Strategy

Whether you’re a startup taking on industry giants or a giant moving into markets dominated by powerful incumbents, how do you compete with opponents that have size, strength and history on their side? To prevent opponents from bringing their full strength into play, successful challengers use what authors David B. Yoffie and Mary Kwak of Harvard Business School call judo strategy. Judo strategists avoid head-to-head struggles and other trials of strength, which they are likely to lose. Instead, by relying on speed, agility and creative thinking, they develop strategies that make it difficult for stronger rivals to compete. Judo strategy is most effective when three core principles & #8212; movement, balance and leverage & #8212; are used in combination. But at different stages of competition, a single principle may play a particularly important role. In the early days of a business, for example, before the contours of the competitive landscape have been fully defined, movement typically takes center stage. The authors use Palm Computing (now Palm Inc.) to illustrate judo strategy’s core principle of movement at work. The company dominated the handheld computing market less than a year after shipping its first electronic organizer in early 1996, despite competition from the most powerful software company in the world. Microsoft marshaled masses of money, manpower and marketing muscle behind its own handheld operating system. But year after year, Palm remained far ahead. By mastering the principles of judo strategy and learning to implement them through specific techniques, other companies can emulate the way Palm competed with a stronger opponent. The authors came to that conclusion after studying companies as varied as Juniper Networks, Intuit, Frontier Airlines and Charles Schwab. They caution, however, that judo strategy is not a rigid formula to be followed step by step. Depending on the nature of their competition, companies will combine and implement the principles in different ways. But the basic tenets hold: Stay out of competitors’ sights by deliberately acting harmless (like a puppy dog), define the competitive space to establish the game, and follow through fast to build a big lead before competitors learn how to respond.

New research shows that among today’s numerous strategic alliances, the most successful are in companies with a department specifically assigned to overseeing alliances. Management professors Jeffrey H. Dyer, Prashant Kale and Harbir Singh came to that conclusion after conducting an in-depth study of 200 corporations and their 1,572 alliances. The number of strategic alliances has increased dramatically over the past decade, with more than 20,000 reported during the last two years alone. On average, the top 500 global companies each participate in 60 major strategic alliances. Fraught with risk, almost half fail. The authors set out to discover why some companies manage alliances effectively when others fail. They found that organizations such as Hewlett-Packard, Oracle, Eli Lilly & ; Co. and Parke Davis, which excel at generating value from alliances, have a dedicated strategic-alliance function. Companies with a dedicated function were better at solving problems related to the four key alliance-management elements & #8212; knowledge management, external visibility, internal coordination and accountability. A dedicated function, the authors show, acts as a focal point for learning and for leveraging feedback from prior and ongoing alliances. It systematically establishes processes to articulate, document, codify and share alliance know-how. The authors found that one benefit of creating an alliance function was that it compelled companies to create metrics for evaluating the performance of all their alliances. And regular evaluations alerted senior managers to intervene when a particular alliance was struggling. Many companies with dedicated alliance functions report codifying alliance-management knowledge. They create guidelines to help with specific aspects of the alliance life cycle, such as partner selection or alliance negotiation. Some companies establish training programs, both formal ones and informal ones & #8212; such as roundtables that let managers of various alliances share their experience. When done properly, dedicated alliance functions offer internal legitimacy to alliances, assist in setting strategic priorities and draw on resources across the company. That is why, the authors advise, the function cannot be buried within a particular division or be relegated to low-level support within business development.

