, they are acquiring local IT

operations in the US, staffed with American workforce, who have better understand ing of the

American context . Second, they are seeking to hire and train new type of workforce in India,

who has both technica l skills and knowledge of business functio ns. They recogni ze the need to

evolve an interactive customer relations strategy focused more on collaborative discovery of

issues and opportunities for technologica l interventio n s, and backed b y utilitaria n IT solutio ns.

Source : http://kno wle dge . wha rto n. upe nn.e du/a rticle /dre am -run -india n -e nde d/

Part II – M anaging Re source s

Managing ‘Method’ Resources - Knowledge Management Strategy

Knowledge manageme nt functio na l strategy encompasses managing knowledge in different parts

of a firm’s value chain, as well as in the value chain system going beyond the firm’s boundaries .

Knowledge manageme nt (KM) strategy is often classified as specialized or codificatio n (making

experientia l knowledge explicit) vs. generalized or abstraction (generalizing the explicit

knowledge) [Boisot, 1991]. Specialized KM strategy involve s discovering useful knowledge,

encoding and storing that into shared repositories, and retrieval of specialized knowledge that

others have contributed ( Hansen, Nohria, & Tierney , 1999). Such a strategy focuses on pushing

the specialized knowledge of the world, industry, and people’s experiences in readily -usab le

form to those who can apply that for serving the customers more cost -effective ly without

reinventing the wheel. It also entails embodying the specialized knowledge in to automated

systems, to support effic ie nt and prompt applicatio ns. This type of ‘applied” research and

development (R&D) uses ‘followership’ , i.e. adoption of appropriate proven, specialized external

and interna l knowledge content to bring about process effic ie nc ies. Focus is on ‘exploitatio n’ of

existing specialized competencies, and increme nta l improveme nt in these competencies .

Conversely, the generalized KM strategy is driven by an organizatio na l culture founded

on a n abstract set of relationsh ips and networks, as a way to promote mutual understand ing of

the shared context and co -creation of new knowledge ( Hayes and Walsham , 2003) . The

emphasis is not on transferring of knowledge, but on engaging the knowledge creation capability

of the member s, so that they are able to consider ways of adding greater value for the customer

as they share and apply the knowledge. This type of ‘basic’ or ‘funda me nta l’ research and

development (R&D) integrates fresh, leading -ed ge knowledge for ‘product innovatio n s’. It gives

firms ‘leadership’ in the form of first -move r advantage , as they become the first to bring a

product innovatio n to the ir customers . Even learning from outside the firm is modified and

given an origina l form that offers added value to the cus tomers. To facilitate consta nt

‘exploratio n’ of new value addition ideas, firms encourage creativity in generating new

knowledge and in developing deep relations with – or even acquiring – entities that have the

capability to generate knowledge of value to the customers. Design think ing and hack -a-thons

are deployed by the firms seeking to generate and combine knowledge in new ways.

The new age global firms , such as A pple, Google, Amazon, and Tesla, excel at

general ized KM strategy, developing agility for regularly moving into entirely reconstruc ted new

business domains . They become successful in these new dom ains, by using their specialized IT

knowledge such as about design (Apple), search (Googl e), sales (Amazon), and sustainab ility

(Tesla). The older enduring global firms – such as those in the pharmaceutica ls industry (see

box below), tend to rely more on specialized KM strategy, to manage cost as well as speed for

preempting competitive attacks. They overcome the limitatio ns of over specializatio n , by

becoming adept at scanning of the environme nt to identify and to form allia nces with firms

having complementary specialized knowledge . At the same time, they may extend the lifecyc le

of existing product generations thr ough improveme nts using a highly -spec ia lized KM strategy.

Pharmaceutical firms support their specialized KM through complementary contracts

In the pharmaceutica ls industry, the cost of bringing a new drug to market averages $ 700

millio n. The firms in India generally lack resources to bring out origina l drugs on their own.

However, ma ny have created their names for origina l research by participating in contract

research. The pharmaceutic a l product development consists of several process stages, and the

contract research firms can help lower the cost and time of specific process stages. As a result,

the world R&D outsourcing market has grown from $ 5.4 billio n in 1997 to $ 9.3 billio n in 2001.

The Hyderabad -based, Rs. 2,590 millio n (~$ 55 millio n) Divi’s Laboratories offers low cost

contract research on process design, validatio n, and op timizatio n for new drug candidates to

multinatio na l firms such as Pfizer. Its specializa tio n is in helping elimina te harmful side effects

in a molecule, that otherwise has a high potential (Singh and Surendar, 2003).

Managing ‘Machine’ Resources - Tec hnology and Innovation Management Strategy

Technology and innovatio n manageme nt (TIM) strategy is often classified as process oriented

vs. product oriented (Edquist, Hommen & McKelvey, 2001 3). Process oriented TIM strategy

seeks to achieve most effic ie nt process combinatio n of capital and labor costs. When the unit

labor costs are high, this is done by investing in larger scale capital -inte nsive technology and in

full 24x7 exploitatio n of this technology. When the unit capital c osts are high, the firm instead

deploy s labor -intensive technologie s that operate at smalle r scale without experienc ing cost

escalation associated with the lack of economies of scale. Historica lly, the American firms

achieved cost advantage in the global market using capital -inte nsive technology. They

automate d repetitive work using cost -effective machinery to displace costly labor. After the

World War II, Japanese firms faced capital shortages, and so invested in labor -intensive

technologies that achieved lower costs even without large scale. In either case, the firms today

deploy informa tio n and other technologies in accounting, order processing, and other

administrative and backroom support areas , to help understand their cost structure, and to m ake

efforts to reduce variances and mainta in control.

