business analysis

Chapter 7. Supporting Business Strategy through Functional Strategies

In 2015, India’s packaged fruits drink market was valued at Rs. 11 billion (~US$200 million). Dabur held a 55% share of the market, followed by PepsiCo at 30%; up from 50% and 25% respectively a decade back. Fewer than 20% of the people in India consume fruit juices as part of their diet, as compared to ~40% who consumed bottled water and ~60% who consumed coffee and soft drinks. Over the past decade, the market has grown by 15-20% annually because of the rising health-consciousness, and is expected to sustain that growth over the coming years. The government of India has set targets to triple the size of processed food sector, by increasing the level of processing of perishables from 6% to 20%, and value addition from 20% to 35%, as a way to raise farm incomes (Sharma, 2015). Dabur has been sourcing mass-produced lychee, guava, grapes, and mango juices from the domestic vendors, and orange, apple, and pineapple concentrates from the overseas suppliers. To be more responsive to the consumer needs, Dabur has been buying fruits directly from farmers since 2004, and is processing them in-house in a new plant it set-up in Siliguri, West Bengal. It has also migrated to a flexible production system to offer fruit in a variety of specialized forms, such as juice, sauce, puree, smoothie, paste, and ketchup. To grow its share of the overall market and grow even faster than the market, Dabur has used customized Research and Development to boost the share of the under-served institutional segment in its total sales from a fourth in 2003 to a third now. Amit Burman, the then CEO of Dabur, noted, ‘Often, products are created when our [institutional] buyers tell us about their culinary problems, which could range from getting pre-chopped onions in bulk to mixing the best juice and yoghurt smoothie. As we have the experience and the network, and there is ample capacity available in the country, it is easy for us to offer solutions (Srinivas, 2003).’ More flexible operations and sourcing system, and institutionally led marketing and research effort has also helped Dabur realize its strategic intent of becoming a leader in the broader processed fruits market, beyond just juices and concentrates.

In this chapter, we explore three different types of functional strategies – market taking, market making, and market seeking. In addition to deciding the overall strategy for their business, executives also need to develop and align functional core competencies. Dabur’s growth strategy has required new competencies in supply chain, research and development, operations, and marketing. Each function relies on different and specific techniques and technologies to achieve the common business objectives of cost efficiency, customer and quality differentiation, and innovation for growth.

Alternative business strategies are often equally viable. On average, the two contrasting business strategies—cost leadership and differentiation in the Porter’s framework—perform equally well (Gupta and Govindarajan, 1984). Some firms still outperform others because of their ability to develop appropriate supporting functional core competencies. In doing so, the firms must deal with two challenges:

a) Business level strategy: First, business strategies need to be supported with appropriate functional core competencies. For instance, a firm with a business strategy of cost leadership (such as a budget hotel or budget airline), may invest in technologies that minimize the quality assurance and training needs, simplify product designs to reduce the need for specialized vendors or machines, and simplify the customer servicing to efficiently deliver its products.

b) Micro foundations: Second, structural and relational conditions need to be conducive to promote the intended functional behaviors. For instance, some sort of centralized organizational structure may help achieve the cost efficiency business objectives. Consider a case where a firm offers promotional discounts to implement a volume leadership strategy, but fails because it did not also develop vendors and capacity to scale manufacturing without compromising on quality. When a higher central structure oversees all these functions, and fosters a culture of inter-functional collaboration, these interactive functional behaviors are more likely to actualize.

To resolve the above challenges, design of functional strategies should be guided by three principles:

(a) Consistency: Functional behaviors should be consistent with the business objectives. If the goal is to create a premium positioning, then the use of low-end, discount distribution channels may not be effective.

(b) Balance: Micro foundations are necessary to balance functional behaviors, based on a portfolio of inter-balancing core competencies across different functions. If the goal is to realize low cost leadership, manufacturing may seek to maintain zero inventory levels; however, such zero inventory levels could result in a loss of sales, decline in the customer satisfaction, and reduced economies of scale and profitability. Therefore, the firm may need to invest in more interactive vendor and customer relations, for more dynamic information exchange about demand and supply.

(c) Dynamism: Firms should be cautious in not inadvertently turning their functional core competencies into a source of rigidity and entropy. They should foster a culture of learning and functional dynamism, alert about changes in the environment. A firm which focuses on small local business customers may observe changes in customer needs, when the customers become bigger and global, and when new competitors enter with innovative products. In this situation, the firm may need to improve its customer servicing, in order to defend its overall low cost focus, and accordingly adapt its functional level strategies. For instance, consider how Daewoo Motors balances the limitations of its supply chain, human resources, and operations, by adopting an unusually responsive customer servicing function: it even accepts higher costs of warranty to effectively implement its cost leadership strategy in the car business:

Daewoo Motors deploys a cost leadership strategy in its automotive business in the US. Its cars are priced at least 10–20% less than the competing cars in given market segments. While many customers of Daewoo Motors report high satisfaction with the quality of their cars, Daewoo cars are not generally perceived as reliable as the competing cars from the Japanese and American firms. To give customers peace of mind, Daewoo offers an industry leading 10-year warranty that includes free roadside assistance. This warranty is a necessity—a hygiene factor—in getting the consumers to buy its cars. The warranty does not differentiate Daewoo from its competitors since the customers are not motivated to purchase Daewoo car primarily because of this warranty. Instead, Daewoo customers are attracted by its low prices. The warranty serves to balance the concerns about quality that are associated with cost-cutting strategy, and signals to the customers that Daewoo is responsive to their concerns.

The guiding principles of consistency, balance, and responsiveness, also help a firm operating with a protectionist view of value chain, seeking only either cost leadership advantage or differentiation advantage, to migrate to a growth mindset under more dynamic conditions. In dynamic environments, a traditional cost-leader will find it more difficult to ignore quality, product image, and bases for differentiation. Similarly, a differentiator will find it necessary to also adopt an effective cost control, even though cost containment was not a priority in the past. Thus, a firm with a traditional business strategy of differentiation will gain the dynamic capability to leverage some low-cost functional strategies and thereby transform from a costescalating differentiator to a cost-effective differentiator. In the 1990s, the premium car maker, Mercedez Benz relied on cost containing functional strategies for supporting its growth strategy, after an earlier set of differentiation alone functional strategies ended up creating highly expensive products for which there was a very limited demand.

