week 5

there are 2 activities but please write at least 250 words per activity with references  only from the week class reading 

2/5/2018Week 5 Learning Activities – BMGT 495 6380 Strategic Management (2182)

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Week 5 Learning Activity 1

 

During the previous week (Week 4), you identified the generic strategic direction for your selected
company. It is now time for you to identify specific alternative strategies for implementation.
Focusing on the same company as in your Week 3 DQs and Week 4 DQs, and based on the
strategic direction that you identified in Week 4, you are expected to:

 

Requirement 1:

 

Reiterate briefly (a) the same company and (b) its generic strategy direction as you have
uncovered in your W4 Learning Activity.

Requirement 2:

 

Create either at least four (4)corporate­level strategies or at least three (3) business­unit­
level strategies, [that is, three specific upper­level strategies] that the focal organization
should pursue to achieve the identified strategic direction.

 

Requirement 3:

 

Keep in mind that all of these alternative strategies MUST fit under the umbrella of the
strategic direction that you identified last week.

 

Please note sequential levels of strategies

 

Generic strategy → Corporate­level strategy → Business­unit­level strategy

 

Requirement 4:

 

Explain in full details (1) each alternative strategy, and (2) the reason “why each alternative is
a good possibility” for achieving the strategic direction.

 

Requirement 5:

2/5/2018 Week 5 Learning Activities – BMGT 495 6380 Strategic Management (2182)

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Support the rationale of each of your explanations.

 

Requirement 6:

 

Use the appropriate APA formatted scholarly reference source and corresponding in­text
citations in all your postings.

Week 5 Learning Activity 2

Requirement 1:

Use the alternative strategies that you identified in Learning Activity 1 of W5 as the focal
points for the quantitative analysis

     Requirement 2:

Complete all the necessary computations by using the analytic tool QSPM matrix to review
the strategic alternatives as identified this week in Learning Activity # 1 to identify just ONE
strategy out of the four strategies in W5 DQ1) to move forward.
In other words, create your own QSPM and show all the appropriate math within that QSPM,
so that you can compare and contrast the weighted scores for the whole pool of three
alternative strategies, andidentify that optimal strategy based on the computed outcomes of
this quantitative analysis

    Requirement 3:

Provide a detailed explanation of theONE strategy identified by using this QSPM tool, and
explain with at least 3 underlying reasons why that quantitatively optimal strategy iscritical to
the organization’s future success.
Support the rationale of each of your explanations.

 

   Requirement 4:

 
Use the appropriate APA formatted scholarly reference source and corresponding in­text
citations in all your postings.

2/5/2018Week 5: Feb 5 -11 – BMGT 495 6380 Strategic Management (2182)

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Read:

Strategic Management:

Chapter 7:  Competing in International Markets

Chapter 8:  Selecting Corporate Level Strategies

Boston Consulting Group (BCG) Matrix

What is Corporate Strategy, Really?

Strategy, Marketing, and Technology are all Intertwined

Exploring the Structural Effects of Internetworking

IBM Internetworking

How to Build Collaborative Advantage

Globalization in Uncertain Times: 10 Key Takeaways

What a Trump Presidency Will Mean for Globalization

Complete:

http://www.professionalacademy.com/news/marketing-theories-boston-consulting-group-matrix

WHAT IS CORPORATE STRATEGY, REALLY?

Strategy, marketing, and technology are all intertwined

https://learn.umuc.edu/content/enforced/267247-001153-01-2182-OL1-6380/Exploring%20the%20Structural%20Effects%20of%20Internetworking ?_&d2lSessionVal=o2FDCjvDvqta0JfVBSzbDb6a3

http://www.cisco.com/c/en/us/support/docs/ibm-technologies/data-link-switching-dlsw-data-link-switching-plus-dlsw-/12305-18.html

http://sloanreview.mit.edu/article/how-to-build-collaborative-advantage/

http://www.ieseinsight.com/doc.aspx?id=1871&ar=6&idioma=2

http://knowledge.wharton.upenn.edu/article/globalization-and-a-trump-presidency/?utm_source=kw_newsletter&utm_medium=email&utm_campaign=2016-11-15

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Chapter 7

Competing in International Markets

L E A R N I N G O B J E C T I V E S

After reading this chapter, you should be able to understand and articulate answers to the following

questions:

1. What are the main benefits and risks of competing in international markets?

2. What is the “diamond model,” and how does it help explain why some firms compete better in

international markets than others?

3. What are the various global strategies that firms can adopt?

4. What forms of involvement are available to firms that seek to compete in international markets?

Kia Picks Up Speed

Kia is enjoying accelerated growth within the global automobile industry.

On June 2, 2011, South Korean automaker Kia announced plans for a major expansion of its American

production facility. Capacity at Kia Motors Manufacturing Georgia Inc. (KMMG) was slated to expand 20

percent from 300,000 to 360,000 vehicles per year. In addition to the crossover utility vehicle Sorento,

the plant would begin making a sedan named the Optima in September 2011. The expansion of the plant

was estimated to cost $100 million and was expected to create 1,000 new jobs. [1]

This ambitious growth was made possible by Kia’s superb performance in the US market. KMMG had

started building vehicles less than two years earlier after being constructed for a cost of $1 billion. In

2010, yearly sales in the United States climbed above 350,000 vehicles. Kia’s overall share of the US

market increased in 2010 for the sixteenth consecutive year. In May 2011, Kia sold more than 48,000 cars

and trucks in United States, an increase of more than 53 percent from May 2010 sales levels. The Optima

led the way with a whopping 210 percent increase in sales.

Kia was not the only beneficiary of its success. KMMG’s location of West Point, Georgia, had been

economically devastated when its homegrown textile company, WestPoint Home, shut down its local

Chapter 7 from Mastering Strategic Management was adapted by The Saylor Foundation under
a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 license without attribution as requested

by the work’s original creator or licensee. © 2014, The Saylor Foundation.

http://www.saylor.org/site/textbooks/Mastering%20Strategic%20Management

http://creativecommons.org/licenses/by-nc-sa/3.0/

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factories to take advantage of lower labor prices overseas. Following a fierce competition with towns in

Mississippi, Kentucky, and other states, West Point was selected in 2006 as the site of Kia’s first US

manufacturing facility. To win the plant, state and local authorities offered Kia more than $400 million

worth of incentives, including tax breaks, free land, and infrastructure creation.

Georgia’s return on this investment included two thousand new jobs at the plant as well as hundreds of

jobs at suppliers that set up shop to support KMMG. The neighboring state of Alabama benefited from

KMMG’s success too. As of June 2011, nearly sixty companies spread across twenty-three Alabama

counties supplied parts or services to KMMG. [2]

The name “Kia” means to arise or come up out of Asia. [3] This name is very appropriate; Kia rose from

humble beginnings as a maker of bicycle parts in 1944 to become a global player in the automobile

industry. As of 2011, Kia was producing more than 2.1 million vehicles per year in eight countries. Kias

were sold in 172 countries. Kia employed more than 44,000 people and enjoyed annual revenues in excess

of $20 billion. Fellow South Korean automaker Hyundai owned just over 33 percent of Kia, and the two

firms strengthened each other through collaboration. When taking all of these facts into consideration,

Kia’s slogan—The Power to Surprise—had to make its rivals wonder what surprises the Korean upstart

might have in store for them next.

Workers in Georgia build Sorentos for South Korea–based Kia.

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Image courtesy of IFCAR,

http://upload.wikimedia.org/wikipedia/commons/9/98/2011_Kia_Sorento_LX_2_–_02-13-

2010 .

[1] http://www.kmmgusa.com/2011/06/kia-motors-manufacturing-georgia- begins-expansion-projects-to-support-

increased-volume-beginning -in-2012/

[2] Kent, D. 2011, June 19. Kia production in Georgia helping companies across Alabama. al.com. Retrieved from

http://blog.al.com/businessnews/2011/06/kia_production_in_georgia_help.html

[3] Frequently asked questions. Kia website. Retrieved from http://www.kia.com/#/faq/

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7.1 Advantages and Disadvantages of Competing in
International Markets

L E A R N I N G O B J E C T I V E S

1. Understand the potential benefits of competing in international markets.

2. Understand the risks faced when competing in international markets.

As Kia’s experience illustrates, international business is a huge segment of the world’s economic

activity. Amazingly, current projections suggest that, within a few years, the total dollar value of

trade across national borders will be greater than the total dollar value of trade within all of the

world’s countries combined. One driver of the rapid growth of internal business over the past two

decades has been the opening up of large economies such as China and Russia that had been mostly

closed off to outside investors.

The United States enjoys the world’s largest economy. As an illustration of the power of the

American economy, consider that, as of early 2011, the economy of just one state—California—would

be the eighth largest in the world if it were a country, ranking between Italy and Brazil. [1] The size of

the US economy has led American commerce to be very much intertwined with international

markets. In fact, it is fair to say that every business is affected by international markets to some

degree. Tiny businesses such as individual convenience stores and clothing boutiques sell products

that are imported from abroad. Meanwhile, corporate goliaths such as General Motors (GM), Coca-

Cola, and Microsoft conduct a great volume of business overseas.

Access to New Customers

Perhaps the most obvious reason to compete in international markets is gaining access to new customers.

Although the United States enjoys the largest economy in the world, it accounts for only about 5 percent

of the world’s population. Selling goods and services to the other 95 percent of people on the planet can be

very appealing, especially for companies whose industry within their home market are saturated ().

Few companies have a stronger “All-American” identity than McDonald’s. Yet McDonald’s is increasingly

reliant on sales outside the United States. In 2006, the United States accounted for 34 percent of

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McDonald’s revenue, while Europe accounted for 32 percent and 14 percent was generated across Asia,

the Middle East, and Africa. By 2011, Europe was McDonald’s biggest source of revenue (40 percent), the

US share had fallen to 32 percent, and the collective contribution of Asia, the Middle East, and Africa had

jumped to 23 percent. With less than one-third of its sales being generated in its home country,

McDonald’s is truly a global powerhouse.

Levi’s jeans are appreciated by customers worldwide, as shown by this balloon featured at the Putrajaya

International Hot Air Balloon Fiesta.

Image courtesy of Kevin Poh, http://www.flickr.com/photos/kevinpoh/4446228896.

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China and India are increasingly attractive markets to US firms. The countries are the two most populous

in the world. Both nations have growing middle classes, which means that more and more people are able

to purchase goods and services that are not merely necessities of life. This trend has created tremendous

opportunities for some firms. In the first half of 2010, for example, GM sold more vehicles in China than it

sold in the United States (1.2 million vs. 1.08 million). This gap seemed likely to expand; in the first half of

2010, GM’s sales in China increased nearly 50 percent relative to 2009 levels, while sales in the United

States rose 15 percent. [2]

Lowering Costs

Many firms that compete in international markets hope to gain cost advantages. If a firm can increase it

sales volume by entering a new country, for example, it may attain economies of scale that lower its

production costs. Going international also has implications for dealing with suppliers. The growth that

overseas expansion creates leads many businesses to purchase supplies in greater numbers. This can

provide a firm with stronger leverage when negotiating prices with its suppliers.

Offshoring has become a popular yet controversial means for trying to reduce costs. Offshoring involves

relocating a business activity to another country. Many American companies have closed down operations

at home in favor of creating new operations in countries such as China and India that offer cheaper labor.

While offshoring can reduce a firm’s costs of doing business, the job losses in the firm’s home country can

devastate local communities. For example, West Point, Georgia, lost approximately 16,000 jobs in the

1990s and 2000s as local textile factories were shut down in favor of offshoring. [3]Fortunately for the

town, Kia’s decision to locate its first US factory in West Point has improved the economy in the past few

years. In another example, Fortune Brands saved $45 million a year by relocating several factories to

Mexico, but the employee count in just one of the affected US plants dropped from 1,160 to 350.

A growing number of US companies are finding that offshoring is not providing the benefits they had

expected. This has led to a new phenomenon known asreshoring, whereby jobs that had been sent

overseas are returning home. In some cases, the quality provided by workers overseas is not good enough.

Carbonite, a seller of computer backup services, found that its call center in Boston was providing much

strong customer satisfaction than its call center in India. The Boston operation’s higher rating was

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attained even though it handled the more challenging customer complaints. As a result, Carbonite plans

to shift 250 call center jobs back to the United States by the end of 2012.

In other cases, the expected cost savings have not materialized. NCR had been making ATMs and self-

service checkout systems in China, Hungary, and Brazil. These machines can weigh more than a ton, and

NCR found that shipping them from overseas plants back to the United States was extremely expensive.

NCR hired 500 workers to start making the ATMs and checkout systems at a plant in Columbus, Georgia.

NCR’s plans call for 370 more jobs to be added at the plant by 2014. Similarly, General Electric

announced plans to hire approximately 1,300 workers in Louisville, Kentucky, starting in the fall of 2011.

These workers will make water heaters and refrigerators that had been produced overseas. [4]

Diversification of Business Risk

A familiar cliché warns “don’t put all of your eggs in one basket.” Applied to business, this cliché suggests

that it is dangerous for a firm to operate in only one country. Business risk refers to the potential that an

operation might fail. If a firm is completely dependent on one country, negative events in that country

could ruin the firm. Just like spreading one’s eggs into multiple baskets reduces the chances that all eggs

will be broken, business risk is reduced when a firm is involved in multiple countries.

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Firms can reduce business risk by competing in a variety of international markets. For example,

the ampm convenience store chain has locations in the United States, Mexico, Brazil, and Japan.

Image courtesy of MASA, http://upload.wikimedia.org/wikipedia/commons/d/db/Ampm.JPG.

Consider, for example, natural disasters such as the earthquakes and tsunami that hit Japan in 2011. If

Japanese automakers such as Toyota, Nissan, and Honda sold cars only in their home country, the

financial consequences could have been grave. Because these firms operate in many countries, however,

they were protected from being ruined by events in Japan. In other words, these firms diversified their

business risk by not being overly dependent on their Japanese operations.

American cigarette companies such as Philip Morris and R. J. Reynolds are challenged by trends within

the United States and Europe. Tobacco use in these areas is declining as more laws are passed that ban

smoking in public areas and in restaurants. In response, cigarette makers are attempting to increase their

operations within countries where smoking remains popular to remain profitable over time.

In 2006, for example, Philip Morris spent $5.2 billion to purchase a controlling interest in Indonesian

cigarette maker Sampoerna. This was the biggest acquisition ever in Indonesia by a foreign company.

Tapping into Indonesia’s population of approximately 230 million people was attractive to Philip Morris

in part because nearly two-thirds of men are smokers, and smoking among women is on the rise. As of

2007, Indonesia was the fifth-largest tobacco market in the world, trailing only China, the United States,

Russia, and Japan. To appeal to local preferences for cigarettes flavored with cloves, Philip Morris

introduced a variety of its signature Marlboro brand called Marlboro Mix 9 that includes cloves in its

formulation. [5]

Trends in the decline of cigarette use in the United

States and Europe may snuff out profits enjoyed by

brands such as Marlboro.

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Image courtesy of Autodesigner, http://en.wikipedia.org/wiki/File:Marlboroultralights.JPG.

Figure 7.2 Entering New Markets: Worth the Risk?

Image courtesy of The Fayj, http://www.flickr.com/photos/fayjo/333325967/

Political Risk

Although competing in international markets offers important potential benefits, such as access to new

customers, the opportunity to lower costs, and the diversification of business risk, going overseas also

poses daunting challenges. Political risk refers to the potential for government upheaval or interference

with business to harm an operation within a country (). For example, the term “Arab Spring” has been

used to refer to a series of uprisings in 2011 within countries such as Tunisia, Egypt, Libya, Bahrain, Syria,

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and Yemen. Unstable governments associated with such demonstrations and uprisings make it difficult

for firms to plan for the future. Over time, a government could become increasingly hostile to foreign

businesses by imposing new taxes and new regulations. In extreme cases, a firm’s assets in a country are

seized by the national government. This process is callednationalization. In recent years, for example,

Venezuela has nationalized foreign-controlled operations in the oil, cement, steel, and glass industries.

Countries with the highest levels of political risk tend to be those such as Somalia, Sudan, and Afghanistan

whose governments are so unstable that few foreign companies are willing to enter them. High levels of

political risk are also present, however, in several of the world’s important emerging economies, including

India, the Philippines, Russia, and Indonesia. This creates a dilemma for firms in that these risky settings

also offer enormous growth opportunities. Firms can choose to concentrate their efforts in countries such

as Canada, Australia, South Korea, and Japan that have very low levels of political risk, but opportunities

in such settings are often more modest. [6]

Economic Risk

Economic risk refers to the potential for a country’s economic conditions and policies, property rights

protections, and currency exchange rates to harm a firm’s operations within a country. Executives who

lead companies that do business in many different countries have to take stock of these various

dimensions and try to anticipate how the dimensions will affect their companies. Because economies are

unpredictable, economic risk presents executives with tremendous challenges.

Consider, for example, Kia’s operations in Europe. In May 2009, Kia reported increased sales in ten

European countries relative to May 2008. The firm enjoyed a 62 percent year-to-year increase in Slovakia,

58 percent in Austria, 50 percent in Gibraltar, 49 percent in Sweden, 43 percent in Poland, 24 percent in

Germany, 21 percent in the United Kingdom, 13 percent in the Czech Republic, 6 percent in Belgium, and

3 percent in Italy. [7] As Kia’s executives planned for the future, they needed to wonder how economic

conditions would influence Kia’s future performance in Europe. If inflation and interest rates were to

increase in a particular country, this would make it more difficult for consumers to purchase new Kias. If

currency exchange rates were to change such that the euro became weaker relative to the South Korean

won, this would make a Kia more expensive for European buyers.

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Cultural Risk

Cultural risk refers to the potential for a company’s operations in a country to struggle because of

differences in language, customs, norms, and customer preferences (). The history of business is full of

colorful examples of cultural differences undermining companies. For example, a laundry detergent

company was surprised by its poor sales in the Middle East. Executives believed that their product was

being skillfully promoted using print advertisements that showed dirty clothing on the left, a box of

detergent in the middle, and clean clothing on the right.

A simple and effective message, right? Not exactly. Unlike English and other Western languages, the

languages used in the Middle East, such as Hebrew and Arabic, involve reading from right to left. To

consumers, the implication of the detergent ads was that the product could be used to take clean clothes

and make the dirty. Not surprisingly, few boxes of the detergent were sold before this cultural blunder was

discovered.

A refrigerator manufacturer experienced poor sales in the Middle East because of another cultural

difference. The firm used a photo of an open refrigerator in its prints ads to demonstrate the large amount

of storage offered by the appliance. Unfortunately, the photo prominently featured pork, a type of meat

that is not eaten by the Jews and Muslims who make up most of the area’s population. [8] To get a sense of

consumers’ reactions, imagine if you saw a refrigerator ad that showed meat from a horse or a dog. You

would likely be disgusted. In some parts of world, however, horse and dog meat are accepted parts of

diets. Firms must take cultural differences such as these into account when competing in international

markets.

Cultural differences can cause problems even when the cultures involved are very similar and share the

same language. RecycleBank is an American firm that specializes in creating programs that reward people

for recycling, similar to airlines’ frequent-flyer programs. In 2009, RecycleBank expanded its operations

into the United Kingdom. Executives at RecycleBank became offended when the British press referred to

RecycleBank’s rewards program as a “scheme.” Their concern was unwarranted, however. The

word scheme implies sneakiness when used in the United States, but a scheme simply means a service in

the United Kingdom. [9]Differences in the meaning of English words between the United States and the

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United Kingdom are also vexing to American men named Randy, who wonder why Brits giggle at the

mention of their name.

K E Y T A K E A W A Y

Competing in international markets involves important opportunities and daunting threats. The

opportunities include access to new customers, lowering costs, and diversification of business risk. The

threats include political risk, economic risk, and cultural risk.

E X E R C I S E S

1. Is offshoring ethical or unethical? Why?

2. Do you expect reshoring to become more popular in the years ahead? Why or why not?

3. Have you ever seen an advertisement that was culturally offensive? Why do you think that companies are

sometimes slow to realize that their ads will offend people?

[1] Stateside substitutes. 2011, January 2011. The Economist. Retrieved

fromhttp://www.economist.com/blogs/dailychart/2011/01/comparing_us_states_ countries

[2] Isidore, C. 2010. July 2. GM’s Chinese sales top US. CNNMoney. Retrieved from

http://money.cnn.com/2010/07/02/news/companies/gm_china/index.htm

[3] Copeland, L. 2010, March 25. Kia breathes life into old Georgia textile mill town. USA Today. Retrieved

from http://www.usatoday.com/news/nation/2010-03-24-boomtown_N.htm

[4] Isidore, C. 2011, June 17. Made in USA: Overseas jobs come home. CNNMoney. Retrieved from

http://money.cnn.com/2011/06/17/news/economy/made_in_usa/index.htm

[5] T2M. 2007, July 3. Clove-flavored Marlboro now in Indonesia [Web blog post]. Retrieved from http://www.the-

two-malcontents.com/2007/07/clove-flavored-marlboro- now-in-indonesia

[6] Kostigen, T. 2011, February 25. Beware: The world’s riskiest countries. Market Watch.Wall Street Journal.

Retrieved from http://www.marketwatch.com/story/beware-the -worlds-riskiest-countries-2011-02-25

[7] Kia sales climb strongly in 10 countries in May [Press release]. Kia website. Retrieved from http://www.kia-

press.com/press/corporate/20090605-kia%20sales%20 climb%20strongly%20in%2010%20countries.aspx

[8] Ricks, D. A. 1993. Blunders in international business. Cambridge, MA: Blackwell.

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[9] Maltby, E. 2010, January 19. Expanding abroad? Avoid cultural gaffes. Wall Street Journal. Retrieved from

http://online.wsj.com/article/SB100014240527487036 57604575005511903147960.html

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7.2 Drivers of Success and Failure When Competing in
International Markets

L E A R N I N G O B J E C T I V E S

1. Explain the elements of the “diamond model.”

2. Understand how the model helps to explain success and failure in international markets.

The title of a book written by newspaper columnist Thomas Friedman attracted a great deal of attention

when the book was released in 2005. In The World Is Flat: A Brief History of the 21st Century, Friedman

argued that technological advances and increased interconnectedness is leveling the competitive playing

field between developed and emerging countries. This means that companies exist in a “flat world”

because economies across the globe are converging on a single integrated global system. [1] For executives,

a key implication is that a firm’s being based in a particular country is ceasing to be an advantage or

disadvantage.

While Friedman’s notion of business becoming a flat world is flashy and attention grabbing, it does not

match reality. Research studies conducted since 2005 have found that some firms enjoy advantages based

on their country of origin while others suffer disadvantages. A powerful framework for understanding how

likely it is that firms based in a particular country will be successful when competing in international

markets was provided by Professor Michael Porter of the Harvard Business School. [2] The framework is

formally known as “the determinants of national advantage,” but it is often referred to more simply as

“the diamond model” because of its shape.

According to the model, the ability of the firms in an industry whose origin is in a particular country (e.g.,

South Korean automakers or Italian shoemakers) to be successful in the international arena is shaped by

four factors: (1) their home country’s demand conditions, (2) their home country’s factor conditions, (3)

related and supporting industries within their home country, and (4) strategy, structure, and rivalry

among their domestic competitors.

Demand Conditions

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Within the diamond model, demand conditions refer to the nature of domestic customers.

It is tempting to believe that firms benefit when their domestic customers are perfectly willing to purchase

inferior products. This would be a faulty belief! Instead, firms benefit when their domestic customers

have high expectations.

Japanese consumers are known for insisting on very high levels of quality, aesthetics, and reliability.

Japanese automakers such as Honda, Toyota, and Nissan reap rewards from this situation. These firms

have to work hard to satisfy their domestic buyers. Living up to lofty quality standards at home prepares

these firms to offer high-quality products when competing in international markets. In contrast, French

car buyers do not stand out as particularly fussy. It is probably not a coincidence that French automakers

Renault and Peugeot have struggled to gain traction within the global auto industry.

Demand conditions also help to explain why German automakers such as Porsche, Mercedes-Benz, and

BMW create excellent luxury and high-performance vehicles. German consumers value superb

engineering. While a car is simply a means of transportation in some cultures, Germans place value on the

concept of fahrvergnügen, which means “driving pleasure.” Meanwhile, demand for fast cars is high in

Germany because the country has built nearly eight thousand miles of superhighways known as

autobahns. No speed limits for cars are enforced on more than half of the eight thousand miles. Many

Germans enjoy driving at 150 miles per hour or more, and German automakers must build cars capable of

safely reaching and maintaining such speeds. When these companies compete in the international arena,

the engineering and performance of their vehicles stand out.

Factor Conditions

Factor conditions refer to the nature of raw material and other inputs that firms need to create goods and

services. Examples include land, labor, capital markets, and infrastructure. Firms benefit when

they have good access to factor conditions and face challenges when they do not. Companies based in the

United States, for example, are able to draw on plentiful natural resources, a skilled labor force, highly developed

transportation systems, and sophisticated capital markets to be successful. The dramatic growth of Chinese

manufacturers in recent years has been fueled in part by the availability of cheap labor.

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In some cases, overcoming disadvantages in factor conditions leads companies to develop unique skills.

Japan is a relatively small island nation with little room to spare. This situation has led Japanese firms to

be pioneers in the efficient use of warehouse space through systems such as just-in-

time inventory management (JIT). Rather than storing large amounts of parts and material, JIT

management conserves space—and lowers costs—by requiring inputs to a production process to arrive at

the moment they are needed. Their use of JIT management has given Japanese manufacturers an

advantage when they compete in

international markets.

Related and Supporting Industries

Could Italian shoemakers create some of the world’s best shoes if Italian leather makers were not among

the world’s best? Possibly, but it would be much more difficult. The concept

of related and supporting industries refers to the extent to which firms’ domestic suppliers and other

complementary industries are developed and helpful.

Italian shoemakers such as Salvatore Ferragamo, Prada, Gucci, and Versace benefit from the availability

of top-quality leather within their home country. If these shoemakers needed to rely on imported leather,

they would lose flexibility and speed.

Fine Italian shoes, such as those found at the famous Via Montenapoleone in Milan, are usually

made of fine Italian leather.

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Image courtesy of Warburg, http://en.wikipedia.org/wiki/File:Milan_Montenapoleone_16.JPG.

The auto industry is a setting where related and supporting industries are very important. Electronics are

key components of modern vehicles. South Korean automakers Kia and Hyundai can leverage the

excellent electronics provided by South Korean firms Samsung and LG. Similarly, Honda, Nissan, and

Toyota are able to draw on the skills of Sony and other Japanese electronics firms. Unfortunately, for

French automakers Renault and Peugeot, no French electronics firms are standouts in the international

arena. This situation makes it difficult for Renault and Peugeot to integrate electronics into their vehicles

as effectively as their South Korean and Japanese rivals.

In extreme cases, the poor condition of related and supporting industries can undermine an operation.

Otabo LLC, a small custom shoe company, was forced to shut down its Florida factory in 2008. Otabo

struggled to find technicians that had the skills needed to fix its shoemaking machines. Meanwhile, there

are very few suppliers of shoelaces, soles, eyelets, and other components in the United States because

about 99 percent of the shoes purchased in the United States are imported, mostly from China. The few

available suppliers were unwilling to create the small batches of customized materials that Otabo wanted.

In the end, the American factory simply could not get access to many of the supplies needed to create

shoes. [3] Production was shifted to China, where all the needed supplies can be found easily and cheaply.

Firm Strategy, Structure, and Rivalry

The concept of firm strategy, structure, and rivalry refers to how challenging it is to survive domestic

competition. The Olympics offer a good analogy for illustrating the positive aspects of very challenging

domestic situations. If the competition to make a national team in gymnastics is fierce, the gymnasts

who make the team will have been pushed to stretch their abilities and performance. In contrast,

gymnasts who faced few contenders in their quest to make a national team will not have been tested

with the same level of intensity. When the two types meet at the Olympics, the gymnasts who overcame

huge hurdles to make their national teams are likely to have an edge over athletes from countries with

few skilled gymnasts.

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Companies that have survived intense rivalry within their home markets are likely to have developed

strategies and structures that will facilitate their success when they compete in international markets.

Hyundai and Kia had to keep pace with each other within the South Korean market before expanding

overseas. The leading Japanese automakers—Honda, Nissan, and Toyota—have had to compete not only

with one another but also with smaller yet still potent domestic firms such as Isuzu, Mazda, Mitsubishi,

Subaru, and Suzuki. In both examples, the need to navigate potent domestic rivals has helped firms later

become fearsome international players.

Succeeding despite difficult domestic competition prepares firms to expand their kingdoms into

international markets.

Image courtesy of Chrisloader,

http://en.wikipedia.org/wiki/File:Leicester_Square_Burger_King .

If, in contrast, domestic competition is fairly light, a company may enjoy admirable profits within its

home market. However, the lack of being pushed by rivals will likely mean that the firm struggles to reach

its potential in creativity and innovation. This undermines the firm’s ability to compete overseas and

makes it vulnerable to foreign entry into its home market. Because neither Renault nor Peugeot has been

a remarkable innovator historically, these French automakers have enjoyed fairly gentle domestic

competition. Once the auto industry became a global competition, however, these firms found themselves

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trailing their Asian rivals.