In contrast, product -oriented TIM strategy is driven by an organizatio na l culture seeking

to complexify the firm capacity to offer a more generalized portfolio of services to its customers.

The i nformatio n -e nab led intellige nt machines may be deployed in the frontline customer -

oriented processes and activitie s, to help search, collate, and gather new intellige nce (for

instance, through internet, and through sensors). Tools, such as loyalty progr ams and cards, for

instance, seek to collect data about their customers , and to create innovative, differentia ted

products, such as a continuo us stream of informatio n filtered to the specific customer needs.

Informatio n systems may help define micro -segme nts of customer bases, based on complex

algorithms and extensive databases of the customer profiles . They may help define and price

custom product configura tio ns, and close the deal during their first interactio n with the client.

Design think ing and moonshot thinking (striving to find imagina tive solutio ns to seemingly

intractable problems) are being used by many firms today to develop new product concept s.

In a global, compet itive environme nt, process -oriented TIM strategy is seen as a

‘Strategic necessity ’ to generate cost savings (Powell and Dent -Micalle f, 1997). Short

development cycles make products more cost -effective, supporting first mover advantages,

market size and sh are, tight controls, process investme nt, ease of manufac ture, and width of

product line. However, traditiona lly the winner s have been those who are first focused on raising

the wedge between costs and customer benefits , thereby differe ntiating and supporting high

performance. For instance, a shift towards floor to electronic trading at New York stock

exchange did generate cost effic ie nc ie s, but the deciding factor in its success was how it

strategica lly positioned the stock exchange on a higher frontier vis -à-vis other alternat ive s.

3 Edquist , C., L. Homme n, a nd M. McKe lve y (2001 ). Innova tion a nd Employme nt : Proce ss ve rsus

Prod uct Innova tion . Cheltenham, Edward Elgar.

Using Product oriented TIM to Offer Customer Choice, and Process Oriented TIM to offer Cost

Sav ings to Partners

The Chennai -based Apollo Hospital in India has ties with an insuranc e company, 900 hospitals,

2,000 physicia ns, and numerous pharmacies across 50 cities of India, all connected by a central

relationa l informa tio n system network. The hospital, or th e physic ia n swipes a magnetic card

containing a patient identificatio n number when a patient visits to log on to a huge central server

that contains all relevant data, such as disease profile, and insuranc e entitle me nts. The system

allows Apollo Hospital to offer more differe ntiated choice to the patients through a wide network

of physic ia ns, and hospitals. It is also the basis for Apollo Hospital ’s operational and

manageme nt consulting business. Each allied hospital pay s it between 3 –5% of its annual

tur nover as manageme nt fees; and between 3 –7% of the project cost on all hospital consulting

projects undertaken to better the facilities of its allied hospi tals. In turn, allied hospitals are able

to leverage Apollo’s centralized purchasing system to get che aper rates for equipment, and other

medical supplies (Dhawan, 2000).

In recent years, many firms are becoming successful on the basis of process oriented TIM , by

discovering new ways of deploying technologie s to offer affordable solutions . Consider Airbnb.

Founded in 2009 with $25,000 credit card debt, in 2017, the accommodatio ns -re nta l platform

Airbnb is valued at $30 billio n , with 1500 employees and 3 millio n rentals across the world in

65,000 cities and 19 2 countries. Airbnb owns no physical assets, and yet is valued m ore than

four times than Hyatt Hotels, the global hospitality firm which has 45, 000 employees spread

across 600 franchised properties. And while Hyatt ’s business is comparative ly flat, Airbnb has

become the big gest hotelier of the world and is still growing exponentia lly. The key to the

success of Airbnb has been investme nts in the digita l process technology, that has offered a

transparent and easy way for anybody to list their vacant houses or rooms for short -term renta ls,

and for the users to search and to review experiences of other users with those properties . These

rentals are particula rly attractive for those seeking a ffordable options, when the top hotels are

sold out dur ing busy events or seasons. Airbnb has augmented this process oriented TIM, with

product oriented TIM that seeks to offer experiences that are alternative t o mass produced

tourism. For instance, its new app product in 2016 included an innovative matching system

designed to understand travele rs’ preferences and then match them with the homes,

neighborhoods and authentic experiences and trips that meet their needs.

Source: https://press.a ta irb nb.co m/a irb nb -la unc hes -ne w -prod ucts -to-insp ire -peop le -to-live -there/

M anaging ‘M one tary’ Re source s – Inve stme nt Strate gy

Investme nt strategy deals with the procedures and systems for capital structure and capital

expenditure, liquid ity levels, modes of raising capital, working capital, and levels of profit

distributio n and retention. This strategy is critically shaped by the turbulence in environme nt

and other continge nc ies related with the choice of business strategy (Shank and Govindaraja n,

1993). Investme nt strategy is often classified as budget -oriented vs. opportunity -orie nted.