Mercedez business unit of Diamler-Benz traditionally followed a business strategy of differentiation. During the 1980s, Japanese firms rapidly upgraded their capabilities to offer viable products in the mid-range automotive market. In response to losses in the mid-range market, American firms started offering a variety of luxury-oriented options in their vehicles to make them attractive for the high-end customers. As a result, demand for the high-end differentiated Mercedez cars began shrinking. Initially, Mercedez sought to habitually defend its competitive position by using functional strategies to enhance differentiation. This added differentiation only raised the costs of the vehicles, and made them too pricey for most customers. The sales of Mercedez cars dropped dramatically, even though the overall auto market was growing. Thereafter, Mercedez decided to adopt new low-cost functional strategies to support its new focus on growth business strategy. It ventured outside Germany, where its cost of operations were very high, and invested in the US for making less costly versions of Mercedez cars. The more cost-effective, nevertheless distinctive, Mercedez cars proved immensely attractive to a larger group of customers (Gupta, 1998).

In the field of strategy, three major sources of competitive advantage are recognized – resource-based view, relational view, and growth view. Resource-based view emphasizes the role of resources (Wernerfelt, 1984; Rumelt, 1984, Penrose, 1959), knowledge (Nelson & Winter, 1982; Arthur, 1994), core competencies (Prahalad & Hamel, 1990), and dynamic capabilities (Teece, Pisano & Shuen, 1992). Resources become a source of enduring competitive advantage through the presence of isolating mechanisms that make it difficult for other firms to substitute or imitate those resources (Rumelt, 1984). Knowledge resources, in particular, tend to be protected by isolating mechanisms, because uniquely varying paths of firm experience generate uniquely varying bundles of resources and uniquely varying ways of combining and codifying these resources for specific deployments (Nelson & Winter, 1982). Firms develop core competence for coordinating, communicating and integrating their unique bundle of resources and knowledge into a range of technological applications for customer benefits, thereby accruing increasing returns and competitive differentiation (Prahalad & Hamel, 1990). While finance per se may not result in competitive advantage, firms leverage finance by investing into dynamic capability for reconfiguring their resource bundles in sync and with agility to the changing, often in uncertain, complex, ambiguous and discontinuous ways, threats and opportunities in the environment (Teece, Pisano and Shuen, 1992).

Relational view (Dyer and Singh, 1986) emphasizes the role of strategic relationships with key stakeholders – employees, suppliers, and customers. Even the rivals are co-opted using a lens of value net collaboration, and become suppliers, customers, or even extended employee base striving to solve problems or pursue opportunities for creating value together (Brandenburger and Nalebuff, 1996).

Growth view emphasizes operational agility and resiliency of firms in moving to, protecting and upgrading structurally attractive positons (Porter, 1996), leadership capacity for managing change and enacting entrepreneurial mindset (Gupta, Macmillan & Surie, 2004), and mindful stewarding of the firm’s mission, vision and values for responsible behaviors.

Managing resources, managing relationships, and managing growth, then, are three fundamental strategies for achieving enduring competitive advantage for any firm. The objective of this paper is to deconstruct these fundamental strategies into specific functional strategies.

a) Managing three types of relationships – human resources (manpower), supply chain (materials), and customers (marketing),

b) Managing three types of resources – knowledge (methods), technology and innovation (machine), and investments (money),

c) Managing three levers of growth – operations (manufacturing power), leadership (motivating power), and stewardship (manipulating power).

Figure 4.1 illustrates the classification framework, which we refer to as 9M model of functional strategies.

A. Managing Relationships - Functions about the relationships with workforce, vendors, and customers

Part I – Managing Relationships

Managing Relationships with Workforce – Human Resources Strategy

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

Key elements of a high-commitment HR strategy include:

a) Talent acquisition and acculturation: To achieve deep organizational learning, high commitment HR strategy seeks high levels of mutual commitment on part of both the hiring managers as well as hired employees. Talent is acquired for their potential commitment to the firm, and willingness to embrace the corporate family and its service excellence priority.

b) Talent deployment and development: High-commitment HR strategy actualizes commitment through flexible deployment of talent, and a carefully crafted career development plan where each employee is offered opportunity to develop, such as through rotation across multiple functions. This helps each employee to leverage the entire portfolio of functional core competencies to develop a deeper learning of the value firm may add, and to actually design and deliver this added value. Instead of having a higher central authority deciding how to best integrate and combine various functional core competencies, each employee is developed to be able to do so in a rapid, responsive and decentralized manner. Employees are trained extensively to be multi-task experts and are assigned broadband job classifications, so that there is no gap in service if anyone is absent or decides to leave.

c) Talent compensation and churn: High commitment HR strategy sustains commitment by compensating for not only performance, but also accumulation of firm-specific knowledge and experience through years of dedicated service encompassing multiple functions, geographies, and product groups. To encourage high levels of churn or mobility within the firm, and low levels of attrition, employees are offered voice and autonomy to be self-managing; and are given the information, opportunity, and authority to serve the customers the best way possible.

Conversely, key elements of a low commitment HR strategy are as follows:

a) Talent acquisition and acculturation: Talent is acquired for the skills and experiences employees bring with them, almost as if they are freelancers who are offering their talent and human capital. Firms achieve greatest cost efficiency when they acquire a talent portfolio comprising of employees whose skills complement one another, and who work together well as a team, through fairly objective well-defined roles. The most critical acculturation is for the employees to be oriented about other members of the team whose roles influence their own efficiency, and with the structures such as the supervisors or the specialists who have the power to evaluate and decide the boundaries of each members’ role.

b) Talent deployment and development: Talent is deployed in the roles that each individual employee can best perform based on his or her specific skill sets and experiences, given the skill sets and experiences of other employees or even potentially new employees. Firm makes minimal investments in talent development, unless it is unable to find the talent of required skills and experiences in its local market and hiring the talent from the global market is either not feasible or not cost-effective.

c) Talent compensation and churn: Talent is compensated based on the match with the requirements of the job, and based on the market range for performance of that job type. If others whose skills and experiences are a better match for the job are available for similar levels of market compensation, then the firm is unlikely to be willing to pay the same compensation to the current employee and expects the employee to search for alternative jobs that are more closely aligned with his or her specific skills and experiences.

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

Li (2003) investigated the relationship between HR strategies and business objectives, using a sample of beverage and electronic multinational corporations in China. The study shows the firms seeking a cost efficiency objective tended to use short-term and temporary employment and less educated workforce, offer less monetary compensation to the employees, and rely more on the managers and supervisors for making major decisions and disciplining employees. In contrast, the firms seeking differentiation business objectives tended to use long-term and continuing employment and more educated workers, give more monetary compensation to the employees, and involve workers in making major decisions.