The Internet has created new markets, customers, products and modes of conducting business. But it also has given currency to some dangerous half-truths. Admonishing Internet businesses to “stop grabbing the land and start cultivating it,” Subramanian Rangan and Ron Adner, professors of management and strategy at INSEAD in France, explain why seven popular strategies are not the path to profitable growth. First-mover advantage, for example, gets too much credit for e-business success. Companies believe that they can lock in customers and trigger a winner-take-all dynamic, but there is no guarantee that those benefits will go to first movers. The allure of reach & #8212; increasing the number of customer segments & #8212; causes many companies to ignore fit, the coherence with which their activities reinforce one another. Digital Equipment Corp. paid the price when it sacrificed fit to reach, attempting to make PCs, workstations, minicomputers and mainframes under one roof. Another tempting growth strategy is to provide customer solutions, offering products or services that complement a company’s core offering. But offering solutions can dilute a company’s focus. Targeting the right Internet sector is one way to maintain focus. When companies view the Internet as undifferentiated landscape, they are less able to distinguish the drivers of customer value and performance & #8212; or the metrics to measure them. Some companies see best-of-breed-partner leverage as the secret of profitable growth. But although the Internet makes it easier and cheaper to align activities across company boundaries, it does not do much to align interests & #8212; a requirement for the creation of joint value. Another misconception is the belief that an Internet business will automatically be successful abroad. As MTV, Wal-Mart and Honda discovered, companies first must be successful at home and then move outward in a way that accommodates local differences. The last, and perhaps most dangerous, misconception is managers’ belief that technology can substitute for strategy. Technology and strategy are strong complements. Companies that understand their technology better than they understand their customers and competition won’t succeed in any economy, old or new. The authors provide thoughtful guidelines for avoiding misconceptions and taking a sensible approach to business on the Internet.

As adapting to globalization becomes increasingly necessary, business customers are pressuring suppliers to accept global-pricing contracts (GPCs). So far, most of the benefits of GPCs have redounded to the business customer. Although purchasers may promise a supplier access to international markets, guaranteed production volumes and improved economies of scale and scope, too often they fail to deliver. They may not buy as much as planned, may demand customization that the supplier cannot leverage with other customers, may force the supplier to drop the customer's competitors -- or may fall on hard times and have to scale back commitments. That is why, before signing a contract, suppliers should do due diligence. According to Das Narayandas of Harvard Business School, John Quelch of the London Business School and Gordon Swartz of Oxford Associates, suppliers must fully understand the customer's global strategy and the business conditions in its respective markets. They also need a firm grasp of their own strategy and local practices. Which GPCs would be suitable and which would be detrimental? Suppliers don't want to turn down all GPCs. They recognize that their global customers may be both their largest customers and their fastest growing ones -- and understandably, they want to share in the benefits of growth. Using data collected from interviews with global-account managers in diverse industries on four continents, the authors bring the global concepts down to earth to help suppliers navigate the uneven terrain. By exploring why customers want GPCs, under what circumstances the contracts are likely to profit suppliers, and how to successfully implement contracts, Narayandas and his colleagues identify preparation as the key to success. The more information suppliers can gather (for example, about variances in their own pricing in different markets, about the cost to serve the customer, about exchange rates and local regulations), the better their negotiating position. During negotiations, it might be useful to know whether the customer demands the same price in every market regardless of the supplier's varying costs -- yet continues to charge its own customers varying prices. A carefully negotiated GPC can be a winning outcome for both supplier and customer and can serve as the foundation for a broader, mutually advantageous relationship that extends beyond price.

When faced with a global IT infrastructure transition project, Xerox managers decided to launch a knowledge-sharing initiative called the Transition Alliance. When fully functional, the Alliance comprised fifty IT professionals responsible for managing 70,000 desktop workstations, nearly 1,200 servers, and networking hardware on five continents. Storck and Hill observed that community members provided high-quality, validated solutions; handled unstructured problems well; and dealt effectively with new developments in hardware and software. The authors also point out that the motivation for learning and developing at an individual level seemed greater in this community structure than in other organizational forms, which has important implications for the longer-term job performance of the participants. The Alliance was more than simply a group that met occasionally to discuss common issues related to a single functional or professional area. It had a defined relationship to formal organizational objectives yet was not formally required to report back to headquarters on its activities. Within the Alliance, the communication repertoire was built upon the leadership training required for all Xerox employees. Work processes that developed within the Alliance supplemented those used elsewhere in the organization. Handling action items, creating meeting agendas, and developing other processes were evidence of the self-directed nature of the group and provided a context for communication. Storck and Hill identified six guiding principles that were instrumental to Alliance success and are applicable whenever circumstances require organizational learning: -- Design an interaction format that promotes openness and allows for serendipity. -- Build upon a common organizational culture. -- Demonstrate the existence of mutual interests after the initial success at resolving issues and achieving corporate goals. -- Leverage those aspects of the organizational culture that respect the value of collective learning. -- Embed knowledge-sharing practices into the work processes of the group. -- Establish an environment in which knowledge sharing is based on processes and cultural norms that are defined by the community rather than other parts of the organization.