Budget -oriented investme nt strategy is driven by a goal to achieve most efficie nt

investme nt allocatio n given the market constraints. Firms esta blish budgets based on an

assessment of the historica l, competitive, or technical standards of costs, and expected unit

revenues under assumptio ns of specific market conditio ns. Revenue and cost performance is

closely monitored against the budgets, and de viatio ns are investiga ted very tightly using period

short -term reports. Budgetary standards are augmented with operating control measures of cost,

quality and reliability performance. This allows the firm to rely on the budgeting and discounted

cash flow techniques for monitoring performance of investme nt projects. A budget -oriented

investme nt strategy takes a market -arbitraging portfolio manageme nt view of the firm – where

differe nt activities of the firm are considered independent, with few synergies and little need for

strategic coordinatio n (Porter, 1987). In conglome rate s that have several unrelated business

portfolios, a budget -oriented stra tegy is often deployed.

In contrast, opportunity -orie nted investme nt strategy is driven by an organiza tio na l

culture seeking multip le new opportunities to add customer value. Such a firm seeks to make

several rapid adjustments in its understand ing of customer preferences, which makes future

revenues and costs diffic ult to estimate. Under such strategy, f irms are likely to set aside funds

for supporting projects that explore new opportunities and seek ways to add value for the

customers. Performance i s likely to be evaluated on a longer term horizon, using not only

financ ia l measures, but also institutio na l control measures of corporate reputation and the

prestige, focusing on transparency, diversity, and sustainab ility. The emphasis is likely to be on

capital appreciation outcomes. The formal financ ia l planning and accounting control tools,

such as the budget and capital expenditure based on discounted cash flows, are less useful. The

firm must rely more on strategy forming and defining missio n, vi sion, and goals — for

evaluating and monitoring strategic plans, capital expenditure projects, and acquisitio n

proposals. An opportunity -orie nted investme nt strategy takes an activity sharing view of the

firm – where different activitie s of the firm are i nterconnec ted, with substantia l synergies and

need for strategic coordinatio n. The synergies are often exploited by specifying key

performance targets and strategic milesto nes that may not be easy to quantify. Further, the

decisions based on these syner gies require taking a long -term perspective so that the

interdepende nce among the units could be developed and exploited fruitfully.

A study by Nilsson (2002) showed that budget oriented investme nt control is better

adapted with the business units following a cost leadership strategy and a portfolio manageme nt

intent. In other words, budget oriented investme nt strategy works better when there are few

linkages a mong differ e nt business activities. Its downside is that over a period of time, lack of

activity sharing can limit the ability of the firm to benefit from cost saving synergie s. On the

other hand, opportunity -orie nted investme nt control is better adapted with the business units

following a differe ntiatio n strategy and an activity sharing intent . Nevertheless, over dependence

on other business units can limit a firm’s flexib ility to manage its costs .

Using Budget oriented Inv estment Control to Sustain low -cost leadership

In 2002, the Rs. 62 billio n diversified Mahindra Group of India was suffering from a severe

recession. The Group had investme nts in 32 subsidiaries, with a portfolio of unrelated businesses

includ ing time -share resorts, and a realty business. M&M’s 18% of assets were locked into the

shares of group companies, yield ing just 5.6%, and its own stock price had fallen to an all -time

low of Rs. 50 in September 2001. The Group Chairman, Anand Mahindra, operated as a venture

capitalist responsible for allocating capital, while the day -to-day responsibilitie s of running the

businesses rested with the business heads. In December 2002, the Chairman launched Project

Blue -chip.

Project Blue -chip replaced qualitative ly selected performance benchmarks like market share,

sales, and profits with two common quantitative measures of performance — free cash flow (cash

after appropriating for investme nts and profits), and return on capital employed (ROCE). It also

stopped the practice of allowing mid -year revisio n of the budgets, and introduced the concept of

‘no -excuses budget’. The variable pay component of senior manageme nt was attached to the

Blue -chip goal, so that capital is allowed to flow to the project with the highest returns,

regardless of where the surpluses were generated. Within a year, the pri ce of the M&M share

surged to Rs. 390.25 from Rs. 112.55 at the end of 2002 (Dhawan and Byotra, 2004).

As the improved capabilitie s and domestic environme nts have expanded their

opportunities for adding value , firms in emerging markets are increasingly adopt ing more

opportunity -orie nted investme nt strategy . Consider the case of India :

Using Opportunity oriented Inv estment Control to Differ entiate

In 2003, American Express and IMA India surveyed changing role of Chief Financia l Officer

(CFO) in India. Over a six -year period since 1997, when the survey was first con ducted, the role

of the CFO has been transformed ‘from one relating to pure finance to that of leadership, and

strategic decision -mak ing.’ In 1997, 85% of the CFOs spent most of their time on transactio n

processing and control; now that is down to 45%. The time spent on strategy has increased from

36% in 1997 to 48% in 2003, mostly because of a greater emphasis on strategic planning. This

shift is indicative of a growing attempt by the Indian companies to become more differe ntiated,

and to rely less on thei r low labor cost advantages (Jayaram, 2003).

Twenty years later, in 2016, Deloitte Survey of CFOs in India reiterated these trends,

“Today’s CFOs are not only performing their traditiona l role of preserving the assets of the

organiza tio n and run ning a tight and effective financ e operation but are also performing the role

of strategists and contributing towards deciding on the direction of the business. Research also

supports the view that CFOs are being involved in more strategic and top level de cision making.

In fact, the finance functio n itself is being considered by some as a strategic business partner.”

