Strategy

Corporate executives need to rethink their marketing policies to reflect the distinctly different environments of EMs.

Together, suppliers organized to save Toyota from a devastating crisis that threatened to halt operations for weeks.

Growing recognition of the importance of supply chain management has prompted firms in the automotive industry to adopt new practices, including tiered supplier partnerships and supplier associations. While these approaches have been successful in the automotive industry, they may not be applicable to all firms. As an alternative, the authors propose the leveraged learning network. They use the experience of the High-Performance Manufacturing (HPM) Supplier Consortium developed by Allen Bradley Canada, a manufacturer of electric control panels, to explain how these networks operate and the results they achieve. The leveraged learning network is appropriate in cases where the buyer needs to improve supplier performance but lacks the power to compel the necessary improvements. Allen Bradley's initiatives to enhance supplier performance led to the development of a supply consortium; a reorganization culminated in the creation of HPM, a consortium of independent suppliers whose goal is "to work together to enable each member to optimize its competitiveness . . . using shared resources and experience." The consortium conducts a variety of education programs. A facilitator ensures that ideas and information flow continuously among the membership. Allen Bradley has greatly benefited from the suppliers' efforts to strive for world-class standards through reductions in defects, prices, and lead times; greater conformance to schedules; and better service. At the same time, the leveraged learning network poses difficulties, such as the buyer's forfeiture of control over membership and the need to dismiss members who fail to contribute sufficiently to the learning process. The challenge for managers and researchers is to determine the best conditions under which to choose either the tiered supplier partnership approach or the learning leveraged network. While the latter offers many potential opportunities, much work needs to be done to explore further its costs, benefits, and limitations.

By sharing components and production processes across a platform of products, companies can develop differentiated products efficiently, make their manufacturing processes more flexible, and take market share away from competitors that develop only one product at a time. The platform approach also enables companies to manufacture products in high volumes that are tailored to meet the needs of individual customers. A platform is a collection of assets -- components, processes, knowledge, people, and relationships -- that are shared by a set of products. The platform planning effort involves two key tasks. First, product planning and marketing managers determine which market segments to enter, what the customers in each segment want, and what product attributes will appeal to those customers. Second, system-level designers decide what product architecture to use to deliver the different products while sharing parts and production steps across the products. Using an example from the automobile industry -- the design of an instrument panel, or dashboard -- the authors illustrate how the platform-planning process works. They point out three key ideas that underlie the process: 1. Customers care about distinctiveness, how closely the product meets their needs. At the same time, the cost of a firm's internal operations is driven by the level of parts held in common among a group of products. 2. Given a particular product architecture, a trade-off exists between distinctiveness and commonality. 3. Product architecture dictates the nature of the trade-off between distinctiveness and commonality. By developing and aligning three tools -- a product plan, a differentiation plan, and a commonality plan -- managers can balance the need for distinctiveness with the need for commonality. Together these tools provide a common language that a company's marketing, design, and manufacturing functions can all understand. To successfully meet the challenges inherent in the platform approach, the process must be cooperative, involving all key functions, and must be guided by top management.

While franchising has become the dominant mode of retailing in the United States, three-quarters of new franchise systems fail within twelve years. This high failure rate makes it important for potential franchisees to identify new franchisors that are likely to succeed and for franchisors to be aware of policies and practices that enhance long-term survival. To meet these needs, the authors present a model, based on a twelve-year study of 157 companies in 27 industries, of what makes new franchise systems succeed. The story of Newfran, a fictional composite of the successful new franchisors in the study, illustrates the key characteristics of success and their relationships to one another. For potential franchisees, the example of Newfran offers six criteria for selecting a new franchise system: 1. Seek franchisors that are expanding rapidly. Establishing brand name is crucial to success. A slowly growing franchise system may not be able to promote its brand name cost-competitively. 2. Do not seek a franchise system that promises a lot of field support. Field support is costly. New franchisors are better off devoting scarce resources to growing the franchise system. 3. Do not be dismayed by the lean headquarters of a new franchise system. A lean operation enhances growth and brand-name development. 4. Seek franchisors that are developing strong brand names. Indicators of brand-name value include a large system size relative to the industry average and the system's ranking in Entrepreneur Magazine. 5. Look for membership in the International Franchise Association and registration with state authorities. These associations provide a quality check on the franchise system and signal the franchisor's reliability. 6. Be wary of new franchisors that offer masterfranchising. Selling the responsibility to recruit and manage franchisees to another party allows the franchisor to grow more quickly but increases the probability of system failure. For new franchisors, these criteria highlight the need to develop the brand name, expand rapidly, and show a trustworthy nature to potential franchisees. Following the policies identified in the study does not guarantee success but significantly increases a franchise system's prospects.

Compared to new companies or niche players, established companies find it difficult to innovate strategically -- to reconceptualize what the business is all about and, as a result, to play the game in an existing business in a dramatically different way. Drawing on examples of highly profitable companies in diverse industries, the author explains how long-time players can overcome the four chief obstacles to strategic innovation. 1. Inertia of success. Strategic innovators monitor their strategic health for early signals of trouble and are willing, if necessary, to abandon the status quo for the uncertainty of change. These companies also work to convince employees that current performance is good but not good enough. They develop a new challenge to galvanize the organization into active thinking, and they expend significant time and effort selling the challenge to everyone. 2. Uncertainty about what to change into. Strategic innovators challenge their dominant way of thinking and shift emphasis away from determining how they need to compete toward questioning who their customers are and what they really want. They institutionalize a questioning attitude and find ways to shake up the system every few years. 3. Uncertainty surrounding new strategic positions. At a given time, a company does not know which idea will succeed and which core competencies will be essential. Successful strategic innovators follow the model of capitalism: they create internal variety, even at the expense of efficiency, and allow the outside market to decide the winners and losers. 4. The challenges of implementation. Successful companies set up a separate organizational unit to support a new strategic innovation and create a context that supports integration between different units within the company. In managing the transition from the old to the new, they let the two systems coexist but gradually allocate resources to the new so that it grows at the expense of the old. For established companies, the challenge of strategic innovation is organizational: developing a culture that questions current success while promoting experimentation. Strong leadership is essential in creating that culture. Only those companies that strive for self-renewal, the author argues, will succeed in the long term.

