Reading Review 3:
“BUSINESS REALITIES” from Chapter 1 of ‘Managing for results’
Peter F Drucker, 1989, Heinemann Professional Publishing Ltd
[First published 1964]
(This reading summary aims to capture the main points and the spirit of the original in readable form, rather than being a straightforward préçis. It may not cover all the points raised in the original text and does not quote the many examples referenced. It is not intended to contain any value judgments about the original text, but inevitably it remains a personal interpretation. For a comprehensive appreciation readers are strongly recommended to the original article.)
Executives simply do not spend enough time on the future – today takes all their time. All their time is spent fire-fighting, reacting to short term pressures, mounting often unsuccessful crash programmes to solve recurrent problems. They need a systematic approach to break out of this situation.
There are three aspects to the task of business management:
1. Making the existing business effective
2. Identifying and exploiting its potential
3. Changing the business to exploit a changed future.

Individually these three are hard enough to achieve, but they have to be addressed together as integral parts of the management task. To do this successfully requires a practical understanding of business as an economic system. Without this understanding, the job of management inevitably degenerates into fire-fighting.
Though all businesses are different, using different technologies, serving different customers, with different products, and being different in size, structure and culture, nevertheless there are some assumptions which appear common to all business. These ‘realities’ are widely experienced and recognised, but few managers make practical use of them in managing their own business.
The assumptions or ‘realities’ are:

1. Profits and resources are only obtained from outside the business.”
It is the customer who decides whether or not the activities of the business are worth an economic price ie a price which produces economic results. Similarly, the only distinctive resource that a business has is knowledge and that too exists outside the business. The job of business is to convert outside resources (knowledge) into outside results.
2. Profits come from exploiting opportunities, not solving problems.
Problems cannot be ignored, but should be minimised. Solving problems only eliminates restrictions – results must come from exploiting opportunities.
3. Resources need to be allocated to opportunities.
The entrepreneur’s task is to maximise opportunities, being effective is more important than being efficient, doing the right thing than doing the thing right.
4. Profits are only achieved through leadership.
Profits are achieve by being distinctive in some aspect that the customer values. This does not mean being the biggest, or the market leader, but it does mean being the leader in something the customer values.
5. Leadership positions do not last long.
The profitability of leadership attracts imitators who inevitably erode profitability. Management’s job is give new direction and energy to achieve new leadership positions and so maintain profitability.
6. Today’s business is already half obsolete.
The business of today, its assets, people, technologies, products, markets and successful recipes, are all the result of past decisions and they are unlikely to be appropriate for the busines of tomorrow.
7. Resources tend naturally to be allocated thinly across a wide front.
This is a universal truth in the social world. 10% of products generate 90% of profit. 10% of sales staff generate 90% of new business. But, although 10% of customers generate 90% of sales, resources (eg time, money, energy etc) will usually be spread equally across all customers, rather than being focused on the productive few.
8. Concentration is the source of profitability.
To be profitable a business must concentrate all its resources, efforts and enthusiasms on the few really productive opportunities (ie the 10%). This is the most violated of all business realities.
These assumptions should form the basis for understanding the particular business situation. They may not all be true for every business, but they are the starting point for making the existing business effective, identifying and exploiting its potential and changing it to exploit the future.