(Deloitte, 2016: 18)

In recent years, t he web has disrupted traditio na l investme nt models. With the web, it is

possible t o launch a business, to assemble capacity, and to acquire customers, at a fraction of

what it cost in the 1990s. Demonetiza tio n of business models has enabled firms suc h as

Craigslist, eBay and Amazon to scale with extraordinary speed to become some the world’s

biggest companies. The new informatio n -enab led technologies are powering exponentia l cost

drops across every business functio n (Ismael, Malone & van Geest 2014 4). It has now become

possible to share resources across activities , and to leverage third party resources, seamlessly.

Amazon for instance shares its web platform for selling products directly to customers, as well as

allowing the third -party vendors to sell to those customers. Thus, many firms are successfully

offering affordable products and services to the customers, using opportunity oriented investme nt

strategy. These firms have most of their costs as variable, with transparent low -cost pricing, and

they generate profits through massiv e scale , alternative channels (such as membership fees or ad

revenues) , and transformative purpose (typically some form of democratized, collaborative

con sumptio n) .

M anaging Growth through M anufacturing - Ope rations M anage me nt Strate gy

Manufacturing ve ry broadly is a functio n engaged in managing manufactured or man -made

assets. Operations manageme nt (OM) strategy seeks to leverage assets, i.e. capabilitie s, of a firm

to drive competitive advantage (Skinner, 1969; Aranda, 2002).

The operations strate gy may be classified as asset -intensive or service -inte nsive (i.e. asset

light) (Aranda, 2002) . Asset -intensive operations strategy seeks to leverage under -valued fixed

assets that are based on market infrastruc ture and mainta in h ighly effic ie nt operating or variable

costs. Note that these effic ie nc ies do not arise from hiring of lower cost workforce or sourcing

of lower cost inputs or distributio n using lower cost channels (which are instead associated with

human resource, supply chain, and customer exchange strategies respectively). Rather they

emanate from an efficie nt exploitatio n of the assets and infrastructure traded from the market, so

that the firm is able to transform a set of inputs into outputs in less time, or is abl e to design

outputs using resources of more limited quality and quantity. Effic ie nc y in asset exploitatio n

arises from an operations strategy that is ‘designed to maximize performance on a few success

criteria of strategic importance ’ and a recognitio n that ‘ a system which is technologica lly

constrained cannot perform superbly on every measure’. (Skinner, 1969) . Firms tend to focus

on customers with similar needs, and on products and services with similar process design, in

order to generate the follow ing three types of economies using a common asset infrastruc ture.

• Economies of learning: First, as firms work on the same assets, they may gain experience

and learning about what process work and what don’t, yield ing them economies of

learning. After the World War II, Japanese firms pursued predomina ntly this type of

cost economies. During the 1960s, Honda, for instance, priced its motorcycle s very

aggressive ly, yet was able to achieve positive cash flows and sustainab le growth because

of the cost im proveme nts associated with its learning curve (Boston Consulting Group,

1975).

• Economies of scale: Second, firms may automate the process through special -purpose

assets, which yield economies of scale or enduring savings in variable costs. During the

20 th century, American firms pursued predominantly this type of cost economies. They

invested in special purpose machinery and tools and specialized workforce, to

manufac ture specific standardized product lines in large volumes.

• Economies of specializ atio n and network: Third, firms may organize the operations

process as a network, with teams of highly specialized employees responsible for

differe nt parts of asset operation, and with different firms in the network also responsible

for different product groups each requiring specialized assets; thus accruing economies of

4 Malone, M., Ismail, S. & van Gees t, Y. (2014) Exponential Organizations: W hy new organizations are

ten times better, faster, and cheaper than yours , Diversion Books.

specializa tio n and network. During the 20 th century, German firms pursued primarily

this type of cost economies.

Japanese OM strategy is referred to as lean production; the America n OM strategy is referred to

as mass production; and German OM strategy is referred to as network specializatio n; each of

the three asset manageme nt strategies help firms achieve cost effic ie nc ie s.

In contrast, service -inte nsive OM st rategy is driven by an organizatio na l culture seeking to

achieve flexib le operating capability. Flexib ility is achieved by recognizing the limita tio ns of

technologica l constraints, and using reconfigurab le informa tio n smart light assets for discovering

the values of priority to the customers. Flexibility is also achieved by focusing on general

purpose goals and values that resonate with a broad group of customers, such as social,

environme nta l and customer sensitivity and responsive ness. More than a t echnical process,

flexib ility emanates from an organic service -mind set, culture and technology; which allows the

firms to offer a high level of service personalizatio n and customiza tio n to its target customers

using reconfigurab le informatio n -smart light a ssets. There are many dimensio ns of service -

oriented OM strategy such as:

a) Service mindset: European firms have traditio na lly relied on the professiona l ethics of the

members of guilds and professiona l trade organizatio ns. This has helped them with

craf ts-oriented operations, where custom designs help achieve higher value -added

through exclusive small -batc h production.

b) Service culture : Japanese firms have traditiona lly relied on a deep service culture to

engage its workforce and suppliers in the pro duction of a large variety of products,

customized to the specific needs of the customers.

c) Service technology: American firms in recent years have relied on innovative service

technologies using effective informa tio n processing and deep data mining to c onfigure

their products in a range of mixes and to a range of custom specificatio ns.

New insights on OM strategies have emerged as the firms have faced shrink ing product life

cycles, new technologie s, educated knowledge workforce, and global competitio n.

