Strategy

Food giant Kellogg Co. struggled throughout the 1990s, as both the stature of its legendary brands and its profit margins declined. A noted business journalist describes how the appointment of Carlos Gutierrez as CEO and the loss of market leadership to General Mills Inc. in 1999 forced Kellogg to establish a more meaningful, sustainable profit-oriented focus in recent years and outlines Kellogg's ambitious program of change. New business models emphasized value (rather than volume) growth and encouraged stronger cash flow. Realism was restored to financial forecasts, brand unit operations more closely integrated and employee compensation tied directly to business unit performance. New product launch documents stopped evaluating margins by volume alone, and innovation specialists were encouraged to add value-added touches to existing brands. As a result of this change in strategy, says the author, Kellogg's fortunes have improved dramatically. New product launches based on existing products have done well. And the company is better able to access its healthy food roots by playing up the health benefits of key products. Most importantly, says the author, a return to strong profitable growth and increasing market confidence in the company serves as further evidence of the strategy's success.

Every industry leader lives in fear of the low-end competitor -- a company offering much lower prices for a seemingly similar product. The vast majority of such low-end companies fall into one of four types: strippers, predators, reformers and transformers. Each of those is defined by the functionality of product and the convenience of purchase. Strippers, for instance, typically enter a market with a bare-bones offering, reduced in function and usually in convenience. Industry leaders have significant advantages for combating low-end competition, but they often hesitate because they're afraid their actions will adversely affect their current profit margins. The answer, then, is to find the response that is most likely to restore market calm in the least disruptive way. An industry leader could choose to ride out the challenge by ignoring, blocking or acquiring the low-end competitor. Or it could decide to strengthen its own value proposition by adding new price points, increasing its level of benefits or dropping its prices. Such tactics can be effective in the short term, but the industry leader also needs to consider strategic retreat, particularly when certain conditions make future low-end challenges inevitable.

Traditional models for developing and managing corporate portfolios are based on financial frameworks, business synergies or leveraging core competencies into related businesses. In this article, the author goes beyond those traditional approaches and offers an alternative & #8212; the corporate sphere of influence. Like nations, says the author, companies build spheres of influence that protect their cores, project their power outward to weaken rivals and prepare the way for future moves. By recognizing the strategic purpose of each part of the portfolio, the sphere of influence model focuses attention on the company’s overall strategy, including how it wants to structure the division of product and geographic markets in an industry, which threats it will address or ignore, and how the company’s portfolio enhances or detracts from its competitive or alliance strategy. Thinking in terms of building a sphere of influence forces managers to draw together corporate- and business-level strategic analyses that are often treated as separate. The corporate-level concern about where to fight and the business-level concern about with whom and how to fight are brought together into a coherent view. In this article, the author defines the components of a sphere of influence and explains how senior executives can use his framework to assess their company’s current sphere and map their desired one. Then he offers examples of how companies have managed their spheres. He draws examples from a wide range of industries and companies, including Microsoft, Procter & ; Gamble, Johnson & ; Johnson, Anheuser-Busch, Nokia, Harley-Davidson and Mexican cement company CEMEX. For an extended discussion of how companies can leverage their spheres of influence to support their overall grand strategy, see “The Balance of Power,” by Richard D’Aveni (MIT Sloan Management Review 45, no. 4 [2004]: 46a-46i).

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Many companies have supply chains that are global. They start with the sourcing of components and raw materials from around the world, then move their basic manufacturing to low-cost locations overseas. But few organizations have innovation processes that are equally global. That is, rarely do businesses have innovation activities that integrate distinctive knowledge from around the world as effectively as global supply chains integrate far-flung sources of raw materials, labor, components and services. But some companies & #8212; Nokia, Airbus, SAP and Starbucks, among them & #8212; have managed to assemble an integrated “innovation chain” that is truly global. They have been able to implement a process for innovating that transcends local clusters and national boundaries, becoming what the authors call “metanational innovators.” This process requires three steps: prospecting (finding relevant pockets of knowledge from around the world), assessing (deciding on the optimal “footprint” for a particular innovation) and mobilizing (using cost-effective mechanisms to move distant knowledge without degrading it).When done properly, metanational innovation can provide companies with a powerful new source of competitive advantage: more, higher-value innovation at lower cost.

As China prepared to enter the World Trade Organization in 2001, many multinationals planned to invest new billions in operations there. But their ambitious growth plans must be viewed with caution. Experienced multinationals have long been aware of the challenges, summed up by the adage that in China "everything is possible, but nothing is easy." But few predicted the most formidable obstacle to success: the emergence of tough competition from local Chinese players. The authors' research over the past five years reveals that while market dominance by local champions is not universal, it's becoming more frequent. Multinationals must face the fact that the competitive edge that is potentially available to them from superior technologies, products and systems will be blunted unless they build stronger local competencies. Specifically, they explain that multinationals must show a new determination to master the complexities of distribution, sales and service in China's secondary cities and rural heartland, and to learn how to more sensitively adapt products, processes and marketing messages to the peculiarities of the Chinese market.

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One of the most thoroughly studied questions in business is how, at budgeting time, large corporations should choose among investment opportunities. Why, then, are so many senior executives frustrated with the process and convinced that their companies' capital is not being invested as well as it could be? One reason is that even the best-designed systems can be trumped by the power of personality. It has become commonplace, in fact, for talented and charismatic managers to spin, manipulate and otherwise cajole senior management into funding their business ideas -- often in the face of numbers that would, on their own, dictate a negative decision. Having guided dozens of major corporations through the budgeting process and watched hundreds of presentations by line managers asking for capital, the authors have profiled five archetypes of bad behavior commonly used by managers to subvert decision-making standards and win resources. They also explain how senior managers can counteract such behavior and instill values that lead to better use of investment capital.

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