K E Y T A K E A W A Y

The likelihood that a firm will succeed when it competes in international markets is shaped by four

aspects of its domestic market: (1) demand conditions; (2) factor conditions; (3) related and supporting

industries; and (4) strategy, structure, and rivalry among its domestic competitors.

E X E R C I S E S

1. Which of the four elements of the diamond model do you believe has the strongest influence on a firm’s

fate when it competes in international markets?

2. Automakers in China and India have yet to compete on the world stage. Based on the diamond model,

would these firms be likely to succeed or fail within the global auto industry?

[1] Friedman, T. L. 2005. The world is flat: A brief history of the 21st century. New York, NY: Farrar, Straus and

Giroux.

[2] Porter, M. E. 1990. The competitive advantage of nations, New York, NY: Free Press.

[3] Aeppel, T. 2008, March 3. US shoe factory finds supplies are Achilles’ heel. Wall Street Journal. Retrieved from

http://online.wsj.com/article/SB120450124543206313.html

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7.3 Types of International Strategies

L E A R N I N G O B J E C T I V E S

1. Understand what a multidomestic strategy involves and be able to offer an example.

2. Understand what a global strategy involves and be able to offer an example.

3. Understand what a transnational strategy involves and be able to offer an example.

A firm that has operations in more than one country is known as a multinational corporation (MNC).

The largest MNCs are major players within the international arena. Walmart’s annual worldwide

sales, for example, are larger than the dollar value of the entire economies of Austria, Norway, and

Saudi Arabia. Although Walmart tends to be viewed as an American retailer, the firm earns more

than one-quarter of its revenues outside the United States. Walmart owns significant numbers of

stores in Mexico (1,730 as of mid-2011), Central America (549), Brazil (479), Japan (414), the United

Kingdom (385), Canada (325), Chile (279), and Argentina (63). Walmart also participates in joint

ventures in China (328 stores) and India (5). [1] Even more modestly sized MNCs are still very

powerful. If Kia were a country, its current sales level of approximately $21 billion would place it in

the top 100 among the more than 180 nations in the world.

Multinationals such as Kia and Walmart must choose an international strategy to guide their efforts

in various countries. There are three main international strategies available: (1) multidomestic, (2)

global, and (3) transnational (Figure 7.10 “International Strategy”). Each strategy involves a different

approach to trying to build efficiency across nations and trying to be responsiveness to variation in

customer preferences and market conditions across nations.

Multidomestic Strategy

A firm using a multidomestic strategy sacrifices efficiency in favor of emphasizing responsiveness to local

requirements within each of its markets. Rather than trying to force all of its American-made shows on

viewers around the globe, MTV customizes the programming that is shown on its channels within dozens

of countries, including New Zealand, Portugal, Pakistan, and India. Similarly, food company H. J. Heinz

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adapts its products to match local preferences. Because some Indians will not eat garlic and onion, for

example, Heinz offers them a version of its signature ketchup that does not include these two ingredients.

Figure 7.10 International Strategy

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Images courtesy of kenny-lex,http://www.flickr.com/photos/kenny_lex/3059058350/ (top left);

Pete,http://www.flickr.com/photos/comedynose/3542592243/ (bottom right); Ged

Carroll,http://www.flickr.com/photos/renaissancechambara/4241378353/ (top left); Creative

Tools,http://www.flickr.com/photos/creative_tools/4293407348/ (bottom right); Windell

Oskay, http://www.flickr.com/photos/oskay/4578993380/ (bottom right); Andrew

Maiman,http://www.flickr.com/photos/amaiman/5550834826/ (top right);

Bodo,http://www.flickr.com/photos/64448029@N05/5901416357/ (top right).

Baked beans flavored with curry? This H. J. Heinz

product is very popular in the United Kingdom.

Image courtesy of Gordon Joly,

http://upload.wikimedia.org/wikipedia/commons/f/f4

/Curry_Beanz .

Global Strategy

A firm using a global strategy sacrifices responsiveness to local requirements within each of its markets in

favor of emphasizing efficiency. This strategy is the complete opposite of a multidomestic strategy. Some

minor modifications to products and services may be made in various markets, but a global strategy

stresses the need to gain economies of scale by offering essentially the same products or services in each

market.

Microsoft, for example, offers the same software programs around the world but adjusts the programs to

match local languages. Similarly, consumer goods maker Procter & Gamble attempts to gain efficiency by

creating global brands whenever possible. Global strategies also can be very effective for firms whose

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product or service is largely hidden from the customer’s view, such as silicon chip maker Intel. For such

firms, variance in local preferences is not very important.

Transnational Strategy

A firm using a transnational strategy seeks a middle ground between a multidomestic strategy and a

global strategy. Such a firm tries to balance the desire for efficiency with the need to adjust to local

preferences within various countries. For example, large fast-food chains such as McDonald’s and

Kentucky Fried Chicken (KFC) rely on the same brand names and the same core menu items around the

world. These firms make some concessions to local tastes too. In France, for example, wine can be

purchased at McDonald’s. This approach makes sense for McDonald’s because wine is a central element of

French diets.

K E Y T A K E A W A Y

Multinational corporations choose from among three basic international strategies: (1) multidomestic, (2)

global, and (3) transnational. These strategies vary in their emphasis on achieving efficiency around the

world and responding to local needs.

E X E R C I S E S

1. Which of the three international strategies is Kia using? Is this the best strategy for Kia to be using?

2. Identify examples of companies using each of the three international strategies other than those

described above. Which company do you think is best positioned to compete in international markets?

[1] Standard & Poor’s stock report on Walmart.

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7.4 Options for Competing in International Markets

L E A R N I N G O B J E C T I V E S

1. Understand the various options for entering an international market.

2. Be able to provide an example of a firm using each option.

When the executives in charge of a firm decide to enter a new country, they must decide how to enter

the country. There are five basic options available: (1) exporting, (2) creating a wholly owned

subsidiary, (3) franchising, (4) licensing, and (5) creating a joint venture or strategic alliance. These

options vary in terms of how much control a firm has over its operation, how much risk is involved,

and what share of the operation’s profits the firm gets to keep.

Exporting

Exporting involves creating goods within a firm’s home country and then shipping them to another

country. Once the goods reach foreign shores, the exporter’s role is over. A local firm then sells the goods

to local customers. Many firms that expand overseas start out as exporters because exporting offers a low-

cost method to find out whether a firm’s products are appealing to customers in other lands. Some Asian

automakers, for example, first entered the US market though exporting. Small firms may rely on

exporting because it is a low-cost option.

Once a firm’s products are found to be viable in a particular country, exporting often becomes

undesirable. A firm that exports its goods loses control of them once they are turned over to a local firm

for sale locally. This local distributor may treat customers poorly and thereby damage the firm’s brand.

Also, an exporter only makes money when it sells its goods to a local firm, not when end users buy the

goods. Executives may want their firm rather than a local distributor to enjoy the profits that are made

when products are sold to individual customers.

Creating a Wholly Owned Subsidiary

A wholly owned subsidiary is a business operation in a foreign country that a firm fully owns. A firm can

develop a wholly owned subsidiary through agreenfield venture, meaning that the firm creates the entire

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operation itself. Another possibility is purchasing an existing operation from a local company or another

foreign operator.

Regardless of whether a firm builds a wholly owned subsidiary “from scratch” or acquires an existing

operation, having a wholly owned subsidiary can be attractive because the firm maintains complete

control over the operation and gets to keep all of the profits that the operation makes. A wholly owned

subsidiary can be quite risky, however, because the firm must pay all of the expenses required to set it up

and operate it. Kia, for example, spent $1 billion to build its US factory. Many firms are reluctant to spend

such sums in more volatile countries because they fear that they may never recoup their investments.

Franchising

Franchising has been used by many firms that compete in service industries to develop a worldwide

presence. Subway, The UPS Store, and Hilton Hotels are just a few of the firms that have done so.

Franchising involves an organization (called a franchisor) granting the right to use its brand name,

products, and processes to other organizations (known as franchisees) in exchange for an up-front

payment (a franchise fee) and a percentage of franchisees’ revenues (a royalty fee).

Franchising is an attractive way to enter foreign markets because it requires little financial investment by

the franchisor. Indeed, local franchisees must pay the vast majority of the expenses associated with

getting their businesses up and running. On the downside, the decision to franchise means that a firm will

get to enjoy only a small portion of the profits made under its brand name. Also, local franchisees may

behave in ways that the franchisor does not approve. For example, Kentucky Fried Chicken (KFC) was

angered by some of its franchisees in Asia when they started selling fish dishes without KFC’s approval. It

is often difficult to fix such problems because laws in many countries are stacked in favor of local

businesses. Last, franchises are only successful if franchisees are provided with a simple and effective

business model. Executives thus need to avoid expanding internationally through franchising until their

formula has been perfected.

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Licensing

While franchising is an option within service industries, licensing is most frequently used in

manufacturing industries. Licensing involves granting a foreign company the right to create a company’s

product within a foreign country in exchange for a fee. These relationships often center on patented

technology. A firm that grants a license avoids absorbing a lot of costs, but its profits are limited to the

fees that it collects from the local firm. The firm also loses some control over how its technology is used.

A historical example involving licensing illustrates how rapidly events can change within the international

arena. By the time Japan surrendered to the United States and its Allies in 1945, World War II had

crippled the country’s industrial infrastructure. In response to this problem, Japanese firms imported a

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great deal of technology, especially from American firms. When the Korean War broke out in the early

1950s, the American military relied on Jeeps made in Japan using licensed technology. In just a few years,

a mortal enemy had become a valuable ally.

Strategy at the Movies

Gung Ho

Can American workers survive under Japanese management? Although this sounds like the premise for a

bad reality TV show, the question was a legitimate consideration for General Motors (GM) and Toyota in

the early 1980s. GM was struggling at the time to compete with the inexpensive, reliable, and fuel-efficient

cars produced by Japanese firms. Meanwhile, Toyota was worried that the US government would limit the

number of foreign cars that could be imported. To address these issues, these companies worked together

to reopen a defunct GM plant in Fremont, California, in 1984 that would manufacture both companies’

automobiles in one facility. The plant had been the worst performer in the GM system; however, under

Toyota’s management, the New United Motor Manufacturing Incorporated (NUMMI) plant became the

best factory associated with GM—using the same workers as before! Despite NUMMI’s eventual success,

the joint production plant experienced significant growing pains stemming from the cultural differences

between Japanese managers and American workers.

The NUMMI story inspired the 1986 movie Gung Ho in which a closed automobile manufacturing plant

in Hadleyville, Pennsylvania, was reopened by Japanese car company Assan Motors. While Assan Motors

and the workers of Hadleyville were both excited about the venture, neither was prepared for the

differences between the two cultures. For example, Japanese workers feel personally ashamed when they

make a mistake. When manager Oishi Kazihiro failed to meet production targets, he was punished with

“ribbons of shame” and forced to apologize to his employees for letting them down. In contrast, American

workers were presented in the film as likely to reject management authority, prone to fighting at work,

and not opposed to taking shortcuts.

When Assan Motors’ executives attempted to institute morning calisthenics and insisted that employees

work late without overtime pay, the American workers challenged these policies and eventually walked off

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the production line. Assan Motors’ near failure was the result of differences in cultural norms and

values. Gung Ho illustrates the value of understanding and bridging cultural differences to facilitate

successful cross-cultural collaboration, value that was realized in real life by NUMMI.

Joint Ventures and Strategic Alliances

Within each market entry option described earlier, a firm either maintains strong control of operations

(wholly owned subsidiary) or it turns most control over to a local firm (exporting, franchising, and

licensing). In some cases, however, executives find it beneficial to work closely with one or more local

partners in a joint venture or a strategic alliance. In a joint venture, two or more organizations each

contribute to the creation of a new entity. In a strategic alliance, firms work together cooperatively, but no

new organization is formed. In both cases, the firm and its local partner or partners share decision-

making authority, control of the operation, and any profits that the relationship creates.

Joint ventures and strategic alliances are especially attractive when a firm believes that working closely

with locals will provide it important knowledge about local conditions, facilitate acceptance of their

involvement by government officials, or both. In the late 1980s, China was a difficult market for American

businesses to enter. Executives at KFC saw China as an attractive country because chicken is a key

element of Chinese diets. After considering the various options for entering China with its first restaurant,

KFC decided to create a joint venture with three local organizations. KFC owned 51 percent of the venture;

having more than half of the operation was advantageous in case disagreements arose. A Chinese bank

owned 25 percent, the local tourist bureau owned 14 percent, and the final 10 percent was owned by a

local chicken producer that would supply the restaurant with its signature food item.

Having these three local partners helped KFC navigate the cumbersome regulatory process that was in

place and allowed the American firm to withstand the scrutiny of wary Chinese officials. Despite these

advantages, it still took more than a year for the store to be built and approved. Once open in 1987,

however, KFC was an instant success in China. As China’s economy gradually became more and more

open, KFC was a major beneficiary. By the end of 1997, KFC operated 191 restaurants in 50 Chinese cities.

By the start of 2011, there were approximately 3,200 KFCs spread across 850 Chinese cites. Roughly 90

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percent of these restaurants are wholly owned subsidiaries of KFC—a stark indication of how much doing

business in China has changed over the past twenty-five years.

As of early 2011, KFC was opening a new store in China every eighteen hours on average.

Image courtesy of Wikimedia,

http://upload.wikimedia.org/wikipedia/commons/f/fb/Kfc_of_china .

K E Y T A K E A W A Y

When entering a new country, executives can choose exporting, creating a wholly owned subsidiary,

franchising, licensing, and creating a joint venture or strategic alliance. The key issues of how much

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control a firm has over its operation, how much risk is involved, and what share of the operation’s profits

the firm gets to keep all vary across these options.

E X E R C I S E S

1. Do you believe that KFC would have been so successful in China today if executives had tried to make

their first store a wholly owned subsidiary? Why or why not?

2. The typical joint venture only lasts a few years. Why might joint ventures dissolve so quickly?

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7.5 Conclusion

This chapter explains competition in international markets. Executives must consider the benefits

and risks of competing internationally when making decisions about whether to expand overseas.

Executives also need to determine the likelihood that their firms will succeed when they compete in

international markets by examining demand conditions, factor conditions, related and supporting

industries, and strategy, structure, and rivalry among its domestic competitors. When a firm does

venture overseas, a decision must be made about whether its international strategy will be

multidomestic, global, or transnational. Finally, when leading a firm to enter a new market,

executives can choose to manage the operation via exporting, creating a wholly owned subsidiary,

franchising, licensing, and creating a joint venture or strategic alliance.

E X E R C I S E S

1. Divide your class into four or eight groups, depending on the size of the class. Each group should select a

different industry. Find examples of each international strategy for your industry. Discuss which strategy

seems to be the most successful in your selected industry.

2. This chapter discussed Kia and other automakers. If you were assigned to turn around a struggling

automaker such as General Motors or Chrysler, what actions would you take to revive the company’s

prospects within the global auto industry?

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Chapter 8

Selecting Corporate-Level Strategies

L E A R N I N G O B J E C T I V E S
After reading this chapter, you should be able to understand and articulate answers to the following
questions:

1. Why might a firm concentrate on a single industry?

2. What is vertical integration and what benefits can it provide?

3. What are the two types of diversification and when should they be used?

4. Why and how might a firm retrench or restructure?

5. What is portfolio planning and why is it useful?

What’s the Big Picture at Disney?

Walt Disney remains a worldwide icon five decades after his death.

Image courtesy of Wikipedia,

http://en.wikipedia.org/wiki/File:Walt_Disney_Snow_white_1937_trailer_screenshot_(13) .

Chapter 8 from Mastering Strategic Management was adapted by The Saylor Foundation under
a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 license without attribution as requested

by the work’s original creator or licensee. © 2014, The Saylor Foundation.

http://www.saylor.org/site/textbooks/Mastering%20Strategic%20Management

http://creativecommons.org/licenses/by-nc-sa/3.0/

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The animated film Cars 2 was released by Pixar Animation Studios in late June 2011. This sequel to the

smash hit Cars made $66 million at the box office on its opening weekend and appeared likely to be yet

another commercial success for Pixar’s parent corporation, The Walt Disney Company. By the second

weekend after its release, Cars 2 had raked in $109 million.

Although Walt Disney was a visionary, even he would have struggled to imagine such enormous numbers

when his company was created. In 1923, Disney Brothers Cartoon Studio was started by Walt and his

brother Roy in their uncle’s garage. The fledgling company gained momentum in 1928 when a character

was invented that still plays a central role for Disney today—Mickey Mouse. Disney expanded beyond

short cartoons to make its first feature film, Snow White and the Seven Dwarves, in 1937.

Following a string of legendary films such as Pinocchio (1940), Fantasia(1940), Bambi (1942),

and Cinderella (1950), Walt Disney began to diversify his empire. His company developed a television

series for the American Broadcasting Company (ABC) in 1954 and opened the Disneyland theme park in

1955. Shortly before its opening, the theme park was featured on the television show to expose the

American public to Walt’s innovative ideas. One of the hosts of that episode was Ronald Reagan, who

twenty-five years later became president of the United States. A larger theme park, Walt Disney World,

was opened in Orlando in 1971. Roy Disney died just two months after Disney World opened; his brother

Walt had passed in 1966 while planning the creation of the Orlando facility.

The Walt Disney Company began a series of acquisitions in 1993 with the purchase of movie studio

Miramax Pictures. ABC was acquired in 1996, along with its very successful sports broadcasting company,

ESPN. Two other important acquisitions were made during the following decade. Pixar Studios was

purchased in 2006 for $7.4 billion. This strategic move brought a very creative and successful animation

company under Disney’s control. Three years later, Marvel Entertainment was acquired for $4.24 billion.

Marvel was attractive because of its vast roster of popular characters, including Iron Man, the X-Men, the

Incredible Hulk, the Fantastic Four, and Captain America. In addition to featuring these characters in

movies, Disney could build attractions around them within its theme parks.

With annual revenues in excess of $38 billion, The Walt Disney Company was the largest media

conglomerate in the world by 2010. It was active in four key industries. Disney’s theme parks included not

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only its American locations but also joint ventures in France and Hong Kong. A park in Shanghai, China,

is slated to open by 2016. The theme park business accounted for 28 percent of Disney’s revenues.

Disney’s presence in the television industry, including ABC, ESPN, Disney Channel, and ten television

stations, accounted for 45 percent of revenues. Disney’s original business, filmed entertainment,

accounted for 18 percent of revenue. Merchandise licensing was responsible for 7 percent of revenue. This

segment of the business included children’s books, video games, and 350 stores spread across North

American, Europe, and Japan. The remaining 2 percent of revenues were derived from interactive online

technologies. Much of this revenue was derived from Playdom, an online gaming company that Disney

acquired in 2010. [1]

By mid-2011, questions arose about how Disney was managing one of its most visible subsidiaries. Pixar’s

enormous success had been built on creativity and risk taking. Pixar executives were justifiably proud that

they made successful movies that most studios would view as quirky and too off-the-wall. A good example

is 2009’s Up!, which made $730 million despite having unusual main characters: a grouchy widower, a

misfit “Wilderness Explorer” in search of a merit badge for helping the elderly, and a talking dog. Disney

executives, however, seemed to be adopting a much different approach to moviemaking. In a February

2011 speech, Disney’s chief financial officer noted that Disney intended to emphasize movie franchises

such as Toy Story and Cars that can support sequels and sell merchandise.

When the reviews of Pixar’s Cars 2 came out in June, it seemed that Disney’s preferences were the driving

force behind the movie. The film was making money, but it lacked Pixar’s trademark artistry. One movie

critic noted, “With Cars 2, Pixar goes somewhere new: the ditch.” Another suggested that “this frenzied

sequel seldom gets beyond mediocrity.” A stock analyst that follows Disney perhaps summed up the

situation best when he suggested that Cars 2 was “the worst-case scenario.…A movie created solely to

drive merchandise. It feels cynical. Parents may feel they’re watching a two-hour commercial.” [2] Looking

to the future, Pixar executives had to wonder whether their studio could excel as part of a huge firm.

Would Disney’s financial emphasis destroy the creativity that made Pixar worth more than $7 billion in

the first place? The big picture was definitely unclear.

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Will John Lassiter, Pixar’s chief creative officer, be prevented from making more quirky films

like Up! by parent company Disney?

Image courtesy of Nicolas Genin,

http://upload.wikimedia.org/wikipedia/commons/b/bc/John_Lasseter-Up-66th_Mostra .

When dealing with corporate-level strategy, executives seek answers to a key question: In what industry

or industries should our firm compete? The executives in charge of a firm such as The Walt Disney

Company must decide whether to remain within their present domains or venture into new ones. In

Disney’s case, the firm has expanded from its original business (films) and into television, theme parks,

and several others. In contrast, many firms never expand beyond their initial choice of industry.

[1] Standard & Poor’s stock report on The Walt Disney Company.

[2] Stewart, J. B. 2011, June 1. A collision of creativity and cash. New York Times. Retrieved

from http://www.nytimes.com/2011/07/02/business/02stewart.html

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8.1 Concentration Strategies

L E A R N I N G O B J E C T I V E S

1. Name and understand the three concentration strategies.

2. Be able to explain horizontal integration and two reasons why it often fails.

For many firms, concentration strategies are very sensible. These strategies involve trying to compete

successfully only within a single industry. McDonald’s, Starbucks, and Subway are three firms that

have relied heavily on concentration strategies to become dominant players.

Market Penetration

There are three concentration strategies: (1) market penetration, (2) market development, and (3) product

development. A firm can use one, two, or all three as part of its efforts to excel within an industry.[1]

Market penetration involves trying to gain additional share of a firm’s existing markets using existing products.

Often firms will rely on advertising to attract new customers with existing markets.

Nike, for example, features famous athletes in print and television ads designed to take market share

within the athletic shoes business from Adidas and other rivals. McDonald’s has pursued market

penetration in recent years by using Latino themes within some of its advertising. The firm also maintains

a Spanish-language website at http://www.meencanta.com; the website’s name is the Spanish translation

of McDonald’s slogan “I’m lovin’ it.” McDonald’s hopes to gain more Latino customers through initiatives

such as this website.

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Nike relies in part on a market penetration strategy within the athletic shoe business.

Image courtesy of Jean-Louis Zimmermann,

Market Development

Market development involves taking existing products and trying to sell them within new markets. One

way to reach a new market is to enter a new retail channel. Starbucks, for example, has stepped beyond

selling coffee beans only in its stores and now sells beans in grocery stores. This enables Starbucks to

reach consumers that do not visit its coffeehouses.

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Starbucks’ market development strategy has allowed fans to buy its beans in grocery stores.

Image courtesy of Claire Gribbin,http://en.wikipedia.org/wiki/File:Starbucks_coffee_beans .

Entering new geographic areas is another way to pursue market development. Philadelphia-based Tasty

Baking Company has sold its Tastykake snack cakes since 1914 within Pennsylvania and adjoining states.

The firm’s products have become something of a cult hit among customers, who view the products as

much tastier than the snack cakes offered by rivals such as Hostess and Little Debbie. In April 2011,

Tastykake was purchased by Flowers Foods, a bakery firm based in Georgia. When it made this

acquisition, Flower Foods announced its intention to begin extensively distributing Tastykake’s products

within the southeastern United States. Displaced Pennsylvanians in the south rejoiced.

Product Development

Product development involves creating new products to serve existing markets. In the 1940s, for example,

Disney expanded its offerings within the film business by going beyond cartoons and creating movies

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featuring real actors. More recently, McDonald’s has gradually moved more and more of its menu toward

healthy items to appeal to customers who are concerned about nutrition.

In 2009, Starbucks introduced VIA, an instant coffee variety that executives hoped would appeal to their

customers when they do not have easy access to a Starbucks store or a coffeepot. The soft drink industry is

a frequent location of product development efforts. Coca-Cola and Pepsi regularly introduce new

varieties—such as Coke Zero and Pepsi Cherry Vanilla—in an attempt to take market share from each

other and from their smaller rivals.

Product development is a popular strategy in the soft-drink industry, but not all developments pay

off. Coca-Cola Black (a blending of cola and coffee flavors) was launched in 2006 but discontinued

in 2008.

Image courtesy of Barry,

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Seattle-based Jones Soda Co. takes a novel approach to product development. Each winter, the firm

introduces a holiday-themed set of unusual flavors. Jones Soda’s 2006 set focus on the flavors of

Thanksgiving. It contained Green Pea, Sweet Potato, Dinner Roll, Turkey and Gravy, and Antacid sodas.

The flavors of Christmas were the focus of 2007’s set, which included Sugar Plum, Christmas Tree, Egg

Nog, and Christmas Ham. In early 2011, Jones Soda let it customers choose the winter 2011 flavors via a

poll on its website. The winners were Candy Cane, Gingerbread, Pear Tree, and Egg Nog. None of these

holiday flavors are expected to be big hits, of course. The hope is that the buzz that surrounds the unusual

flavors each year will grab customers’ attention and get them to try—and become hooked on—Jones

Soda’s more traditional flavors.

Horizontal Integration: Mergers and Acquisitions

Rather than rely on their own efforts, some firms try to expand their presence in an industry by acquiring

or merging with one of their rivals. This strategic move is known as horizontal integration.

An acquisition takes place when one company purchases another company. Generally, the acquired company is

smaller than the firm that purchases it. A merger joins two companies into one. Mergers typically involve similarly

sized companies. Disney was much bigger than Miramax and Pixar when it joined with these

firms in 1993 and 2006, respectively, thus these two horizontal integration moves are considered to be acquisitions.

Horizontal integration can be attractive for several reasons. In many cases, horizontal integration is aimed

at lowering costs by achieving greater economies of scale. This was the reasoning behind several mergers

of large oil companies, including BP and Amoco in 1998, Exxon and Mobil in 1999, and Chevron and

Texaco in 2001. Oil exploration and refining is expensive. Executives in charge of each of these six

corporations believed that greater efficiency could be achieved by combining forces with a former rival.

Considering horizontal integration alongside Porter’s five forces model highlights that such moves also

reduce the intensity of rivalry in an industry and thereby make the industry more profitable.

Some purchased firms are attractive because they own strategic resources such as valuable brand names.

Acquiring Tasty Baking was appealing to Flowers Foods, for example, because the name Tastykake is well

known for quality in heavily populated areas of the northeastern United States. Some purchased firms

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have market share that is attractive. Part of the motivation behind Southwest Airlines’ purchase of

AirTran was that AirTran had a significant share of the airline business in cities—especially Atlanta, home

of the world’s busiest airport—that Southwest had not yet entered. Rather than build a presence from

nothing in Atlanta, Southwest executives believed that buying a position was prudent.

Horizontal integration can also provide access to new distribution channels. Some observers were puzzled

when Zuffa, the parent company of the Ultimate Fighting Championship (UFC), purchased rival mixed

martial arts (MMA) promotion Strikeforce. UFC had such a dominant position within MMA that

Strikeforce seemed to add very little for Zuffa. Unlike UFC, Strikeforce had gained exposure on network

television through broadcasts on CBS and its partner Showtime. Thus acquiring Strikeforce might help

Zuffa gain mainstream exposure of its product. [2]

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The combination of UFC and Strikeforce into one company may accelerate the growing popularity

of mixed martial arts.

Image courtesy of hydropeek,

Despite the potential benefits of mergers and acquisitions, their financial results often are very

disappointing. One study found that more than 60 percent of mergers and acquisitions erode shareholder

wealth while fewer than one in six increases shareholder wealth. [3] Some of these moves struggle because

the cultures of the two companies cannot be meshed. This chapter’s opening vignette suggests that Disney

and Pixar may be experiencing this problem. Other acquisitions fail because the buyer pays more for a

target company than that company is worth and the buyer never earns back the premium it paid.

In the end, between 30 percent and 45 percent of mergers and acquisitions are undone, often at huge

losses. [4] For example, Mattel purchased The Learning Company in 1999 for $3.6 billion and sold it a year

later for $430 million—12 percent of the original purchase price. Similarly, Daimler-Benz bought Chrysler

in 1998 for $37 billion. When the acquisition was undone in 2007, Daimler recouped only $1.5 billion

worth of value—a mere 4 percent of what it paid. Thus executives need to be cautious when considering

using horizontal integration.

K E Y T A K E A W A Y S

A concentration strategy involves trying to compete successfully within a single industry.

Market penetration, market development, and product development are three methods to grow within

an industry. Mergers and acquisitions are popular moves for executing a concentration strategy, but

executives need to be cautious about horizontal integration because the results are often poor.

E X E R C I S E S

1. Suppose the president of your college or university decided to merge with or acquire another school.

What schools would be good candidates for this horizontal integration move? Would the move be a

success?

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2. Given that so many mergers and acquisitions fail, why do you think that executives keep making

horizontal integration moves?

3. Can you identify a struggling company that could benefit from market penetration, market development,

or product development? What might you advise this company’s executives to do differently?

[1] Ansoff, H. I. 1957. Strategies for diversification. Harvard Business Review, 35(5), 113–124.

[2] Wagenheim, J. 2011, March 12. UFC buys out Strikeforce in another step toward global domination. SI.com.

Retrieved from http://sportsillustrated.cnn.com/2011/writers/jeff_wagenheim/03/12/strikeforce-

purchased/index.html

[3] Henry, D. 2002, October 14. Mergers: Why most big deals don’t pay off. Business Week, 60–70.