Unexpectedly, firms have been able to elevate minimum benchmarks on multip le operations

criteria, as efforts to enhance one type of operational competence have required firms to

cumula tive ly further competence in other operational areas as well. A s tudy by Ferdows and De

Meyer (1990) suggested that among the high performing manufac ture rs, the improve me nts move

from quality to reliability, followed by flexib ility (which they take to includ e speed), and cost

effic ie nc y. Thus, they suggest that efforts to reduce operating costs – a key focus of asset -

intensive OM strategy - should take place alongside continuing efforts to improve quality,

reliability and flexib ility, or else those efforts will not be as sustainab le or effective. On the

other hand, effo rts to improve operating flexib ility – a key focus of service -inte nsive OM

strategy - should take place alongside continuing efforts to improve quality and reliability.

As illustra ted by the case of F ibres and Fabric internatio na l, many emerging market fi rms

are using flexib le service technolo gy and forming partnership s with foreign customers and

experts to bring flexib le mind -set and culture to their operations.

Adding v alue through serv ice intensiv e OM

The Bangalore -based Fibres and Fabric Internatio na l is going against cost -conscious

manufac tu ring, and creating a differe ntiated niche by pioneering flexib le manufac turing system

in fashio n garments. For this, it is not just buying technology, but also augmenting its capabilities

for using technology. It uses imported high -tech machine s, has hired an Italian technicia n to help

accelerate lead times, and has set up a Rs. 60 millio n state -of-the -art water recycling plant for

bagging eco -friendly buyers from the Netherlands, and Germany. I t command s an average price

of 14.43 euros on its sales of 2 mi llio n fashion denim jeans — more than double the 7 euros

commanded by the Chinese manufac ture rs. It also successfully entered the high -fashio n jeans

market, command ing a premium on jeans retailing at 200 Euros and above. Since in these

markets, inventory hol ding costs are high, most European retailers prefer to deal with suppliers

who can replenish stocks in short lead times; its flexib le manufacturing system allows a lead

time of just two weeks — unheard of in China (Surendar and Rajshekhar, 2004).

M anagin g Growth through M otivating Powe r – The Le ade rship Strate gy

Leadership strategy encompasses setting directions and overall purpose, missio n, and values of

the firm, as well as mobilizing, distributing, and redistributing resources to support actions

aligne d with the intended purpose missio n, values, and direction of the firm. It is often classified

as transactio na l vs. transformatio na l (Burns, 1978; Bass, 1985).

Transactio na l leadership seeks to sub -divide overall direction of th e firm into very

specific objectives aligned with the specific competencies of people and with specific resources

they have. Transactiona l leadership operates by not only dividing the overall purpose into

objectives, but also conditio ning the rewards, suc h as compensatio n, bonus, and recognitio n of

employees on the accomplishme nt of these objectives – i.e.. for complia nce with the leader’s

expectations. The transactiona l leaders with extensive experience in their jobs and with their

firms tend to be more familiar with the organizatio n’s structure, systems, processes, and people,

and are more effective in imple me nting cost leadership strategy. The transactiona l emphasis

ensures economica l processes and good value, while keeping cost down, year after year, i n every

activity, through standardized, repetitive processes and output. The thrust is on capital

investme nt, as opposed to personnel development; employees are not expected to have a high

level of decision -mak ing.

There is very limited possibility of fai lure, or need to learn by trial and error, since the

primary goal is to motivate members to fully draw on competencies and resources they already

have. The teams may still learn, but this learning is vicarious, unplanned, and tactical. Pascale

(1984), f or instance, reconstructed the story of Honda’s success in motorcycles during the 1960s

based on intervie ws with Honda managers and employees. He uncovered the role of uninte nded

and unexpected learning while striving for a very transactiona l approach – Honda’s employees in

the US entrusted with market development began riding their lightest motorcycle for personal

chores in the Los Angeles market. The US customers were known to prefer the heavier

motorcycle and Honda’s employees needed to be as cost eff ic ie nt as they could be in using the

very limited resources they had been entrusted by the leaders. So, they decided to use the

lighte st bike resource for personal use, and the heaviest bike resource for market development

use. However, when families wer e enamored by small -b uilt people riding the light bikes, Honda

received advance payments from American retailers to build large volumes of those bikes.

In contrast, t ransforma tio na l leadership is driven by an organiza tio na l culture seeking to

engage p eople with the overall purpose, missio n, and values of the organizatio n. It offers

freedom or autonomy for people to develop and refine their competencies and to invest in

resources and technologies, as needed, to further the overall purpose. Through a commitme nt to

higher values, people are expected to go beyond their self -inte rests, and work towards a long -

term vision of better future , leading by example, and inspiring and developing others to bring

about change. Transformatio na l leaders tend to bri ng new visions, and are better supporters of

differe ntiatio n (Kathuria and Porth, 2003). The transforma tio na l values of flexib ility,

spontaneity, and employee participatio n are consistent with the mission of the prospector and

analyzer business strategies, who are constantly searching and developing new market

opportunities (Guthrie and Olian, (1991).