Reading Review 4:
“PERSPECTIVES ON EXPERIENCE”
Writen and Published in 1968 by The Boston Consulting Group, Inc.
(This reading summary aims to capture the main points and the spirit of the original in readable form, rather than being a straightforward préçis. It may not cover all the points raised in the original text and does not quote the many examples referenced. It is not intended to contain any value judgments about the original text, but inevitably it remains a personal interpretation. For a comprehensive appreciation readers are strongly recommended to the original article.)
Cost data shows that total costs consistently decline by between 20% and 30% each time accumulated production (ie experience) is doubled. The cost decline is not automoatic, but depends critically on competent management driving costs down as volume increases.
This relationship of costs to experience is graphed as a curve representing a similar meaning to the learning curve but representing all costs (including for example, R&D, selling, promotion, overheads etc) rather than simply production. The curve itself is best represented on log:log scales as a straight line.
In an industry that is growing fast experience will be quickly doubled and the consequent cost reductions very significant. In an industry which is not growing at all the significance of experience cost reductions will rapidly diminish. An industry which has existed for many years and which has stopped growing will gain no significant benefit from experience.
The performance of competitors within the industry will also be bound by this cost:experience relationship. So long as their market shares remain the same relative to each other and have done so from the beginning then their costs relative to each other will also remain constant.
Data on prices and experience shows that prices tend to decline by the same characteristic rate as costs, so long as competition remains stable. If prices do not fall as rapidly as costs then in due course new competitors will be attracted by the high margins being achieved and the increased competition will eventually force prices down. This may result in some shaking out of competitors before prices resume their close relationship with costs. A common example of this is where prices for a new poroduct are set initially below cost in order to create a market and then maintained at that level even after the requisite cost reductions.
If costs depend on experience and prices follow costs then, so long as there are no non-price barriers to competition, profit will depend on cumulative market share. The competitor with fastest reducing costs will take market from those with slower reducing costs and this instability will continue until one competitor dominates the market (ie has over 50% or double the largest competitor). Then the smaller competitor will either have to increase market share or accept lower profit margins. In the end, the smaller competitor is likely to be eliminated.
There is a great deal of evidence of these relationships in situations of direct price competition.
There has been phenomenal technological advance yet cost reduction (eg $3 transcontinental phone call, £100 tv set etc) has had far greater impact than new product introductions. The implications are profound: A producer that does not reduce costs at the industry rate will become uncompetitive; the producer with the largest cumulative market share should have the lowest costs; new products must usually be introduced at prices below costs to create a market; competition will ultimately force prices down as fast as costs; market share in fast growth markets is extremely valuable; market shares are unstable until one producer dominates.
It is possible to calculate the value of changes in market share so long as there is a direct relationship between market share and accumulated experience which may not always be apparent. {Appendix B provides a way of calculating the present value of a share of market.}
If products are growing fast, and particularly if they are new having little accumulated experience, then the impact of experience based cost reductions will be dramatic. If growth is slow the impact of such cost reductions may be minimal.
The return from increasing market share in a rapidly growing market can be very high. In a low growth market, the returns would be much reduced and the likely costs of disturbing settled market structures extremely high.
New products should be priced at a level, almost invariably below cost, which will not only create a market but also deter other competitors entering the market. The lower the initial price, the quicker experience and cost advantage is built up.
The aim of experience based strategy is to achieve market dominance so that they become the most profitable producer. This is usually achieved by price leadership, but once achieved the lowest cost producer will tend to allow the high cost producer to make market prices. This will increase profits, so long as prices do not become so high as to encourage new entrants or to make it feasible for the high cost producer to consider re-engaging in battles for market share.
The strategic implications of experience curves apply to all growth businesses, but for low growth situations experience curves are of “little strategic importance”. Even for high growth businesses it is essential to understand the competitive context before adopting an experience based strategy. Misunderstandings about competition can occur when competitors have differing financial resources, different time horizons, differing abilities to plan and execute pricing strategies, conflicting market information and when they started out at different times.
One of the unknowns of any strategy is how the competition will respond. Experience curves provide a rationale for understanding likely responses to attempts to change market shares, so long as all competitors understand the implications.
Experience curves should in practice not be used mechanically to measure situations, but as a means of understanding competitive relationships. There are a number of practical problems in their use. For example, defining the product is problematic. The empirical base of experience curves is all related to basic products such as plastics, gasoline, semiconductors etc. As the product definition narroews into sectors the basic relation holds but the products themselves are either joint productions or partial bi-products ands a clear cut precis product definition is rarely possible. And costs depend very much on product definition. Similarly costs are often difficult to identify with precision because of allocations and variations in accounting treatment. Similarly inflation can be a complicating factor.
Appendix A provides experience curve data and graphs of the 24 selected products which were the basis for the 20% – 30% reduction in costs every time accumulated production doubles. They are all generic products, ie commodities where the focus of competition is likely to be price. They are: germanium transistors, silicon transistors, germanium diodes, silicon diodes, integrated circuits, crude oil, motor gasoline, ethylene, benzene, paraxylene, low density polyethylene, polypropylene, polystyrene, pvc, primary aluminium, primary magnesium, titanium sponge, monochrome tv sets, total free standing gas ranges, total free standing electric ranges, facial tissue, Japanese beer, electric power, refined cane sugar.