[4] Hitt, M. A., Harrison, J. S., & Ireland, R. D. 2001. Mergers and acquisitions: A guide to creating value for

stakeholders. New York, NY: Oxford University Press.

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8.2 Vertical Integration Strategies

L E A R N I N G O B J E C T I V E S

1. Understand what backward vertical integration is.

2. Understand what forward vertical integration is.

3. Be able to provide examples of backward and forward vertical integration.

When pursuing a vertical integration strategy, a firm gets involved in new portions of the value chain

(Figure 8.3 “Vertical Integration at American Apparel”). This approach can be very attractive when a

firm’s suppliers or buyers have too much power over the firm and are becoming increasingly

profitable at the firm’s expense. By entering the domain of a supplier or a buyer, executives can

reduce or eliminate the leverage that the supplier or buyer has over the firm. Considering vertical

integration alongside Porter’s five forces model highlights that such moves can create greater profit

potential. Firms can pursue vertical integration on their own, such as when Apple opened stores

bearing its brand, or through a merger or acquisition, such as when eBay purchased PayPal.

In the late 1800s, Carnegie Steel Company was a pioneer in the use of vertical integration. The firm

controlled the iron mines that provided the key ingredient in steel, the coal mines that provided the

fuel for steelmaking, the railroads that transported raw material to steel mills, and the steel mills

themselves. Having control over all elements of the production process ensured the stability and

quality of key inputs. By using vertical integration, Carnegie Steel achieved levels of efficiency never

before seen in the steel industry.

Figure 8.3 Vertical Integration at American Apparel

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Images courtesy of alossix, http://www.flickr.com/photos/alossix/2588175535/ (top

middle),http://www.flickr.com/photos/alossix/2588242383/ (top

left),http://www.flickr.com/photos/alossix/2589149772/ (bottom left); Dov

Charney, http://www.flickr.com/photos/dovcharney/2885342063/ (top right); Nicolas

Nova, http://www.flickr.com/photos/nnova/3399896671/(background);

vmiramontes,http://www.flickr.com/photos/vmiramontes/4376957889/ (bottom right).

Today, oil companies are among the most vertically integrated firms. Firms such as ExxonMobil and

ConocoPhillips can be involved in all stages of the value chain, including crude oil exploration,

drilling for oil, shipping oil to refineries, refining crude oil into products such as gasoline,

distributing fuel to gas stations, and operating gas stations.

The risk of not being vertically integrated is illustrated by the 2010 Deepwater Horizon oil spill in the

Gulf of Mexico. Although the US government held BP responsible for the disaster, BP cast at least

some of the blame on drilling rig owner Transocean and two other suppliers: Halliburton Energy

Services (which created the cement casing for the rig on the ocean floor) and Cameron International

Corporation (which had sold Transocean blowout prevention equipment that failed to prevent the

disaster). In April 2011, BP sued these three firms for what it viewed as their roles in the oil spill.

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The 2010 explosion of the Deepwater Horizon oil rig cost eleven lives and released nearly five

million barrels of crude oil into the Gulf of Mexico.

Image courtesy of US Coast Guard,

http://en.wikipedia.org/wiki/File:Deepwater_Horizon_offshore_drilling_unit_on_fire_2010 .

Vertical integration also creates risks. Venturing into new portions of the value chain can take a firm

into very different businesses. A lumberyard that started building houses, for example, would find

that the skills it developed in the lumber business have very limited value to home construction. Such

a firm would be better off selling lumber to contractors.

Vertical integration can also create complacency. Consider, for example, a situation in which an

aluminum company is purchased by a can company. People within the aluminum company may

believe that they do not need to worry about doing a good job because the can company is

guaranteed to use their products. Some companies try to avoid this problem by forcing their

subsidiary to compete with outside suppliers, but this undermines the reason for purchasing the

subsidiary in the first place.

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Backward Vertical Integration

A backward vertical integration strategy involves a firm moving back along the value chain and entering a

supplier’s business. Some firms use this strategy when executives are concerned that a supplier has too

much power over their firms. In the early days of the automobile business, Ford Motor Company created

subsidiaries that provided key inputs to vehicles such as rubber, glass, and metal. This approach ensured

that Ford would not be hurt by suppliers holding out for higher prices or providing materials of inferior

quality.

To ensure high quality, Ford relied heavily on backward vertical integration in the early days of

the automobile industry.

Image courtesy of Ford Corporation, http://en.wikipedia.org/wiki/File:Ford_1939 .

Although backward vertical integration is usually discussed within the context of manufacturing

businesses, such as steelmaking and the auto industry, this strategy is also available to firms such as

Disney that compete within the entertainment sector. ESPN is a key element of Disney’s operations within

the television business. Rather than depend on outside production companies to provide talk shows and

movies centered on sports, ESPN created its own production company. ESPN Films is a subsidiary of

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ESPN that was created in 2001. ESPN Films has created many of ESPN’s best-known programs, including

Around the Horn and Pardon the Interruption. By owning its own production company, ESPN can ensure

that it has a steady flow of programs that meet its needs.

Forward Vertical Integration

A forward vertical integration strategy involves a firm moving further down the value chain to enter a

buyer’s business. Disney has pursued forward vertical integration by operating more than three hundred

retail stores that sell merchandise based on Disney’s characters and movies. This allows Disney to capture

profits that would otherwise be enjoyed by another store. Each time a Hannah Montana book bag is sold

through a Disney store, the firm makes a little more profit than it would if the same book bag were sold by

a retailer such as Target.

Forward vertical integration also can be useful for neutralizing the effect of powerful buyers. Rental car

agencies are able to insist on low prices for the vehicles they buy from automakers because they purchase

thousands of cars. If one automaker stubbornly tries to charge high prices, a rental car agency can simply

buy cars from a more accommodating automaker. It is perhaps not surprising that Ford purchased Hertz

Corporation, the world’s biggest rental car agency, in 1994. This ensured that Hertz would not drive too

hard of a bargain when buying Ford vehicles. By 2005, selling vehicles to rental car companies had

become less important to Ford and Ford was struggling financially. The firm then reversed its forward

vertical integration strategy by selling Hertz.

eBay’s purchase of PayPal and Apple’s creation of Apple Stores are two recent examples of forward

vertical integration. Despite its enormous success, one concern for eBay is that many individuals avoid

eBay because they are nervous about buying and selling goods online with strangers. PayPal addressed

this problem by serving, in exchange for a fee, as an intermediary between online buyers and sellers.

eBay’s acquisition of PayPal signaled to potential customers that their online transactions were completely

safe—eBay was now not only the place where business took place but eBay also protected buyers and

sellers from being ripped off.

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Apple’s ownership of its own branded stores set the firm apart from computer makers such as Hewlett-

Packard, Acer, and Gateway that only distribute their products through retailers like Best Buy and Office

Depot. Employees at Best Buy and Office Depot are likely to know just a little bit about each of the various

brands their store carries.

In contrast, Apple’s stores are popular in part because store employees are experts about Apple products.

They can therefore provide customers with accurate and insightful advice about purchases and repairs.

This is an important advantage that has been created through forward vertical integration.

K E Y T A K E A W A Y

Vertical integration occurs when a firm gets involved in new portions of the value chain. By entering the

domain of a supplier (backward vertical integration) or a buyer (forward vertical integration), executives

can reduce or eliminate the leverage that the supplier or buyer has over the firm.

E X E R C I S E S

1. Identify a well-known company that does not use backward or forward vertical integration. Why do you

believe that the firm’s executives have avoided these strategies?

2. Some universities have used vertical integration by creating their own publishing companies. The Harvard

Business Press is perhaps the best-known example. Are there other ways that a university might vertical

integrate? If so, what benefits might this create?

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8.3 Diversification Strategies

L E A R N I N G O B J E C T I V E S

1. Explain the concept of diversification.

2. Be able to apply the three tests for diversification.

3. Distinguish related and unrelated diversification.

Firms using diversification strategies enter entirely new industries. While vertical integration involves

a firm moving into a new part of a value chain that it is already is within, diversification requires

moving into new value chains. Many firms accomplish this through a merger or an acquisition, while

others expand into new industries without the involvement of another firm.

Three Tests for Diversification

A proposed diversification move should pass three tests or it should be rejected. [1]

1. How attractive is the industry that a firm is considering entering? Unless the industry has strong

profit potential, entering it may be very risky.

2. How much will it cost to enter the industry? Executives need to be sure that their firm can recoup the

expenses that it absorbs in order to diversify. When Philip Morris bought 7Up in the late 1970s, it paid

four times what 7Up was actually worth. Making up these costs proved to be impossible and 7Up was

sold in 1986.

3. Will the new unit and the firm be better off? Unless one side or the other gains a competitive

advantage, diversification should be avoided. In the case of Philip Morris and 7Up, for example,

neither side benefited significantly from joining together.

Related Diversification

Related diversification occurs when a firm moves into a new industry that has important similarities with

the firm’s existing industry or industries (Figure 8.4 “The Sweet Fragrance of Success: The Brands That

“Make Up” the Lauder Empire”). Because films and television are both aspects of entertainment, Disney’s

purchase of ABC is an example of related diversification. Some firms that engage in related diversification

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aim to develop and exploit acore competency to become more successful. A core competency is a skill set

that is difficult for competitors to imitate, can be leveraged in different businesses, and contributes to the

benefits enjoyed by customers within each business. [2] For example, Newell Rubbermaid is skilled at

identifying underperforming brands and integrating them into their three business groups: (1) home and

family, (2) office products, and (3) tools, hardware, and commercial products.

Figure 8.4 The Sweet Fragrance of Success: The Brands That “Make Up” the Lauder Empire

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Images courtesy of Betsy Weber, http://www.flickr.com/photos/betsyweber/5915582379/ (fourth

row left); ookikioo, http://www.flickr.com/photos/ookikioo/856924791/ (third row middle);

Shotcuts Software,http://www.flickr.com/photos/57283318@N07/5303842500/ (second row

right); Joanne Saige Lee,

http://www.flickr.com/photos/crystalliferous/3025018504/sizes/m/in/photostream/ (third row

left); Jessica Sheridan,http://www.flickr.com/photos/16353290@N00/4043846042/ (first row

middle); daveynin, http://www.flickr.com/photos/daveynin/2726423708/(second row left);

Handmade Image, http://www.flickr.com/photos/33707373@N03/4643563760/ (fourth row

right); Church Street Marketplace,

http://www.flickr.com/photos/churchstreetmarketplace/4180164459/(third row right); ookikioo,

http://www.flickr.com/photos/ookikioo/314692747/sizes/m/in/photostream/ (first row left);

Liane Chan, http://www.flickr.com/photos/porcupiny/1926961411/sizes/o/in/photostream/ (first

row right).

Honda Motor Company provides a good example of leveraging a core competency through related

diversification. Although Honda is best known for its cars and trucks, the company actually started out in

the motorcycle business. Through competing in this business, Honda developed a unique ability to build

small and reliable engines. When executives decided to diversify into the automobile industry, Honda was

successful in part because it leveraged this ability within its new business. Honda also applied its engine-

building skills in the all-terrain vehicle, lawn mower, and boat motor industries.

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Honda’s related diversification strategy has taken the firm into several businesses, including boat

motors.

Image courtesy of

Wikimedia,http://upload.wikimedia.org/wikipedia/en/5/53/Hondaoutboard .

Sometimes the benefits of related diversification that executives hope to enjoy are never achieved. Both

soft drinks and cigarettes are products that consumers do not need. Companies must convince consumers

to buy these products through marketing activities such as branding and advertising. Thus, on the surface,

the acquisition of 7Up by Philip Morris seemed to offer the potential for Philip Morris to take its existing

marketing skills and apply them within a new industry. Unfortunately, the possible benefits to 7Up never

materialized.

Unrelated Diversification

Why would a soft-drink company buy a movie studio? It’s hard to imagine the logic behind such a move,

but Coca-Cola did just this when it purchased Columbia Pictures in 1982 for $750 million. This is a good

example ofunrelated diversification, which occurs when a firm enters an industry that lacks any important

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similarities with the firm’s existing industry or industries (Figure 8.5 “Unrelated Diversification at

Berkshire Hathaway”). Luckily for Coca-Cola, its investment paid off—Columbia was sold to Sony for $3.4

billion just seven years later.

Most unrelated diversification efforts, however, do not have happy endings. Harley-Davidson, for

example, once tried to sell Harley-branded bottled water. Starbucks tried to diversify into offering

Starbucks-branded furniture. Both efforts were disasters. Although Harley-Davidson and Starbucks both

enjoy iconic brands, these strategic resources simply did not transfer effectively to the bottled water and

furniture businesses.

Lighter firm Zippo is currently trying to avoid this scenario. According to CEO Geoffrey Booth, the Zippo

is viewed by consumers as a “rugged, durable, made in America, iconic” brand. [3] This brand has fueled

eighty years of success for the firm. But the future of the lighter business is bleak. Zippo executives expect

to sell about 12 million lighters this year, which is a 50 percent decline from Zippo’s sales levels in the

1990s. This downward trend is likely to continue as smoking becomes less and less attractive in many

countries. To save their company, Zippo executives want to diversify.

The durability of Zippo’s products is illustrated by this lighter, which still works despite being made in 1968.

Image courtesy of David J. Fred, http://upload.wikimedia.org/wikipedia/commons/9/97/Zippo-Slim-1968-Lit .

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In particular, Zippo wants to follow a path blazed by Eddie Bauer and Victorinox Swiss Army Brands Inc.

The rugged outdoors image of Eddie Bauer’s clothing brand has been used effectively to sell sport utility

vehicles made by Ford. The high-quality image of Swiss Army knives has been used to sell Swiss Army–

branded luggage and watches. As of March 2011, Zippo was examining a wide variety of markets where

their brand could be leveraged, including watches, clothing, wallets, pens, liquor flasks, outdoor hand

warmers, playing cards, gas grills, and cologne. Trying to figure out which of these diversification options

would be winners, such as the Eddie Bauer-edition Ford Explorer, and which would be losers, such as

Harley-branded bottled water, was a key challenge facing Zippo executives.

Strategy at the Movies

In Good Company

What do Techline cell phones, Sports America magazine, and Crispity Crunch cereals have in common?

Not much, but that did not stop Globodyne from buying each of these companies in its quest for synergy

in the 2004 movie In Good Company. Executive Carter Duryea was excited when his employer Globodyne

purchased Waterman Publishing, the owner of Sports America magazine. The acquisition landed him a

big promotion and increased his salary to “Porsche-leasing” size.

Synergy is created when two or more businesses produce benefits together that could not be produced

separately. While Duryea was confident that a cross-promotional strategy between his advertising division

and the other units within the Globodyne universe was a slam-dunk, Waterman employee Dan Foreman

saw little congruence between advertisements in Sports America on the one hand and cell phones and

breakfast cereals on the other. Despite his considerable efforts, Duryea was unable to increase ad pages

in Sports America because the unrelated nature of Globodyne’s other business units inhibited his strategy

of creating synergy. Seeing little value in owning a failing publishing company, Globodyne promptly sold

the division to another conglomerate. After the sale, the executives that had been rewarded for the initial

purchase of Waterman Publishing, including Duryea, were fired.

Globodyne’s inability to successfully manage Waterman Publishing illustrates the difficulties associated

with unrelated diversification. While buying companies outside a parent company’s core competencies

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can increase the size of the company and in turn its executives’ bank accounts, managing firms unfamiliar

to management is generally a risky and losing proposition. Decades of research on strategic management

suggest that when firms diversify, it is best to “stick to the knitting.” That is, stay with businesses

executives are familiar with and avoid moving into ventures where little expertise exists.

In Good Company starred Topher Grace as ill-fated junior executive Carter Duryea.

Image courtesy of David Shankbone,http://en.wikipedia.org/wiki/File:Topher_Grace_by_David_Shankbone .

K E Y T A K E A W A Y

Diversification strategies involve firmly stepping beyond its existing industries and entering a new value

chain. Generally, related diversification (entering a new industry that has important similarities with a

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firm’s existing industries) is wiser than unrelated diversification (entering a new industry that lacks such

similarities).

E X E R C I S E S

1. Studies have shown that executives’ pay increases when their firms gets larger. What role, if any, do you

think executive pay plays in diversification decisions?

2. Identify a firm that has recently engaged in diversification. Search the firm’s website to identify

executives’ rationale for diversifying. Do you find the reasoning to be convincing? Why or why not?

[1] Porter, M. E. 1987. From competitive advantage to corporate strategy. Harvard Business Review, 65(3), 102–

121.

[2] Prahalad, C. K., & Hamel, G. 1990. The core competencies of the corporation. Harvard Business Review, 86(1),

79–91.

[3] http://th2010.townhall.com/news/us/2011/03/20/zippos_burning_ambition_lies_in_ retail_expansion.

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8.4 Strategies for Getting Smaller

L E A R N I N G O B J E C T I V E S

1. Understand why a firm would want to shrink or exit from a business.

2. Be able to distinguish retrenchment and restructuring.

“In what industry or industries should our firm compete?” is the central question addressed by

corporate-level strategy. In some cases, the answer that executives arrive at involves exiting one or

more industries.

Retrenchment

In the early twentieth century, many military battles were fought in series of parallel trenches. If an

attacking army advanced enough to force a defending army to abandon a trench, the defenders would

move back to the next trench and try to refortify their position. This small retreat was preferable to losing

the battle entirely. Trench warfare inspired the business term retrenchment. Firms following a

retrenchment strategy shrink one or more of their business units. Much like an army under attack, firms

using this strategy hope to make just a small retreat rather than losing a battle for survival.

Retrenchment is often accomplished through laying off employees. In July 2011, for example, South

African grocery store chain Pick n Pay announced plans to release more than 3,000 of its estimated

36,000 workers. Just over a month earlier, South African officials had approved Walmart’s acquisition of

a leading local retailer called Massmart. Rivalry in the South African grocery business seemed likely to

become fiercer, and Pick n Pay executives needed to cut costs for their firm to remain competitive.

A Pick n Pay executive explained the layoffs by noting that “the decision was not taken lightly but was

required to ensure the viability of the retail business and its employees into the future.” [1] This is a

common rationale for retrenchment—by shrinking the size of a firm, executives hope that the firm can

survive as a profitable enterprise. Without becoming smaller and more cost effective, Pick n Pay and other

firms that use retrenchment can risk total failure.

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The term retrenchment has its origins in trench warfare, which is shown in this World War I photo

taken in France.

Image courtesy of Lt. J. W. Brooke,

http://en.wikipedia.org/wiki/File:Cheshire_Regiment_trench_Somme_1916 .

Restructuring

Executives sometimes decide that bolder moves than retrenchment are needed for their firms to be

successful in the future. Divestment refers to selling off part of a firm’s operations. In some cases,

divestment reverses a forward vertical integration strategy, such as when Ford sold Hertz. Divestment can

also be used to reverse backward vertical integration. General Motors (GM), for example, turned a parts

supplier called Delphi Automotive Systems Corporation from a GM subsidiary into an independent firm.

This was done via a spin-off, which involves creating a new company whose stock is owned by investors.

GM stockholders received 0.69893 shares of Delphi for every share of stock they owned in GM. A stockholder

who owned 100 shares of GM received 69 shares of the new company plus a small cash payment in lieu of

a fractional share.

Saylor URL: http://www.saylor.org/books Saylor.org
267

Divestment also serves as a means to undo diversification strategies. Divestment can be especially

appealing to executives in charge of firms that have engaged in unrelated diversification. Investors often

struggle to understand the complexity of diversified firms, and this can result in relatively poor

performance by the stocks of such firms. This is known as a diversification discount. Executives

sometimes attempt to unlock hidden shareholder value by breaking up diversified companies.

Fortune Brands provides a good example. Surprisingly, this company does not own Fortune magazine,

but it has been involved in a diverse set of industries. As of 2010, the firm consisted of three businesses:

spirits (including Jim Beam and Maker’s Mark), household goods (including Masterlock and Moen

Faucets), and golf equipment (including Titleist clubs and balls as well as FootJoy shoes). In December

2010, Fortune Brand’s CEO announced a plan to separate the three businesses to “maximize long-term

value for our shareholders and to create exciting opportunities within our businesses.” [2] Fortune Brands

took the first step toward overcoming the diversification discount in May 2011 when it reached an

agreement to sell its gold business to Fila. In June 2011, plans to spin off the home products business were

announced.

Fortune Brands hopes to unlock hidden shareholder value by divesting unrelated brands such as

Masterlock.

Image courtesy of Thegreenj,

http://upload.wikimedia.org/wikipedia/commons/a/a1/Masterpadlock .

Executives are sometimes forced to admit that the operations that they want to abandon have no value. If

selling off part of a business is not possible, the best option may be liquidation. This involves simply

Saylor URL: http://www.saylor.org/books Saylor.org
268

shutting down portions of a firm’s operations, often at a tremendous financial loss. GM has done this by

scrapping its Geo, Saturn, Oldsmobile, and Pontiac brands. Ford recently followed this approach by

shutting down its Mercury brand. Such moves are painful because massive investments are written off,

but becoming “leaner and meaner” may save a company from total ruin.

K E Y T A K E A W A Y

Executives sometimes need to reduce the size of their firms to maximize the chances of success. This can

involve fairly modest steps such as retrenchment or more profound restructuring strategies.

E X E R C I S E S

1. Should Disney consider using retrenchment or restructuring? Why or why not?

2. Given how much information is readily available about companies, why do you think investors still

struggle to analyze diversified companies?

[1] Chilwane, L. 2011, July 7. Pick n Pay to retrench. The New Age. Retrieved

fromhttp://www.thenewage.co.za/22462-1025-53-Pick_n_Pay_to_retrench

[2] Sauerhaft, R. 2011, May 20. Fortune Brands to sell Titleist and FootJoy to Fila Korea. Golf.com. Retrieved

fromhttp://www.golf.com/golf/tours_news/article/0,28136,2073173,00.html#ixzz1MvXStp2b

Saylor URL: http://www.saylor.org/books Saylor.org
269

8.5 Portfolio Planning and Corporate-Level Strategy

L E A R N I N G O B J E C T I V E S

1. Understand why a firm would want to use portfolio planning.

2. Be able to explain the limitations of portfolio planning.

Executives in charge of firms involved in many different businesses must figure out how to manage

such portfolios. General Electric (GE), for example, competes in a very wide variety of industries,

including financial services, insurance, television, theme parks, electricity generation, lightbulbs,

robotics, medical equipment, railroad locomotives, and aircraft jet engines. When leading a company

such as GE, executives must decide which units to grow, which ones to shrink, and which ones to

abandon.

Portfolio planning can be a useful tool. Portfolio planning is a process that helps executives assess

their firms’ prospects for success within each of its industries, offers suggestions about what to do

within each industry, and provides ideas for how to allocate resources across industries. Portfolio

planning first gained widespread attention in the 1970s, and it remains a popular tool among

executives today.

The Boston Consulting Group (BCG) Matrix

The Boston Consulting Group (BCG) matrix is the best-known approach to portfolio planning.

Using the matrix requires a firm’s businesses to be categorized as high or low along two dimensions:

its share of the market and the growth rate of its industry. High market share units within slow-growing

industries are called cash cows. Because their industries have bleak prospects, profits from cash cows

should not be invested back into cash cows but rather diverted to more promising businesses.

Low market share units within slow-growing industries are called dogs. These units are good candidates

for divestment. High market share units within fast-growing industries are calledstars. These units

have bright prospects and thus are good candidates for growth. Finally, low-market-share units within

fast-growing industries are called question marks. Executives must decide whether to build these

units into stars or to divest them.

Saylor URL: http://www.saylor.org/books Saylor.org
270

Owning a puppy is fun, but companies may want to avoid owning units that are considered to be dogs.

Photo courtesy of D. Ketchen.

The BCG matrix is just one portfolio planning technique. With the help of a leading consulting firm, GE

developed the attractiveness-strength matrix to examine its diverse activities. This planning approach

involves rating each of a firm’s businesses in terms of the attractiveness of the industry and the firm’s

strength within the industry. Each dimension is divided into three categories, resulting in nine boxes.

Each of these boxes has a set of recommendations associated with it.

Limitations to Portfolio Planning

Although portfolio planning is a useful tool, this tool has important limitations. First, portfolio planning

oversimplifies the reality of competition by focusing on just two dimensions when analyzing a company’s

operations within an industry. Many dimensions are important to consider when making strategic

decisions, not just two. Second, portfolio planning can create motivational problems among employees.

For example, if workers know that their firm’s executives believe in the BCG matrix and that their

subsidiary is classified as a dog, then they may give up any hope for the future. Similarly, workers within

cash cow units could become dismayed once they realize that the profits that they help create will be

diverted to boost other areas of the firm. Third, portfolio planning does not help identify new

opportunities. Because this tool only deals with existing businesses, it cannot reveal what new industries a

firm should consider entering.

Saylor URL: http://www.saylor.org/books Saylor.org
271

K E Y T A K E A W A Y

Portfolio planning is a useful tool for analyzing a firm’s operations, but this tool has limitations. The BCG

matrix is one of the most widely used approaches to portfolio planning.

E X E R C I S E S

1. Is market share a good dimension to use when analyzing the prospects of a business? Why or why not?

2. What might executives do to keep employees within dog units motivated and focused on their jobs?

Saylor URL: http://www.saylor.org/books Saylor.org
272

8.6 Conclusion

This chapter explains corporate-level strategy. Executives grappling with corporate-level strategy

must decide in what industry or industries their firms will compete. Many of the possible answers to

this question involve growth. Concentration strategies involve competing within existing domains to

expand within those domains. This can take the form of market penetration, market development, or

product development. Integration involves expanding into new stages of the value chain. Backward

integration occurs when a firm enters a supplier’s business while forward vertical integration occurs

when a firm enters a customer’s business. Diversification involves entering entirely new industries;

this can be an industry that is related or unrelated to a firm’s existing activities. Sometimes being

smart about corporate-level strategy requires shrinking the firm through retrenchment or

restructuring. Finally, portfolio planning can be useful for analyzing firms that participate in a wide

variety of industries.

E X E R C I S E S

1. Divide your class into four or eight groups, depending on the size of the class. Each group should create a

new portfolio planning technique by selecting two dimensions along which companies can be analyzed.

Allow each group three to five minutes to present its approach to the class. Discuss which portfolio

planning technique seems to offer the best insights.

2. This chapter discussed Disney. Imagine that you were hired as a consultant by General Electric (GE), a firm

that competes with Disney in the movie, television, and theme park industries. What actions would you

recommend that GE take in these three industries to gain advantages over Disney?

2/5/2018 Strategy, marketing, and technology are all intertwined – Chief Marketing Technologis

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JANUARY 20, 2014BY SCOTT BRINKER

Strategy, marketing, and technology are all intertwined

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Home Archives About Published Speaking chiefmartecTV Sponsorship

Joe Pulizzi and Robert Rose covered my latest marketing technology landscape as part of their
PNR: This Old Marketing podcast this week. They start on this segment around the 24:49 mark,
with a ri� on the Saturday Night Live The Rent Is Too Damn High skit. “Digital marketing is t

o

o

damn complicated!”

It’s a terri�c discussion about the interplay between marketing, technology, IT, strategy, and
process. These were some of the points raised in their chat:

“Technology is de�nitely outpacing our ability to consume it as marketers.”
Buying technology is not a good way to �gure out your strategy.
Most marketers aren’t using the technology they already have very well.
These problems happen when marketers are in charge of technology purchases.
Marketing and IT need to be better aligned and more collaborative.
You should determine your strategy and process �rst, and then �nd the right software to
execute that — �t the tool to the problem, not the problem to the tool.
The only thing technology can do is make your processes more e�cient.

I agree enthusiastically with about 75% of that. But there are three points I’d make:

1. Marketing technology is not just about e�ciency — it’s about experiences.
2. The relationship between strategy and technology is circular, not linear.
3. Marketers cannot abdicate their responsibility to understand technology.

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Marketing technology landscape (2016)

What will happen with marketing
technology in 2015?

What if 1,000+ marketing technology
vendors were the new normal?

Strategy, marketing, and technology are all
intertwined

Strategy, marketing, and technology are all intertwined. To reference the How to Draw an Owl
post from Seth Godin that Joe and Robert mention later in their podcast, the reality is more
complex than just drawing two circles.

Marketing technology is about both e�ciency and experiences

Here’s the one quote from the podcast that I really disagree with (emphasis partly mine):

“Figure out your process �rst. And then get aligned with your internal IT guys to �gure out
what it is you exactly need to facilitate. Because that’s the only thing that technology will
ever, ever do. The only thing technology will ever do is facilitate a process that you have
more e�ciently. That’s all it’s ever going to do.”

Um, no. That trivializes the role of technology in modern marketing too much.

Marketing technology is not just about making existing processes more e�cient. It’s the
interface by which marketing sees and touches the digital world. Your choice of marketing
software — and how you use it — will shape the experiences you deliver to prospects and
customers.

Examples include: web and mobile marketing apps, webinar and virtual event software,
personalization, gami�cation, interactive ads, and so on. In content marketing, Uber�ip is a
great example of marketing software that is more about experience than e�ciency.

Other marketing technology is focused on e�ciency, but not always by facilitating existing
processes. In many cases, it’s about creating entirely new kinds of processes that weren’t even
possible before.