If the firms are trapped by their historica l processes, systems, and culture, it becomes

diffic ult for them to pursue a ‘new’ vision for the organi za tio n. Similarly, if the firms live too

much in the world of imaginatio n, they may be disconnected with their historica l and

contemporary reality and fail to actualize their dreams. Thus, pragmatic leadership in today’s

world where we face immense soc ial challenges of inclusio n, security and growth, requires more

than a process of positive imagina tio n of transformatio na l processes, systems, and culture. It

also requires setting measurable micro milesto nes, so that people are encouraged and rewarded

for identifying the obstacles for realizing that future state, and clarify the path that explode the

existing cultura l limits on what is possible. This path takes the shape of ‘entrepreneuria l

leadership’ for not only sustaining competitive advantages, but a lso realizing the broader

missio n, purpose, and values.

Transformatio n leadership is based on the values of collabor atio n , cohesion, and

adaptability , as underlined by an interesting story of milk bottles.

In the early 1900s, cap -less milk bottles were used in Europe. Two garden birds — the blue jay,

and the robin — used to sip cream from the bottles. After world War I, tin foil caps were used on

bottles. The blue jays learnt to peck the caps open to sip the cream, but the robin could not.

Scholars found that blue jays move in flocks of 14 to 15 birds, and continue parenting till their

young ones were old enough to take care of themse lves. So, the learning by one bird is quickly

and effic ie ntly shared among the entire flock. On the other hand, the male robin has a territoria l

temperament, and does not allow other birds of the species to come close. Hence, there is no

sharing between ro bins. Transforma tio na l leadership fosters collaborative social propagation

amongst the blue jays; it allow s them to enjoy the cream, and to grow healthy (Fisher and Hinde,

1949).

Traditio na lly, fostering collaborative teams required significa nt leadership effort;

therefore , transforma tio na l leadership in organizatio ns was generally associated with premium

positioning and differe ntiatio n strategy. However, digita l technologies have remarkably

reduced the cost of collaboratio n across global borders and across differe nt stakeholder groups.

New age transformatio na l leadership has been focused on democratizatio n of access , as

illustra ted by the ride sharing (Uber) , accommodati o n sharing (Airbnb ), channel sharing (ebay)

firms. In I ndia, Patanjali has emerged in a very short time as the largest consumer products

firm, through transformatio na l leadership of spiritua l and yoga teacher Baba Ramdev . Baba

Ramdev has been passionate ab out using traditiona l ayurvedic and other knowledg e of India to

take away domestic market for consumer products from the multina tio na l firms , and this passion

has offered the inspiratio na l power for Patanjali to scale and expand in multip le categories .

M anaging Growth through M anipulating Powe r – The Ste wardship Str ate gy

Manipula ting power very broadly is the ability of firms to be a player in a community deriving

from the legitimac y and accountability of their strategic behavior. Stewardship strategy accounts

for the resources arbitraged by a firm from the constitue nts with whom it has a range of

relationships, and offers legitimac y that the firm has deployed these resources effective ly

achieving growth that accrues incrementa l value for all constitue nts as well.

Stewardship strategy may be classified as private or social. Private stewardship strategy

is grounded in the agency theory, which holds that the only fiduc iary obligatio n firms have is to

their stockhold ing investors . In the agency theory, the stockholders privately bear financ ia l risk

in exchange for giving fiduc iary rights on the organiza tio n’s resources to the strategists , and

therefore have the power to take direct control of the organiza tio n if they believe the strategists

are not working in their best interest. Stockholders, supported by the force of the legal system

and the markets, punish the organizatio ns that do not structure their interna l resource allocatio n,

activities, and behaviors in ways that maximize private effic ie nc y. The stakeholders ar e viewed

as part of an environme nt that a firm should manipulate to assure cost savings, revenues, profits,

and ultimate ly returns to stockholders. For instance, a firm might adopt total quality

manageme nt as part of its strategy to increase sales volumes . In the process, the firm would seek

to signific a ntly improve its relationships with two key stakeholders: workers, and suppliers.

However, if the firm does not enjoy improved sales through greater quality initiatives, it would

withdraw its commitme nt to improved worker and supplier relations (Shawn and Wicks, 1999).

Similarly, a firm invests in environme nt friend ly technologie s only if the customers are willing to

pay additiona l for the products, that they would not otherwise, or if the governme nt would

impose fines that are larger than the costs of these investme nts. Philanthrop ic activities, when

undertaken, are just like any other cost of doing business — the y are cost of co -opting various

stakeholders so that the business is allowed to serve, and maxim ize private returns for the

stockholders . Put differe ntly, under the agency theory, the principles of relating with the

stakeholders are defined purely in terms of their priv ate economic value for the stockholders at a

given time, and decisions are re -eva luated on an ongoing basis for their priv ate economic

benefits and costs to the firm .

On the other hand, the Social stewardship strategy is driven by an organizatio na l culture

grounded in trusteeship theory, which holds that the boundaries of fiduciary o bligatio n extend to

other stakeholders also. In the trusteeship theory, manipula ting functio n is endogenous to the

organiza tio n, and is based on the intrinsic worth of the principle s and moral commitme nts about

how to relate with the stakeholders. The firm is not guided by the desire to use stakeholders

primarily to maximize private profits and returns for the shareholders. It does not follow only

those values that appear to be of private advantage to the stockholders. Instead, the firm first

identifie s its values (and all the stakeholders for whom this value is oriented) , and then seeks to

pursue strategies that help it actualize or add those values . The firm is guided by the social, i.e.

broader, impact of its decisions on all its target stakeholders, and strives to foster a positive

influe nc e, quite independent of the stakeholders’ instrume nta l value to its profitability. The

broader socially responsible stakeholder interests are the basic foundatio ns on which a firm seeks

to construct its unique identity, positioning, and strategic intent.