Reading Review 5
“THE PRODUCT PORTFOLIO”
Written and Published in pamphlet form in 1968
by The Boston Consulting Group, Inc
(This reading summary aims to capture the main points and the spirit of the original in readable form, rather than being a straightforward préçis. It may not cover all the points raised in the original text and does not quote the many examples referenced. It is not intended to contain any value judgments about the original text, but inevitably it remains a personal interpretation.)
To be successful a company needs a portfolio of products which is in balance in terms of cash flows, ie some products will generate surplus cash while others need cash to be invested if they are to maintain their position. .
Empirical work on experience curves showed that the competitor which had gained the most experience in producing a product would enjoy the greatest cost reductions and therefore should enjoy the lowest costs. In an industry where products are largely undifferentiated (ie commodity products) and therefore take a simple market price, the lowest costs will translate directly into highest profit margins. Relative market share is taken as a proxy for accumulated experience. Thus the competitor with the highest relative market share should achieve the highest profitability and therefore generate the largest cash surpluses. In short high relative market share implies high cash generation.
Products that are growing rapidly need cash to be invested both in building their physical assets and in increasing their working capital (ie stocks and work in progress and trade debtors). The higher the growth, the more cash is required. Products which are only growing slowly if at all should generate cash surpluses.
High market shares are either earned through the achievement of some competitive advantage in terms of product attributes, or can be purchased. The value of increases in marekt share can be extremely high, especially in a rapidly growing market.
No market grows indefinitely. The aim must be to achieve an advantageous position when the market growth slows down and the benefitrs in terms of cash surpluses can be realised.
High relative market share / low growth products are referred to as “cash cows”. They generate a large surplus cash because of their market share and require little to be reinvested because of their low growth. So typically they will generate more cash than is required to maintain their position ie cash that can be reinvested elsewhere.
Low relative market share / low growth products are referred to as “dogs”. They generate little profit because of their low relative market share though they may show an accounting profit. They do not require much to be invested, but nevertheless may require all cash generated to be reinvested to maintain their position. Their only value is what can be extracted from them in liquidation.
Low relative market share / high growth products are referred to as “problem children”. They generate little cash because of their low relative market share and require substantial investment to maintain their position in the high growth market. So they consume cash. When growth slows down they will naturally become dogs and this can only be prevented by either acquiring more market share to become a star during the high growth phase, or by liquidating.
The high relative market share / high growth product is referred to as a “star”. These generate cash because of their high profitability derived from high market share, but also consume a lot of cash to build capacity etc in order to maintain its position. Overall they may well be cash consumers. It is crucial to maintain their “star” position until growth slows and they become “cash cows”.
The benefits from achieving high relative market share are very high and the returns from leading a growth market could ultimately by enormous.
The successful company needs a portfolio which is balanced between cash cgenerators and cash consumers ie “cash cows” to invest in “problem children” to turn them into “stars” which will eventiually become “cash cows”. “Dogs” are not wanted – they are simply symbols of failure.

Reading Review 6
“HOW COMPTETIVE FORCES SHAPE STRATEGY”
Porter, M E, Harvard Business Review, March-April, 1979
(This reading summary aims to capture the main points and the spirit of the original in readable form, rather than being a straightforward préçis. It may not cover all the points raised in the original text and does not quote the many examples referenced. It is not intended to contain any value judgments about the original text, but inevitably it remains a personal interpretation. For a comprehensive appreciation readers are strongly recommended to the original article.)
Strategy is all about coping with competition, the state of which is embedded in the underlying economics of an industry. There are five competitive forces which determine an industry’s underlying profitability. Analysis of these forces does not merely define the level of competition and therefore profitability, but also suggests how a business might best position itself within the industry and how it might influence the forces.
The five forces behave differently and have differing importance to each industry. It is vital to know which is,or are, the most importance for your industry.
If the threat of new entrants coming into the industry is low then the existing participants may enjoy high profits. Barriers to entry depend on six factors: economies of scale achieved by existing participants; differentiated products with their existing brand loyalties; scale of required investment; cost advantages of existing particpants eg through experience, patents, strategic material supplies etc; distribution problems; government regulation eg licensing. Apart from these factual barriers, the industry may have a behavioural track record (eg how previous potential entrasnts were treated) which raises or lowers the barriers to entry. All of these factors is subject to change, either because of changing conditions or as a result of explicit strategic decision within the industry.
Each industry buys in from its suppliers and sells to its customers and the amount of surplus from these transactions that remains within the industry depends on the bargaining power of suppliers and bargaining power of customers. Suppliers will take most of the surplus if they are few in number, they provide a differentiated product, they have little competition, they might integrate forward and / or the customer industry is relatively unimportant to them. Customers will take most of the surplus if they are big, if the product they buy is a standard or commodity product, if the product they buy is an important part of their overall costs, if their industry works on tight margins, if the product they buy does not save them money and if the customers might integrate backwards.
Choice of buyers and customers are important decisions which should take account of their relative bargaining power. This is particularly importnat if the product is neither the lowest cost nor adequately differentiated from its competitors.
The existence of substitute products clearly limits the price at which products can be sold unless they can be adequately differentiated from the substitutes. The most dangerous substitutes are those that promise most price performance improvements and thos that are supplied by a highly profitable industry.
The fifth competitive force is the competitive rivalry among existing participants. In the economist’s perfectly competitive industry, rivalry is unconstrained and priftability is bid away. This happens when there are many competitors, when they are of a similar scale, products are similar, growth is slow, fixed costs are high and increments in capacity are large scale and exit barriers are high.
Having assessed the industry’s five forces the strategist must identify the relationship between the particular business and the individual factors underlying each of the forces. This is the basis for making strategic decisons about positioning the company, influencing the competitive forces and repositioning in anticipation of changes in the underlying factors.
Positioning the company assumes the the forces are fixed and identifies the positions where competition is least. Generally this means differentiating the product from the industry norm and doing it somehow differently in terms of production, distribution or service.
Influencing the competitive forces can be done again by differentiating the product, or by capital investment in new facilities or by forward or backward integration. Change is not easy to achieve because the forces are mainly dependent on external factors, but ilfuencing them is feasible in many cases.
Repositioning to take advantage of change requires the change to be forecast first. It may be possible, for example, to identify approximately when an industry is going to mature and growth come to an end, when different rules of competiton might apply, and to reposition to take advantage of the new phase of the life cycle.
The key to strategy is to position in a way which avoids head on competition whether from existing rivals, new entrants or substitutes and to recognise the dangers of the position being eroded by the growing power of suppliers and customers. This positioning may involve any number of new initiatives, eg new ways of differentiating the product, developing strategic alliances with customers or suppliers, developing technology leadership, etc.