Firms using a high commitment HR strategy are likely to invest deeply in their human resources to support their differentiation advantage and tend to be highly protective of their employees, as they may lose their unique firm-specific knowledge to their rivals should a critical mass of their highly experienced employees were to be poached by their rivals. Such firms are likely to behave like defenders (Miles and Snow, 1984). In such firms, employees with greater firm and product-specific skills and knowledge are likely to be valued more, and enhanced through continuous training, well-established career paths, and performance appraisal and feedback systems that foster employee development. A high amount of employment security and voice is likely to be offered to the employees to mitigate turnover, minimizing the cost of replacing workers and the knowledge they possess.

In contrast, firms using a low commitment HR strategy are likely to take a market-arbitraging freelancer approach to their human resources to support their cost efficiency advantage and develop a capacity to substitute talent or use semi-skilled talent interchangeably. Such firms are likely to begin behaving like Prospectors (Miles and Snow, 1984). Such firms may have stronger capacity to adopt new technologies or pursue new product-markets, using talent hired from outside.

In the past, the global HR best practices were commonly referred to as the high performance HR practices, because they reflect best practices adopted by the world’s most successful organizations. Paul Osterman (1994) reported that the high performance HR practices are more likely to be adopted by firms engaged in the sectors exposed to international competition, employing more advanced technology, and pursuing integrative competitive strategies that combine quality and service dimensions as well as cost. In recent years, with the rapid pace of technology change and the need for integrating diverse sources of knowledge, world’s most successful firms have relied increasingly on freelance and contract knowledge workers. In fact, this new world is being referred to as the “gig” or “freelance” economy.

When the firms deploy freelance workforce in an organizational and market culture of low-commitment HR, the overall morale of both internal and external workforce is likely to be low and diminish with potential of high conflict. Conversely, when the firms deploy freelance workforce in an organizational and market culture of high commitment HR, the overall morale of both types of workforce is likely to be high and rise through potential of collaboration and enhanced success.

Building commitment in a Freelance Economy Hiring freelancers as regular employees has become a cost-effective solution for firms seeking to sustain growth. Freelance employees bring specialization, creativity and flexibility to firms. It is possible to hire such employees from around the world, at very short notices, without too much cost. A big downside of freelance employees is their lack of familiarity with the company and their low levels of engagement 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 acccomplishments on social media. And, it is scalable at very little cost. The firms are making freelancers participating members of their organization, including them in all communication and inviting them to all team meetings. They are including freelancers in employee recognition 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 also solicit feedback from freelancers, in order to discover new opportunities and to show they are valued by the company.

Managing Relationships with Vendors - Supply Chain Strategy

Supply chain strategy involves managing the entire sequence of materials, information, and money flow from the suppliers to customers, with an emphasis on the business objectives. Functionally, supply chain strategy may be classified as responsive vs. predictable. A responsive supply chain strategy is driven by an organizational culture that is agile, custom configurable, and flexible. It engages mutual 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 willingness 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 transformation process in the value chain (Olhager, 2012). The decoupling point is where a product takes on unique characteristics or specifications for a specific customer or group of customers. Because of the mutually collaborative relationship between the firm and the vendors, the firm is able to customize a larger proportion of the value-added in an agile, flexible way (Olhager, 2012 ).

Proactive demand management in responsive supply chains goes beyond the typical market offerings, reactive problem solving and recovery, and even simple satisfaction of existing customer satisfactions (Morash, 2001). Emphasis is on becoming a part of the customer organization as ‘internal 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 recognition 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) .

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-effectiveness in offering supplies of rather standard specifications in sufficient volumes and with short lead times. The firms may have multiple vendors for the same supplies, to ensure they are getting the most competitive purchasing costs. Such a strategy contributes to supply chains that are efficient, fast, and predictable (Perez, 2013). Predictable supply chain strategy emphasizes matching supply to predictable demand as efficiently as possible. 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 management. These competencies allow the firms to offer efficient delivery of reliable products and services at competitive prices, with minimal difficulty and inconvenience to the customers. The total cost for the customer is reduced through lower costs of order fulfillment, and through supply chain time compression. The firms may establish computerized links with major suppliers that share information about their inventory levels. This allows suppliers to adjust their production schedule automatically, and helps the entire supply chain become efficient (Gutterman, 2011).

The global supply chain best practices have traditionally entailed being highly responsive, but with an eye towards predictability. Morash and Lynch (2002) surveyed about 4,000 firms in eleven industrialized nations from North America, Western Europe, and East Asia. Excellent firms in the study deployed highly responsive supply chain strategy to support customer service strategies. They did so by postponing commitment to product form, assembly, or forward movement, and intermittent acceleration and deceleration of product flows to synchronize product with changing customer requirements. They, however, also built predictability, through real-time order information systems; collaborative planning and forecasting; vendor-managed inventory; resident supplier employees as buyers (known as just-in-time II); flexible or agile manufacturing; and locating suppliers’ production lines on the customer’s premises (i.e., JIT III).

Competing through Responsive Supply Chains that are predictable The retail market in India is becoming more organized. The new retailers are striving for a differentiated strategy to take away a significant share of market away from the kirana stores— the traditional mom-and-pop corner shops. Initially, most sought to locate in premium shopping malls, and project a modern image; however, that has not been sufficient to justify their high prices in a nation where the consumers are very value conscious. Traditionally, the consumer product companies in India serviced all outlets in a territory—be it a kirana shop, or a supermarket—through a specific distributor. RPG Retail, a Chennai based firm, found it hard to convince consumer product giants like Hindustan 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 Premium. The things have changed so much that Hindustan Lever Ltd even piloted a separate distributor for all modern retail outlets (those with self-service format) in 2003, observing: ‘These outlets need to be serviced differently… . 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 competing 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-batch supplies based on the hottest fashion trends.