For instance, using marketing automation to simply schedule batch-and-blast email is an
example of making an existing process slightly more e�cient. But the bigger opportunity is to
create more personalized, behavior-driven nurturing processes that weren’t conceivable with
manually operated email marketing. By the way, this doesn’t just make lead nurturing more
e�cient — it can make it a much better nurturing experience for your audience too.

I do agree with Joe and Robert that technology is not a magic bullet. It won’t absolve you of the
need to produce brilliant content. But the interplay between technology and strategy is more
complex than one merely being the handmaiden of the other.

The relationship between strategy and technology is circular

Joe and Robert make the excellent point that you shouldn’t buy a bunch of technology and
then try to �gure out what strategy you can create with it — Option B) in the sketch below. I
wholeheartedly agree. No technology is a strategy-in-a-box.

However, simply inverting that approach into Option A) — de�ne your strategy, and then go
looking for technology to help implement it — isn’t quite right either.

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Why? Because technological innovations change what kinds of strategies are possible. If you
don’t let technology in�uence and inspire your strategy, you’re missing the opportunity to
innovate your own business.

The right approach is Option C), more of a circular relationship. You want to understand what
is technically possible — a frontier that is constantly advancing — to inform your strategy
development. Your strategy then guides where you make greater technology investments. And
what you learn from using that technology, especially as it evolves, should feedback into the
re�nement of your strategy. Managed well, this can be a virtuous cycle.

Keep in mind this Steve Jobs quote: “People don’t know what they want until you show it to
them.” And Henry Ford, who said, “If I had asked people what they wanted, they would have
said faster horses.” Innovation is often achieved through non-linear leaps.

Continuously experimenting with new, emerging technologies does not have to be the negative
“shiny object syndrome.” If it’s done in moderation, as part of an intentional exploration of how
your business can harness new innovations, it can be an evergreen source of competitive
advantage.

Marketers must take responsibility for their technology

Joe and Robert attribute a quote to Scott Stratten of UnMarketing fame, “We suck at the
technology we have, much less buying anything new.” (Although with a little bit of Googling, I
haven’t been able to �nd that quote.)

I don’t disagree with the diagnosis. After all, this explosion of technology is a fairly new aspect
of marketing, so it’s not surprising that we collectively have little professional intuition about
how to harness and manage it. However, the answer is not to downplay technology.

The

answer is to get better at using it well.

The reason why the CMO will spend more on technology than the CIO is because it’s through
software-mediated channels that we’re engaging our audience. Marketing is increasingly about
designing and delivering customer experiences, and software is the digital clay we use to sculpt
them. The CMO is responsible for that outcome, so it makes sense that the CMO should take a
leadership role in the technology strategy to achieve it.

Of course, marketing and IT should work together. Marketing must adhere to IT governance as
much as it does �nancial governance. Security, regulatory requirements, business continuity,
integration with the rest of a company’s IT systems, etc., are all important facets of good
technology management. Marketing cannot be a rogue state.

But if marketing doesn’t really understand technology — and IT doesn’t really understand
marketing — then their “collaboration” can all too easily look like this: Marketing asks for faster
horses. IT gives them faster horses. The automobile passes both of them by.

Other things being equal, IT will seek to minimize costs and risks in technology purchases.
That’s a valuable perspective — but it’s not the only one that matters. Customer experience
matters. Marketing performance matters. And the software that is the cheapest or easiest to
buy may not be the most e�ective for marketing’s purpose. Standardizing on everything from
GigantorSoft may optimize procurement — but that’s not as important as optimizing customer
acquisition and delight.

Marketing must have a strong enough grasp of technology to advocate for the software to
achieve its goals — and, more importantly, to be able to apply it e�ectively when they get it.
But how do we get there from here, if marketing doesn’t have those capabilities today?

The best path I’ve seen is for marketing and IT to embrace a class of hybrid professionals called
marketing technologists. These are people with expertise in both marketing and technology,
and they �uidly intermingle the two disciplines.

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Marketing Technology Landscape
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81% of big �rms now have a chief
marketing technologist

Comments

ROBERT ROSEROBERT ROSE SAYS:SAYS:
JANUARY 20, 2014 AT 3:57 PMJANUARY 20, 2014 AT 3:57 PM

Scott….Scott….

This is such a wonderful post…. Your subtle (but very important) nuanced change in theThis is such a wonderful post…. Your subtle (but very important) nuanced change in the
intertwining of the two is right on the money in my book… and you’ll get no argumentintertwining of the two is right on the money in my book… and you’ll get no argument
from me there…. I would agree – even if I didn’t elucidate it as well in the podcast…from me there…. I would agree – even if I didn’t elucidate it as well in the podcast…

I guess the only point I’ll take at all is where you disagree with my assessment ofI guess the only point I’ll take at all is where you disagree with my assessment of
technology…technology…

They may come from a predominantly IT background or a marketing one, but they are credible
on both dimensions. They may directly report into IT or marketing — I’ve seen both work, but
the latter is more common — but they serve the mission of smartly applying technology in the
pursuit of brilliantly e�ective marketing.

Whether you love or hate the term “growth hacker,” that’s an apt phrase for some of the best
work that marketing technologists do.

Not everyone in marketing needs to be a marketing technologist. But having that capability
within marketing’s team changes marketing’s relationship with technology. It’s no longer the
way a Neanderthal might look at �re, “Oooh, pretty! Ouch! Ouch! Ouch!” It’s more like how a
blacksmith harnesses �re to forge objects of great strength and beauty.

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If i’m “trivializing” it… you may be romanticizing it a bit… If i’m “trivializing” it… you may be romanticizing it a bit… � � Any company can invest in –Any company can invest in –
and too many over invest – the promise of “experience” creating technology. and too many over invest – the promise of “experience” creating technology. TheThe
challenge is that capability alone does not actually compel a consumer to become a lead,challenge is that capability alone does not actually compel a consumer to become a lead,
to purchase or to evangelize the brand… Only we (as humans) can actually create theto purchase or to evangelize the brand… Only we (as humans) can actually create the
experiences that, facilitated by great technology, can produce the value that consumersexperiences that, facilitated by great technology, can produce the value that consumers
�nd attractive enough to engage with.�nd attractive enough to engage with.

And that’s really my point about marketers stepping up and making sure that they �rstAnd that’s really my point about marketers stepping up and making sure that they �rst
understand what they’re trying to do. A chainsaw in my hands is nothing but a uselessunderstand what they’re trying to do. A chainsaw in my hands is nothing but a useless
and dangerous weapon – whereas in an artist’s hands it becomes a thing that createsand dangerous weapon – whereas in an artist’s hands it becomes a thing that creates
beautiful ice sculpture and in a lumberjack’s hands becomes an e�cient means tobeautiful ice sculpture and in a lumberjack’s hands becomes an e�cient means to
produce lumber… Technology, by its very de�nition, is but the application of tools to solveproduce lumber… Technology, by its very de�nition, is but the application of tools to solve
a problem.a problem.

Of course I agree with you and think that marketers should be aligned with technologistsOf course I agree with you and think that marketers should be aligned with technologists
who can inspire the marketer with the capabilities that new innovations bring…. But toowho can inspire the marketer with the capabilities that new innovations bring…. But too
often that “shiny object syndrome” can blind the marketer into thinking that the giantoften that “shiny object syndrome” can blind the marketer into thinking that the giant
shiny new platform (or capability) is important – when it’s actually not. shiny new platform (or capability) is important – when it’s actually not. So – IMHO –So – IMHO –
strategy �rst (inspired by the capabilities that innovative technology *might bring*) andstrategy �rst (inspired by the capabilities that innovative technology *might bring*) and
then application of the technology to solve the challenge.then application of the technology to solve the challenge.

Keep burning my friend… This was a really good one!!Keep burning my friend… This was a really good one!!

Cheers,Cheers,

~rr~rr

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SCOTT BRINKERSCOTT BRINKER SAYS:SAYS:
JANUARY 20, 2014 AT 5:09 PMJANUARY 20, 2014 AT 5:09 PM

Thanks, Robert — �rst for covering this topic in your podcast with JoeThanks, Robert — �rst for covering this topic in your podcast with Joe
(including the very kind compliment at the start of that segment) and for(including the very kind compliment at the start of that segment) and for
taking the time to chime in on this post. And, while I’m at it, for all the greattaking the time to chime in on this post. And, while I’m at it, for all the great
support you’ve given me and my blog for quite some time. I really appreciatesupport you’ve given me and my blog for quite some time. I really appreciate
it.it.

I had a feeling that we actually did agree on many of these points — I almostI had a feeling that we actually did agree on many of these points — I almost
wrote that at the end of the post, but I didn’t want to presume. However, sincewrote that at the end of the post, but I didn’t want to presume. However, since
some of the remarks in your podcast did re�ect concerns that I know otherssome of the remarks in your podcast did re�ect concerns that I know others
have had with the often awkward collision of marketing and technology, ithave had with the often awkward collision of marketing and technology, it
seemed like a good context for engaging in a little debate.seemed like a good context for engaging in a little debate.

And to emphasize: I completely agree with you that it’s humans who mustAnd to emphasize: I completely agree with you that it’s humans who must
drive the creation of great customer experiences with technology as theirdrive the creation of great customer experiences with technology as their
brushes, paint, and canvas.brushes, paint, and canvas.

Indeed, I have romanticized the marketing technology ideal above. TechnologyIndeed, I have romanticized the marketing technology ideal above. Technology
strategy and management is hard and often messy. And I think we both agreestrategy and management is hard and often messy. And I think we both agree
that it’s better for marketers to take small steps that they can handle wellthat it’s better for marketers to take small steps that they can handle well
rather than letting dreams of technology nirvana get too far ahead of theirrather than letting dreams of technology nirvana get too far ahead of their
abilities. The important thing, I believe, is to keep making forward progress:abilities. The important thing, I believe, is to keep making forward progress:
marketing is unlikely to be less entwined with technology in the years ahead.marketing is unlikely to be less entwined with technology in the years ahead.

Funny enough, I actually �nd the situation somewhat analogous to contentFunny enough, I actually �nd the situation somewhat analogous to content
marketing and the mission of the CMI. Great content marketing is incrediblymarketing and the mission of the CMI. Great content marketing is incredibly
important. But it’s also actually hard to do well — and I’m sure you’ve seenimportant. But it’s also actually hard to do well — and I’m sure you’ve seen
many cases where people’s ambitions for trying to do too much, too quicklymany cases where people’s ambitions for trying to do too much, too quickly
results in a content quagmire. But even though it’s challenging, marketersresults in a content quagmire. But even though it’s challenging, marketers
can’t a�ord to ignore it or take too much of a “hands o�” approach bycan’t a�ord to ignore it or take too much of a “hands o�” approach by
outsourcing it wholesale to someone else. It’s a big part of what modernoutsourcing it wholesale to someone else. It’s a big part of what modern
marketing is all about.marketing is all about.

And so a little romance is probably good to inspire people to embrace theseAnd so a little romance is probably good to inspire people to embrace these
new opportunities. But like any romance, there’s more to it than wine andnew opportunities. But like any romance, there’s more to it than wine and
roses. �roses. �

Thank you again!Thank you again!

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HENK VHENK V SAYS:SAYS:
JANUARY 21, 2014 AT 4:36 PMJANUARY 21, 2014 AT 4:36 PM

Scott,Scott,

As an enterprise architect, I �rst commend you for your insights into technology andAs an enterprise architect, I �rst commend you for your insights into technology and
marketing aspects . I have been working through a number of reference architectures tomarketing aspects . I have been working through a number of reference architectures to
support digital marketing and in most of these endeavours ran into the same “traditionalsupport digital marketing and in most of these endeavours ran into the same “traditional
IT architecture will not work here” wall each time.IT architecture will not work here” wall each time.

This “awkward collision of marketing and technology” as you stated is a serious challengeThis “awkward collision of marketing and technology” as you stated is a serious challenge
for architects, because we are dealing with a new revolution, rich and diversi�edfor architects, because we are dealing with a new revolution, rich and diversi�ed
applications landscape and still very immature consolidated suite of products. This ICTapplications landscape and still very immature consolidated suite of products. This ICT
and marketing “language and cultural divide” makes it extremely di�cult to put theand marketing “language and cultural divide” makes it extremely di�cult to put the
marketing genie in the proverbial architectural box. I have learned that I need need amarketing genie in the proverbial architectural box. I have learned that I need need a
lamp instead of the box so to speak.lamp instead of the box so to speak.

Your articles and references into the marketing revolution/collision as it unfolds has beenYour articles and references into the marketing revolution/collision as it unfolds has been
invaluable for me to build a more acceptable reference architecture that will support thisinvaluable for me to build a more acceptable reference architecture that will support this
digital marketing and technology collision of two galaxies.digital marketing and technology collision of two galaxies.

Thank you for this very beautifully articulated debate and information you bring to theThank you for this very beautifully articulated debate and information you bring to the
table.table.

Cheers,Cheers,
HenkHenk

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SCOTT BRINKERSCOTT BRINKER SAYS:SAYS:
JANUARY 23, 2014 AT 6:55 AMJANUARY 23, 2014 AT 6:55 AM

Hi, Henk — thanks for the comment. I really appreciate you sharing yourHi, Henk — thanks for the comment. I really appreciate you sharing your
thoughts from an enterprise architecture perspective.thoughts from an enterprise architecture perspective.

While this “collision” is unlike anything that marketing has had to deal withWhile this “collision” is unlike anything that marketing has had to deal with
before, it is good to note that it’s certainly not a standard playbook from the ITbefore, it is good to note that it’s certainly not a standard playbook from the IT
side either. There’s a tremendous amount of knowledge and experience inside either. There’s a tremendous amount of knowledge and experience in
technology management that IT professionals bring to bear on this challengetechnology management that IT professionals bring to bear on this challenge
— for instance, what “enterprise architecture” is and why it’s so important. But— for instance, what “enterprise architecture” is and why it’s so important. But
from that foundation, something new must be synthesized.from that foundation, something new must be synthesized.

If ever you’d be comfortable sharing some of the “best practices” that you’reIf ever you’d be comfortable sharing some of the “best practices” that you’re
discovering in your work on this mission — what an acceptable referencediscovering in your work on this mission — what an acceptable reference
architecture looks like from your view — I’d love to do a Q&A with you for thearchitecture looks like from your view — I’d love to do a Q&A with you for the
blog about them. I’m sure many other readers would bene�t from what you’veblog about them. I’m sure many other readers would bene�t from what you’ve
learned.learned.

Godspeed!Godspeed!

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DON NANNEMAN (@DNANNEMAN)DON NANNEMAN (@DNANNEMAN) SAYS:SAYS:
JANUARY 24, 2014 AT 1:27 PMJANUARY 24, 2014 AT 1:27 PM

I’d be very interested in that Enterprise Architecture best practicesI’d be very interested in that Enterprise Architecture best practices
discussion as well. discussion as well. We marketers have a vast array of toolsWe marketers have a vast array of tools
available to us today, as highlighted in Scott’s latest chart. available to us today, as highlighted in Scott’s latest chart. How allHow all
these applications integrate and interoperate together in thethese applications integrate and interoperate together in the
backo�ce, or cloud is a major stumbling block for manybacko�ce, or cloud is a major stumbling block for many
organizations. organizations. Startups are often able to avoid some of theStartups are often able to avoid some of the
challenges that more mature businesses with legacy on-premise ITchallenges that more mature businesses with legacy on-premise IT
infrastructures are faced with. infrastructures are faced with. So yes, please let’s have thatSo yes, please let’s have that
discussion.discussion.

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JEREMY FLOYDJEREMY FLOYD SAYS:SAYS:
JANUARY 25, 2014 AT 9:00 AMJANUARY 25, 2014 AT 9:00 AM

Scott, thank you.Scott, thank you.

As a guy that has a history as a system administrator, programmer, philosopher, lawyer,As a guy that has a history as a system administrator, programmer, philosopher, lawyer,
marketing agency principal and chief marketing o�cer, this post echoes ideas that I’vemarketing agency principal and chief marketing o�cer, this post echoes ideas that I’ve
had since the early 2000s. Both technology and marketing are (in their most basic forms)had since the early 2000s. Both technology and marketing are (in their most basic forms)
communication vehicles…one being the vehicle the other, the map.communication vehicles…one being the vehicle the other, the map.

As you’ve described it, the convergence of these three crosses the spectrum of the brain.As you’ve described it, the convergence of these three crosses the spectrum of the brain.
From the logical linear processing of the left side and the creative, processing side of theFrom the logical linear processing of the left side and the creative, processing side of the
right, the ability to multi-process does not lead to a dead end. Rather determiningright, the ability to multi-process does not lead to a dead end. Rather determining
destination, execution and tactics allows for continual re�nement.destination, execution and tactics allows for continual re�nement.

Years before Marissa Mayer stepped into the spotlight at Yahoo, I was fascinated by herYears before Marissa Mayer stepped into the spotlight at Yahoo, I was fascinated by her
undergraduate �eld of undergraduate �eld of study at Stanfordstudy at Stanford linguistics, philosophy, cognitive psychology, and linguistics, philosophy, cognitive psychology, and
computer science classes. Merging these disparate �elds meant understanding the toolscomputer science classes. Merging these disparate �elds meant understanding the tools
and e�ects of technology.and e�ects of technology.

This is a very valuable skill, yet organizations do not have an understanding for the rareThis is a very valuable skill, yet organizations do not have an understanding for the rare
�nd of the humanities technologist. It will become increasingly important.�nd of the humanities technologist. It will become increasingly important.

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ADAMABIRDADAMABIRD SAYS:SAYS:
MARCH 18, 2014 AT 9:23 PMMARCH 18, 2014 AT 9:23 PM

Scott, Great post.Scott, Great post.
Fantastic insights and I love the concept of a Marketing Technologist.Fantastic insights and I love the concept of a Marketing Technologist.

I have been looking for a concise way of explaining my team’s role within the largerI have been looking for a concise way of explaining my team’s role within the larger
organisation. This title and mission �ts perfectly.organisation. This title and mission �ts perfectly.

Keep up the great work on the blog and graphics.Keep up the great work on the blog and graphics.

– Adam– Adam

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you:%0D%0A%0D%0AWHAT IS CORPORATE STRATEGY, REALLY?%0D%0A%0D%0AA perennial
question for the corporate office is “How can we add value?” For many senior executives, the “Hippocratic
oath” of corporate management seems to be the answer: First, do no harm. Divisional autonomy has gone
from managerial principle to mantra. The corporate office is there simply to set and enforce performance

targets. But in:%20%0D%0A%0D%0ARead the article at
https%3A%2F%2Fiveybusinessjournal.com%2Fpublication%2Fwhat­is­corporate­strategy­really%2F)

A perennial question for the corporate office is “How can we add value?” For many senior executives, the
“Hippocratic oath” of corporate management seems to be the answer: First, do no harm. Divisional
autonomy has gone from managerial principle to mantra. The corporate office is there simply to set and
enforce performance targets. But in a world increasingly obsessed with private equity, the power of focus,
and the discipline of debt, is there really a role for even the most mildly diversified firm and the corporate
layer of management that such diversification necessarily creates?

I believe so, but only if we expand our horizons beyond merely “adding value” to including the critically
important but typically overlooked problem of managing strategic uncertainty.

Why this is important, and how to do it more effectively, is what I hope to describe in this article.

Of strategies competitive and corporate
I’ve found it useful to define strategy as “how an organization creates and captures value in a specific
product market.” In my experience, this definition is both sufficiently precise to have substantive content yet
inclusive enough to capture what most people feel should be part of so critical a concept. Reflect for moment
on what you think your organization’s strategy is in light of this definition and see if you find it consistent with
your intuition.

mailto:?subject=Ivey%20Business%20Journal:%20WHAT%20IS%20CORPORATE%20STRATEGY,%20REALLY?&body=An%20article%20from%20the%20Ivey%20Business%20Journal%20is%20being%20shared%20with%20you:%0D%0A%0D%0AWHAT%20IS%20CORPORATE%20STRATEGY,%20REALLY?%0D%0A%0D%0AA%20perennial%20question%20for%20the%20corporate%20office%20is%20%E2%80%9CHow%20can%20we%20add%20value?%E2%80%9D%20For%20many%20senior%20executives,%20the%20%E2%80%9CHippocratic%20oath%E2%80%9D%20of%20corporate%20management%20seems%20to%20be%20the%20answer:%20First,%20do%20no%20harm.%20Divisional%20autonomy%20has%20gone%20from%20managerial%20principle%20to%20mantra.%20The%20corporate%20office%20is%20there%20simply%20to%20set%20and%20enforce%20performance%20targets.%20But%20in:%20%0D%0A%0D%0ARead%20the%20article%20at%20https%3A%2F%2Fiveybusinessjournal.com%2Fpublication%2Fwhat-is-corporate-strategy-really%2F

The most significant element of this definition lies in its most easily overlooked part: that strategy is about
how to create and capture value in a specific product market. This highlights the importance of defining
clearly the organization and product market that are the focus of strategy.

For example, this definition makes the question “What is General Motors’ strategy” incoherent, for embedded
in that question is the assumption that there is a single product market in which General Motors competes,
which of course is not true: Chevy’s Corvette and GMC’s Montana mini­van are only the weakest of
substitutes. Few people, when they go shopping for a car, consider the possibility of getting one instead of
the other.

And so my proposed definition captures only competitive strategy, that is, the ways in which an organization
competes, since competition for revenue, and hence profits, takes place ultimately at the product market
level.

What, then, is corporate strategy? The most widespread view is that improving the competitive strategies of
the operating units is the essence of corporate strategy. The corporate office should be focused on, for
example, the identification and capture of synergies between operating units. There remains considerable
debate about how best to do this. But the underlying assumption – that corporate strategy supplements
competitive strategy – goes unchallenged, begging the question whether the corporate office can make any
other kind of contribution.

This assumption blinds us to the other half of the value equation: uncertainty. It is indisputable that
generating returns is critical, and an operating division’s competitive strategy is a description of how that unit
hopes to create and capture the value required to deliver those returns. But as those familiar with financial
theory and practice will know, there can be no returns without risk. Indeed, in a very real sense, accepting
risk is the price of those returns, and the hope of more of the latter can only be purchased at the price of
more of the former.

And so we have the opportunity to see corporate strategy not as merely a supplement to competitive
strategy but also as the overlooked complement. And so a definition of corporate strategy consists of two
parts: (i) capturing inter­divisional synergies – which is the extent of current thinking; and (ii) how the
organization identifies and manages strategic uncertainty. It is this under­development of this second part
that I hope to begin to redress.

Generating returns vs. managing uncertainty
Many leaders justly resist placing too much faith in organizational design. However, the org chart matters,
because it defines how large, complex tasks are divided into manageable chunks, thereby making
cooperative effort possible. After all, one cannot throw a group of people into a room and shout “get on with
it.” The company’s work must be differentiated, that is, separated into sub­tasks, whilst simultaneously being
integrated, that is, coordinated such that the completion of the sub­tasks cumulates to the attainment of the
larger end. Organizational structure permits the achievement of these competing, but complementary, goals.

In the realm of strategy­making, however, little attention has been paid to how this same principle should be
applied. In any corporation with multiple business units – that is, in any diversified company – the
unquestioned dogma is that operating division managers must have the full measure of decision­making
freedom, given that they are to be held accountable for their results.

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General managers with full decision­making responsibility for a specific operating division – that is, a unit
with a competitive strategy – must perforce decide what that strategy should be. Highly differentiated
strategies, either low cost or product leadership, offer the promise of high returns, but only because they run
higher strategic risk. Staking a defensible claim to a unique competitive position demands bold commitments
over long periods of time to assets and capabilities that few others feel will be valuable in the future. In other
words, greatness requires that companies make a significant, and largely irreversible, strategic bet. And like
all bets, even when the odds are with you, you can end up losing (nearly) everything.

Take, for example, Sony’s Betamax video cassette recorder. This iconic example of strategic failure is often
adduced to illustrate managerial incompetence or greed: Sony had “too short” a recording time or refused
“reasonable” licensing terms to other potential manufacturers.

The full story is long and complex, but we will learn the wrong lessons from Sony’s mistake if we insist on
looking at the company’s choices after the fact. The more relevant perspective is when Sony had to make its
choices. And what quickly becomes clear is that Sony’s decisions were perfectly reasonable and in fact
entirely consistent with the desire to dominate the market utterly.

For example, the company could have licensed its designs widely, dumbing­down its proprietary technology
in the interests of acquiring greater market share faster. However, this would have compromised Sony’s
ability to capture a greater share of the value it created. In other words, Sony chose a bigger slice of a
smaller pie, concluding this would be more valuable than a smaller slice of a larger pie. In the event, Sony’s
choice was the wrong choice, but that only became clear long after the fact. Who was to say that Sony’s
“value capture” strategy – one pursued to such great effect with the Walkman or the PlayStation 2 – was
going to fail this time?

It is this kinship between success and failure that defines the “strategy paradox”: precisely the same
behaviors that maximize an organization’s possibility of great success also maximize its likelihood of total
catastrophe. Operating divisions, forced to chose and implement a competitive strategy, face a dilemma: do
they pursue high­risk, but potentially high­return strategies, or do they sacrifice any meaningful chance at
greatness in exchange for reduced risk?

Empirically, most businesses opt for the security of me­too, derivative strategies over the higher­risk, but
potentially higher­return strategies defined by more highly­differentiated positions. In other words, complete
divisional autonomy relegates firms either to accepting strategic risk or avoiding it. What is missing is a
meaningful way actively to manage it.

Managing a complex task essentially means identifying the appropriate dimension of differentiation and
integration. Most organizations think of this differentiation in terms of geographic regions, functions,
processes, etc. and mechanisms of integration in terms of specialist roles, cross­functional teams, etc.
These concepts are so familiar as to be almost banal to anyone steeped in organizational life. What is less
common, and hence less intuitive, is that to manage strategic uncertainty effectively we must similarly
differentiate roles based on the strategic uncertainty decision­makers face and integrate them by way of the
strategic commitments to be made. I call this organizational design principle Requisite Uncertainty. And
unlike most organizational design principles, which operate essentially horizontally, Requisite Uncertainty
speaks directly to the roles and responsibilities delegated to each level of the vertical hierarchy.

Perhaps the most important insights into the attributes of an effective hierarchy come to us from the late
Elliott Jaques (pronounced “Jacks”), a Canadian organizational psychologist. Jaques determined that
hierarchies function best when each level is separated from the others by the time horizon associated with
the decisions made at that level. So, for example, the marketing manager is responsible for getting a new
flavor of toothpaste into the market. He decides what the marketing mix will be, the investment in co­op
advertising, which channels to focus on, and so on. Jaques’s research demonstrates that this manager will
know whether or not he made good decisions within three months to a year.

The next level up in the hierarchy – say, the general manager responsible for oral health care – has a
number of functions reporting to her: our marketing manager, of course, as well as product development,
R&D, HR, finance, etc. Her task is different: to decide what the competitive strategy of this division will be.
This requires making a commitment, at the most generic level, to a low­cost or differentiated strategy. Such
commitments take time to implement and still longer for the environment to provide the feedback needed to
determine their success. Jaques’ work suggests that a time horizon of three to five years is appropriate.

When coping with the tension between risk and return are assigned to the same management level, as
conventional management theory demands, general managers must choose between temerity and timidity.
We should not be surprised: they have no mechanisms at their disposal to manage uncertainty. It is the
hierarchical equivalent of failing to separate finance from HR, and then wondering why the cash
management system is breaking down and the benefits plan is a shambles.

Requisite Uncertainty separates making strategic commitments from managing the risk created by making
those commitments. Operating division managers must make commitments if high achievement is to be
even a possibility. It falls to corporate management, the next layer up in the hierarchy, and so responsible for
a still longer time horizon, to create the strategic options needed so that divisions, if they happen to have
made the wrong (even if entirely reasonable) commitments, can adapt their strategies as required.

We can see the outline of this structure at work at Microsoft over the last several decades. In the late 1980s,
Microsoft had a corporate commitment to the computer software industry. There was, however, material
uncertainty – strategic uncertainty – surrounding how best to compete in that space. And so the company
pursued a number of different trajectories simultaneously. MS­DOS was their bread­and­butter product for
both personal and corporate computing customers. Yet Microsoft was collaborating with IBM on the OS/2
graphical interface operating system, even as it was developing its own graphical Windows systems, while
exploring a version of Unix targeted at commercial markets. And on the applications front, the company was
writing Excel and Word for the Apple OS.

This was not diversification in defense of ignorance – the creation of a portfolio with uncorrelated fortunes
and cash flows. Rather, it was a carefully constructed set of hedges against different strategic paths, some of
which could prove enormously useful to each other. Some of these strategic options, like OS/2, never came
“into the money” and were abandoned. Others, in particular the Windows OS and, most importantly, its
complementarity with Word, Excel, and other applications, became the foundation of decades of profitability
and industry dominance.

Today, Microsoft continues to build and manage a portfolio of strategic options. The Windows OS platform
and Office applications suite are the company’s current bread and butter, but strategic uncertainties abound.
What will the next platform, or platforms, for personal computing be? Mobile devices? Game players? What
about content, search, or online services? From the perspective of the corporate office, Microsoft’s
investments in Windows Mobile, Xbox, MSNBC, and MSN are strategic options that create the ability, but not

the obligation, to morph the Windows division in a number of very different ways, depending on how the
industry evolves over the long term – say, five to seven years. Microsoft’s corporate strategy, then, can be
seen as designed to mitigate strategic risk in ways that the divisions, and shareholders, cannot replicate.