Reading Review 7
“GENERIC COMPETITIVE STRATEGIES”, from Chapter 2 of ‘Competitive Strategy’, Porter, M E, Free Press, 1980
(This reading summary aims to capture the main points and the spirit of the original in readable form, rather than being a straightforward préçis. It may not cover all the points raised in the original text and does not quote all the examples referenced. It is not intended to contain any value judgments about the original text, but inevitably it remains a personal interpretation. For a comprehensive appreciation readers are strongly recommended to the original chapter.)
There are just three ways of outperforming the competition in the context of the five forces which shape industry profitability. They are overall cost leadership, differentiation and focus.
Overall cost leadership requires a management fixation on cost control and cost reduction in all overhead and fucntional areas of the business. Achieving the lowest costs needs more than just competent management and the benefits of high relative marekt share (ie most experience). It requires a cost focused culture which affects the way everything in the company is done. At the same time, since the cost leader’s product achieves the market price it must also achieve competitive quality and service – it is not a strategy of ‘cheap and nasty’.
The cost leader is in a relatively strong position with respect to each of the five competitive forces, especially head to head competition among rivals.
Differentiation is the strategy of making the product or service recognisably different across the whole industry. The source of difference can be anything: technology, design, brand image, features, service, distribution etc. Differentiation is best if it covers several product attributes. Differentiation, like cost leadership, is a means of positioning advantageously with respect to the five forces. The essence of differentiation is that customers are prepared to pay premium price for the difference. This may mean that the differntiator has to accpet a smaller market share.
Focus is the strategy of attacking only a particular niche of the market defined by buyer group, geography or product segment. The strategy involves delivering either the lowest cost or best product or service to the chosen market niche. For example, Porter Paint provides a differentiated service to the professional painter (eg offering free paint matching, fast delivery to the worksite of even small amounts of product, etc); Martin-Brower is the lowest cost food distributor to its chosen marekt of just 8 leading fast food chains.
Each of the strategires requires consistent pursuit over time if it is to be successful. This usually involves the building of different organisational capabilities and skills. Cost leadership requires sustained investment in process technology, low cost product design and lowq cost distribution, tight labour supervision, incentives based on quantitative targets. Differentiation requires strong marketing and product development skills, focues on quality and technology with ability to exploit creativity and attract and motivate high skill labour and technical people.
The strategies are different ways of coping with the competitive forces. But a firm that doesn’t adopt one of these strategies gets ‘stuck in the middle’, unable to be the lowest cost producer, nor able to maintain high margin customers in the face of effective differentiating competitors. Such firms will also have a confused corporate culture which delivers confusing messages to its people. Firms that asre stuck-in-the-middle must decide which strategy to adopt. Cost leadership usually involves large scale investment in new technology and possibly the acquisition of market share, while the differentiation or focus strategies are likely to involve significant reductions in market share. In many industries the viability of these decisions is confimred by the fact that both the largest market share and the smallest (differentiators and focusers) achieve high profitability while the mdium sized firms achieve low margins.
There are two risks involved in adopting any of the strategies. Firstly, the strategy may not be achieved, and secondly, the competitive position may be eroded.
Risks of cost leadership are that new technology may eliminate the benefits of previous investments; newcomers may start with new technology; product demand may change (exampled by the Ford / GM battle in the 1920s where Ford was the cost leader, but as the market became more affluent, demanding more features etc GM was able to overtake Ford with a strategy of differentiation.); costs may rise narrowing the cost leader’s advantage.
Risks of differentiation are that the cost leader may open up such a price advantage that the differentation is no longer regarded as wothwhile; alternatively points of differentiation may be effectively copied and the difference eroded.
Risks of focus are that the cost advantage of the focuser against the broad market cost leader may be eroded, the point of differentiation between the focuser and broad market differentiator may be eroded, or the focuser may be outfocused by even narrower market segmentation.

Reading Review 15:
.”STRATEGIC INTENT”,
Garry Hamel & C K Prahalad, Harvard Business Review, May-June, 1989.
(This reading summary aims to capture the main points and the spirit of the original in readable form, rather than being a straightforward préçis. It may not cover all the points raised in the original text and does not quote the many examples referenced. It is not intended to contain any value judgments about the original text, but inevitably it remains a personal interpretation. For a comprehensive appreciation readers are strongly recommended to the original article.)