Zara Pioneers Predictable (Fast) Supply chain, that is responsive 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 collections during the year. They take their inspiration from many sources, including extensive feedback from stores (both quantitative information about the items sold and qualitative information from store managers). Unlike other leading apparel firms who typically sell 2000-4000 different items every year, Zara is able to design and offer 10,000 items every year – appealing to a broader group of customers with unique preferences. Purchased fabric 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, arriving at the store within 2-3 days. Zara is able to replace existing collections, and introduce a new collection – 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-conscious youth segment. Source: http://www.nytimes.com/2012/11/11/magazine/how-zara-grew-into-the-worlds-largest-fashion-retailer.html ; http://www.investopedia.com/articles/markets/120215/hm-vs-zara-vs-uniqlo-comparing-business-models.asp

Managing Relationships with Customers - Customer Management Strategy

Customer relationship management (CRM)) strategy involves managing exchange with customers and channel members. CRM strategy may be classified as utilitarian vs. interactive (Vilcox & Mohan, 2007). Utilitarian 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-shelf products. The primary purpose is to “make a sale” now or soon, and to address those needs of the customers that can be most efficiently met with the resources available to the firm. In such spot market 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 utilitarian CRM strategy enables firms to make their product development decisions based on their process technology capabilities – the capabilities to discover, develop, combine and integrate resources cost-effectively. The strategy demands low-cost channels of distribution, 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 utilization and economies 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 organizational culture of designing product experience based on an interactive communication with the customers, and where the customers also design their use experience based on the interactive communication 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 communication 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-generating 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 emphasizes a “pull approach”, where the firm pulls all cylinders to offer a great experience to the customer (Kohli and Jaworski, 1990). With the rise of network organizations, interactive marketing has gained prominence.

The case of Castrol illustrates the difference between the two types of strategies in practice.

Castrol is the world’s leading lubricant firm. It follows a relationship-oriented interactive customer exchange with its premium customers. It uses both pre- and post- sales customer engagement process that begins with joint dialog between the Castrol and the customer teams, and a survey of the customer plant-specific personalization needed in the generic plant platform. Based on this dialog and survey, personalized package of solutions comprising of products and services is developed and offered to the customers. The risks to the customers are reduced as Castrol works with its customers to diagnose their plant-specific needs, build the solution, and track the performance. In the long-term contract, assessment, continuous improvement, and closing the loop between the expectations and the performance is built-in. For its mass customers, Castrol follows a deal-oriented utilitarian customer exchange. It has invested in automating the sales and delivery processes; so that these customers and the channel partners are able to order the products and services they need seamlessly with an assurance that Castrol offers a competitive pricing on its products. Source: Adapted from Hax (2002)

In global marketplaces, firms often combine image positioning with 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 information about the firm and so are unable to verify a firm’s claim of quality unless they actually use the product. Thus, utilitarian CRM by itself is likely to be ineffective, unless grounded in the framework of interactive CRM.

Building trust for utilitarian CRM through interactive strategy – what next for Indian IT firms? During the 1980s, the Indian information technology companies built their early business models by offering low cost programming power and business process management capabilities to the American firms. During the 1990s, the leading Indian IT firms began sending their employees to the US to work on-site with American businesses, in order to build better understanding of the client needs, organizational issues, and market conditions. This helped them develop trust with American clients, and move from lower value-adding utilitarian positioning (referred often as body-shopping or sweatshops) to higher value-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 analytics, robotics, and artificial intelligence, as well as availability of cloud and software-as-service on demand are enabling the American businesses to rethink how technology could be used to transform their business models. The older model of Indian IT firms seeking to understand from the American firms what they want from the IT function, and then delivering 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 understanding of the American context. Second, they are seeking to hire and train new type of workforce in India, who has both technical skills and knowledge of business functions. They recognize the need to evolve an interactive customer relations strategy focused more on collaborative discovery of issues and opportunities for technological interventions, and backed by utilitarian IT solutions. Source: http://knowledge.wharton.upenn.edu/article/dream-run-indian-ended/

Part II – Managing Resources

Managing ‘Method’ Resources - Knowledge Management Strategy

Knowledge management functional 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 management (KM) strategy is often classified as specialized or codification (making experiential knowledge explicit) vs. generalized or abstraction (generalizing the explicit knowledge) [Boisot, 1991]. Specialized KM strategy involves 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-usable form to those who can apply that for serving the customers more cost-effectively without reinventing the wheel. It also entails embodying the specialized knowledge into automated systems, to support efficient and prompt applications. This type of ‘applied” research and development (R&D) uses ‘followership’, i.e. adoption of appropriate proven, specialized external and internal knowledge content to bring about process efficiencies. Focus is on ‘exploitation’ of existing specialized competencies, and incremental improvement in these competencies.

Conversely, the generalized KM strategy is driven by an organizational culture founded on an abstract set of relationships and networks, as a way to promote mutual understanding 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 members, 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 ‘fundamental’ research and development (R&D) integrates fresh, leading-edge knowledge for ‘product innovations’. It gives firms ‘leadership’ in the form of first-mover advantage, as they become the first to bring a product innovation to their customers. Even learning from outside the firm is modified and given an original form that offers added value to the customers. To facilitate constant ‘exploration’ 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 thinking 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 Apple, Google, Amazon, and Tesla, excel at generalized KM strategy, developing agility for regularly moving into entirely reconstructed new business domains. They become successful in these new domains, by using their specialized IT knowledge such as about design (Apple), search (Google), sales (Amazon), and sustainability (Tesla). The older enduring global firms – such as those in the pharmaceuticals 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 limitations of over specialization, by becoming adept at scanning of the environment to identify and to form alliances with firms having complementary specialized knowledge. At the same time, they may extend the lifecycle of existing product generations through improvements using a highly-specialized KM strategy.

Pharmaceutical firms support their specialized KM through complementary contracts In the pharmaceuticals industry, the cost of bringing a new drug to market averages $ 700 million. The firms in India generally lack resources to bring out original drugs on their own. However, many have created their names for original research by participating in contract research. The pharmaceutical product development consists of several process stages, and the contract research firms can help lower the cost and time of specific process stages. As a result, the world R&D outsourcing market has grown from $ 5.4 billion in 1997 to $ 9.3 billion in 2001. The Hyderabad-based, Rs. 2,590 million (~$ 55 million) Divi’s Laboratories offers low cost contract research on process design, validation, and optimization for new drug candidates to multinational firms such as Pfizer. Its specialization is in helping eliminate harmful side effects in a molecule, that otherwise has a high potential (Singh and Surendar, 2003).

Managing ‘Machine’ Resources - Technology and Innovation Management Strategy

Technology and innovation management (TIM) strategy is often classified as process oriented vs. product oriented (Edquist, Hommen & McKelvey, 2001 ). Process oriented TIM strategy seeks to achieve most efficient process combination of capital and labor costs. When the unit labor costs are high, this is done by investing in larger scale capital-intensive technology and in full 24x7 exploitation of this technology. When the unit capital costs are high, the firm instead deploys labor-intensive technologies that operate at smaller scale without experiencing cost escalation associated with the lack of economies of scale. Historically, the American firms achieved cost advantage in the global market using capital-intensive technology. They automated 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 information and other technologies in accounting, order processing, and other administrative and backroom support areas, to help understand their cost structure, and to make efforts to reduce variances and maintain control.