Consistent with the notion of Requisite Uncertainty, managers responsible for each of these divisions
(Windows Mobile, Xbox, MSN, etc.) view the ventures they guide not as options but as commitments: each
manager must choose how best to make their division as successful as possible in the medium term – say,
three to five years. If these managers were forced to deal with the full flower of strategic uncertainty, they
would necessarily pull in their horns, since they would be investing for both today and tomorrow, which would
dilute financial resources and, more importantly, management attention. As it is, they are able to apply
themselves fully to the challenges of the markets in which they compete.

And at the functional level, managers must simply “make plan”: delivering on the commitments that have
been made, often years ago.

Option. Commitment. Plan. The same operating assets create value in at least three different ways
simultaneously and continuously through time. Strategic options create value by reducing risk. Strategic
commitments create value by besting competitors, and delivering on plan generates the cash that keeps any
organization going. And different layers of the hierarchy are responsible for managing each value­generating
mechanism.

Johnson & Johnson: A case study
Microsoft has accomplished this remarkable feat for more than two decades largely as a result of the very­
nearly unique skills and position of Bill Gates, the founder and until recently CEO and chairman of the
company. Arguably one of the few business geniuses of our generation, Gates had the insight and the
influence to grapple with uncertainty head­on. As much as we might admire the substance of Microsoft’s
strategy and strategy­making, at a process level it is difficult to generalize from its experience, as very few of
us are likely ever to find ourselves in Bill Gates’s position.

Johnson & Johnson (J&J) provides a more illuminating case study, revealing how mere mortals can achieve
results that have so far been the preserve of the admired few. A remarkable corporate success story, J&J
has outperformed the general stock market for years, in part by pioneering the next wave of cutting­edge
management practices. And they appear to be on the cusp of continuing that enviable tradition.

Like many other large corporations, J&J maintains a “corporate venture capital” group called Johnson &
Johnson Development Corporation (JJDC). Unlike most groups of this kind, however, JJDC seems less
obsessed with measuring success solely in terms of the returns on their portfolio of investments. After all, if
shareholders want exposure to venture capital­like investments, there are better and more efficient
mechanisms to create it — by investing in VC funds, for example. And in a $55 billion corporate like J&J,
creating material returns would require a level of investment far beyond the $500 million currently under
JJDC’s management – a level that would almost certainty starve the existing businesses of the investment
they need to compete.

What is JJDC for, then? In short, it is the organ of the corporate office that manages the strategic risk faced
by the operating companies (OpCos). Working carefully with the OpCos, JJDC determines what strategic
uncertainties cloud an OpCo’s competitive future, and which of those uncertainties the OpCo is exposed to

as a result of its strategic commitments. JJDC then creates the necessary strategic options so the OpCo can
continue to pursue its higher­risk, higher­return strategy…without the same level of risk.

A key part of this equation is driving the OpCos to pursue higher­risk strategies in the first place. Most
operating companies, whether divisions or stand­along going concerns, systematically trade returns for lower
mortality rates. At J&J, however, the corporate office sets demanding performance targets. The specifics are
confidential, but for example, the OpCos are responsible for delivering specified returns (e.g., 15% ROA)
within specified time periods (e.g., a three­year average) with specified resources (a capital expenditure and
operating budget approved by corporate). Without those targets, the OpCos would do what the majority of
stand­alone business units do: drift into mediocrity.

But if all J&J were able to do with its demanding performance hurdles were trade a portfolio of low­risk, low­
return OpCos for a portfolio of high­risk, high­return OpCos, it would merely have purchased a dollar for 20
nickels – creating the possibility of higher returns at the cost of higher risk. It is JJDC’s involvement that
allows this portfolio to generate the returns associated with taking on greater risk without taking on the risk.

JJDC, then, does not merely seek out new growth opportunities, attempting to find “winners” that will
compensate for any “losers” in the existing portfolio. Rather, it creates strategic options that make it possible
for OpCos to adjust their strategies in ways they could not – at least, not without having to compromise their
ability to make and deliver on the strategic commitments necessary for extraordinary competitive success.

Consider how this has played out in the Ethicon Endosurgery (EES) OpCo. EES sells, among other medical
devices, a wide array of colonoscopes used for the interrogation of the colon and lower gastrointestinal tract
in order to diagnose and treat a variety of pathologies, including colon cancer.

For many years, the key to continued growth and profitability in the colonoscope business has been making
the devices better able to access ever­smaller body cavities, increasing the accuracy of diagnosis, and
increasing the surgeon’s ability to remove ever­smaller patches of diseased tissue. The sales force in EES –
the folks delivering on plan – knocks on the doors of proctologists around the world to convince them that
EES has the best devices.

At the OpCo level, however, a new strategic commitment is in the making: from “better scopes” to “less
discomfort.” Growth in the colonoscopy business is a function of getting more people to get colonoscopies,
and an important way to do that is to reduce the pain associated with the procedure. There are at least two
ways to do this. One is to increase the “intelligence” in the device so that the skill of the surgeon is less a
factor that it has been historically. The kinds of investment required to deliver these improvements fall within
the money, time, and performance constraints of OpCo management, and so this is a trade­off between
short and medium term considerations that is rightly left in their hands.

A second pain management strategy, however, involves pharmacological solutions and very sophisticated
drug/device combinations. EES has the budget to explore such solutions on its own; it is the complexity,
uncertainty, and the time horizon associated with drug­based solutions that create the challenge. Exploring
new drugs and new drug applications falls into the category of a strategic uncertainty for an OpCo committed
to medical devices, and if EES were to get pulled in that direction, it would be violating the principle of
Requisite Uncertainty, with predictable and negative results. Specifically, EES would likely be less able to
execute effectively on its existing strategic commitments, thereby compromising its ability to deliver returns.

About the Author
Michael E. Raynor
(https://iveybusinessjournal.com/author/mraynor/)

Michael E. Raynor is a director at Deloitte Services LLP.

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Consequently, it falls to JJDC to work with EES to identify, make, and manage the seed investments needed
to manage this strategy uncertainty. EES can therefore focus on the commitments it must in order to hit the
targets set for it by corporate without having merely to accept the strategic risk that would come from
ignoring the risks arising from a strategic shift from “better scopes” to “less pain.”

The strategy of humility
Competitive strategy is about commitment. But commitment necessarily exposes a business to strategic risk
– the possibility that it has committed reasonably, but wrongly. If corporate strategy is nothing more than the
attempt to decrease the frequency of such mistakes, then we are sure to be disappointed: there’s no good
reason to think corporate managers have better crystal balls than operating managers.

The new frontier in corporate strategy, I believe, is in thinking more carefully and deliberately about how to
enable operating divisions to pursue outsized returns without having merely to accept the risk that has
historically accompanied such boldness. Greater returns at greater risk is, frankly, meaningless. Greater
returns and the same or reduced risk? Now that’s a worthwhile goal.

Making progress in this direction will require the corporate office to adopt a fundamentally different mindset.
Rather than attempt to wrestle ambiguity to the ground, managing strategic uncertainty demands that we
embrace our ignorance of the future, and place critical strategic unknowns at the center of the strategic
conversation.

Commitment still matters – but commitments are not for corporate strategists to make. The corporate role is
not to see over the horizon but rather to imagine what one might find there, and begin preparations
accordingly. This frees the crew to focus its full attention on the shoals and treasures that are already in
view.

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MARKETING THEORIES – BOSTON
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Visit our Marketing Theories Page to see more of our
marketing buzzword busting blogs. 

If you are working with a product portfolio you have a
range of tools at your disposal to determine how each
one or a group of the products are doing. You could
consider using the Product Life Cycle but if you need a
current “snap shot” of how the products are doing you
would benefit more from using the Boston Consulting
Group Matrix.

Back in 1968 a clever chap from Boston Consulting
Group, Bruce Henderson, created this chart to help
organisations with the task of analysing their product
line or portfolio.

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The

matrix assess products on two dimensions. The first
dimension looks at the products general level of
growth within its market. The second dimension then
measures the product’s market share relative to the
largest competitor in the industry. Analysing products
in this way provides a useful insight into the likely
opportunities and problems with a particular product.

Products are classified into four distinct groups, Stars,
Cash Cows, Problem Child and Dog. Lets have a look
at what each one means for the product and the
decision making process.

Stars (high share and high growth)

Star products all have rapid growth and dominant
market share. This means that star products can be
seen as market leading products. These products will
need a lot of investment to retain their position, to
support further growth as well as to maintain its lead
over competing products. This being said, star
products will also be generating a lot of income due to
the strength they have in the market. The main
problem for product portfolio managers it to judge
whether the market is going to continue to grow or
whether it will go down. Star product can become
Cash Cows as the market growth starts to decline if
they keep their high market share.

Cash Cows (high share, low growth)

Cash cows don’t need the same level of support as
before. This is due to less competitive pressures with a

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low growth market and they usually enjoy a dominant
position that has been generated from economies of
scale. Cash cows are still generating a significant level
of income but is not costing the organisation much to
maintain. These products can be “milked” to fund Star
products.

Dogs (low share, low growth)

Product classified as dogs always have a weak market
share in a low growth market. These products are very
likely making a loss or a very low profit at best. These
products can be a big drain on management time and
resources. The question for managers are whether the
investment currently being spent on keeping these
products alive, could be spent on making something
that would be more profitable. The answer to this
question is usually yes.

Problem Child (low share, high growth)

Also sometime referred to as Question Marks, these
products prove to be tricky ones for product
managers. These products are in a high growth
market but does not seem to have a high share of the
market. The could be reason for this such as a very
new product to the market. If this is not the case, then
some questions need to be asked. What is the
organisation doing wrong? What is competitors doing
right? It could be that these products just need more
investment behind them to become Stars.

A completed matrix can be used to assess the strenght
of your organisation and its product portfolio.
Organisations would ideally like to have a good mix of
cash cows and stars. There are four assumptions that
underpin the Boston Consulting Group Matrix:

1. If you want to gain market share you will need to
invest in a competitive package, especially through
investment in marketing

2. Market share gains have the potential to generate a
cash surplus due to the e�ect of economies of scale.

3. The maturity stage of the product life cycle is where
any cash surplus is most likely to be generated

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4. The best opportunities to build a strong market
position usually occur during a market’s growth
period.

We hope that you have found this information useful.
This theory forms part of the syllabus for some of the
CIM courses that we o�er. Please have a look at these
if you would like to further your marketing knowledge
and skills.

If you would like more information on our CIM
Marketing courses please download a copy of our
prospectus today. 

 
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2/5/2018 What a Trump Presidency Will Mean for Globalization – Knowledge@Wharton

http://knowledge.wharton.upenn.edu/article/globalization-and-a-trump-presidency/?utm_source=kw_newsletter&utm_medium=email&utm_campaign=2016-11-15 1/6

As President-elect Donald Trump “pivots from campaigning to governing,” some realities at
home and abroad will become clear, said Wharton Dean Geo�rey Garrett, who is also a
management professor at the school. For one, while Trump has sharply criticized international
trade deals like the Trans-Paci�c Partnership (TPP) and NAFTA, his best options may be to
rewrite the former and make peace with the latter, Garrett noted. Another challenge is in
delivering on his promises to Americans who have su�ered from growing inequality and
stagnant incomes in recent decades as globalization and technological change drove economic
growth.

The way forward is to convince people that the U.S. does bene�t from globalization, but make it
inclusive at the same time, Garrett said. At the same time, the U.S. would see substantial
“positive impact” if it manages to achieve a sustainable annual GDP growth rate of 3% or more,

Nov 11, 2016  Business Radio, Podcasts Asia-Paci�c, North America

PUBLIC POLICY

What a Trump Presidency Will Mean for
Globalization

The Wharton School

http://knowledge.wharton.upenn.edu/faculty/ggarrett/

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2/5/2018 What a Trump Presidency Will Mean for Globalization – Knowledge@Wharton

http://knowledge.wharton.upenn.edu/article/globalization-and-a-trump-presidency/?utm_source=kw_newsletter&utm_medium=email&utm_campaign=2016-11-15 2/6

he added. He discussed some of the challenges and options facing Trump on the
Knowledge@Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the
podcast at the top of this page.)

“There’s less certainty around what the core of the Trump agenda will be internationally than
domestically,” said Garrett. He noted that much of Trump’s domestic agenda, led by the
promise of tax cuts, is “conventional Republican” fare.

Garrett described Trump’s comments on international a�airs as essentially “general
statements” that are critical of U.S. policies. Here, he referred to Trump’s argument that the
U.S. is not getting “enough bang for its buck with allies” in the Middle East and also that it is
“losing to China and losing on trade.”

“If your growth drivers also narrow the bene�ts,
that creates a big political and social challenge,
but that is also an economic challenge.”

Walking the Talk on TPP, NAFTA

Of the various international issues on Trump’s agenda, “the more burning and the more
pressing issue is what to do with TPP,” according to Garrett. “My preferred go-forward path
would not be to try to ink the TPP deal as it is currently written, but go back closer to scratch.”

Putting the TPP in perspective, Garrett said the idea behind it was important in that it espoused
a free trade agreement spanning both sides of the Paci�c, uniting the U.S., Canada and Mexico
with the big East Asian countries. The TPP deal that Barack Obama championed was not about
economics, but about geopolitics, he added. “It was an e�ort by Obama to say to the world that
we write the rules of the road to the 21 century, not China.”st

However, Garrett said “the TPP is, in essence, dead on arrival as written in Washington, D.C.”
He noted that unwinding the TPP as it stands “potentially creates some real challenges in Asia,
because a lot of the Asian countries that signed up to the TPP did so because the U.S. asked them
to do that.”

http://businessradio.wharton.upenn.edu/

2/5/2018 What a Trump Presidency Will Mean for Globalization – Knowledge@Wharton

http://knowledge.wharton.upenn.edu/article/globalization-and-a-trump-presidency/?utm_source=kw_newsletter&utm_medium=email&utm_campaign=2016-11-15 3/6

One crucial shortcoming of the TPP in its current form is that it doesn’t include China, even
though it is the world’s largest trading nation and Asia’s largest economy, said Garrett. He
argued that China should be a part of such a deal.

Trump will need to come up with some alternative to the TPP, “and the alternative that I would
encourage is one that includes China,” said Garrett. “Mr. Trump said he is good at negotiating
deals. The Chinese are deal makers. I’d encourage him to try to strike a deal that’s win-win for
China and the U.S. on trade.”

Why Strike a Deal with China?

Garrett said there is a strong case for China to be included in the TPP. “Obviously, Asia has
become an incredibly important growth engine for the world so we should never forget that,”
he said. “But when it comes to China in particular, all Americans are going to have to come to
terms with two very important realities. One is the centrality of the Chinese market and Chinese
consumers to American �rms.” He noted that while Apple assembles its devices in China, that
country accounts for a quarter of the company’s worldwide market. “It’s a massive consumer
market, and American �rms bene�t enormously form that.”

The second reality Americans have to appreciate is Chinese investments in U.S. companies, said
Garrett. Outbound Chinese investments in the last 20 years or so have found their way into U.S.
companies that covet the Chinese domestic market, he added.

“Mr. Trump said he is good at negotiating deals.
The Chinese are deal makers. I’d encourage him
to try to strike a deal that’s win-win for China
and the U.S. on trade.”

“Going forward, we are going to be dealing with a lot of outbound Chinese investments,” said
Garrett of what the Trump administration would need to factor in. “Of course, we have seen that
movie before,” he added, citing Japanese investments into the U.S. in the 1990s. “It took a while
for Americans to come to grips with that, but having a lot of Toyotas — good cars made cheaply
in the U.S. — has ultimately been a great bene�t to the U.S. I hope and expect that would be true
with Chinese investments; maybe not tomorrow, but if we measured in 10-year chunks, that
would be an important new reality for this economy.”

2/5/2018 What a Trump Presidency Will Mean for Globalization – Knowledge@Wharton

http://knowledge.wharton.upenn.edu/article/globalization-and-a-trump-presidency/?utm_source=kw_newsletter&utm_medium=email&utm_campaign=2016-11-15 4/6

Compared with the TPP, Trump may have much less opportunity to walk away from the North
American Free Trade Agreement, or NAFTA, between the U.S., Canada and Mexico. “It would be
… very di�cult to unwind NAFTA, and very unwise to do so,” said Garrett.

Garrett referred to the “gravity model of trade” in international economics that explains how
bilateral trade �ows work based on the economic sizes of trading partners and the distance
between them. “It makes more sense to do more trade with countries that are closer to you,” he
said. “The fact that the U.S. shares very large land borders with both Canada and Mexico makes
trade among those three countries an absolute natural.” He predicted that despite the anti-
NAFTA rhetoric in the campaign, that trade agreement will probably endure.

GDP Growth Challenge

Many commentators have talked of a GDP growth rate of 4% in Trump’s presidency. But Garrett
doesn’t think such a growth rate is sustainable. Historically, GDP growth in the U.S. after World
War II has ranged between 3.25% and 3.5%, he noted. “If the U.S. could get back to that … that
would have an enormous positive impact, not only economically but also politically in the
country,” he said. “I wouldn’t be thinking of a sustainable 4% [GDP growth rate]; you might be
able to juice it up to that with some short-term stimulus.”

Economic growth is the pot of gold the �nancial markets want as they welcomed Trump’s
victory. The markets cheered him for two reasons, according to Garrett. One is the prospect of
corporate tax cuts, and the other is his promise to invest in infrastructure improvements. “Both
of those stimulate the economy in the short term,” he said. “But the bigger issue is the longer-
term one: Can you keep the growth rate north of 3%?”

Those questions bring into focus the big drivers of growth, according to Garrett. “The big
drivers in the past 20 years or so are technology and globalization,” he said. “The challenge that
comes with both of them is that they have had a narrowing e�ect — not a broadening e�ect

—

when it comes to income distribution. If your growth drivers also narrow the bene�ts, that
creates a big political and social challenge, but that is also an economic challenge.”

What could Trump do to make sure everybody can bene�t from globalization? “Using the bully
pulpit to begin with is important,” said Garrett. “To my mind, the most important thing to say
is that everyone in America does bene�t from globalization. We bene�t because the things that
we consume on a daily basis are just much cheaper. ‘Made in America’ is a lovely slogan, but if
we sourced, produced and made everything in this country, prices for the stu� we buy would be
much higher.”

2/5/2018 What a Trump Presidency Will Mean for Globalization – Knowledge@Wharton

http://knowledge.wharton.upenn.edu/article/globalization-and-a-trump-presidency/?utm_source=kw_newsletter&utm_medium=email&utm_campaign=2016-11-15 5/6

“‘Made in America’ is a lovely slogan, but if we
sourced, produced and made everything in this
country, prices for the stuff we buy would be
much higher.”

The similarities between the two growth drivers of technological change and globalization form
one of Trump’s biggest challenges ahead. “One similarity is [both have] reduced demand for
less skilled labor,” said Garrett. “We saw that in the Rust Belt states swinging to Trump from
the Democrats. So now, President-elect Trump really has to take that one on.”

What Helped Trump Win?

In drawing insights from Trump’s victory, “the big story is economic, not social,” said Garrett.
“The temptation to focus on the uniqueness of Donald Trump as a candidate is clear. But what
he was actually doing was riding a big structural wave of change in the United States.”

That “structural wave” revolved around inequality and stagnant incomes, and “Trump’s unique
personality probably catalyzed that,” Garrett explained. “Think about inequality, for example:
We tend to associate that with post-2008, post-�nancial crisis, but inequality in the U.S. started
increasing dramatically in the latter 1980s and went up a lot under Bill Clinton in the 1990s.”
Similarly, many Americans have coped with stagnant incomes over the past 15 years or so, he
continued.

Now, in taking forward his election pitch, Trump has to “pivot from campaigning to
governing,” said Garrett. “It also creates the Trump agenda, which should be to increase
growth, but to do so in a way that includes more people in it.”

The First 100 Days

Could one expect to see policy action on some of those issues in Trump’s �rst 100 days as
president? “The ‘100 Days’ thing tends to be mostly about symbolism,” said Garrett. “I would
expect a lot of symbolic chart-the-course kind of things. The realities of governing tend to take
much longer than that. High-level political theater is bound to be a core part of the game. And
of course Mr. Trump has proved incredibly adept at that.”

2/5/2018 What a Trump Presidency Will Mean for Globalization – Knowledge@Wharton

http://knowledge.wharton.upenn.edu/article/globalization-and-a-trump-presidency/?utm_source=kw_newsletter&utm_medium=email&utm_campaign=2016-11-15 6/6

All materials copyright of the Wharton School (http://www.wharton.upenn.edu/) of the University of
Pennsylvania (http://www.upenn.edu/).

In addition to symbolic actions, Garrett predicted that Trump will also send out some “big
international signals” in his �rst 100 days. Those would include assertions that the U.S. is going
to get tough on terrorism and that it doesn’t like the nuclear deal that the Obama
administration cut with Iran, he said. He also expected some negative actions such as the
repudiation of the current TPP agreement, but hopes “there would be some signaling of a
forward path as well” on that front.

The Wharton School

http://www.upenn.edu/

2/5/2018 IESE Insight Globalization in Uncertain Times: 10 Key Takeaways

http://www.ieseinsight.com/doc.aspx?id=1871&ar=6&idioma=2 1/1

3

Economics

  Globalization in Uncertain
Times: 10 Key Takeaways 
Ghemawat, Pankaj; Altman, Steven

   

The backlash against globalization still has the
power to surprise. Confounding most polls
and expert opinions, the United States voted
in the presidential candidate promising to
build walls, kick out immigrants and otherwise
close U.S. borders. 

 

As anti­globalization momentum grows, the
DHL Global Connectedness Index (GCI)
gathers 1.8 million data points to paint a clear
picture of international flows that is based on
facts. In the accompanying report, subtitled
“The State of Globalization in an Age of
Ambiguity,” Pankaj Ghemawat and Steven A.
Altman of IESE and NYU Stern School of
Business argue that “flows that cross borders
are much too large to ignore but still far
smaller than many people think.”

 

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The 250­page report includes key takeaways
and tools for leaders thinking about
globalization strategies for the uncertain
future. 

 

Here are 10 key takeaways from the report:
 

1. “Europe remains the world’s most globally
connected region, with eight of the 10 most
connected countries ­­ which reminds us
what its disintegration might put at risk.”

 

Europe is followed by North America, with
East Asia and the Pacific coming in third. 

 

And here are the top 10 most globally
connected countries in 2015 (with change
from 2013 in parentheses):

 

Source: DHL Global Connectedness Index
2016

 

The top 10 are all among the world’s most
prosperous countries. The United Arab
Emirates is the only one not classified as an
“advanced economy” by the International
Monetary Fund (IMF). 

 
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2. “Singapore tops the rankings in terms of
depth and the United Kingdom in terms of
breadth.”

 

Here, depth is defined as a country’s
international flows relative to the size of its
domestic economy. The leaders on the depth
dimension of the index tend to be wealthy and
relatively small. The top three results were
unchanged from 2013 to 2015: (1)
Singapore, (2) Hong Kong SAR and (3)
Luxembourg. 

 

Meanwhile, breadth tracks how closely a
country’s distribution of international flows
across its partner countries matches the
global distribution of the same type of flows.
The leaders in terms of breadth tend to be
larger nations. These top three were also the
same as in the last report: (1) United
Kingdom, (2) United States and (3)
Netherlands.

 

3. “The world’s overall level of global
connectedness finally surpassed its pre­crisis
peak during 2014 and continued to increase,
but more slowly, in 2015.”

 

Note that the DHL GCI covers 2005 to 2015,
so it does not yet take into account the two big
anti­globalization shocks of 2016: The British
decision to leave the European Union (known
as Brexit) and nationalist candidate Donald
Trump winning the U.S. presidential election. 

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But looking at 2005 up through 2015, global
connectedness has been growing, especially
in its depth (or, intensity). 

 
Source: DHL Global Connectedness Index
2016
 

4. “While international trade remained under
pressure in 2015, increases were reported on
the depth (intensity) of capital, people, and
especially information flows.”

 

Global connectedness is measured along the
lines of four pillars: trade (products and
services), investment (capital), information
(internet traffic, phone calls, print media) and
people (migrants, tourists, students). These
four pillars “encompass most of the aspects of
international connectedness that have
maximum relevance for business people,
policymakers, and ordinary citizens
concerned with the impact of globalization on
their life opportunities,” the authors explain.

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Over the past decade, information flows have
grown most significantly. Below is a look at the
global connectedness trends, measuring
depth (intensity) along the four pillars:

 
Source: DHL Global Connectedness Index
2016
 

5. “Globalization and urbanization combine to
prompt strong interest in global cities, but
prior research on them is subject to numerous
shortcomings.”

 

Globalization and urbanization are two of the
key macro­trends shaping our recent past and
our future. For the first time, the 2016 report
introduces two new city­level indexes ­­
Globalization Hotspots and Globalization
Giants ­­ tracking the same four pillars as the
country­level indexes. The 113 cities in the

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ranking are spread across 64 countries and
together account for a third of world GDP. 

6. “Singapore tops both of our new city­level
globalization indexes: Globalization Hotspots
(cities with the most intense international
flows) and Globalization Giants (cities with the
largest absolute international flows).”

 

Based on measures of the magnitude of cities’
international interactions, the 2015
Globalization Giants are: (1) Singapore, (2)
Hong Kong, (3) London, (4) New York and (5)
Paris. 

 

The ranking of Globalization Hotspots supplies
a novel take on the phenomenon of global
cities by measuring the intensity (relative to
city size) rather than the absolute magnitude
of cities’ international flows. The 2015
Globalization Hotspots are: (1) Singapore, (2)
Manama, (3) Hong Kong, (4) Dubai and (5)
Amsterdam. 

 

Singapore is a perennial on global city lists,
but the second­ranked Manama, the modestly
sized capital of Bahrain, is a more surprising
member of the top 10. “Manama attracted six
times as much announced (inward) greenfield
FDI [foreign direct investment] relative to its
GDP as London and five times as many tourist
arrivals per capita (including business
travelers) as New York,” the report notes.
More than half of Manama’s population are
foreign citizens.

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7. “Actual levels of global connectedness are
still only a fraction of what people estimate
them to be, suggesting an opportunity to
correct misperceptions and apprehensions.”

 

For example, the authors note that in both the
United Kingdom and the United States people
think that there are more than twice as many
immigrants as there really are (the actual
numbers are 13 and 14 percent of U.K. and
U.S. populations, respectively). Simply telling
people the actual share of immigrants
reduces the proportion who think there are
“too many” immigrants by between a third and
a half, they report. It follows that anti­
immigration votes (Brexit, Trump) might have
been better challenged if voters were armed
with facts. 

 

Similarly, people tend to exaggerate and
overestimate the impact of global trade,
information flows and more. Global trade and
information exchanges are significant, but not
as extensive as people think. 

 

8. “Distance still matters ­­ even online. Most
international flows take place within rather
than between regions.”

 

For example, the authors note that more than
70 percent of the average European country’s
international trade, capital, information, and
people flows take place within Europe itself.

 
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And looking at who follows whom on Twitter
(information flows): 39 percent of all Twitter
ties turn out to be local (as in within the same
metropolitan area), 36 percent fall outside the
same area but within the same country and
25 percent are international. Facebook traffic
is even more locally bound. 

 

9. “Emerging economies trade as intensively
as advanced economies, but advanced
economies are four to nine times as deeply
integrated into international capital,
information, and people flows.”

 

More specifically, advanced economies are
about four times as deeply integrated into
international capital flows, five times as much
on people flows, and nine times with respect
to information flows.

 

10. “Looking forward, the future of
globalization is shrouded in an unusual
amount of ambiguity, and depends critically
on the choices of policymakers around the
world.”

 

Launched just days after Donald Trump’s
surprising win, the report hopes to arm
policymakers with real information about the
actual levels of globalization ­­ which, in sum,
are still lower than most people think. 

 

Methodology, Very Briefly
 

Analyzing more than 1.8 million data points
going back to 2005, the Global

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Connectedness Index measures the depth
and breadth of connectedness and tracks
trends. The 2016 report ranks 140 countries
and territories encompassing 99 percent of
the world’s GDP and 95 percent of its
population are measured.

 

The index tracks 12 types of cross­border
interactions grouped into four pillars: 

 

1. Trade: covers flows of goods and services.
2. Capital: focuses on the flows and stocks of
FDI and portfolio equity. (Note that debt
capital is excluded because of the dangers
associated with high levels of international
indebtedness.)

3. Information: incorporates data on
international internet bandwidth,
international telephone calls and trade in
printed material.

4. People: measures cross­border movements
for the long­term (migration), medium­term
(university students pursuing degrees
abroad) and short­term (tourism).

See also: “Two Laws for Global Business” for a
summary of the 2016 book The Laws of
Globalization and Business Applications.