Many Western managers are moving heaven and earth to remain competitive with Eastern, particularly Japanese companies, through imitation. They try such initiatives as product line rationalising, downsizing, delayering, quality circles, just-in-time production, business process re-engineering, benchmarking, continuous improvement, Japanese HRM practices and the rest, and when these all fail they form strategic alliances with their tormentors. But imitation is not good enough. By imitating they will never catch up. They need to rethink strategy from the bottom up.
Western orthodoxies such as strategic fit, the strategy hierarchy, logical incrementalism, generic strategies etc tend to lead to strategic decline while Eastern firms, working without these constraints, break out of existing structures, leverage their resources and achieve the wildest sounding ambitions.
Few Western firms successfully anticipate new global competitors because their competitor analysis focuses on the existing resources (human, technical and financial) of present competitors – a ’snapshot of a moving car’ – the pace at which new competitive advantages are being built is rarely recognised. It is vital to understand the resolution, stamina and inventiveness of potential competitors.
Successful competitors begin with crazy ambitions – an obsession with winning at all levels of the organisation and a 10-20 year quest for global leadership. This is referred to as strategic intent. For example: Komatsu’s “Encircle Caterpillar” and Canon’s “Beat Xerox”.
Strategic intent focuses the organisation’s attention on winning, motivating people by communicating the value of the target, leaving room for individual and team initiatives, sustaining enthusiasm by providing new operational definitions as circumstances change, and using intent consistently to guide resource allocations. It states a target that deserves personal effort and which remains consistent over time.
Strategic intent is different from, perhaps incompatible with, strategic planning. A strategic plan acts as a feasibility seive which filters out unrealistic goals such as global leadership for a relatively minor player. But strategic intent deliberately sets a goal which is dramatically beyond the reach of existing resources. It then focuses the organisation on closing the gap by passing a series of discrete milestones. For example, Canon first had to understand Xerox patents, then license Xerox technology to make a product to gain market experience. It had to gear up internal R&D, then license out its own technology to pay for further R&D. Then it entered market segments initially where Xerox was weak, then in its main markets by an innovative means (eg selling rather than leasing) etc etc. This is a long haul achieved by a series of challenges that stretch the organisation. A similar picture is given of how Komatsu encircled Caterpillar.
For a challenge to be effective individuals and teams throughout the organisation must understand it and its implications for their own jobs. Top management must therefore:
1. Create a sense of urgency or quasi-crisis.
2. Create a competitor focus at every level through widespread use of competitive intelligence.
3. Provide employees with the skills they need to work effectively.
4. Give the organisation time to digest one challenge before launching the next.
5. Establish clear milestones and review mechanisms.
Success will only be achieved if employees are engaged intellectually and emotionally and top and bottom of the organisation share the pain and gain in a reciprocal responsibility for competitiveness.
All competitive advantages are short-lived and an organisation’s most robust competitive advantage is its capacity to improve existing skills and learn new ones.
To achieve a strategic intent a company must usually take on and beat a larger, better financed competitor. Imitation results in failure; competitive innovation is required for success. Hamel & Prahalad note the following four approaches to competitive innovation:
1. Building Layers of advantage
2. Searching for Loose bricks
3. Changing the terms of engagement
4. Competing through collaboration.
Building layers of advantage is instanced by the Japanese TV industry. It started on basis of cheap ‘bowl of rice’ labour. This was vulnerable so they built channels and brands to achieve a global franchise, global marketing and now regional manufacturing and design, to tailor products to national markets.
Searching for loose bricks: for example, many Japanese industries have entered markets at the low cost end through supply of commodity components and progressively fought upmarket with finished products.
Changing the terms of engagement: eg Cannon taking on Xerox.
Collaboration (eg licensing, out-sourcing, joint ventures etc): the Japanese attacked TV manufacture with low costs and, once established, offered to produce the next generation products (eg VCRs CD players etc). American firms succombed, saving on R&D etc, but in many cases found it impossibly expensive to climb back on board the new technology and thus forfeited their future.
Competitive innovation is likened to judo – the game is to upset rivals by using their weight against them; recognise and upset their existing success recipes.
Nearly all the examples of strategic intent illustrate Japanese firms beating, encircling or upsetting American and/or European firms, but it is the Ameriucan and European firms which have the ’sophisticated’ strategy models. Playing the strategy orthodoxies is competitive suicide. BCG, Porter, SBU orientation, professional general management (ie not industry specific or expert), leadership myths and the rest, in the end, all fail. They only lead to top management caution and organisational conservatism which, even if based on successful recipes, ultimately only fulfils investors’ short term orientation, leaving strategic success to the ambitious, unorthodox achievers of strategic intent.
994 words

Reading Review 17:
.”THE CORE COMPETENCE OF THE CORPORATION”,
C K Prahalad & Garry Hamel, Harvard Business Review, May-June, 1990.
(This reading summary aims to capture the main points and the spirit of the original in readable form, rather than being a straightforward préçis. It may not cover all the points raised in the original text and does not quote the many examples referenced. It is not intended to contain any value judgments about the original text, but inevitably it remains a personal interpretation. For a comprehensive appreciation readers are strongly recommended to the original article.)