Faced with the possible closing of his NCR subsidiary in Dundee, Scotland, manager Jim Adamson worked on improving manufacturing quality and restoring the confidence of customers. He also began to develop a vision for Dundee as NCR's strategic center for the ATM business. When the Ohio headquarters resisted Adamson's plans, he persevered, cooperating with people there while sponsoring independent research in Dundee. Five years later, the Scottish subsidiary won NCR's global ATM business; the next year, its market share surpassed world competitors IBM and Diebold. The Dundee case is an example of subsidiary initiative: the proactive, deliberate pursuit of a new business opportunity by a subsidiary company undertaken to expand the subsidiary's scope of responsibility. Subsidiary initiative enables MNCs to tap into opportunities around the world, and, through competition among units, it enhances operational efficiency. But these initiatives face obstacles. Managers often encounter a "corporate immune system" that works against their efforts. They need savvy, persistence, and luck to break through corporate barriers. Studying subsidiary initiatives in five countries, the authors found that they took two forms: externally focused, involving new opportunities in the marketplace, and internally focused, involving opportunities within the boundaries of the corporation. Common to both types was an entrepreneurial component. In external initiatives, a champion emerged in the early stages. These individuals tested the idea in a small way. As the project took shape, they sought allies -- local customers or mentors in the home office. Finally, once the product was viable, they formally presented it to headquarters. In internal initiatives, subsidiary managers were on the lookout for new activities in the corporation that dovetailed with their capabilities. These units needed to be well integrated into the corporate system and have a good reputation; champions of internal initiatives had to pursue a more orthodox line of attack through the formal lines of authority. Based on these observations, the authors suggest two key roles for foreign subsidiaries: market development, in which the subsidiary identifies and acts on new business opportunities in its local market, and network optimization, in which the subsidiary seeks out and eliminates inefficient activities within the multinational network. Subsidiary initiative can yield outstanding successes for large multinationals. But subsidiary and parent-company managers will have to make shifts in their roles. For those who foster the attitudes and behaviors that allow initiatives to flourish, the rewards will be substantial.

Why do companies frequently make bad investment decisions and continue to blunder, even after the weaknesses in their capital budgeting analyses are evident? Because, according to the authors, they don’t integrate capital budgeting into their overall strategy. Boquist et al. offer a capital budgeting framework that has six key features: (1) it is dynamic, (2) it is integral to the firm’s strategy, (3) it recognizes sequences of options, (4) it is cross-functional, (5) it aligns employee compensation with capital allocation, and (6) it emphasizes performance-based training. The authors’ framework for dynamic capital budgeting has three simultaneous steps: 1. Identify a status quo strategy and how it must perform to maximize shareholder value. The strategy will help the company determine the trade-off in capital budgeting between cycle time and risk. The more time and resources it commits to collecting information about a project, the more it can learn about cash flows and the lower the risk. But it achieves this risk reduction at the expense of a longer cycle time. 2. Establish a system for evaluating projects and preparing capital allocation requests that is consistent with the strategy. The system has four phases & #8212; a new idea phase, preliminary evaluation phase, business evaluation phase, and go-ahead or reject phase & #8212; and three tollgates & #8212; strategic, preliminary, and business. For approval, a project must pass through all three tollgates. 3. Develop a culture consistent with the strategy and the evaluation system. The company’s long-term commitment to the strategy should be evident to employees. Employees from all functional areas should be trained in the system’s underpinnings. The employee compensation system should tie bonuses to performance measures that correlate with shareholder wealth. Only by implementing an integrated framework, say the authors, can a company make intelligent investment decisions with long-term strategy in mind.

With the increasing number of mergers and acquisitions, particularly across national borders, the importance of knowing how to approach delicate negotiations has grown. In this case study and interview, James Sebenius traces an Italian copper-products company's negotiations to provide important lessons for anyone involved in cross-border transactions. Sebenius interviewed Sergio Ceccuzzi, management board member of KM Europa Metal AG and chairman of its subsidiary, Europa Metalli SpA. Together they discuss the growth of the holding company, SMI (Societa Metallurgica Italiana SpA). In 1965, SMI was one of many small and medium-sized copper transformation companies in Italy. Over the years, it developed a strategy of growth by acquisition, but only in areas that amplified its line of business. It first acquired Finmeccanica, a state-owned competitor, at a time when privatization in Italy was anathema. Next, through skillful negotiations, it acquired its major French competitor, Tr_fim_taux, also a state-owned firm. And, in its most difficult transaction, it overcame formidable obstacles to acquire Kabel-metal AG, a German competitor. Throughout his conversation with Ceccuzzi, the author indicates specific lessons to be learned from each deal. In summary, he encapsulates the lessons into twelve major points, among them: be willing to wait, sometimes for years, for the right circumstances to culminate the deal; establish good personal relationships; map out the likely players in the deal and assess their interests, not yours; figure out how to deal with potential deal blockers; and, perhaps most important, remember that, even after the deal is done, negotiation does not stop.

The authoråÊdiscusses how to improve strategy making.