Faced with increasing global competition, many firms are finding that price-based or target costing is emerging as a key strategic tool. The target cost is a financial goal for the full cost of a product, derived from estimates of selling price and desired profit (which top management sets on the basis of firm strategy and financial goals). Product selling price is constrained by the marketplace and is determined by analysis along the entire industry value chain and across all functions in a firm. Common to most target-cost applications is a belief that large-scale cost planning and reduction must occur early in the product life cycle. However, Shank and Fisher believe there is no conceptual reason the methodology cannot be a value-added exercise applied to existing products during manufacturing. They posit that if managers were to believe that, during manufacturing, only incremental (i.e., slight) change is possible (through kaizen costing or controlling costs with standard-cost systems), firms would likely miss significant strategic opportunities. Shank and Fisher present a case study that demonstrates the relevance of target-costing techniques for a process-industry plant built in the 1890s that had been making largely the same products for fifty years. The firm's managers, who had used a standard-cost system for many years, might have concluded that kaizen costing was most appropriate for this plant. However, competitive realities necessi-tated a major strategic change that employed target costing as an important ingredient in cost-reduction efforts leading to strategic revitalization. At the beginning of this field study, plant managers focused too much attention on standard cost versus actual cost. There was heavy pressure to move standard cost toward actual cost in order to minimize unfavorable variances for public financial reporting. Managers focused too little attention on ideal manufacturing cost, and target costing received no attention. At the end of the field study, the most useful cost-management tool focused on ideal manufacturing cost versus target cost in relation to actual cost. The standard cost concept essentially dropped out of the picture. Target costing forced managers to rewrite the rules of the game by changing the way the mill delivered value to the customer. Because standard costing accepts the existing game rules and the existing value chain, the authors believe that fundamental cost breakthroughs are much more probable when using target costing.

How faulty decision making led to the ruin of a once profitable ordnance manufacturer.

Processes to solidify and streamline supplier-customer relationships can result in mutually beneficial commercial success.

A survey on supplier relationships administered to 447 managers from the major U.S. and Japanese automobile manufacturers showed that these firms do not manage primarily by strategic partnerships, but instead participate in various types of relationships. The author proposes and empirically validates a framework for managing a portfolio of relationships that will help senior managers answer two key questions: Which governance structure or relational design should a firm choose under certain external contingencies? What is the appropriate way to manage each type of relationship? The survey examined the specific investment of buyers and suppliers from both national samples in four types of relationships: strategic partnership, market exchange, captive buyer, and captive supplier. Interestingly, the level of investment made by either party in every type of relationship significantly correlated with practices commonly associated with strategic partnerships, such as long-term relationships, mutual trust, cooperation, and wide-scope relationships that include multiple components. No one type of buyer-supplier relationship & #8212; not even the strategic partnership & #8212; was inherently superior, which suggests that each can be well or poorly managed. Firms successfully manage supply chains by matching relationship type to specific product, market, and supplier conditions and by adopting an appropriate management approach for each type of relationship. Findings also countered the popular belief that Japanese firms tend to manage their suppliers using highly dedicated relationships or strategic partnerships. They appear to conduct business with a smaller ratio of strategic partnerships than is commonly believed (19 percent of the sample) and to extensively use market-exchange relationships (31 percent) & #8212; a practice usually associated with Western manufacturers. The author provides a contextual profile of product and market conditions most conducive to each type of relationship and discusses the management features common to the best performers in each category. By consciously and systematically matching the design of each relationship to its external context, product executives can stifle the urge to join the sweeping fad of strategic partnerships and avoid underdesigning and overdesigning external relationships.