In the trusteeship theory, resource allocatio n is guided by the concern for increasing the

overall social value of the resource endowments, since such increase enables increasing amount

of resources for all the stakehol ders, irrespective of their share. For instance, a firm may respond

to the community concerns for ecology by being proactive. It may design its products for

disassembly — whic h increases useful life of the product and enables easy disassembly and

recycling; such products are also eco -friendly because they use material in the form of products,

and recycled materia ls. Additiona l benefits include safer working conditions for employees. The

firm may also be able to create a distinc tive eco -friendly image that app eals to customers

(Shrivasta va, 1995).

In the age of social media, the society has multip le tools, eyes, ears, minds, and voices, to

uncover disinge nuo us attempts of firms to manipula te its members, for the private benefit of few

private investors. A sig nifica nt gulf has emerged between the most powerful private investors,

who tend to be very wealthy, and the other members of the society, who tend to be

predominantly from limited resources families and communitie s. Firms who demonstrate an

authentic com mitme nt to improving social benefit cost ratios of resources arbitraged by them are

likely to find it easier to also be able to accrue greater private value. For instance, Financia l

Times introduced a FTSE4Good index comprising stocks of companies with a trusteeship theory

of action , and this index has been found to outperform other broad -based indices (Mukerjea,

2003).

Summary: Using Functional Strate gie s to Support Busine ss Strate gie s

As a summary, it is useful to consider the differe nt ways functio n a l strategies may be used to

support the business strategies of cost leadership and differe ntiatio n.

The firms can use functio na l strategies in three ways to support their cost leadership strategy:

a) Discovery capability: Discovery of the functio na l resou rces that could be used by the

firms most cost -effective ly to serve their target customer demand.

b) Developme nt competence: Developme nt of a network of the providers of functio na l

resources inside and outside the firm boundaries, who compleme nt each oth er’s

capability in enabling the firms to cost -effective ly serve their target customer demand

c) Deployme nt capability: Technologica l, organiza tio na l, and social structures, processes,

and behaviors that promote timely and efficie nt exchange of informa ti o n with the

providers of functio na l resources about their target customer demand

The firms following a differe ntiatio n strategy are concerned less about cost -effective ly

serving their target customer demand, and more about accruing value -additio n for thei r

customers.

a) Instead of seeking to add value by generating savings on their products for the customers,

they seek to add value by offering services that make the products more valuable for the

customers.

b) Instead of prioritizing on timely and efficie nt exchange of informa tio n about their target

customer demand, they emphasize ongoing understand ing of the overall value their target

customers seek, and effective exchange of this knowledge with the providers of

functio na l resources.

Micro foundat io ns play an important role in how functio na l strategies might support business

strategies, includ ing the other strategies of focus and growth discussed previously.

M icro -foundatio ns of Functional Strate gie s

Structural, relationa l and behavioral factors play an important role in the design of appropriate

functio na l strategies, and in the relationship of functio na l strategies with business strategies.

Structural factors: Organizatio na l structures play an important role in the ability of the firms to

coordinate the discovery , developme nt and deployment of functio na l competencies. The

organiza tio na l structures may take several differe nt characteristics – such as “mechanistic ”

versus “organic ”, “tall” versus “flat”, “centr alized ” versus “decentralized ” and

“standardizatio n” versus “mutua l adjustment”. Centralized organizatio na l structures are ones

where strategic decisions are taken centrally, these structures allow for tight control of costs, and

tend to foster cost effic ie nc y related functio na l competencies. Functiona l organiza tio na l

structures are ones where senior executives are in charge of differe nt functio na l resources; these

structures support development of deep functio na l competencie s. Conversely, when th e firms

need to develop responsive approaches, decentralized structures that distribute power to

employees tend to be more effective. Also, when firms need to promote inter -linka ges among

various functio ns, product -based organiza tio na l structures tend to be favored.

The firms may also decide to use different structures for organizing differe nt functio ns.

Gutterman (2011: 4), for instance, observes, “Traditio na lly, manufa cturing functio ns in the US

tended to have a tall hierarchy with centralized decis ion making and relied heavily on

standardized procedures. The result was a relative ly mechanistic structure that fit well with the

production line approach to the pace of work. On the other hand, effective R&D is more likely to

occur with an organic stru cture with a minimum of hierarchy and tolerance for decentralized

decision making that empowers skilled engineers and scientists to use and trust their skills and

knowledge when solving problems that arrive in the course of the innovatio n process.”

Howeve r, structures can also constrain the type of functio na l capabilities – for instance,

Japanese firms put many American manufacturers out of business, when they developed more

service -orie nted operations by flattening the hierarchy, and empowering employees on the

product line to discover decentralized opportunities for mutua l adjustment and accumula te

capabilities to deliver broad variety through continuo us improve me nt or kaizen. Similarly,

during the late 2000s, many customer -fac ing employees in the U.S. financ ia l services sector

abused their autonomy and used false or dubious documentatio n to write mortgages.