In contrast, product-oriented TIM strategy is driven by an organizational culture seeking to complexify the firm capacity to offer a more generalized portfolio of services to its customers. The information-enabled intelligent machines may be deployed in the frontline customer-oriented processes and activities, to help search, collate, and gather new intelligence (for instance, through internet, and through sensors). Tools, such as loyalty programs and cards, for instance, seek to collect data about their customers, and to create innovative, differentiated products, such as a continuous stream of information filtered to the specific customer needs. Information systems may help define micro-segments of customer bases, based on complex algorithms and extensive databases of the customer profiles. They may help define and price custom product configurations, and close the deal during their first interaction with the client. Design thinking and moonshot thinking (striving to find imaginative solutions to seemingly intractable problems) are being used by many firms today to develop new product concepts.

In a global, competitive environment, process-oriented TIM strategy is seen as a ‘Strategic necessity’ to generate cost savings (Powell and Dent-Micallef, 1997). Short development cycles make products more cost-effective, supporting first mover advantages, market size and share, tight controls, process investment, ease of manufacture, and width of product line. However, traditionally the winners have been those who are first focused on raising the wedge between costs and customer benefits, thereby differentiating and supporting high performance. For instance, a shift towards floor to electronic trading at New York stock exchange did generate cost efficiencies, but the deciding factor in its success was how it strategically positioned the stock exchange on a higher frontier vis-à-vis other alternatives.

Using Product oriented TIM to Offer Customer Choice, and Process Oriented TIM to offer Cost Savings to Partners The Chennai-based Apollo Hospital in India has ties with an insurance company, 900 hospitals, 2,000 physicians, and numerous pharmacies across 50 cities of India, all connected by a central relational information system network. The hospital, or the physician swipes a magnetic card containing a patient identification number when a patient visits to log on to a huge central server that contains all relevant data, such as disease profile, and insurance entitlements. The system allows Apollo Hospital to offer more differentiated choice to the patients through a wide network of physicians, and hospitals. It is also the basis for Apollo Hospital’s operational and management consulting business. Each allied hospital pays it between 3–5% of its annual turnover as management fees; and between 3–7% of the project cost on all hospital consulting projects undertaken to better the facilities of its allied hospitals. In turn, allied hospitals are able to leverage Apollo’s centralized purchasing system to get cheaper 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 technologies to offer affordable solutions. Consider Airbnb.

Founded in 2009 with $25,000 credit card debt, in 2017, the accommodations-rental platform Airbnb is valued at $30 billion, with 1500 employees and 3 million rentals across the world in 65,000 cities and 192 countries. Airbnb owns no physical assets, and yet is valued more 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 comparatively flat, Airbnb has become the biggest hotelier of the world and is still growing exponentially. The key to the success of Airbnb has been investments in the digital process technology, that has offered a transparent and easy way for anybody to list their vacant houses or rooms for short-term rentals, and for the users to search and to review experiences of other users with those properties. These rentals are particularly attractive for those seeking affordable options, when the top hotels are sold out during busy events or seasons. Airbnb has augmented this process oriented TIM, with product oriented TIM that seeks to offer experiences that are alternative to mass produced tourism. For instance, its new app product in 2016 included an innovative matching system designed to understand travelers’ preferences and then match them with the homes, neighborhoods and authentic experiences and trips that meet their needs. Source: https://press.atairbnb.com/airbnb-launches-new-products-to-inspire-people-to-live-there/

Managing ‘Monetary’ Resources – Investment Strategy

Investment strategy deals with the procedures and systems for capital structure and capital expenditure, liquidity levels, modes of raising capital, working capital, and levels of profit distribution and retention. This strategy is critically shaped by the turbulence in environment and other contingencies related with the choice of business strategy (Shank and Govindarajan, 1993). Investment strategy is often classified as budget-oriented vs. opportunity-oriented.

Budget-oriented investment strategy is driven by a goal to achieve most efficient investment allocation given the market constraints. Firms establish budgets based on an assessment of the historical, competitive, or technical standards of costs, and expected unit revenues under assumptions of specific market conditions. Revenue and cost performance is closely monitored against the budgets, and deviations are investigated 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 investment projects. A budget-oriented investment strategy takes a market-arbitraging portfolio management view of the firm – where different activities of the firm are considered independent, with few synergies and little need for strategic coordination (Porter, 1987). In conglomerates that have several unrelated business portfolios, a budget-oriented strategy is often deployed.

In contrast, opportunity-oriented investment strategy is driven by an organizational culture seeking multiple new opportunities to add customer value. Such a firm seeks to make several rapid adjustments in its understanding of customer preferences, which makes future revenues and costs difficult to estimate. Under such strategy, firms are likely to set aside funds for supporting projects that explore new opportunities and seek ways to add value for the customers. Performance is likely to be evaluated on a longer term horizon, using not only financial measures, but also institutional control measures of corporate reputation and the prestige, focusing on transparency, diversity, and sustainability. The emphasis is likely to be on capital appreciation outcomes. The formal financial 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 mission, vision, and goals — for evaluating and monitoring strategic plans, capital expenditure projects, and acquisition proposals. An opportunity-oriented investment strategy takes an activity sharing view of the firm – where different activities of the firm are interconnected, with substantial synergies and need for strategic coordination. The synergies are often exploited by specifying key performance targets and strategic milestones that may not be easy to quantify. Further, the decisions based on these synergies require taking a long-term perspective so that the interdependence among the units could be developed and exploited fruitfully.

A study by Nilsson (2002) showed that budget oriented investment control is better adapted with the business units following a cost leadership strategy and a portfolio management intent. In other words, budget oriented investment strategy works better when there are few linkages among different 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 synergies. On the other hand, opportunity-oriented investment control is better adapted with the business units following a differentiation strategy and an activity sharing intent. Nevertheless, over dependence on other business units can limit a firm’s flexibility to manage its costs.