In the 1980s managers were assessed on their ability to restructure and delayer their organisations. In the 1990s it will be their ability to identify and exploit the core competencies that make growth possible.
Compare GTE and NEC. From 1980 to 1988 GTE sales went from $9.98Bn to $16.46Bn while NEC’s went from $3.8Bn to $21.89Bn. In 1980 GTE looked much better placed than NEC, but NEC outperformed them because it thought of itself in terms of core competencies.
NEC articulated a strategic intent to exploit the convergence of computing and communications – “C&C”. This was communicated to everyone inside the firm and outside in the mid-70s. A “C&C Committee” oversaw the development of core products and core competencies. This was supported by co-ordination groups and committees cutting across SBUs. They also multiplied internal resources through collaboration (over 100 alliances as of 1987) and accumulated a broad array of core competencies, quickly and cheaply (following Japanese tradition!). The strategic intent behind these alliances was well known and understood by all NEC managers.
GTE see themselves as a portfolio of businesses whereas NEC see themselves as a portfolio of competencies – the comparison is repeated with Honda vs Chrysler, Cannon vs Xerox, and others.
In the short run, competitiveness depends on product price/performance attributes, but fairly shortly demanding standards of price and quality are established as the prerequisite of survival. In the long run competitiveness comes from the ability to build core competencies (corporate wide technologies and production skills that empower individual businesses to adapt quickly to changing opportunities) quicker and cheaper than competitors in order to build features and sophistication into products and develop completely unanticipated products.
Core competence is about harmonising streams of technology, the organisation of work and the delivery of value. It requires communication, involvement and a deep commitment to working across organisational boundaries. For example, theoretical know-how is not enough for Casio to produce business card sized radios – they also need to combine competencies in miniaturisation, microprocessor design, material science and ultra-thin precision casing.
Core competencies are not only about combining streams of technology, but also about organising work and delivering value. To bring Sony’s competence in miniaturisation to fruition they also need to ensure that technologists, engineers and marketers all understand customer needs as well as the technological possibilities.
3M’s competencies in substrates, coatings and adhesives have produced businesses as diverse as Post-It notes, magnetic tape, photographic film, pressure sensitive tapes and coated abrasives. This is an example of the tree analogy: roots = competencies, trunk = core (generic) products, branches=businesses, leaves/fruit = end products.
Examples of core competencies are given: Honda’s core competencies in engines and power trains applied to cars, motorcycles, lawn mowers and generators. Canon’s core competencies in optics, imaging and microprocessor control applied to copiers, laser printers, cameras and image scanners.
Core competencies have the following features:
1. They provide potential access to wide variety of markets (eg display systems lead to calculators, miniature TVs, laptop monitors and car dash boards.
2. They should make a significant contribution to the perceived customer benefits of the end product.
3. They should be difficult for competitors to replicate.
Any firm is unlikely to achieve global leadership in more than five or six fundamental competencies. Firms need to list their competencies and those of their competitors rather than simply compare products in terms of price / quality attributes.
It’s easy to throw away core competencies – eg Chrysler out-sourcing engines to Mitsubishi and Hyundai – Honda does not do this. Several US & EU companies have got out of TV manufacture and thus seem likely to miss out on high resolution TV in the 90s. If you get off the train it’s very unlikely that you will be able to walk to the next station and climb aboard again. For example, Motorola missed out the 256K generation of DRAM chips. Sony lost out on Betamax, but retains its core competence through 8mm camcorders. Managements stuck in the SBU mind-set miss out on these opportunities, for example, General Electric and TV.
Core products are based on core competencies eg Honda engines, Canon’s laser printer engines, Matsushita’s refrigerator compressors. Thus JVC established VCR supply relationships with leading national consumer electronics companies, thus gaining the cash and diversity of market experience which enabled it to outpace Philips and Sony.
Global leadership is fought at three levels: core competencies, core products and, most superficially of all, end products. The SBU is thus an anachronism which results in under-investment in developing both core competencies and core products, both in terms of money and, more importantly, of skills and people. The result is therefore only in incremental end product development ie “bounded innovation”, rather than radical innovation in fundamental new developments.
Strategic management’s task is therefore to establish a corporate architecture which guides competence building through collaborative partnerships externally and the rotation of key people through different areas of the business internally; eg at Canon people are moved from cameras to copiers to precision optics and later to cross divisional project teams. Prahalad and Hamel emphasise there is no one best way of organising the corporate architecture.
SBUs should bid for core competencies (ie people) just as it does for funds. The people critical to core competencies are corporate assets to be deployed by corporate management. Competence carriers should be regularly brought together to trade notes and ideas in order to build a strong feeling of community among these people. Their loyalty should be to the integrity of the core competence they represent (not to their SBU).
Core competencies are the wellspring of new business development. An obsession with competence building will characterise the global winners of the 1990s.