This article is based on:  DHL
Global Connectedness Index
2016 
Publisher:  DHL 
Year:  2016 
Language:  English 

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2/5/2018 How to Build Collaborative Advantage

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How to Build Collaborative
Advantage
Magazine: Fall 2004 • Research Feature • October 15, 2004 • Reading Time: 23 min 

Morten T. Hansen and Nitin Nohria

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For many years, multinational corporations could compete successfully
by exploiting scale and scope economies or by taking advantage of
imperfections in the world’s goods, labor and capital markets. But these
ways of competing are no longer as profitable as they once were. In
most industries, multinationals no longer compete primarily with
companies whose boundaries are confined to a single nation. Rather,
they go head-to-head with a handful of other giants that are comparable
in size, in their access to international resources and in worldwide
market position. Against such global competitors, it is hard to sustain
an advantage based on traditional economies of scale and scope.

Consider the oil industry. The industry is dominated by a handful of global players such as Exxon Mobil,
BP, Shell and ChevronTexaco. They each have global exploration, refining and distribution operations,
leaving little room for any company to gain competitive advantage with economies of scale. Similarly, they
each have brands that are more or less equally well recognized the world over, reducing opportunities for a
company to seize competitive advantage with an economy of scope based on its brand power. Such relative
parity among multinational corporations can also be observed in consumer electronics, information
technology, pharmaceuticals, banking, professional services and even retailing.

Under these circumstances, MNCs must seek new sources of competitive advantage. While multinationals
in the past realized economies of scope principally by utilizing physical assets (such as distribution systems)
and exploiting a companywide brand, the new economies of scope are based on the ability of business units,

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subsidiaries and functional departments within the company to collaborate successfully by sharing
knowledge and jointly developing new products and services. Multinationals that can stimulate and
support collaboration will be better able to leverage their dispersed resources and capabilities in
subsidiaries and divisions around the globe.

Collaboration can be an MNC’s source of competitive advantage because it does not occur automatically —
far from it. Indeed, several barriers impede collaboration within complex multiunit organizations. And in
order to overcome those barriers, companies will have to develop distinct organizing capabilities that
cannot be easily imitated.

Interunit collaboration is not only difficult to achieve but also poorly understood. However, a framework
that links managerial action, barriers to interunit collaboration, and value creation in MNCs can help
managers “unpack” the concept.

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ABOUT THE AUTHORS

Morten T. Hansen is an associate professor of entrepreneurship at INSEAD in Fontainebleau, France.Nitin Nohria is Richard P. Chapman Professor of
Business Administration at Harvard Business School in Boston. They can be reached at morten.hansen@insead.edu and nnohria@hbs.edu.

1 

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REFERENCES (19)

1.  See B. Kogut and U. Zander, “Knowledge of the Firm, Combinative Capabilities, and the Replication of Technology,” Organization Science 3, no. 3 (1992):
383–397; C. Hill, “Diversification and Economic Performance: Bringing Structure and Corporate Management Back Into the Picture,” in “Fundamental Issues in
Strategy,” eds. R. Rumelt, D. Schendel and D. Teece (Boston: Harvard Business School Press, 1995), 297–322; and J. Nahapiet and S. Ghoshal, “Social Capital,
Intellectual Capital and the Organizational Advantage,” Academy of Management Review 23, no. 2 (April 1998): 242–266.

2.  For an in­depth look at BP on this issue, see S.E. Prokesch, “Unleashing the Power of Learning: An Interview With British Petroleum’s John Browne,”
Harvard Business Review 75, no. 5 (September–October 1997): 146–168; and M.T. Hansen and B. Von Oetinger, “Introducing T­Shaped Managers: Knowledge
Management’s Next Generation,” Harvard Business Review 79, no. 3 (March 2001): 106–116. The section on BP in the text draws on the latter article.

3.  See P.R. Lawrence and N. Nohria, “Driven: How Human Nature Shapes Our Choices” (San Francisco: Jossey­Bass, 2002).

4.  This section draws on M. Hansen, “Turning the Lone Star Into a Real Team Player,” Financial Times, Aug. 7, 2002, 11–13.

5.  See, for example, M.B. Brewer, “Ingroup Bias in the Minimal Intergroup Situation: A Cognitive Motivational Analysis,” Psychological Bulletin 86 (1979): 307–
324; and H. Tajfel and J.C. Turner, “The Social Identity Theory of Intergroup Behavior,” in “Psychology of Intergroup Relations,” 2nd ed., eds. S. Worchel and
W.G. Austin (Chicago: Nelson Hall Publishers, 1986), 7–24.

6.  See P.J. Oakes, S.A. Haslam, B. Morrison and D. Grace, “Becoming an In­Group: Reexamining the Impact of Familiarity on Perceptions of Group
Homogeneity,” Social Psychology Quarterly 58, no. 1 (March 1995): 52–60; and D.A. Wilder, “Reduction of Intergroup Discrimination Through Individuation of the
Out­Group,” Journal of Personality & Social Psychology 36 (1978): 1361–1374.

7.  See R.H. Hayes and K.B. Clark, “Exploring the Sources of Productivity Differences at the Factory Level” (New York: Wiley, 1985); and R. Katz and T.J.
Allen, “Investigating the Not Invented Here (NIH) Syndrome: A Look at the Performance, Tenure and Communication Patterns of 50 R&D Project Groups,” in
“Readings in the Management of Innovation,” 2nd ed., M.L. Tushman and W.L. Moore, eds. (New York: HarperCollins Publishers, 1988), 293–309.

8.  See also S. Ghoshal and L. Gratton, “Integrating the Enterprise,” MIT Sloan Management Review 44, no. 1 (fall 2002): 31–38.

9.  See M.T. Hansen, “The Search­Transfer Problem: The Role of Weak Ties in Sharing Knowledge Across Organization Subunits,” Administrative Science
Quarterly 44, no. 1 (March 1999): 82–111; and M.T. Hansen and B. Lovas, “How Do Multinational Companies Leverage Technological Competencies? Moving
From Single to Interdependent Explanations,” Strategic Management Journal, in press.

10.  For more details on knowledge management in management­consulting companies, see M.T. Hansen, N. Nohria and T. Tierney, “What’s Your Strategy for
Managing Knowledge?” Harvard Business Review 77, no. 2 (March–April, 1999): 106–116.

11.  See A.K. Gupta and V. Govindarajan, “Knowledge Flows Within Multinational Corporations,” Strategic Management Journal 21 (April 2000): 473–496.

12.  See W. Tsai, “Social Structure of ‘Coopetition’ Within a Multiunit Organization: Coordination, Competition and Intraorganizational Knowledge Sharing,”
Organization Science 13, no. 2 (March–April 2002): 179–190.

13.  For a detailed description of these changes at Morgan Stanley, see M.D. Burton, T.J. DeLong and K. Lawrence, “Morgan Stanley: Becoming a ‘One­Firm’
Firm,” Harvard Business School case no. 9­400­043 (Boston: Harvard Business School Publishing, 1999); and M.D. Burton, “The Firmwide 360­Degree
Performance Evaluation Process at Morgan Stanley,” Harvard Business School case no. 9­498­053 (Boston: Harvard Business School Publishing, 1998).

14.  See M. Haas, “Acting on What Others Know: Distributed Knowledge and Team Performance” (unpublished Ph.D. diss., Harvard University, 2002).

15.  For an in­depth look at inspiring common goals, see J. Collins and J. Porras, “Building Your Company’s Vision,” Harvard Business Review 74, no. 5
(September–October 1996): 65–77.

16.  See M.T. Hansen and C. Darwall, 2003, “Intuit Inc.: Transforming an Entrepreneurial Company Into a Collaborative Organization,” Harvard Business School
case 9­403­064 (Boston: Harvard Business School Publishing, 2003).

17.  See R.H. Coase, “The Nature of the Firm,” Econometrica 4 (1937): 386–405.

18.  See R.E. Caves, “Multinational Enterprise and Economic Analysis (Cambridge, United Kingdom: Cambridge University Press, 1982).

19.  See C. Barnard, “The Functions of the Executive” (Cambridge, Massachusetts: Harvard University Press, 1939).

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Updated: September 9, 2005 Document ID: 12305

IBM Internetworking

Contents

The Internetwork: A Strategic Asset

Total Cost of Ownership and Applications Availability

Challenges of SNA Integration

High Availability

High Performance, Predictable SNA Response Time

Scalability

Flexible Media Options

Cost-E�ective WAN Options

Centralized, Automated Network Management

Cisco’s IBM Internetworking Strategy

Cisco’s IBM Internetworking Features: Meeting Business Needs

High Availability
Scalability

Predictable Response Time and

Guaranteed Bandwidth Reservation

Media Flexibility: SDLC, LAN, and WAN

Comprehensive Network Management

Open Standards

DLSw

Remote Branch Networks Migration

Related Information

The Internetwork: A Strategic Asset
Products Catalog: Cisco IOS Software

Companies and organizations increasingly rely on the rapid and e�cient �ow of information as a key
strategic asset. They view their internetworks as the conduits of this information that enhance
productivity and provide competitive advantages in the global marketplace.

https://www.cisco.com/en/US/products/sw/iosswrel/products_ios_cisco_ios_software_releases.html

https://www.cisco.com/c/en/us/index.html

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Ultimately, it is the order of magnitude improvement in organizational productivity that is the
compelling bene�t of robust internetworks. Yet beneath this wide-ranging umbrella, MIS managers
must focus on several issues that have tremendous in�uence on determining the e�ectiveness of their
internetworks. Two of these issues—the availability of user applications and the total cost of ownership
of a network—are inextricably linked to every company’s information systems strategy.

No company in the world can match Cisco Systems when it comes to maximizing the applications
availability and minimizing the total cost of internetwork ownership. Over the last decade, our proven
technology and complete range of scalable solutions have enabled us to set the pace in the
networking industry. More than anything else, Cisco owes its leadership position to its unique and
robust Cisco Internetwork Operating System (Cisco IOS®)—the value-added software that resides at
the heart of all Cisco internetworking solutions.

Cisco IOS software is the key di�erentiator that separates Cisco’s internetworking solutions from other
alternatives in the industry. For Systems Network Architecture (SNA) mission-critical application users,
Cisco IOS software provides the industry’s most �exible migration paths to client/server and peer-to-
peer applications of the future. Cisco IOS software’s value-added intelligence supports users and
applications throughout the entire enterprise. It provides security and data integrity for the
internetwork. It cost-e�ectively manages resources through the control and uni�cation of complex,
distributed network intelligence. Finally, it functions as a �exible vehicle to add new services, features,
and applications to the internetwork.

Total Cost of Ownership and Applications Availability
Two critical issues drive the evolution of today’s information systems: total cost of ownership and
applications availability. In IBM environments, companies can reduce their costs of ownership
dramatically with the consolidation of multiple SNA and non-SNA networks into one multiprotocol
internetwork. This consolidation eliminates redundant and expensive wide-area communications links
and reduces personnel costs because it simpli�es multiprotocol environments management. In
addition, it provides an infrastructure that allows access to any application from any point in the
network.

A consolidated internetwork must support common applications availability across any media or
platform to ensure success. It must also provide high availability for mission-critical applications and
predictable response time for end users. This requires a range of features that optimize link utilization,
reroute around link failures, and prioritize mission-critical tra�c.

Enterprise Networks Today

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The enterprise of today and tomorrow has requirements that span all four internetworking sectors:
Workgroup, IBM Internetworking, Core, and Access.

Challenges of SNA Integration
Many challenges confront network managers as they consider SNA integration. Perhaps most
important is the need to cost-e�ectively consolidate SNA and LAN internetworks while SNA end-user
response time and availability is still maintained.

Many enterprises also require a scalable solution that can handle networks of over 100,000 SNA
devices. In addition, with the proliferation of new technologies in the local-area network (LAN) and
wide-area network (WAN) arenas, the solution must o�er �exible WAN and LAN choices to protect
current and future investments. As enterprises become more dependent on their internetworks to be
competitive, it becomes increasingly important that the internetwork be adaptable to new
technologies. Finally, today’s multiprotocol internetworks require comprehensive network management
tools that simplify management and allow centralized control, automation, and proactive resource
planning.

High Availability

Mission-critical applications must be available twenty-four hours a day, seven days a week. To
successfully integrate mission-critical tra�c with LAN tra�c, network administrators must be able to
ensure applications availability. To do so requires a reliable transport mechanism that can reroute
around failed links or load balance across multiple links.

High Performance, Predictable SNA Response Time

To ensure high performance, internetworks must fully utilize all available bandwidth and o�er methods
to handle periodic congestion. To fully utilize bandwidth requires high-powered platforms that can
balance tra�c across all available links and automatically dial backup links to handle peak tra�c. As
internetworks carry increased tra�c, the likelihood of periodic tra�c congestion increases. Techniques
must be available that allow network designers to prioritize mission-critical tra�c ahead of less

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important tra�c, like electronic mail or noncritical �le transfers. In addition, features that allow network
designers to allocate bandwidth percentages to speci�c protocols will ensure that SNA users maintain
predictable performance.

Scalability

An integrated multiprotocol solution must be scalable to connect arbitrarily large numbers of LANs or
end stations. Features are required that can control source-route bridging (SRB) and NetBIOS
broadcasts, to thereby avoid tra�c �ooding on Token Ring (TR) LANs. High-density, high-performance
solutions can minimize space requirements, reduce costs, improve performance, and simplify network
design.

Flexible Media Options

To protect current and planned investment and improve application access, internetworking platforms
must o�er �exible media support. Consolidation of Synchronous Data Link Control (SDLC) networks
and LAN networks can greatly reduce costs while it protects customers’ investment in SDLC devices.
In addition, end users need to access SNA applications regardless of how they are connected to the
network, whether it is through SDLC, Token Ring, Ethernet, Fiber Distributed Data Interface (FDDI), or
Asynchronous Transfer Mode (ATM).

Cost-E�ective WAN Options

Because WAN costs are a recurring expense, �exibility in the choice of WAN options is critical.
Multiple options—from dedicated links, to circuit-switched, to packet-switched—allow customers to
select the service that provides the best performance and availability at the least cost.

Centralized, Automated Network Management

The �nal consideration is one of the most important. Comprehensive network management tools must
allow network administrators to provide users with maximum network uptime and a high degree of
applications availability. In addition, integrated management must simplify personnel training and
administrative procedures. The ability to automate router installations and to centralize other router
management activities means that skilled sta� need not be present at each remote site.

SNA Integration Challenge

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Cisco IOS software addresses the integration challenge with solutions that maximize availability,
scalability, performance, �exibility, and management.

Cisco’s IBM Internetworking Strategy
Cisco is the industry leader in the integration of IBM SNA networks within the framework of today’s
expanding multiprotocol global internetworks. In 1993, Cisco held over 67 percent of the SNA router
market, according to an IDC study. Since initiating its �ve-phase SNA integration strategy in 1990,
Cisco has introduced many industry �rsts: the creation of the virtual ring concept, the �rst route
caching mechanism, the highest-performing Token Ring card, and the �rst fully integrated SDLC
conversion capability. The company is currently developing direct attachment to mainframe channels
for TCP/IP and SNA.

Worldwide SNA Router Market 1993

Cisco leads the SNA router market of over $400 million, which represents 23.5 percent of the overall
router market in 1993.

IBM internetworking is unlike any other internetworking market segment. The challenges are unique,
and the solutions are complex. To succeed in this market requires a serious commitment of resources
and people. Cisco has made this commitment, building an infrastructure of dedicated resources with

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years of experience in IBM internetworking. As part of this infrastructure, Cisco o�ers IBM-speci�c
network consultants to help you install your network.

Through its �ve-phase strategy for IBM integration, Cisco has delivered cost-e�ective, feature-rich,
high-performance products. Cisco continues to enhance these o�erings and is now delivering its �fth
phase: full support of SNA peer-to-peer internetworking via Advance Peer-to-Peer Networking
(APPN) Network Node (NN) technology, and the integration of mainframes and LAN internetworks via
direct channel attachment.

Cisco IOS Software Extended Five-Phase IBM Integration Strategy

  LAN WAN Management Delive
ry

Extensions

Pha
se 1

4/16-Mbps
SRB/RSRB

Private Packet-
Switched

SNMP 1990 Enhanced VR, Scalability,
Dynamic Spanning Tree

Pha
se 2

IGS TR/Cisco
3000

SDLC Transport NetView–
SNMP

1991 SDLC TWS, SDLC Broadcast

Pha
se 3

TR–Ethernet SDLLC Local
Termination

LAN Network
Manager

1992 QLLC Conversion, DLSw
Standard

Pha
se 4

IBM Chipset
4-Port TR

Cisco
4000

SNA PU Type 4
Properties

1993 Custom Queuing, 270 kpps SRB

Pha
se 5

Channel
Attach

Cisco
7000

APP
N

SNMP v2 1994–
1995

TCP O�oad, Channel APPN

Cisco’s IBM Internetworking Features: Meeting Business Needs
High Availability

Two key concerns of MIS managers are network availability and the maintenance of consistent end-
user service levels. Cisco has developed several techniques that ensure a high level of reliability when
SNA tra�c is transmitted across a multiprotocol internetwork.

SNA, when transported across a Token Ring backbone, has two primary limitations: an inability to
nondisruptively reroute around network failures, and a low tolerance for network delays. Both
problems cause sessions to be dropped, which forces users to restart and subsequently lose valuable
data and time.

Cisco overcomes the rerouting limitation through IP encapsulation. Through the encapsulation of the
SNA tra�c in IP packets, Cisco internetworking platforms can nondisruptively reroute SNA tra�c
around link failures. To avoid session loss, new routes must be found in less than 10 seconds. Cisco’s
Enhanced Interior Gateway Routing Protocol (Enhanced IGRP) and Open Shortest Path First (OSPF)
routing protocols can generally reroute around failed links in less than two seconds, making the link
outage and recovery transparent to end users.

When SNA tra�c shares links with other LAN tra�c, link congestion can sometimes cause network
delays. If round-trip delays exceed a few seconds, SNA devices will begin error recovery, and in some
cases, SNA sessions will be dropped. In addition, SNA sends frequent control messages to ensure
that session connections are active. These messages can waste expensive WAN bandwidth.

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Cisco o�ers two features that help to overcome this limitation: IP routing and local acknowledgment.
IP routing reroutes based on congestion or adapts to changes in tra�c patterns. With local
acknowledgment, Cisco products locally terminate link connections (both SDLC and LLC2), which
prevents SNA session timeouts and minimizes control messages on the WAN.

Cisco’s Local Sessions Termination Feature

Cisco’s Local Session Termination feature enhances session availability and performance.

Scalability

Cisco internetworks o�er tremendous scalability through several key features that provide support for
very large Token Ring environments. With Cisco IOS software, several scalability limitations are
removed, and you are allowed to do these thing:

Increase the number of Token Ring LANs that can be bridged together across an enterprise.

Increase the number of end systems that you can support without an increase in line speeds.

Attach more LANs to a single device and improve overall throughput within a building or campus.

Increased Connectivity

The source-route bridging protocol—commonly used to bridge Token Ring LANs—is not well suited to
handle large Token Ring environments, because it limits the data path to less than seven bridges and
eight rings. Many enterprises use one backbone LAN to connect one or more LANs on each �oor of a
building and another backbone LAN to connect multiple buildings on a campus. When one campus
connects to another campus, it is quite easy to have LANs that cannot be bridged together because of
the SRB limitation.

Cisco IOS software allows multiple internetworking platforms connected over arbitrary media to be
con�gured as a single virtual ring, which removes the limitations of SRB and allows arbitrarily large

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Token Ring LANs. The virtual ring simpli�es network topology and helps you to build large-scale
networks, because it hides multiple hops. It provides intelligent path selection, because routing within
the virtual ring can occur. And it reduces explorer tra�c—which is used to �nd routes in a SRB network
—because explorer frames within a virtual ring are not exponentially duplicated.

Virtual Ring Architecture

Cisco’s virtual ring architecture allows integration to scale to the largest, most complex networks.

Improved WAN Utilization

Cisco IOS software can signi�cantly improve WAN utilization via the minimization of broadcast tra�c
on the WAN. Two key types of broadcast tra�c are source-route explorer frames and NetBIOS Name
Queries.

In an SRB network, end stations broadcast explorer packets to �nd session partners. Because each
explorer packet is duplicated over each possible path, explorers can generate an inordinate amount of
tra�c in a large meshed Token Ring environment. To minimize these broadcasts, Cisco uses proxy
explorers. With proxy explorers, when the Cisco IOS software learns the route to a given end system,
it caches this information. Subsequent explorer frames to the same address are not broadcast across
the bridged LAN. This can signi�cantly reduce tra�c in SNA networks, which saves expensive WAN
resources.

Both the IBM LAN server and Microsoft LAN Manager operating systems use the NetBIOS protocol.
When NetBIOS clients access servers, they �rst broadcast a name query across the entire bridged
LAN. The query is sent several times to ensure that it reaches its destination, which creates a large
amount of tra�c that can consume lower-speed lines. To reduce this extra tra�c, Cisco developed
NetBIOS name caching. With name caching, only the �rst query is broadcast across a WAN, and the
response is cached. Subsequent queries to the same name are not broadcast across the bridged
LAN. Cisco also supports access lists, so a network administrator can control which servers can be
accessed from a given location. This avoids any unnecessary waste of WAN resources, because all
name queries for these resources are blocked at the Cisco router.

High-Density, High-Performance Token Ring Solution

In campus or building networks, Cisco o�ers a high-density Token Ring solution on its Cisco 7000
high-end platform. The Cisco 7000 supports up to twenty Token Rings via the use of Cisco’s four-port
Token Ring card, which is based on the IBM “Spyglass” chipset and o�ers the highest-available Token
Ring performance in an internetworking platform. Combined with silicon packet switching, the Cisco
7000 delivers a total aggregate throughput of over 270,000 packets per second (pps).

Predictable Response Time and Guaranteed Bandwidth Reservation

Legacy SNA generally has predictable, low bandwidth requirements, while client/server protocols tend
to have bursty, higher bandwidth requirements. When legacy SNA tra�c shares bandwidth with
client/server protocols, it is critical that a technique be available to prioritize mission-critical tra�c,

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which ensures that end-user response time is not impacted. Cisco has developed many features that
ensure that high-priority messages are delivered quickly and reliably, regardless of congestion on a
link.

Mission-Critical Tra�c Prioritization

Without a priority mechanism, mission-critical tra�c may get delayed behind large �le transfers, which
impacts customer service or delays important �nancial transactions. Network delays can sometimes
be avoided with an increase in line speeds, but that is not always possible. To ensure that mission-
critical tra�c always takes precedence over less important network tra�c, Cisco o�ers priority output
queuing.

Priority output queuing enables network administrators to prioritize tra�c, which provides the
granularity that is required to ensure that mission-critical data can be isolated above all other tra�c.
Cisco o�ers four options by which tra�c can be prioritized:

By protocol—This allows speci�ed protocols to be prioritized ahead of all other tra�c. For example,
if SNA tra�c is mission-critical, SNA messages can be given highest priority, followed by TCP/IP,
then NetBIOS and other protocols.

By message size (small messages �rst)—This provides a simple means to prioritize interactive tra�c
ahead of batch �le transfers.

By physical port—With the prioritization of an SDLC line ahead of a LAN or even the prioritization of
one SDLC line ahead of another, network administrators can prioritize tra�c from one department
over another. For example, sales-related tra�c �ow can be prioritized ahead of administration
tra�c.

By SNA device—Prioritization by Logical Unit (LU) address allows speci�ed devices (such as
customer service terminals) to be prioritized ahead of others (for example, printers or administrative
terminals).

Guaranteed Bandwidth Reservation

With Cisco’s custom queuing, network managers can guarantee that, during periods of congestion,
mission-critical tra�c receives a guaranteed minimum amount of bandwidth. If mission-critical tra�c
is not using its entire allotment of bandwidth, that bandwidth can be used by other tra�c. For
example, bandwidth could be reserved such that SNA tra�c receives 40 percent of the bandwidth,
TCP/IP tra�c gets 25 percent, IPX gets 20 percent, and NetBIOS gets 15 percent, which ensures that
SNA always has a large portion of the communication link available to it. If SNA tra�c was light and
only using 20 percent of the link, the remaining 20 percent allocated to SNA could be used by either
TCP/IP or IPX tra�c, which ensures maximum bandwidth utilization.

Custom queuing o�ers the same granular de�nition that is available with priority output queuing.
Custom queuing is designed for environments that want to ensure a minimal level of service for all
protocols.

Prioritization and Bandwidth Management

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Cisco’s custom queueing capability provides predictable response times for mission-critical
applications.

Media Flexibility: SDLC, LAN, and WAN

With Cisco’s wide selection of supported media and WAN services, network administrators can select
media and services that o�ers the best price-to-performance ratio without concern for loss of
connectivity. Cisco o�ers SDLC transport or conversion to LAN protocols, to protect customers’
investments in SDLC. Cisco supports key LAN media (Token Ring, Ethernet, and FDDI) as well as
conversion between LAN protocols. Finally, Cisco o�ers support for a wide selection of WAN services
and has led the industry in the support of emerging new technologies, including Switched Multi-
megabit Data Service (SMDS), Frame Relay, ATM, and High-Speed Serial Interface (HSSI).

Investment Protection: SDLC Support

For companies that want to integrate SDLC environments with multiprotocol LANs, Cisco o�ers two
options: convert SDLC to Token Ring or Ethernet, or transport SDLC without conversion.

Integrated SDLC Conversion

SDLC conversion can be used to convert remote SDLC-attached devices to Token Ring, which
facilitates migration to a LAN environment. Through the use of this option, remote SDLC devices
appear to a front-end processor (FEP) as Token Ring-attached, which enhances performance,
simpli�es con�guration, and reduces line requirements on the FEP. In addition, smaller FEPs can be
used to support SNA tra�c.

In many SNA environments, Ethernet is becoming an increasingly popular option, due to the low cost
of Ethernet adapters and the enhanced manageability with hubs. Presently, IBM 3745 FEPs do not
support SNA over Ethernet. Cisco products allow remote Ethernet-attached devices to access
mainframes via a 3745 FEP through the conversion of Ethernet to either SDLC or Token Ring.

Cisco platforms can also be used to convert tra�c from remote SDLC-attached devices to Ethernet,
which allows mainframe access via less costly 3172 establishment controllers.

SDLC Transport

Some environments need the ability to transport SDLC without conversion (for example, environments
without Token Ring cards on their FEPs). Cisco’s SDLC transport allows network consolidation of
multiprotocol LANs and SNA/SDLC environments without media conversion. SDLC transport can be
used to carry FEP-to-FEP tra�c in addition to FEP-to-controller tra�c.

When SDLC transport is used to connect controllers to a FEP, Cisco o�ers an option called virtual
multidrop, which makes multiple remote SDLC lines appear to the FEP as part of one virtual multidrop
line. This option reduces costs, because it lowers the number of FEP lines required and simpli�es
con�guration requirements for moves and changes.

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Media Flexibility: LANs

Cisco o�ers high-performance transport of any protocol across Token Ring, Ethernet, and FDDI. With
Cisco IOS software, SNA tra�c can traverse any LAN media; for example, SNA can traverse FDDI or
Ethernet backbone LANs. In addition, media conversion is possible between any pair of the supported
LAN types.

Cost-E�ective WAN Services

Because WAN services are a recurring cost, �exibility in the choice of WAN services is key. Cisco
internetworking platforms allow users to select the service that provides the best performance and
availability at the least cost. These include dedicated point-to-point links at speeds that range from
1.2 kbps to 155 Mbps; circuit-switched services for low call-volume applications; packet-switched
services, including X.25, Frame Relay, and SMDS; and cell-switching services, such as ATM. Cisco’s
Frame Relay support allows separate virtual circuits for SNA and non-SNA tra�c, which provides a
means to ensure the service level of SNA while SNA is consolidated on a single physical link with
other protocols.

With dedicated circuits, the network allocates a �xed amount of bandwidth to exclusively serve the
two end points on a given link. Circuit-switched services, on the other hand, o�er advantages in low
call-volume applications because they provide �exible, dynamic WAN connections that are more cost-
e�ective than dedicated circuits. Cisco supports all of today’s array of analog and digital circuit-
switched networks, including the Integrated Services Digital Network (ISDN) physical interface.

A Cisco circuit-switched innovation known as dial-on-demand routing (DDR) allows connections to be
dynamically created when there is tra�c to be sent and automatically disconnected when no longer
required. Cisco’s unique dial backup and load-sharing capabilities automatically dial backup lines
when the primary link either fails or reaches a prede�ned level of congestion.

Cisco internetworking platforms support all of the key packet-switched services, including X.25,
Frame Relay, SMDS, and emerging ATM networks. Cisco products not only support attachment to
X.25, they can provide an X.25 backbone, which allows router networks to transport data from
devices that only support X.25 interfaces. Cisco also supports Quali�ed Logical Link Control (QLLC),
the protocol widely used by SNA devices that connect over an X.25 network. Because it provides
conversion of X.25 QLLC tra�c to LAN or SDLC tra�c, this feature lets users improve performance on
their X.25 backbones and consolidate traditional SNA networks with newer LAN internetworks.

Cisco’s WAN Support

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Cisco’s comprehensive WAN support provides organizations with �exibility, scalability, and lower total
cost of ownership.

Comprehensive Network Management

As internetworks become increasingly strategic assets, many organizations face the challenging task
of how to build a well-managed and productive internetwork that maximizes end-to-end applications
availability while it minimizes total cost of ownership. As internetworks expand—often to remote
locations—management resources are often limited.