Using Budget oriented Investment Control to Sustain low-cost leadership In 2002, the Rs. 62 billion diversified Mahindra Group of India was suffering from a severe recession. The Group had investments in 32 subsidiaries, with a portfolio of unrelated businesses including time-share resorts, and a realty business. M&M’s 18% of assets were locked into the shares of group companies, yielding 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 responsibilities of running the businesses rested with the business heads. In December 2002, the Chairman launched Project Blue-chip. Project Blue-chip replaced qualitatively selected performance benchmarks like market share, sales, and profits with two common quantitative measures of performance—free cash flow (cash after appropriating for investments and profits), and return on capital employed (ROCE). It also stopped the practice of allowing mid-year revision of the budgets, and introduced the concept of ‘no-excuses budget’. The variable pay component of senior management 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 price 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 capabilities and domestic environments have expanded their opportunities for adding value, firms in emerging markets are increasingly adopting more opportunity-oriented investment strategy. Consider the case of India:

Using Opportunity oriented Investment Control to Differentiate In 2003, American Express and IMA India surveyed changing role of Chief Financial Officer (CFO) in India. Over a six-year period since 1997, when the survey was first conducted, the role of the CFO has been transformed ‘from one relating to pure finance to that of leadership, and strategic decision-making.’ In 1997, 85% of the CFOs spent most of their time on transaction 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 differentiated, and to rely less on their 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 traditional role of preserving the assets of the organization and running a tight and effective finance 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 decision making. In fact, the finance function itself is being considered by some as a strategic business partner.” (Deloitte, 2016: 18)

In recent years, the web has disrupted traditional investment models. With the web, it is possible to launch a business, to assemble capacity, and to acquire customers, at a fraction of what it cost in the 1990s. Demonetization of business models has enabled firms such as Craigslist, eBay and Amazon to scale with extraordinary speed to become some the world’s biggest companies. The new information-enabled technologies are powering exponential cost drops across every business function (Ismael, Malone & van Geest 2014 ). 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 investment strategy. These firms have most of their costs as variable, with transparent low-cost pricing, and they generate profits through massive scale, alternative channels (such as membership fees or ad revenues), and transformative purpose (typically some form of democratized, collaborative consumption).

Managing Growth through Manufacturing - Operations Management Strategy

Manufacturing very broadly is a function engaged in managing manufactured or man-made assets. Operations management (OM) strategy seeks to leverage assets, i.e. capabilities, of a firm to drive competitive advantage (Skinner, 1969; Aranda, 2002).

The operations strategy may be classified as asset-intensive or service-intensive (i.e. asset light) (Aranda, 2002). Asset-intensive operations strategy seeks to leverage under-valued fixed assets that are based on market infrastructure and maintain highly efficient operating or variable costs. Note that these efficiencies do not arise from hiring of lower cost workforce or sourcing of lower cost inputs or distribution using lower cost channels (which are instead associated with human resource, supply chain, and customer exchange strategies respectively). Rather they emanate from an efficient exploitation 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 able to design outputs using resources of more limited quality and quantity. Efficiency in asset exploitation arises from an operations strategy that is ‘designed to maximize performance on a few success criteria of strategic importance’ and a recognition that ‘a system which is technologically 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 following three types of economies using a common asset infrastructure.

· 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, yielding them economies of learning. After the World War II, Japanese firms pursued predominantly this type of cost economies. During the 1960s, Honda, for instance, priced its motorcycles very aggressively, yet was able to achieve positive cash flows and sustainable growth because of the cost improvements 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 20th century, American firms pursued predominantly this type of cost economies. They invested in special purpose machinery and tools and specialized workforce, to manufacture specific standardized product lines in large volumes.

· Economies of specialization and network: Third, firms may organize the operations process as a network, with teams of highly specialized employees responsible for different 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 specialization and network. During the 20th century, German firms pursued primarily this type of cost economies.

Japanese OM strategy is referred to as lean production; the American OM strategy is referred to as mass production; and German OM strategy is referred to as network specialization; each of the three asset management strategies help firms achieve cost efficiencies.

In contrast, service-intensive OM strategy is driven by an organizational culture seeking to achieve flexible operating capability. Flexibility is achieved by recognizing the limitations of technological constraints, and using reconfigurable information 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, environmental and customer sensitivity and responsiveness. More than a technical process, flexibility emanates from an organic service-mindset, culture and technology; which allows the firms to offer a high level of service personalization and customization to its target customers using reconfigurable information-smart light assets. There are many dimensions of service-oriented OM strategy such as:

a) Service mindset: European firms have traditionally relied on the professional ethics of the members of guilds and professional trade organizations. This has helped them with crafts-oriented operations, where custom designs help achieve higher value-added through exclusive small-batch production.

b) Service culture: Japanese firms have traditionally relied on a deep service culture to engage its workforce and suppliers in the production 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 information processing and deep data mining to configure their products in a range of mixes and to a range of custom specifications.

New insights on OM strategies have emerged as the firms have faced shrinking product life cycles, new technologies, educated knowledge workforce, and global competition. Unexpectedly, firms have been able to elevate minimum benchmarks on multiple operations criteria, as efforts to enhance one type of operational competence have required firms to cumulatively further competence in other operational areas as well. A study by Ferdows and De Meyer (1990) suggested that among the high performing manufacturers, the improvements move from quality to reliability, followed by flexibility (which they take to include speed), and cost efficiency. 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 flexibility, or else those efforts will not be as sustainable or effective. On the other hand, efforts to improve operating flexibility – a key focus of service-intensive OM strategy - should take place alongside continuing efforts to improve quality and reliability.

As illustrated by the case of Fibres and Fabric international, many emerging market firms are using flexible service technology and forming partnerships with foreign customers and experts to bring flexible mind-set and culture to their operations.

Adding value through service intensive OM The Bangalore-based Fibres and Fabric International is going against cost-conscious manufacturing, and creating a differentiated niche by pioneering flexible manufacturing system in fashion garments. For this, it is not just buying technology, but also augmenting its capabilities for using technology. It uses imported high-tech machines, has hired an Italian technician to help accelerate lead times, and has set up a Rs. 60 million state-of-the-art water recycling plant for bagging eco-friendly buyers from the Netherlands, and Germany. It commands an average price of 14.43 euros on its sales of 2 million fashion denim jeans—more than double the 7 euros commanded by the Chinese manufacturers. It also successfully entered the high-fashion jeans market, commanding a premium on jeans retailing at 200 Euros and above. Since in these markets, inventory holding costs are high, most European retailers prefer to deal with suppliers who can replenish stocks in short lead times; its flexible manufacturing system allows a lead time of just two weeks—unheard of in China (Surendar and Rajshekhar, 2004).