Reading Review 18:
“CORPORATE IMAGINATION AND EXPEDITIONARY MARKETING”,
Gary Hamel & C K Prahalad, Harvard Business Review, July-August, 1991.
(This reading summary aims to capture the main points and the spirit of the original in readable form, rather than being a straightforward préçis. It may not cover all the points raised in the original text and does not quote the many examples referenced. It is not intended to contain any value judgments about the original text, but inevitably it remains a personal interpretation. For a comprehensive appreciation readers are strongly recommended to the original article.)

In the 1980s global competition was waged over price and quality, but in the 1990s the battle will be about creating new markets with new, previously unimaginable products. Differences in cost, quality and cycle time will become insignificant among the survivor. They will need not only to invest in maintaining and developing their core competencies. They will also need corporate imagination and expeditionary marketing to envision new opportunities and create new competitive space before their competitors.
To achieve this a firm must be able to liberate itself from the fixation with ROI and other short term measures and instead be able to accept extremely long delays before opportunities come to fruition. This requires an almost instinctive belief in the ultimate benefits of the new opportunities identified. In Japan corporate imagination has produced many new markets and despite the orthodox wisdom that large firms are not innovative, firms such as Sharp, Sony, Yamaha and others have succeeded.

Corporate Imagination
Most companies get big because they are good at what they do and so it is almost inevitable that the develop a concern for defending their existing business. This inhibits them focusing on new opportunities, but they can still develop a corporate imagination through the following four initiatives:
1. Breaking out of the existing market:
By thinking of the company in terms of core competencies rather than products or business units, it is possible to envision new core products by exploiting two or more competencies which have previously not been combined.
2. Discovering mould breaking new product ideas:
This can be achieved by adding new functionality to existing products (eg Yamaha’s electronic recording piano – many such possibilities are being currently exploited through newly computerised product controls), by offering existing functionality in new forms (eg pocket calculators), or by offering new functionality in new forms (eg home fax machines).
3. Smashing the existing price / performance norms:
New technology presents opportunities to offer previously inconceivable levels of performance at substantially reduced cost.
4. Leading customers rather than following them:
Customers very often cannot conceive the possibilities offered by new technologies so asking them what they want can be futile in exploiting corporate imagination. Companies that lead or educate their customers as to the possibilities develop marketers with technical imagination and technologists with marketing imagination. Neither technology nor marketing alone can create new competitive space, but multidisciplinary teams and individuals can.
Expeditionary Marketing
This is the potentially risky process of creating new markets (where orthodox market research is likely to be inaccurate) ahead of the competition. Letting others take the lead reduces the risk but also the prospects of ultimate success. Learning about the market by introducing new products as a learning exercise and with controlled amounts of risk progressively accumulates information about the mix of functionality, price and performance which will ultimately lead to success. It requires a willingness to make mistakes – like shooting arrows, a miss is used to learn and adjust the aim rather than being rejected as a failure. Expeditionary marketing raises the number of hits by increasing the number of product offerings, market niches and opportunities, thereby rapidly increasing managerial knowledge and understanding.
The development of core competencies and core products can increase the number of potential hits. Many examples are given of successful expeditionary marketing. Further support for the approach is provided by instancing General Electric’s attack on CAD/CAM and CIM. GE did not adopt the expeditionary marketing approach but attacked the opportunity on an all or nothing basis. They found the market took longer than hoped to develop and eventually GE pulled out, only to come back to the market at a much reduced level and with partners to share the risk. An expeditionary marketing approach would have been much safer and more successful from the outset.
Financial criteria are inadequate for measuring managerial performance in expeditionary marketing and corporate imagination. The time and risk adjustments of financial theory mean that this orientation is too short term and inhibits managerial risk taking.
The old mind set focuses on served markets, defending today’s business, conceiving the company as a portfolio of businesses, following customers, focusing on product markets, maximising the hit rate and a measuring commitment in purely financial terms. In contrast the expeditionary marketing approach focuses on opportunity horizons, creating new competitive space, conceiving the company as a portfolio of core competencies, leading customers, focusing on functionalities, maximising learning and measuring commitment in terms of persistence.