Cisco’s strategy to handle these challenges is threefold: centralization, automation, and integration.
This strategy is accomplished with CiscoWorks, a comprehensive package of management
applications based on industry-standard platforms and protocols. CiscoWorks o�ers these services:

Con�guration services lower the cost to install, upgrade, and recon�gure routers. Further, Cisco’s
AutoInstall feature virtually eliminates the time and cost to install remote platforms. With
AutoInstall’s plug-and-play features, a remote site simply plugs the router into the network; the
central operations center handles the tasks to con�gure it and bring it online. CiscoWorks also
allows you to group routers and apply common con�guration changes to all routers at the same
scheduled time.

Comprehensive monitoring services provide network managers with operational and diagnostic data
used to ensure maximum network uptime and applications availability. Through the use of extensive
Simple Network Management Protocol (SNMP) Management Information Base (MIB) attributes,
network managers can use CiscoWorks show commands to view tra�c and error statistics at each
interface and for each protocol. Further, debug commands enable fast problem isolation.

Diagnostic services help administrators minimize network downtime; for example, there are tools
that test router connectivity, trace packet routes, and debug router internal operations.

CiscoWorks runs on NetView/6000 (also known as NetView for AIX), HP OpenView, and SunNet
Manager. CiscoWorks also supports a service point interface to NetView to provide central visibility
and control. The service point interface ensures that important events can be viewed from a central
NetView console and allows applications to be automatically started from NetView, if certain
conditions occur. CiscoWorks comes with a set of NetView programs to assist with the management
of a Cisco network from NetView.

Cisco platforms also support two-way communication with IBM’s LAN Network Manager. This feature
allows network administrators to seamlessly manage their Token Ring LANs from a central site LAN
Network Manager, which protects the customer’s investment in training and management applications.

Internetwork Management

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Cisco o�ers comprehensive management functions that support SNMP, NetView, and IBM’s LAN
Network Manager.

Open Standards

Cisco supports an extensive list of Open System Interconnection (OSI), Consultative Committee for
International Telegraph and Telephone (CCITT), and Internet Engineering Task Force (IETF) open
standards. Where standards do not exist or lack functionality, Cisco has provided the functionality to
address key customer requirements.

DLSw

Cisco has supported SNA transport over IP backbones since 1990. A subset of the features that Cisco
has o�ered to support SNA transport are now collectively referred to as Data Link Switching (DLSw).
DLSw is also an emerging SNA-over-IP routing speci�cation designed to facilitate the integration of
SNA and LAN internetworks, via the encapsulation of nonroutable SNA and NetBIOS protocols within
routable IP protocols. The primary goal of DLSw is to provide an open standard that router vendors
can use to achieve base-level interoperability among their products. Finally, the DLSw standard
includes key recent enhancements over solutions that already exist, including standardized �ow
control and enhanced management.

Cisco plans to support the DLSw standard in Q1, 1995. Cisco’s DLSw will not only support the
standard, it will include additional features, such as extensive media and transport �exibility, and it will
add scalability enhancements to allow even larger, integrated networks to support any-to-any
connectivity. At the same time as Cisco adds new functionality to the DLSw standard, it will continue
to maintain full interoperability and backward compatibility with existing solutions—which will deliver
the most robust DLSw implementation in the industry.

Remote Branch Networks Migration

Cisco has developed a comprehensive strategy to migrate branch o�ces from legacy and SNA
networks to integrated client/server and peer-to-peer internetworks. These solutions meet all of the
access requirements for remote branch o�ces: LAN to LAN connectivity, legacy media and protocol
support, public network access, and SNA host access.

For LAN media, Cisco o�ers support for SNA and NetBIOS—on both Token Ring and Ethernet, across
all platforms—through SRB/RSRB and Transparent Bridging solutions. In addition, Cisco’s translational
bridging addresses Ethernet-to-Token Ring connectivity for these nonroutable protocols. Cisco’s

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DLSw implementation extends features like local acknowledgment and route caching to Ethernet-
based SNA networks, and it enhances the robustness of Token Ring networks.

In branch o�ces with legacy protocols, Cisco provides a variety of capabilities, including Serial
Tunneling of asynchronous, bisynchronous, and SDLC tra�c, as well as integrated SDLC-to-LAN
conversion. These capabilities consolidate the diverse types of tra�c that exist in branch
environments. As an example, a typical bank branch can consolidate bisynchronous automatic teller
machines, SDLC teller platforms, LAN-based o�ce automation, and asynchronous alarm systems onto
a single communication facility.

Cisco’s IBM Access Strategy

LAN Access Legacy Media Public Network SNA Host
Architecture

SRB/RSRB
Transparent Bridging
Translational Bridging
DLSw

STUN SDLLC
Async Tunnel
Bisync Tunnel

Frame Relay – Layer 3 X.25 – Layer 3
QLLC Conversion Frame Relay – Layer
2 (RFC 1490) CFRAD

TN3270 NCIA
DSPU
Concentration
DLUR

Cisco’s IBM access strategy provides comprehensive support for client/server, SNA, and legacy
protocol access through a variety of packet-switching facilities that support various SNA host access
options for mission-critical, mainframe-based SNA applications.

Cisco o�ers many �exible options for connection to public networks. In the Frame Relay domain,
Cisco supports two transport options—layer 2 or layer 3. Cisco’s layer 2 choice conforms to RFC 1490

and allows SNA and NetBIOS to be transported directly over Frame Relay.
Customers can also choose to transport at layer 3—which encapsulates SNA and NetBIOS in IP and
sends it over Frame Relay—to reap the bene�ts of IP’s dynamic routing capabilities, such as
nondisruptive session reroute. In addition, Cisco provides a cost-e�ective platform for customers that
are migrating from dedicated SDLC networks to Frame Relay, in the form of a Cisco Frame Relay
Access Device (CFRAD). The Cisco FRAD can be upgraded to full routing capabilities as LANs are
deployed. Cisco’s IBM access strategy supports a variety of SNA host access methods. For SNA users
on TCP/IP networks, Cisco has provided TN3270 client services in its access server products. With
Cisco’s direct channel attachment to TCP/IP mainframes, TN3270 users bene�t from greater levels of
performance and scalability. For SNA users on APPN networks, Cisco will o�er APPN’s Dependent
Logical Unit Requester (DLUR) for 3270 access from legacy controllers and gateways, to avoid costly
upgrades to these legacy devices.

Finally, Cisco’s Native Client Interface Architecture (NCIA) provides customers with a new option for
SNA applications access that combines the full functionality of native SNA interfaces at both the host
and client with the �exibility to leverage their TCP/IP backbones. NCIA encapsulates SNA tra�c within
a client PC or workstation, to provide direct TCP/IP access while the native SNA interface at the end-
user level is preserved. This can obviate the need for a standalone gateway and provide �exible
TCP/IP routing over the backbone with a native SNA interface to the host. Cisco is also o�ering a
Downstream Physical Unit (DSPU) Concentration function that concentrates multiple SNA Physical
Units (PUs)—such as clients and cluster controllers—and provides a single PU image to the host. This
simpli�es host con�guration and minimizes WAN overhead.

Cisco’s Native Client Interface Architecture

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SNA clients with NCIA provide full-function native SNA interfaces to users and provide �exible TCP/IP
access to enterprise backbones over any IP media without the requirement of a standalone gateway.
Cisco’s platform provides e�cient native SNA interface to mainframes.

Mainframe Integration

A router is an excellent vehicle to use to integrate the mainframe, because mainframe customers
already use routers in conjunction with LAN channel controllers. The advantage of a direct attachment
to a mainframe channel is greater performance and better integration with fewer points of failure. With
the use of the Cisco 7000 platform, Cisco’s strategy is to combine the power of the media-speed
mainframe interface with media-speed LAN, WAN, and ATM interfaces and Cisco’s 270 kpps silicon
switching engine, to o�er the industry’s most powerful mainframe and LAN integration solution.

Cisco’s Channel Interface Processor (CIP) supports both Enterprise Systems Connection (ESCON)—
IBM’s high-speed channel architecture, �rst introduced in 1990—and Bus and Tag connections—IBM’s
older channel architecture, widely used in the current installed base of mainframes.

The Cisco 7000 CIP includes a powerful onboard protocol processing engine to ensure that no
bottlenecks are created. In addition, the Cisco 7000 o�ers dual power supplies and hot-plugable
interface cards to ensure high availability. Across all of Cisco’s platforms, Cisco IOS software o�ers
dynamic recon�guration of any con�guration option, which further improve availability because it
minimizes the need for scheduled downtime. With the 7000’s high-density LAN and WAN cards, FDDI,
and ATM interface modules, it is the premier mainframe channel integration platform.

Mainframe Integration

Cisco’s direct channel attachment allows users to tightly integrate mainframes, both with today’s
networks and those of the future.

APPN Network Node-Based Internetwork

Cisco is committed to supporting IBM’s advanced peer-to-peer networking. Cisco will provide native
APPN Network Node support in its internetworking platforms and has licensed IBM source code to
ensure 100 percent network node compatibility. Cisco products, with their extensive support of LAN
and WAN media, provide an ideal, high-performance platform to support IBM’s APPN NN. Cisco
products with NN functionality can be used in a pure APPN network with a mix of other vendors’ APPN

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platforms. Alternatively, Cisco’s APPN platform can be used in integrated multiprotocol internetworks,
with Cisco’s prioritization techniques providing a means to control bandwidth allocation. Cisco will
also provide a cost-e�ective method to allow 3270 legacy tra�c to take advantage of APPN: the
DLUR function. With the use of this capability, multiple controllers or SNA gateways that support
legacy SNA can attach to a Cisco platform, and legacy tra�c can be transported across a native APPN
backbone without the need for upgrades to APPN.

Cisco will also support APPN’s High Performance Routing (HPR) protocol, which will enable native
SNA to nondisruptively recover from link failures and which will improve APPN performance.

Cisco products allow customers to integrate legacy SNA networks today and choose from a variety of
options for future migration: TCP/IP based, APPN-based, or mixed TCP/IP and APPN.

Cisco’s APPN Solution

Cisco’s APPN implementation supports both today’s legacy applications and future peer-to-peer
applications while it guarantees 100 percent compatibility with APPN end solutions.

IBM Collaboration

Cisco and IBM are collaborating on many fronts to enhance product capability, customer service, and
manageability and to protect customers’ investments in computing and networking facilities. The two
companies cooperated to develop the four-port Token Ring card with the IBM “Spyglass” chipset,
which o�ers the highest performance in the market. Cisco has also licensed ESCON and Bus and Tag
technologies from IBM for incorporation into the Cisco 7000 CIP. Additionally, Cisco uses IBM test
facilities to ensure compatibility between the Cisco channel interface and IBM mainframes.

Cisco and IBM also work closely together as part of the APPN Implementors’ Workshop (AIW), which
is an IBM body developed to de�ne APPN protocols. Cisco licenses the APPN source code from IBM.
The two companies also cooperatively established the Data Link Switching Working Group within the
AIW, to help promote the development of the DLSw standard.

For service, IBM’s �eld service organization performs on-site maintenance, stocks and delivers spare
parts, and provides installation services for Cisco customers. Cisco is also actively collaborating with
IBM to enable interoperability with LAN Network Manager agents on IBM’s Token Ring network
management platform. In addition, Cisco is a member of the NetView/6000 Association, which
incorporates the Cisco MIB into NetView/6000 and certi�es compatibility. Finally, Cisco is providing
CiscoWorks applications for NetView/6000, as well as compatibility certi�cation.

Working with IBM

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Cisco has many cooperative relationships with IBM, to enhance product compatibility, customer service,
and manageability.

The Future: Beyond Integration

As customers implement Cisco technology and integrate their SNA environments into multiprotocol
internetworks, new options become available. Whatever direction the customer chooses—whether to
evolve from SNA to APPN, from SNA to client/server, or to maintain a pure SNA environment—Cisco
will provide the most �exible migration paths to future networks.

At the heart of Cisco’s e�orts is its industry-leading Internetwork Operating System that integrates all
environments: IBM-oriented access, core backbone, mainframe integration, and workgroup
technologies. Cisco’s years of experience with internetworking all major protocols and environments
across every type of WAN service, combined with the company’s dedication to the IBM environment,
make Cisco the premier internetworking vendor for IBM SNA and mainframe integration both today
and tomorrow.

Integrated Internetworking with IOS

Cisco’s comprehensive IBM internetworking strategy provides the most �exible migration options in all
areas of future internetworks; Access, Workgroup, Backbone, and Data Center.

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Related Information
Technical Support & Documentation – Cisco Systems

https://www.cisco.com/cisco/web/support/index.html?referring_site=bodynav

Strategic Management Journal
Strat. Mgmt. J., 25: 429-451 (2004)

Published online in Wiley InterScience (www.interscience.wiley.com). DOI; 10.1002/smj.386

EXPLORING THE STRUCTURAL EFFECTS OF
INTERNETWORKING
PETER J. BREWS^* and CHRISTOPHER L TUCCP
‘ Kenan-Flagier Business School, University ofNortti Carolina at Chapel Hill, Chapel
Hill, North Carolina, U.S.A.
^ College of Management of Technology, Swiss Federal Institute of Technology,
Lausanne, Switzerland

Extant theory presents conflicting perspectives on how internetworking might affect the orga-
nizational structures of established firms. One prediction is that internetworking could narrow
organizational scope and deepen specialization, reduce hierarchy, and increase external part-
nering. A second contends that internetworking might increase scope, expand hierarchy, and
decrease external partnering. Analysis of a multinational sample of 469 firms reveals that deeply
internetworked firms are more focused and specialized, less hierarchical, and more engaged in
external partnering than less intensively internetworked organizations are. No scope broadening
or hierarchy expansion effects are observed. Copyright © 2004 John Wiley & Sons, Ltd.

INTRODUCTION

Organization form is an important dimension of
corporate strategy. Defining where to compete,
which activities to perform inside the firm, and
the structure of the organization are among the
most important decisions executives make, for they
not only define what firms exist for, but also
enable and constrain a multitude of other strate-
gic decisions. Researchers have traditionally been
interested in organizational forms that suit highly
competitive environments (e.g., Ilinitch, D’Aveni,
and Lewin, 1996; Garud and Kotha, 1994). More
recently, scholars have begun considering whether
and how organizational form might differ in the
context of the growth of information-based indus-
tries and the concomitant diffusion of Internet-
based advanced communications technology (e.g..

Key words: internetworking; organizational form; scope;
hierarchy; partnering
*Correspondence to: Peter J. Brews, Kenan-Flagler Business
School, University of North Carolina at Chapel Hill, Campus
Box 3490, McColl Building, Chapel Hill, NC 27599, U.S.A.
E-mail: peter_brews@unc.edu

Winter and Taylor, 1996; Shapiro and Varian,
1999), and how firms have experimented with or
adjusted their form after the appearance of such
innovations (Rindova and Kotha, 2001).

While communications and internetworking
technology have far-reaching effects on industries
and firms (Afuah and Tucci, 2003b) there have
been few, if any, empirical studies on firm-
level adoption of such technology, and how
that adoption infiuences organizational form.
Moreover, extant theory presents contradictory
perspectives on how the Internet might affect
the organizational form of established businesses
(Markides, 2001b). One prediction—based partly
on external coordination cost reduction—is
that internetworking will narrow organizational
scope and deepen specialization, reduce internal
hierarchy, and increase external partnering. An
alternative prediction—based partly on internal
coordination cost diminution—contends that
internetworking allows for an increase in scope,
an expansion of hierarchy, and a reduction
in external partnering. Information technology
has often been associated with contradictory

Copyright © 2004 John Wiley & Sons, Ltd. Received 9 July 2002
Final revision received 5 September 2003

430 P. J. Brews and C. L. Tucci

organizational outcomes (Robey and Boudreau,
1999), and addressing such contradictions in the
case of internetworking has important theoretical
and practical implications. Depending on which
prediction is correct, insights into how different
coordination and production costs affect firm
boundaries are gained. To presage our findings
we note that deeply internetworked firms are
more focused and specialized than less intensively
internetworked organizations are. Moreover, rather
than scope widening or internal hierarchy
expansion, an increase in external partnering and
a decrease in internal hierarchy are also associated
with internetworking.

THEORY DEVELOPMENT

Internetworking’s effect on organizational form
can be evaluated through the lens of transaction
costs economics (TCE). TCE theorizes that
boundaries are determined as firms ‘economize’
on production and transactions costs (Williamson,
1975, 1985; Chiles and McMackin, 1996; Hill,
1990; Pisano, 1990; Monteverde and Teece, 1985).
Transaction costs are usually associated with
search and contracting costs, and with monitoring
and enforcing compliance. Moreover, according to
TCE, a cost-benefit analysis is associated with
expanding the scope and complexity of firms
(Coase, 1937), related to internal and external
coordination costs (Brynjolfsson et al., 1994).’
In this section, we highlight theoretical contrasts
between the marginal benefits and marginal costs
of expansion, and how internetworking might
influence each of them. Prior to presenting the
contrasting perspectives, a definition of terms is
warranted.

Definition of terms

Even though ‘the Internet’ has referred to a ‘net-
work of networks’ since the early 1970s, appli-
cations associated with the Internet have changed
as the Internet has evolved. Initially, the primary
Internet applications were sending text messages
(email), gaining access to remote computers (‘tel-
net’), and transferring files. Then applications such

as those supporting discussion boards appeared,
permitting more real-time interactivity across the
Internet. By the late 1990s the Internet subsumed
the above plus the World Wide Web, now com-
prising millions of web sites interactively accessed
using Hypertext Transfer Protocol (http). In 2003,
a combination of the public Internet and two types
of private Internet-based networks (intranets and
extranets) are utilized in Internet-based commu-
nication. Intranets are only accessible within the
corporation, while extranets are accessible by the
firm and its supply chain or partners. ‘Internet-
enabling’ technically thus refers to the conversion
of IT infrastructures to such networks. Opera-
tionally, Internet enabling permits employees, cus-
tomers, suppliers, and partners of firms to conduct
business activities and processes online through
the use of Internet-based technologies: stakehold-
ers seek information and/or accomplish tasks via
or over the Internet.^

Internetworking lowers external coordination
costs, reducing marginal benefit of expansion

Prior research in corporate strategy has proposed
that expanding firm scope is desirable in situations
where ‘strategic assets’ are non-tradable and where
the potential exists for high transaction costs
between the focal and other firms that would
control the assets in the open market (Markides,
2001a; Williamson, 1975; Teece, 1982). As firms
exist to minimize the sum of production and trans-
action costs, where the costs of performing activ-
ities are lower in the open market these activities
will not remain inside the firm (Williamson, 1985;
Malone, Yates, and Benjamin, 1987). Transaction
costs are usually thought of as involving searching
for parties with whom to transact, negotiating and
drawing up contracts, and monitoring and enforc-
ing those contracts.

Internetworking, like previous information tech-
nologies, has the potential to make information
transmittal much more efficient (Afuah and Tucci,
2003a; Afuah, 2003), and a change in transmittal
capabilities has several implications for the costs
of transacting in the market, influencing search,
monitoring, and enforcement costs. Internet-based
networking ought to decrease search costs to locate
both suppliers and customers. Here, information

‘ For the purposes ot” this paper, ‘complexity of structure’ refers
to the levels of scope and internal hierarchy/bureaucracy noted in
firms (cf. Grinyer and Yasai-Ardekani. 1980, 1981; Pugh et al,
1968).

^See Segaller (1999) and Afuah and Tucci (2003b) for more
information.

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Structural Effects of Internetworking 431

technology acts as an intermediary and enables
access to ‘electronic markets,’ thus reducing buyer
costs in finding information about offerings and
prices (Bakos, 1997; Garicano and Kaplan, 2001).
There are other related reasons for search costs
to decline, such as a wider geographic reach of
possible suppliers, and customers with the poten-
tial to communicate with the firm either directly
or via an intermediary (Afuah and Tucci, 2003b;
Garicano and Kaplan, 2001).

As an open, cheap, standard communication
medium built around public or private Internet-
based networks, internetworking also increases
access to information in forms that suit the users
and transactions involved. Wider access to and
greater transparency of information decrease not
only search, but also monitoring and enforcement
costs. If a contractor’s reputation (e.g., a history of
trading transactions, and counterparts’ satisfaction
with those transactions) is available in the open
market, the potential to gain from ex post oppor-
tunism such as lying, cheating, concealment, or
holdup is reduced (Afuah, 2003). Internetworking
enhances the availability and ‘liquidity’ of such a
rating system. Further, intermediaries that promote
‘business process visibility and synchronization
across an enterprise and with its business partners’
(E2open, 2003) are now appearing, thus enabling
real-time monitoring of transactions. These factors
support the argument that monitoring and enforce-
ment costs will also drop with internetworking,
reducing the marginal benefits of expansion.

In addition to the effects on the main compo-
nents of transaction costs, internetworking might
also have secondary effects that reduce the cost
of performing transactions in the market. For
example, significant improvements in communica-
tion and information processing may also reduce
asset specificity and information asymmetry such
that other asset uses may be more easily found,
especially where assets are information-dependent
(Afuah, 2003). The Internet enables alternative
uses to be sought at low cost, lowering the require-
ment to move relation-specific assets, and allowing
more specialized information technology assets to
be replaced (2003: 41).

In summary, as internetworking has the poten-
tial to reduce the costs of performing transactions
in the market, a move from firm- to market-
based coordination should follow the adoption of
internetworking. Economies of specialization and
scale should allow external contractors to perform

non-core functions more efficiently than inter-
nal ‘dedicated’ producers did before (Williamson,
1996), and firm boundaries should change: deeply
internetworked firms will focus on activities or
capabilities they excel at while contracting out the
remaining activities to others that perform these
better.^ This leads to our first hypothesis:

Hypothesis la: Internetworking will he associ-
ated with a narrowing of business scope and an
increase in business specialization.

When scope is narrowed and/or specialization is
deepened, divestment and/or outsourcing typically
follow. External partnering is thus a corollary
of scope reduction and specialization increase.
Clemons and Row (1992) suggest that as IT low-
ers coordination costs without increasing the risks
associated with greater external coordination, more
recourse to outsourcing and interfirm cooperation
should result. Moreover, Malone et al. (1987) pre-
dict that information technology has the potential
to tightly link stages of an external value chain
across organizations through an ‘electronic inte-
gration effect,’ while Ciborra suggests one role
of information systems as a mediating technol-
ogy is to provide a vehicle ‘through which the
behaviour of the parties and the contract itself
could be better monitored, thus standardizing the
exchange process’ (Ciborra, 1993: 121). Implicit
in such a role is the use of technology to bet-
ter monitor external contracts. The outsourcing of
components that were previously produced inter-
nally requires new monitoring arrangements, and
as these newly formed partnerships can be coor-
dinated through the Internet (Brews, 2000; Miles
et al., 1997), the move from vertically integrated

•’ Though related, economies of scale differ from economies of
specialization. The first construct derives mostly from produc-
tions/operations management and relates to how costs change
depending on the volume of products (or services) produced or
sold. Products with high fixed costs present the greatest oppor-
tunity for scale econotnies. The second construct derives more
from strategic management and relates to the scope (or focus)
of organizations. For our purposes, economies of specialization
are enjoyed when an area of specialization is highly focused
and more customers purchase this offering as a consequence
of the superior costs or quality that the specialization permits.
Thus competitors that experience volume increases by virtue of
increases in specialization will enjoy both economies of spe-
cialization and scale. Economies of specialization relate to the
focus/strategie make-up of the business model, while economies
of scale relate to the volume produced given the business model
in operation.

Copyright © 2004 John Wiley & Sons, Ltd. Strat. Mgmt. J.. 25: 429-451 (2004)

432 P. J. Brews and C. L. Tucci

value chains (Porter, 1980, 1985) to virtually inte-
grated value nets (Parolini, 1999) will be associ-
ated with both an increase in external partneritig
as well as an increase in internetworking. Along
similar lines. Miles et al. (1997) specifically pre-
dicted that as a consequence of internetworking
organizations would evolve from vertically inte-
grated mass producers to cellular clusters of self-
organizing components. Implicit in all the above
predictions are a decrease in vertical integration
(i.e., a narrowing of scope and an increase in
specialization—Hypothesis la) and a concomitant
increase in external partnering. This leads to our
second hypothesis:

Hypothesis lb: Internetworking will be associ-
ated with an increase in external partnering.

Organizational hierarchy structures information
flows and improves control in the face of unknown
environmental contingencies (e.g., uncertainty)
or other behavioral limitations (e.g., bounded
rationality, cf. Williamson, 1975)—any increase
in uncertainty typically causes a shift from markets
to firms (Galbraith, 1977). However, information
technology can improve an organization’s ability
to assess individual performance and can also
increase the awareness that subordinates have of
each other’s actions, thereby lessening uncertainty
and the need for hierarchy (Ciborra, 1993;
Olson, 1981). With the need for coordination
reduced, flatter hierarchies may emerge (Cordelia
and Simon, 1999). Some information systems
researchers have reached similar conclusions
regarding the likely effect of internetworking
on internal hierarchy; in the face of the
Internet organizations will evolve from centralized
structures to fiattened and unbundled networks
(Winter and Taylor, 1996; Hagel and Singer,
1999); or from multilevel hierarchies to de-
layered, downsized organizations (Snow, Miles,
and Coleman, 1992). A reduction in coordination
and transaction costs should thus reduce internal
hierarchy, resulting in our third hypothesis:

Hypothesis lc: Internetworking will be associ-
ated with a reduction in internal hierarchy.

Internetworking lowers internal coordination
costs, reducing marginal cost of expansion

Hypotheses l a – c assert internetworking will nar-
row organizations and de-layer internal structures.

and will contribute to an increase in external
partnering. However, extant theory presents more
than one prediction of internetworking’s poten-
tial impact on organizations and their bound-
aries (Markides, 2001b). Though (and as outlined
above) reduction in search and external coordina-
tion costs might decrease the marginal benefit of
scope expansion, internetworking may also reduce
the marginal cost of scope expansion through
internal coordination cost and bureaucratic infor-
mation loss reduction. When internal coordination
costs or bureaucratic information losses are high,
expansion is inadvisable (Markides, 2001a); a low-
ering of these costs makes expansion feasible.
However, factors associated with the marginal ben-
efits of expansion are distinct from those associated
with marginal costs. Internal coordination costs
relate to information gathering, decision making,
and the compliance monitoring needed when pro-
ducing internally. Through internetworking, com-
munication between the center and the operating
units becomes easier, faster, more reliable, and
more asynchronous (cf. Markides, 2001b; Afuah,
2003; Afuah and Tucci, 2003b; Staudenmayer,
Tripsas and Tucci, 2000; Becker and Murphy,
1992). When that occurs, the costs of coordinat-
ing units—and thus the marginal costs of expan-
sion—decrease and a widening of scope becomes
possible. This leads to our fourth hypothesis:

Hypothesis 2a: Internetworking will be associ-
ated with a broadening of business scope and a
lessening of business specialization.

Just as a narrowing of business scope and a deep-
ening of business specialization might lead to an
increase in external partnering (see Hypothesis
lb), it is logical to expect that a broadening of
scope and a lessening of specialization will have
the opposite effect. However, regardless of any
related scope/specialization effects, there are more
direct reasons explaining why external partnering
might in fact decrease as a result of internet-
working. Malone etal.’s (1987) ‘electronic hier-
archies’ were characterized by less use of external
search and market competition and more use of
tightly coupled operations with fewer long-term
partners, while Clemons, Reddi and Row (1993)
theorized that IT-induced reduction in coordination
costs might also contribute to deeper outsourc-
ing relationships with fewer long-term partners. If
these effects dominate following the introduction

Copyright © 2004 John Wiley & Sons. Ltd. Strat. Mgmt. J.. 25; 429-451 (2004)

Structural Effects of Internetworking 433

of intemetworking, rather than increasing exter-
nal partnering, deeply intemetworked firms might
have fewer extemal partners, leading to the fol-
lowing hypothesis:

Hypothesis 2b: Intemetworking will be associ-
ated with a decrease in extemal partnering.

Though hierarchy potentially reduces uncertainty
through increased control, flowing up and down
the hierarchy information is filtered and distorted
(Blau and Meyer, 1971) and efficient information
processing is often hindered. Consequently, man-
agers spend time sorting through information, thus
limiting their span of control (Mackenzie, 1978).
There are other costs associated with bureaucracy,
including the costs of having middle managers,
and influence or political costs. Influence costs are
incurred when managers unproductively attempt to
influence organizational processes (Milgrom and
Roberts, 1990), and as these costs increase the
marginal cost of expanding the scope of the firm
increases also. However, Intemet-based commu-
nication is less filtered and distorted (Stauden-
mayer et al., 2000) and can be done with less
human intermediation. Thus, Robbins (1990: 107)
proposes that ‘when managers have direct access
to data, they can handle more subordinates’ (cf.
Leifer, 1988). A decline in intemal coordination
costs thus enables deeper intemal hierarchy with-
out reducing spans of control. Moreover, multina-
tional enterprises (MNEs) exploit transborder data
flows through greater centralized communications,
enabling them (or any multidivisional firm) to
expand more easily (Ciborra, 1993). Most impor-
tant for our purpose is that infonnation technology
is likely to simultaneously increase ‘intemal mar-
kets’ and other hybrids within these deeper hier-
archies (Ciborra, 1993). These arguments lead to
the possibility that intemetworking might increase
intemal hierarchy, leading to our sixth and final
hypothesis:

Hypothesis 2c: Intemetworking will be associ-
ated with an increase in intemal hierarchy.