Managing Growth through Motivating Power – The Leadership Strategy

Leadership strategy encompasses setting directions and overall purpose, mission, and values of the firm, as well as mobilizing, distributing, and redistributing resources to support actions aligned with the intended purpose mission, values, and direction of the firm. It is often classified as transactional vs. transformational (Burns, 1978; Bass, 1985).

Transactional leadership seeks to sub-divide overall direction of the firm into very specific objectives aligned with the specific competencies of people and with specific resources they have. Transactional leadership operates by not only dividing the overall purpose into objectives, but also conditioning the rewards, such as compensation, bonus, and recognition of employees on the accomplishment of these objectives – i.e.. for compliance with the leader’s expectations. The transactional leaders with extensive experience in their jobs and with their firms tend to be more familiar with the organization’s structure, systems, processes, and people, and are more effective in implementing cost leadership strategy. The transactional emphasis ensures economical processes and good value, while keeping cost down, year after year, in every activity, through standardized, repetitive processes and output. The thrust is on capital investment, as opposed to personnel development; employees are not expected to have a high level of decision-making.

There is very limited possibility of failure, 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), for instance, reconstructed the story of Honda’s success in motorcycles during the 1960s based on interviews with Honda managers and employees. He uncovered the role of unintended and unexpected learning while striving for a very transactional 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 efficient as they could be in using the very limited resources they had been entrusted by the leaders. So, they decided to use the lightest bike resource for personal use, and the heaviest bike resource for market development use. However, when families were enamored by small-built people riding the light bikes, Honda received advance payments from American retailers to build large volumes of those bikes.

In contrast, transformational leadership is driven by an organizational culture seeking to engage people with the overall purpose, mission, and values of the organization. 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 commitment to higher values, people are expected to go beyond their self-interests, and work towards a long-term vision of better future, leading by example, and inspiring and developing others to bring about change. Transformational leaders tend to bring new visions, and are better supporters of differentiation (Kathuria and Porth, 2003). The transformational values of flexibility, spontaneity, and employee participation 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 historical processes, systems, and culture, it becomes difficult for them to pursue a ‘new’ vision for the organization. Similarly, if the firms live too much in the world of imagination, they may be disconnected with their historical and contemporary reality and fail to actualize their dreams. Thus, pragmatic leadership in today’s world where we face immense social challenges of inclusion, security and growth, requires more than a process of positive imagination of transformational processes, systems, and culture. It also requires setting measurable micro milestones, so that people are encouraged and rewarded for identifying the obstacles for realizing that future state, and clarify the path that explode the existing cultural limits on what is possible. This path takes the shape of ‘entrepreneurial leadership’ for not only sustaining competitive advantages, but also realizing the broader mission, purpose, and values.

Transformation leadership is based on the values of collaboration, 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 themselves. So, the learning by one bird is quickly and efficiently shared among the entire flock. On the other hand, the male robin has a territorial temperament, and does not allow other birds of the species to come close. Hence, there is no sharing between robins. Transformational leadership fosters collaborative social propagation amongst the blue jays; it allows them to enjoy the cream, and to grow healthy (Fisher and Hinde, 1949).

Traditionally, fostering collaborative teams required significant leadership effort; therefore, transformational leadership in organizations was generally associated with premium positioning and differentiation strategy. However, digital technologies have remarkably reduced the cost of collaboration across global borders and across different stakeholder groups. New age transformational leadership has been focused on democratization of access, as illustrated by the ride sharing (Uber), accommodation sharing (Airbnb), channel sharing (ebay) firms. In India, Patanjali has emerged in a very short time as the largest consumer products firm, through transformational leadership of spiritual and yoga teacher Baba Ramdev. Baba Ramdev has been passionate about using traditional ayurvedic and other knowledge of India to take away domestic market for consumer products from the multinational firms, and this passion has offered the inspirational power for Patanjali to scale and expand in multiple categories.

Managing Growth through Manipulating Power – The Stewardship Strategy

Manipulating power very broadly is the ability of firms to be a player in a community deriving from the legitimacy and accountability of their strategic behavior. Stewardship strategy accounts for the resources arbitraged by a firm from the constituents with whom it has a range of relationships, and offers legitimacy that the firm has deployed these resources effectively achieving growth that accrues incremental value for all constituents 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 fiduciary obligation firms have is to their stockholding investors. In the agency theory, the stockholders privately bear financial risk in exchange for giving fiduciary rights on the organization’s resources to the strategists, and therefore have the power to take direct control of the organization 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 organizations that do not structure their internal resource allocation, activities, and behaviors in ways that maximize private efficiency. The stakeholders are viewed as part of an environment that a firm should manipulate to assure cost savings, revenues, profits, and ultimately returns to stockholders. For instance, a firm might adopt total quality management as part of its strategy to increase sales volumes. In the process, the firm would seek to significantly 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 commitment to improved worker and supplier relations (Shawn and Wicks, 1999). Similarly, a firm invests in environment friendly technologies only if the customers are willing to pay additional for the products, that they would not otherwise, or if the government would impose fines that are larger than the costs of these investments. Philanthropic activities, when undertaken, are just like any other cost of doing business—they are cost of co-opting various stakeholders so that the business is allowed to serve, and maximize private returns for the stockholders. Put differently, under the agency theory, the principles of relating with the stakeholders are defined purely in terms of their private economic value for the stockholders at a given time, and decisions are re-evaluated on an ongoing basis for their private economic benefits and costs to the firm.

On the other hand, the Social stewardship strategy is driven by an organizational culture grounded in trusteeship theory, which holds that the boundaries of fiduciary obligation extend to other stakeholders also. In the trusteeship theory, manipulating function is endogenous to the organization, and is based on the intrinsic worth of the principles and moral commitments 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 identifies 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 influence, quite independent of the stakeholders’ instrumental value to its profitability. The broader socially responsible stakeholder interests are the basic foundations on which a firm seeks to construct its unique identity, positioning, and strategic intent.

In the trusteeship theory, resource allocation 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 stakeholders, 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—which 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 materials. Additional benefits include safer working conditions for employees. The firm may also be able to create a distinctive eco-friendly image that appeals to customers (Shrivastava, 1995).

In the age of social media, the society has multiple tools, eyes, ears, minds, and voices, to uncover disingenuous attempts of firms to manipulate its members, for the private benefit of few private investors. A significant 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 communities. Firms who demonstrate an authentic commitment 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, Financial 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 Strategies to Support Business Strategies

As a summary, it is useful to consider the different ways functional strategies may be used to create value by transforming market taking resources, relationships and growth, into market making value.