Reading Review 19:
.”STRATEGY AS STRETCH AND LEVERAGE “,
Gary Hamel & C K Prahalad, Harvard Business Review, March-April, 1993.
(This reading summary aims to capture the main points and the spirit of the original in readable form, rather than being a straightforward préçis. It may not cover all the points raised in the original text and does not quote the many examples referenced. It is not intended to contain any value judgments about the original text, but inevitably it remains a personal interpretation. For a comprehensive appreciation readers are strongly recommended to the original article.)

There are some unexpected winners of (global) competitive battles. The biggest and best resourced do not necessarily win in the long term. Why is this? Where does competitiveness come from?
Situations are analysed in detail, but analysis tends to focus on the existing orthodoxies such as measures of efficiency, quality and customer orientation. Inevitably the result is that Company X is shown to have inadequate quality or too high costs etc. These are the ‘whats’ of competitiveness, but we need to identify the ‘whys’. Why are some firms first with new forms of competitiveness? Why do some firms break the mould while others take it as fixed?
National cultures and systems (eg fiscal and industrial policy) may have some impact, but this is often overstated as many examples show. There are more powerful explanations.

Breaking the mould
The orthodox wisdom, the ways of doing things that have been successful in the past, the agreed industrial recipes, determine both the success and failure of a business. managers are taught these norms both in their formal education and in their work experience. In the days when national markets were insulated this worked reasonably well because all competitors played to the same set of rules. But now markets have been opened up to international / global competitors who provide a wide variety of different norms and recipes. Thus the existing managerial orthodoxies are being continually challenged by new competitors coming from different national backgrounds. Thus global competition is not so much competition of products as competition of managerial mind-sets.

From fit to stretch
The Western mind set about strategy is that it is concerned with:
? investing long term
? allocating resources
? fitting the business most effectively to its environments
This is not necessarily wrong but it is not the only view. An alternative focuses on:
? consistency of direction over the long term
? leveraging resources
? stretching the business beyond its apparent capability
For example, Company A is a market leader that accepts or even defines the orthodox wisdom and recipes of the industry. Typically Company A will seek to maintain market share and achieve a reasonable return on investment. In contrast, Company B is an ambitious new entrant which boldly seeks to challenge Company A’s leadership position. In any direct competitive war Company seems certain to win and Company A therefore plays according to the orthodox rule book. Company B also recognizes these realities and is therefore forced to adopt other, less direct tactics. For example, it focuses on undefended market niches, rather than attacking the broad market as a whole. It will concentrate on achieving leadership in a small number of competencies and outsourcing the rest, rather than trying to achieve leading edge competence across all activities.
The difference between Company A and Company B is not just that B has the speed and flexibility of small scale, but that it has a bigger misfit between its resources and its aspirations. Company A on the other hand has no need to change, or ‘stretch’, in order to achieve its objectives. Creating ‘stretch’ is the most crucial task of strategic management.

From allocation to leverage
Sheer weight of resources is no guarantee of competitive success as many examples demonstrate. The productivity of resources is more important than their scale. Productivity can be raised either by cutting the input or increasing the output. Cutting the input (eg by re-engineering, down sizing, delayering etc) has been widely adopted, but leads to a cost cutting mind set and, ultimately, to failure. Raising the output, ie leveraging, is a more challenging and fruitful process.
Resources can be leveraged in five main ways: concentration, accumulation, complementary use, conservation and recovery.
Concentration of resources
Requires that all the resources of the business, people, plant and equipment, money, functions and systems are focused consistently on achieving the strategic objectives of the business consistently over time.
Accumulation of resources
Means making full use of expertise and knowledge within the organisation, particularly if it challenges existing orthodoxies. It also requires obtaining knowledge and expertise from external sources eg customers, suppliers, competitors etc and defines the learning relationship within any alliances and joint ventures.
Complementary use of resources
Requires the combination of technological resources in order to multiply their impact, for example, combining two or more core competencies to identify new core products. It also requires the business to balance its resources to achieve competitiveness in product development, production and marketing and distribution – a weakness in one are will devalue strengths in others.
Conserving resources
Requires skills and competencies to be exploited by all the company’s relevant business units, thus multiplying the impact. This doesn’t only refer to technologies, but to production processes through flexible manufacturing and to brands. Resources can also be conserved by combining with other organisations to achieve a common goal such as the defeat of a common competitor. Finally resources should be conserved by not fighting head on with the focus competitor, but seeking out under-defended niches and doing things in ways which are counter to their managerial mind set.
Recovering resources
The speed of resource utilisation is crucial – doing it twice as fast requires half the resource – there are many examples of this phenomenon in product development cycle times.

Stretch without risk
Resources should not be committed without adequate knowledge and understanding of the business and its customers and competitors. Strategic management’s job is to accelerate the acquisition of this understanding and thus minimise risk of failure – more haste less speed.
Thus strategy by stretch is not achieved through the development and implementation of a massively detailed plan, but by the identification of a consistently held long term strategic intent and its achievement by many incremental steps along the way.