Organizatio na l structures can shape several differe nt types of linkages between functio na l

and business strategies ( Golden and Ramanuja m, 1985):

(a) No linkage (or Administra tive Linkage): In many owner -led organiza tio na l structures,

strategic functio n s play a predomina ntly administra tive role, and react to the emergent needs of

the organizatio n without regard to its business strategy. For instance, in India, traditiona lly

stewarding strategy has had no clear linkage with business strategies, as firms have invested in

charitable causes either because of the owner prioritie s or the tax deduction for charitable causes.

(b) One -way linkage (or Hierarch ica l Linkage): In firms that rely on a multi -d ivisio na l

organiza tio na l structure organized around business units., business strategies are established and

managed by general managers and senior executives of the firm. The lower -leve l functio na l

managers may have limited if any influe nce on the business strategies set by their bosses . On the

other hand, some organizatio na l structures may give special powers to particular functio ns. For

instance, when operations functio n has special powers, firms tend to develop strong cost -

effective capabilities to perform their business strategy even in premium segments. But when

marketing functio n has special powers, firms tend to develop strong customer empathy and

responsiveness capabilities, even when they are ope rating in price -sensitive segments.

business and functio na l strategists work collaborative ly on differe nt projects . For instance, to

support short -term and relative ly simp le projects, the firms may rely on freelancers using a low

commitme nt human resource strategy. As the firm builds a track record of success with its

customers and gain trust, it may be able to secure more complex projects requiring greater value

addition and responsiveness. That may encourage the firm to offer longer -term employee

contracts, using a higher commitme nt human resource strategy.

(d) Multi -way linkage (or Dynamic Linkage): In transnatio na l organiza tio na l structures,

functio na l and busine ss strategies may be designed interactive ly to dynamica lly frame country -

by -country growth objectives . For instance, investme nts in an emerging market business m ay

help a firm gain cost -effective functio na l competencies, which could then become a basis fo r

expanding into additiona l price -sensitive markets as well as in making differe ntiatio n positioning

more cost -effective on a global basis.

Relationa l & Behaviora l Factors . Organizatio na l cultures also play an important role in the

relationa l and beha vioral patterns of functio na l resources, and therefore the dynamics of

functio na l strategies. The organiza tio na l cultures may take several characteristic s, such as

‘power distance’, ‘uncertainty avoidance’, ‘group collectivism’, ‘generalized collectivism ’,

‘gender egalitaria nism’, ‘humane orientatio n’, ‘assertiveness’, ‘future orientatio n’, and

‘performance orientatio n’ (House et al, 2004) . For instance, the firms seeking to promote

service -orie nted operations functio n may nurture the cultura l values of ‘gender egalitaria nism’,

‘future orientatio n’, and ‘performanc e orientatio n’, and actively reduce ‘power distance’ and

‘uncertainty avoidance’. They may do so by establishing behavior -based performance

evaluatio n system, and by promoting new relations through collaboratio n with marketing

partners who have these desired cultura l practices.

As noted previously, organizatio na l cultures and mindsets are critical factors in the ability

of a firm to pursue growth business strategy, or to successfully exec ute a focus business strategy.

In order to identify opportunities for shaping functio na l mindsets, the firms need to first establish

their existing baseline of competencies in each functio na l area. This can be done using a

functio na l resource scorecard . The functio ns are classified in three categories – managing

relationships (workforce, vendors, customers), managing resources (knowledge, technology,

finance), and managing growth (operating, leading and stewarding). As illustrated in Figure

4.2, a functio na l resource scorecard evaluates both types of functio na l competencies of the firm

across the nine functio ns the left side competencies support the cost effic ie nc y capability, while

the right side competencies support the differe ntiatio n capability . The evaluatio n may be made

against competitive best -in-class standards, or against historica l performance of the firm, or

using subjective absolute ratings.

Figure 4.2 : Functional Re source score card using the 9-M M ode l

Strategic Functions Functional Strategy Cost Efficiency Differentiation

1. Manpower Human Resource Low commitment High commitment

2. Material Supply Cha in Predictable Responsive

3. Method Knowledge Specialized Generalized

4. Money Investment Budget ary Opportunity

5. Manufacturing Operations Asset -intensive Service intensive

6. Machine Technology & Innovation Process oriented Product oriented

7. Marketing Customer Utilitarian Interactive

8. Motivating Leadership Transactional Transfor mational

9. Manipulating Stewarding (Accounting) Private Social

The aggregate level of functio na l competencie s is one indicator of the opportunity for growth.

The rati o of the aggregate level of functio na l competencies, as well as each of the functio na l

competencies, is an indicator of the direction of possible growth. For instance, if cost effic ie nc y

capability is greater than the differe ntiatio n capability, then the firm has an opportunity to grow

its differe ntiatio n capability, as well as to grow new businesses based on its cost leadership

capability.

For instance, Matsushita of Japan has a 250 -year missio n in 1932 to produce an

inexha ustib le supply of goods tha t is affordable to all; true to this missio n, Matsushita has been

focused on cost leadership competencies, though it has a long way to accomplish its missio n.

The use of functio na l resource scorecard can help identify opportunities for further growth. It

may not be possible for the firm to sustainab ly generate new growth using an emphasis only on

cost leadership strategy. It may have to also invest in differentia tio n capability, to promote new

types of structures, relations, and behaviors, which it can then deploy for exploring new ways of

generating cost effic ie nc ies. Reliance on traditiona l approaches alone is not suffic ie nt to sustain

cost leadership in a global, competitive environme nt.

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