The firms can use functional strategies in three ways to seek market taking values:

a) Discovery capability: Discovery of the functional resources that could be used by the firms most cost-effectively to serve their target customer demand.

b) Development competence: Development of a network of the providers of functional resources inside and outside the firm boundaries, who complement each other’s capability in enabling the firms to cost-effectively serve their target customer demand

c) Deployment capability: Technological, organizational, and social structures, processes, and behaviors that promote timely and efficient exchange of information with the providers of functional resources about their target customer demand

Then firms can then create growth value through market making tactics.

Micro foundations play an important role in how functional strategies create market making growth value.

Micro-foundations of Functional Strategies

Structural, relational and behavioral factors play an important role in the design of appropriate functional strategies, and in the relationship of functional strategies with business strategies.

Structural factors: Organizational structures play an important role in the ability of the firms to coordinate the discovery, development and deployment of functional competencies. The organizational structures may take several different characteristics – such as “mechanistic”

versus “organic”, “tall” versus “flat”, “centralized” versus “decentralized” and “standardization” versus “mutual adjustment”. Centralized organizational structures are ones where strategic decisions are taken centrally, these structures allow for tight control of costs, and tend to foster cost efficiency related functional competencies. Functional organizational structures are ones where senior executives are in charge of different functional resources; these structures support development of deep functional competencies. Conversely, when the 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-linkages among various functions, product-based organizational structures tend to be favored.

The firms may also decide to use different structures for organizing different functions. Gutterman (2011: 4), for instance, observes, “Traditionally, manufacturing functions in the US tended to have a tall hierarchy with centralized decision making and relied heavily on standardized procedures. The result was a relatively 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 structure 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 innovation process.”

However, structures can also constrain the type of functional capabilities – for instance, Japanese firms put many American manufacturers out of business, when they developed more service-oriented operations by flattening the hierarchy, and empowering employees on the product line to discover decentralized opportunities for mutual adjustment and accumulate capabilities to deliver broad variety through continuous improvement or kaizen. Similarly, during the late 2000s, many customer-facing employees in the U.S. financial services sector abused their autonomy and used false or dubious documentation to write mortgages.

Organizational structures can shape several different types of linkages between functional and business strategies (Golden and Ramanujam, 1985):

(a) No linkage (or Administrative Linkage): In many owner-led organizational structures, strategic functions play a predominantly administrative role, and react to the emergent needs of the organization without regard to its business strategy. For instance, in India, traditionally stewarding strategy has had no clear linkage with business strategies, as firms have invested in charitable causes either because of the owner priorities or the tax deduction for charitable causes.

(b) One-way linkage (or Hierarchical Linkage): In firms that rely on a multi-divisional organizational structure organized around business units., business strategies are established and managed by general managers and senior executives of the firm. The lower-level functional managers may have limited if any influence on the business strategies set by their bosses. On the other hand, some organizational structures may give special powers to particular functions. For instance, when operations function has special powers, firms tend to develop strong cost-effective capabilities to perform their business strategy even in premium segments. But when marketing function has special powers, firms tend to develop strong customer empathy and responsiveness capabilities, even when they are operating in price-sensitive segments.

(c) Two-way linkage (or Sequential Linkage): In project-based organizations, both business and functional strategists work collaboratively on different projects. For instance, to support short-term and relatively simple projects, the firms may rely on freelancers using a low commitment 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 commitment human resource strategy.

(d) Multi-way linkage (or Dynamic Linkage): In transnational organizational structures, functional and business strategies may be designed interactively to dynamically frame country-by-country growth objectives. For instance, investments in an emerging market business may help a firm gain cost-effective functional competencies, which could then become a basis for expanding into additional price-sensitive markets as well as in making differentiation positioning more cost-effective on a global basis.

Relational & Behavioral Factors. Organizational cultures also play an important role in the relational and behavioral patterns of functional resources, and therefore the dynamics of functional strategies. The organizational cultures may take several characteristics, such as ‘power distance’, ‘uncertainty avoidance’, ‘group collectivism’, ‘generalized collectivism’, ‘gender egalitarianism’, ‘humane orientation’, ‘assertiveness’, ‘future orientation’, and ‘performance orientation’ (House et al, 2004). For instance, the firms seeking to promote service-oriented operations function may nurture the cultural values of ‘gender egalitarianism’, ‘future orientation’, and ‘performance orientation’, and actively reduce ‘power distance’ and ‘uncertainty avoidance’. They may do so by establishing behavior-based performance evaluation system, and by promoting new relations through collaboration with marketing partners who have these desired cultural practices.

As noted previously, organizational cultures and mindsets are critical factors in the ability of a firm to pursue growth business strategy, or to successfully execute a focus business strategy. In order to identify opportunities for shaping functional mindsets, the firms need to first establish their existing baseline of competencies in each functional area. This can be done using a functional resource scorecard. The functions 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 functional resource scorecard evaluates both types of functional competencies of the firm across the nine functions the left side competencies support the cost efficiency capability, while the right side competencies support the differentiation capability. The evaluation may be made against competitive best-in-class standards, or against historical performance of the firm, or using subjective absolute ratings.

Figure 4.2: Functional Resource scorecard using the 9-M Model

Strategic Functions Functional Strategy Market Taking value Market Making Value

1. Manpower Human Resource Low commitment High commitment

2. Material Supply Chain Predictable Responsive

3. Method Knowledge Specialized Generalized

4. Money Investment Budgetary 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 Transformational

9. Manipulating Stewarding (Accounting) Private Social

The aggregate level of functional competencies is one indicator of the opportunity for growth. The ratio of the aggregate level of functional competencies, as well as each of the functional competencies, is an indicator of the direction of possible growth. For instance, if cost efficiency capability is greater than the differentiation capability, then the firm has an opportunity to grow its market making capability, as well as to grow new businesses based on its market seeking capability.

For instance, Matsushita of Japan has a 250-year mission in 1932 to produce an inexhaustible supply of goods that is affordable to all; true to this mission, Matsushita has been focused on market taking cost leadership competencies, though it has a long way to accomplish its mission. The use of functional resource scorecard can help identify opportunities for further growth. It may not be possible for the firm to sustainably generate new growth using an emphasis only on market taking cost leadership strategy. It may have to also invest in market making growth capability, to promote new types of structures, relations, and behaviors, which it can then deploy for exploring new ways of generating cost efficiencies. Reliance on traditional approaches alone is not sufficient to sustain cost leadership in a global, competitive environment.

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