management
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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 .
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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.
(c) Dynamism : Firms should be cautious in not inadvertently turning their functio na l core
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
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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
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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
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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
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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
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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
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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.
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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.
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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
11
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
12
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,
13
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.
14
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
15
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 .
16
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
17
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.
18
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.
19
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.
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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
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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.
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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.
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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
24
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.
(c) Two -way linkage (or Sequential Linkage): In project -based organiza tio ns, b oth
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.
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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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