Note that though the two sets of hypotheses present
opposing perspectives on the stmctural effects of
intemetworking, it is possible that intemetwork-
ing might reduce both extemal and intemal coor-
dination costs simultaneously. Under such condi-
tions empirical support for Hypotheses l a – c would

indicate greater reduction in extemal than inter-
nal coordination costs, while data consistent with
Hypotheses 2a-c would indicate a greater decline
in intemal than external coordination costs.

RESEARCH METHODS

Variable measurement

Since this study is the first to investigate the inter-
networking levels of established companies, new
scales measured the independent variable, denoted
as ‘Intemetworking Depth.’ Measures of the three
dependent variables (Business Scope/Speci-
alization; Hierarchy Reduction; and External Part-
nering) were also required. In addition, we con-
trolled for the effects of six other variables: Inter-
networking Duration, Eirm Size, Eirm Location,
Eirm Global Reach, Overall Eirm Performance,
and Intemetworking Operating Performance. These
controls permitted us to test the robustness of the
relationships discovered, and the first four in par-
ticular also permitted validation of our Internet-
working Depth measurement approach. Justifica-
tion for the inclusion of these variables is outlined
below, and copies of all scales are provided in
the Appendix. Due to its novelty, more attention
is devoted to our measurement of Intemetworking
Depth than to the other study variables.

Independent variable: Internetworking Depth

Domain specification

Though most established businesses only began
implementing Intemet-based business solutions in
1998, adoption is now widespread across the
United States (Varian et al., 2001) and has taken
place in three phases. As initial expectations were
that consumer applications would benefit most
(Coltman et al., 2001) the first phase focused on
front-end interfaces with customers (so-called B2C
or business to consumer). Starting around 1995
with web sites that were little more than online
electronic brochures, B2C has evolved to cus-
tomized web pages that permit the direct pur-
chase of pre-approved products, and sophisticated
customer relationship management solutions based
on software from companies such as Siebel Sys-
tems and SAS Institute. Moving beyond B2C,

Copyright © 2004 John Wiley & Sons. Ltd. Strat. Mgmt. J.. 25: 429-451 (2004)

434 P. J. Brews and C. L. Tucci

the second phase concentrated on back-end activ-
ities with suppliers (B2B or business to busi-
ness) and with interactions between suppliers and
their corporate customers (Coltman et al., 2001).
Most recently, the third phase extended inter-
networking to employees (B2E or business to
employee; see Hansen and Deimler, 2001), and
among other things this includes using the Internet
to provide employees with training opportunities,
career development, employee marketplaces, ben-
efits selection and administration, and health care
information. B2E also includes the conversion of
back-office activities and management processes to
Internet-based platforms.

Accepting that Internet-based mediation in-
volves several levels beyond the initial focus
on front-end ‘transactions’ with customers (El
Sawy et ai, 1999; Sawhney and Zabin, 2001)
and thus involves an amalgamation of B2C, B2B,
and B2E, any conceptualization of internetworking
at established firms must ascertain the extent to
which all firm stakeholders (customers, employees,
suppliers, and partners) interact online. Moreover,
information communication is scaleable according
to ‘reach’ and ‘richness’ (Evans and Wurster,
1997), where reach relates to the number and
diversity of people exchanging information and
richness relates to the amount of information
exchanged and the degree of customization and
interactivity achieved.”* Thus, not only the extent
to which stakeholders are connected (reach) is of
importance; the quality of online interactions (i.e.,
the substance of the activities performed online,
or richness) must also be scaled. Accordingly, in
this study Internetworking Depth measured the
extent that online communications and transactions
are conducted between employees, customers,
suppliers, and partners of established businesses,
where both reach and richness were accounted for.

Measurement

Prior research has mostly relied upon secondary
financial or economic data to capture IT practice

or use.’ However, these methodologies are too
coarse-grained to capture the nuances of richness
and reach and contain potential for measurement
error (cf. Brynjolfsson, 1993). Instead, we ascer-
tained directly from managers how extensively
internetworking is used in the conduct of their
firms’ business operations. Based on fieldwork
done at Cisco Systems and cross-validation with
existing literature (e.g., Barua et al., 2001; Sawh-
ney and Zabin, 2001; Hansen and Deimler, 2001),
seven Guttman-type scales (Guttman, 1944) and
34 statements were developed.

To calibrate reach, four Guttman type scales
(Ql-4) measured the degree to which customers,
suppliers, partners, and employees utilized the
Internet. Reach increased as choices moved from
top to bottom in each scale. Three Guttman-type
scales (Q5-7) and 34 statements (Q8) calibrated
richness. Q5 indicated the range of employee ben-
efits and data that was administered online, Q6
indicated the extent to which expense reimburse-
ment was conducted online, and Q7 explored
the degree to which financial results were avail-
able online. Richness increased as choices pro-
ceeded from top to bottom in each scale. The
34 statements in Q8 covered online activities per-
formed by the employee community, the cus-
tomer community, and the supplier/partner com-
munity, and also included activities relating to
financial management/budgeting/strategy forma-
tion. Respondents indicated on a yes (1) or no
(0) basis whether or not each activity was per-
formed online at their firm. The statements adhered
to Loevinger’s (1967) guidelines for item gener-
ation in that they were based on a broad area
of content and logically related to the construct
under investigation. All activities included in the
instrument design were performed online at Cisco
Systems, thus comparing established organizations
against the extant internetworking capabilities of
an acknowledged pioneer of Internet-enabled oper-
ations. Scores obtained for Q l – 7 and the 34 item

•* Evans and Wurster also point out that before the
Internet a trade-off between richness and reach existed:
rich communications could typically only be made available
to a few recipients. The high bandwidth of Internet-based
communications allows both to be offered simultaneously,
underlining the need to include both constructs in any
conceptualization of internetworking.

‘ For example, Lee and Menon (2000) use a single measure of
IT-related capital expenditure to capture information technol-
ogy use in hospitals, while Tam (1998: 87) conceptualized IT
as ‘a class of capital stock’ that ‘includes major processors and
peripherals that provide the underlying computing infrastructure
of the firm.’ Along similar lines Dewan, Michael, and Min’s
(1998) measure of IT combined computer-related investments
with a capitalized value of other IT expenses, while Dewan and
Kraemer (2000) relied on country-level macro-economic IT cap-
ital investment data to test the association between information
technology and productivity.

Copyright © 2004 John Wiley & Sons, Ltd. Strat. Mgmt. J.. 25: 429-451 (2004)

Structural Effects of Internetworking 435

scales were summed to obtain an Internetwork-
ing Depth score per respondent firm. Cisco Sys-
tems was the only firm in the 469 responses that
obtained the maximum 68 points for Ql-8 .*

Dependent variables

Business Scope/Specialization, Extemal
Partnering, and Hierarchy Reduction

Six statements (see the Appendix) measured
change in Business Scope/Specialization, Hierar-
chy Reduction, and External Partnering. Respon-
dents indicated their agreement (or otherwise)
with each statement on a 5-point scale ranging
from ‘Strongly disagree—the opposite is true’ to
‘Strongly agree.’ The first and last of the six state-
ments measured Business Scope/Specialization.
Strong agreement indicated a firm whose busi-
ness scope was narrowing and specialization was
deepening, with non-core activities being out-
sourced and lower value-added jobs being elim-
inated. Statements three and four captured the
effects on internal hierarchy, and strong agree-
ment indicated a noticeable decrease in manage-
rial levels, internal hierarchy, and bureaucracy.
Statements two and five measured partnering and
alliance behaviors. Strong agreement indicated
firms where in comparison to a few years ago many
more extemal strategic partnerships/alliances/joint
ventures were being entered into, and where
mergers/acquisitions/disposals had also increased
noticeably.

*To bolster our interpretation of the dimensions covered by the
independent variable, we also performed a factor analysis of
the correlation matrix derived from the tetrachoric (for binary
variables) and polychoric (for Guttman scales) correlations. This
approach is recommended because our binary variables are
more likely to be binary representations of latent continuous
variables than pure categorical variables, while the Guttman
scales also represent latent continuous variables. We used
the principal factor method along with a varimax rotation.
Eight factors had eigenvalues greater than one. The factors
represented supplier integration, financial transparency, customer
integration, employee penetration, purchasing integration, human
resource management, supply chain management, and employee
development. These factors underscore the various dimensions
of internetworking and further validate the wide range of our
measurement protocol as well as our measurement approach.
Moreover, highly similar results are noted when we u.se only
the binary variables, or scaled combinations of the variables, to
form the independent variable.

Control Variables

Internetworking Duration

Internetworking Duration captures how long ago
firms began deploying Internet-based solutions in
their business operations, and this variable was
included on the basis that the longer any activity
is undertaken, the more comprehensive or imbed-
ded it becomes. Learning curve effects arise when
activities are continuously undertaken (Hayward,
2002), and we expect that Internetworking Depth
will deepen with repetition and with organiza-
tional learning (Levitt and March, 1988). Accord-
ingly, and following Planning Duration’s effect on
planning capability (Bracker and Pearson, 1986;
Brews and Hunt, 1999), we expected Internetwork-
ing Depth would positively correlate with Internet-
working Duration, thus indirectly influencing our
three dependent variables. Past research measured
duration in a variety of fashions. Bracker and Pear-
son (1986) divided their sample into firms that had
planned for 5 years or longer, vs. those who had
planned for shorter than 5 years. Brews and Hunt
(1999) also employed a binary classification but
reduced the cut-off point to 4 years. Given that
the Internet has only been available for commercial
exploitation for the past 10 years or so, we devel-
oped a more fine-grained seven-category scale to
measure how long firms had actively used inter-
networking, ranging from ‘less than a year ago’ to
‘more than 10 years ago.’

Firm Size

Firm Size is often suggested as a contingency in
IT research but its precise role remains unclear.
Though Attewell and Rule (1984) suggested size
might explain the inconsistent organizational con-
sequences of information technology noted across
studies, in the face of conflicting theoretical pre-
dictions Brynjolfsson et al. (1994) declined to
specify whether increasing use of IT positively
or negatively correlated with size. Varian et al.
(2001), however, found that though organizations
of all sizes adopted Internet business solutions,
enterprises of 5000 employees or more displayed
the highest adoption rate. Following Varian et al.
(2001) we expected size would moderate inter-
networking levels. This is consistent with the
organizational slack literature (Bourgeois, 1981;
Cyert and March, 1992) in that more substantial

Copyright © 2004 John Wiley & Sons, Ltd. Strat. Mgmt. J.. 25: 429-451 (2004)

436 P. J. Brews and C. L. Tucci

organizations have the financial and human cap-
ital to experiment with new technologies. More-
over, size might also influence the dependent
variables: bigger firms may be less specialized,
have more hierarchy and engage more widely
in partnering and alliances than smaller firms
do. Thus when investigating structural effects
such as scope/specialization, de-layering, or the
propensity to engage in partnering, controlling
for size is desirable. Past research principally
employed employee numbers to quantify firm size,
but there is little agreement on the scaling, ranging
from Brews and Hunt’s (1999) four categories to
Fredrickson and Mitchell’s (1984) 18. We asked
respondents to report the size of their firms in
employee numbers, which were coded into seven
categories according to the scale denoted in the
Appendix. Using the log number of employees
rather than the categories does not change the find-
ings reported below.

Firm Location

Anecdotal data (cf. International Technology and
Trade Associates, 2000) confirms that Internet
use is most prevalent in the United States and
least prevalent in the developing world. Govern-
ment bureaucracy and a lack of qualified infor-
mation technology professionals place less devel-
oped nations behind (Hoffman, 2000). E-business
penetration is especially problematic in Asia, par-
ticularly in less developed countries in the region
(D’Amico, Hunter, and Seewald, 2001). Moreover,
Asian firms are also behind in the adoption of
Internet-based business practices: they are only
now starting to purchase materials online, are far
from selling products online, and the majority have
not begun communicating with employees online
(McKinsey, 2001). Firms in developed countries
(DCs) will thus be more internetworked than those
in less developed countries (LDCs), and loca-
tion was included to validate that Internetworking
Depth varied as follows: highest in North Amer-
ica, lowest in LDCs, and in between in other DCs.
We used Todaro’s (1999) classification of DCs and
LDCs. The precise categorization of the 41 coun-
tries and the three-way coding of locations (North
America, Other DCs, and LDCs) are contained in
the Appendix.

Firm Global Reach

Enterprises with global reach have much to gain
from the Internet. Internet-based networks allow
the provision of worldwide, real-time services con-
tinually, and the integration of global supply chains
employing a variety of technology tools (Stephens,
1999). Global companies are more likely to pro-
mote or sell products online, and accordingly
invest far more to expand their online presence
than companies with less global reach and need
to transact internationally (Burns, 2000). Multi-
national companies and well-known brands also
dominate web advertising (Karkoviata, 2001), and
considerable anecdotal evidence supports the the-
sis that global companies especially benefit from
internetworking (Echikson, 2001). Accordingly, as
the extent of dispersion of customers and opera-
tions globally might influence the level of inter-
networking depth and thus the degree to which
internetworking might affect organizational form.
Firm Global Reach was controlled for. Respon-
dents indicated which one of four choices (see the
Appendix) best described their firm.

Overall Firm Performance

Overall Firm Performance (OFP) was included
on the basis that higher-performing firms might
exhibit narrower foci and lower levels of hierar-
chy, or that poor performance might stimulate the
structural effects being tested for. Both objective
and subjective measures have calibrated economic
perfonnance in past research. Objective criteria
include sales growth (Fredrickson and Mitchell,
1984; Pearce, Freeman, and Robinson, 1987),
return on assets/sales (Fredrickson and Mitchell,
1984; Pearce et al., 1987), and stock price per-
formance (Ansoff et al., 1970). Subjective crite-
ria include respondent rating in comparison to
the firm’s overall industry (Pearce et al., 1987;
Brews and Hunt, 1999), or respondent perceptions
of their firm’s current profitability, growth/share,
future positioning, quality, and social responsive-
ness (Hart and Banbury, 1994). Because of the
multi-industry, multinational characteristic of our
sample, and the inability to reliably control for
industry effects and/or other competitive group-
ings, objective measures of financial or business
performance were unsuitable. Following Pearce
et al. (1987) and Brews and Hunt (1999), two sub-
jective perceptual measures of performance were

Copyright © 2004 John Wiley & Sons, Ltd. Strat. Mgmt. J.. 25: 429-451 (2004)

Structural Effects of Internetworking 437

employed: Overall Firm Performance and Internet-
working Operational Performance. Our OFP scale
was identical to that used by Brews and Hunt
(1999), except we eliminated the item that gath-
ered data on market share change.^

Internetworking Operational Performance

Internetworking Operational Performance (IOP)
was included to control for the possibility that
underperforming internetworking infrastructures
might fail to deliver the predicted structural effects.
High performance should enhance the structural
effects anticipated, and IOP accordingly sought
to discover the degree to which internetworking
improved the operational efficiency of firms and
empowered stakeholders. After indicating how sat-
isfied respondents were with their firm’s internet-
working initiatives in general, performance ratings
across four specific dimensions of internetworking
were gathered: the degree to which internetwork-
ing empowered/enabled employees; the degree to
which internetworking enabled firms to reach or
empower customers; the degree to which inter-
networking contributed to cost reduction; and the
degree to which internetworking contributed to
head count reduction. Ratings on a 7-point scale
were provided, from ‘Very low or none’ to ‘Very
high.’ The five statement scores were summed to
obtain the IOP score.

Data gathering

Senior and mid-level executives attending 30 exec-
utive education programs offered by five leading
business schools (two based in North America, one
in northern Europe, and two in South Africa) par-
ticipated in the study. Typically, mailed question-
naires were collected from executives upon their
arrival to attend their chosen program. A multi-
national, multi-industry sample of 469 firms was
gathered. Our large sample size alleviates con-
cerns about statistical power (Schwenk and Dalton,
1991; Ferguson and Ketchen, 1999). We have ade-
quate power to detect small, medium, and large
effects. Forty-one countries are represented, with
62 percent of the firms based in North America, 20
percent in other DCs, and 18 percent from LDCs.

Firms represented in the sample include
Ford Motor Company, DaimlerChrylser, General
Motors, Cisco, Lucent, AT&T, Intel, Nortel, Bell-
South, IBM, HP, EDS, Caterpillar, Boeing, Duke
Energy, Walgreens, Office Depot, and Wachovia.
Prominent international firms represented include
Toyota, Siemens AG, Deutsche Bank, Fujitsu,
UBS, Nokia, ICI of Great Britain, ABB, Scandi-
navian Air System (SAS), and Anglo American,
Telkom, Nedcor, and SAPPI from South Africa.
Over 92 percent of firms reported being in busi-
ness for longer than 10 years, while less than 4
percent indicated being in business for less than
6 years. Though small companies are included,
large, well-established firms make up the majority
of the sample. Our firms have an average number
of employees of approximately 45,000, while U.S.
firms in the sample have an average number of
employees of around 54,000. An equivalent num-
ber for the Fortune 500 is approximately 25,000.
Over 95 percent of respondents reported working
at their firms for longer than 5 years, and catego-
rizing respondents according to title revealed that
40 percent were drawn from middle management
(VP, AVP, Sales Manager), 34 percent from senior
management (General Manger, SVP, EVP, Direc-
tor, Partner), and 8 percent from top management
(President, CEO, CFO, COO, CIO). Eighteen per-
cent were not easily categorized.

Respondents were continually reminded that
there were no correct or incorrect responses: the
answers sought were those that ‘best or most
closely described’ their firm. To aid respondents a
definition of the Internet and clarification of ‘inter-
networking’ and ‘Internet enabled’ was provided at
the beginning of the questionnaire.

RESULTS

We used multivariate OLS regression to test the
study hypotheses.^ Table 1 presents descriptive
statistics and Pearson correlations, while Table 2
conveys the regression results. Internetworking

‘Residual/item analysis of the original Brews and Hunt (1999)
OFP scale obtained from the authors indicated that the scale’s
Cronbach’s alpha improved from 0.79 to 0.92 with the exclusion.

*To check for idiosyncratic estimates based on out-of-range
predictions, we also ran ordered probit regressions using the
same variables (rescaled to have a minimum value of zero)
with virtually identical results in terms of signs and statistical
significance.

Copyright © 2004 John Wiley & Sons, Ltd. Strat. Mgmt. J.. 25: 429-451 (2004)

438 P. J. Brews and C. L. Tucci

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Copyright © 2004 John Wiley & Sons. Ltd. Strat. Mgmt. J.. 25: 429-451 (2004)

Structural Effects of Internetworking 439

Table 2. Structural effects of internetworking (« = 457)

Dependent variables

Constant

Independent variable
Internetworking Depth

Control variables

Int. Operating Performance
Internetworking Duration
Firm Size
Overall Firm Performance
Firm Location
Firm Global Reach
Adjusted R^
F{1, 449)

Business Scope/
Specialization

(Model I)

4.38

0.18

0.21
–

0.13

0.05
-0.11

0.10
0.10

t

9.31***

2.87**

3.92***
-2.73**

0.89
-2.39*

2.08*

2.00*
0.12
9.54

External
Partnering
(Model II)

4.61

0.13

0.13
-0.06

0.17
0.02
0.03
0.10

t

9.61***

2.15*

2.09*
-1.16

3.10″*
0.41
0.71
2.01*
0.12
9.51

Hierarchy
Reduction

(Model III)

fi

5.60

0.14

0.23
-0.11
-0.08
-0.04

0.08
-0.12

t

11.46″*

2.08*

4.08*”
-2.21*
-1.37
-0.89

1.59
-2.55*

0.07
6.18

‘ p <0.05; " p <0.01; '" p < 0.001 Beta coefficients are standardized.

Depth was regressed against Business Scope/Spec-
ialization, Hierarchy Reduction, and Extemal Part-
nering. Control variable effects were simultane-
ously assessed.

As Models I-III in Table 2 indicate, Inter-
networking Depth is positively and significantly
related to all three dependent variables, with the
Intemetworking Depth/Business Scope/Specializa-
tion association being the strongest (Model I, /3 =
0.18, p < 0.01) and the Intemetworking Depth/ Extemal Partnering association being the weakest (Model III, ;6 = 0.13, p < 0.05). Hypotheses l a - c are accepted. Model I is consistent with Hypothe- sis la over Hypothesis 2a, Model II is consistent with Hypothesis lb over H2b, and Model III is consistent with Hypothesis 1 c over Hypothesis 2c. Hypotheses 2a-c are accordingly rejected.

Control variable interactions also present some
interesting findings. First, and unsurprisingly, IOP
positively and significantly correlates with all
three dependent variables, displaying in the case
of Business Scope/Specialization and Hierarchy
Reduction (Models I and III) stronger associa-
tions than Internetworking Depth does. Second,
Intemetworking Duration is negatively associated
with all three dependent variables, though in the
case of Extemal Partnering the association is weak
and statistically insignificant. Third, Firm Size
is the strongest correlate with External Partner-
ing (Model II, p = Q.\l, p < 0.001), while in the cases of Business Scope/Specialization and

Hierarchy Reduction, Internetworking Depth and
IOP are the strongest two correlates of all the
variables tested. Fourth, OFP negatively corre-
lates with Business Scope/Specialization (Model
I, /6 = —0.11, p < 0.05), while Firm Location displays a weak but positive correlation with Business Scope/Specialization (Model I; /6 = 0.10, p < 0.05). Finally, Firm Global Reach associates with all three dependent variables, though the strongest association is negative (Model III with Hierarchy Reduction, p = -

DISCUSSION

Regarding internetworking and evotving
organizationat forms

Congruent with greater reduction in marginal ben-
efits than costs to expansion, our findings show
that intemetworking associates with a narrow-
ing of scope and a deepening of specialization,
with a reduction of intemal hierarchy, and with
an increase in extemal partnering. Deeply inter-
networked organizations are more focused, less
hierarchical, and more likely to engage in exter-
nal partnering than less intensively intemetworked
organizations are. With introduction of the Internet,
markets (as opposed to firms) are increasingly

Copyright © 2004 John Wiley & Sons. Ltd. Strat. Mgmt. J.. 25: 429-451 (2004)

440 P. J. Brews and C. L. Tucci

employed to organize and coordinate productive
work. But this evolution is not due to intemet-
working alone—the sophistication of modern soft-
ware, plus the standardization and automation of
business activities and processes, coupled with the
disintermediation of humans from routine tasks
through technology, combined with managers who
understand the need to focus on core activities
while outsourcing others, are among the motiva-
tors of the evolution reflected in our data. The
Intemet mostly captures and integrates the tech-
nical and managerial advances enjoyed over the
past two decades or so.

However, that markets rather than firms are
being more employed to organize productive work
is not this study’s only contribution. More fine-
grained theoretical concems imbedded in the evo-
lution from firms to markets are also surfaced by
our data. That Intemetworking Depth and Intemet-
working Operational Performance display weaker
associations with External Partnering than they do
with Business Scope/Specialization and with Hier-
archy Reduction indicates that internetworking’s
structural effects are currently intemal: within-firm
effects appear stronger than between-firm effects.
Since the Internet enabling of established firms
has only been underway for a few years, possibly
partner/supplier enabling lags on the basis that eas-
ier intemal conversions/applications are completed
first. Internal enabling is within the immediate con-
trol of firms; the enabling of external ordering,
manufacturing, and supply chain logistics is not.
This reasoning implies that the weaker Extemal
Partnering/internetworking associations are more a
result of difficulty, timing, and inexperience than
any substantive indication that intemetworking is
less applicable to extemal partnering per se. Time
will tell whether such a conclusion is valid.’

Moreover, our need to explain whether (and if
so why) extemal partnering lags hierarchy reduc-
tion/scope narrowing indicates that an ‘evolution-
ary’ TCE theory that predicts how (and in which
order) organizations evolve to more market-based
coordination would enhance the static nature of
current TCE theory, which typically predicts (as

this paper does) ‘before’ vs. ‘after’ optimal bound-
aries assuming a shift in the economics of produc-
tion/transaction costs. Different types of transac-
tion cost reductions might follow different time
scales, possibly due to the nature of the resources
involved and the number of stakeholders included.
One interpretation of the above facts is that trans-
action cost reduction accrues from investment
in physical, human, and social/relational capital.
Physical capital is relatively easy to install or dis-
pose of and should thus produce cost reductions in
a relatively short time. Human capital development
to produce cost reduction usually involves training
and education; learning (which often takes time) is
also required. However, that the intemetworking
of extemal partners is likely to require physical,
human, and social/relational capital investments
potentially makes this dimension harder and possi-
bly more time consuming to achieve, thus explain-
ing the apparent weaker internetworking/external
partnering association.

Whether intemetworking causes scope narrow-
ing/specialization increase, or scope/specialization
changes lead to internetworking deepening is also
not revealed by the data.'” Our hypotheses assume
directionality from internetworking to scope/spe-
ciaHzation changes, but both directions are the-
oretically supportable. The first direction places
information technology/internetworking at the cen-
ter of the structural changes imbedded in the data.
If correct, information technology is providing new
impetus to the de-diversification/focus trend that
began decades ago in the United States (Licht-
enberg, 1990; Markides, 1995; Palich, Cardinal,
and Miller, 2000), and following this reasoning
a technology-driven wave of restructuring (scope
narrowing, de-layering, outsourcing, etc.) is now
underway (see, for example, Champy, 2002, who
supports this line of argument), with possibly more
refined and fine-grained effects than the restructur-
ing of the 1980s and early 1990s.

The opposite causal direction suggests that fac-
tors other than intemetworking drive scope and
specialization changes, which in turn are being

‘Congruent with this reasoning Hartman and Sifonis (2000)
recommend Internet-enabling initiatives start with the easier
to enable internal processes first. These include basic busi-
ness operations such as enabling travel expense vouchers or
placing employee information online. Enabling less risky pro-
cesses/activities provides experience and builds credibility to
convert more challenging processes/activities later.

‘° Linear regression is limited by the fact that it shows correlation
and not causation. Typically, theory is consulted to establish
directionality. Since we find strong theoretical evidence of a
causal link between Internetworking Depth and our dependent
variables, we conclude (but do not ‘prove’) that internetworking
’causes’ the effects under investigation.

Copyright © 2004 John Wiley & Sons. Ltd. Strat. Mgmt. J., 25: 429-451 (2004)

Structural Effects of Internetworking 441

facilitated by intemetworking. That scope narrow-
ing and specialization deepening has been under-
way for decades, driven by forces that include
globalization, deregulation, competitive intensity,
and anti-trust legislation relaxation (Capron, 1999),
and that diversification among large American
firms has recently reduced (Lichtenberg, 1990;
Markides, 1995; Palich et al., 2000) reinforces
this argument. According to such a view factors
beyond this study’s scope (globalization, deregula-
tion, competitive intensity, etc.) drive the scope/sp-
ecialization changes and the internetworking/ sco-
pe/specialization effects noted are evidence that
intemetworking enables firms to reach the special-
ization levels required by the unobserved effects.
Whether ‘dominant’ or ‘facilitative’ better descri-
bes intemetworking’s contribution to the stmctural
changes observed is not only of theoretical interest.
Intemetworking as the sine qua non of the stmc-
tural changes suggests that intemetworking is now
a key capability for effective organization. Inter-
networking as facilitator reduces intemetworking’s
role from urgent/strategic to important but possibly
not fatal if absent.

Regarding the impact of control variables

The strong and significant IOP/dependent vari-
able associations corroborate the observed struc-
tural effects of intemetworking and add insight into
how intemetworking interacts with the structural
variables investigated. Intemetworking effects are
only as powerful as the performance level that the
intemetworking infrastructure allows. This accords
with face validity: intemetworking’s influence
should correlate more strongly with intemetwork-
ing performance (i.e., intemetworking’s effective-
ness) than with measures of intemetworking depth
alone.

However, while the IOP/dependent variable and
the Firm Size and Extemal Partnering/dependent
variable associations are unsurprising, other con-
trol variable/dependent variable associations are
unexpected. The uniformly negative Intemetwork-
ing Duration/dependent variable associations raise
the unwelcome possibility that first movers are at a
disadvantage with respect to internetworking. This
is congruent with those who allege information
technology pioneers often end up in a disadvan-
tageous position (cf. Vitale, 1986; Clemons and
Row, 1991) and consistent with recent empirical

findings of iate-mover advantage’ in other litera-
tures (see, for example Schnaars, 1994; Shankar,
Carpenter, and Rrishnamurthi, 1998; Lieberman
and Montgomery, 1998). Internetworking might
be a relatively easy-to-imitate ‘strategic neces-
sity’ (Clemons and Kimbrough, 1986) where first
movers face learning costs (and performance defi-
cits) not encountered by late movers.” At the very
least our data indicate late movers are not disad-
vantaged by delayed adoption.

That OFP negatively associates with Business
Scope/Specialization is expected but the data by
themselves do not determine whether poor per-
formance motivates scope/specialization changes,
or whether broader scope/lack of specialization
leads to poor performance such that structural
change is necessary. Moreover, that Firm Global
Reach negatively correlates with Hierarchy Reduc-
tion indicates that bureaucracy in global firms is
particularly resistant to change. This is also unsur-
prising given that Hierarchy Reduction also neg-
atively (but insignificantly) associates with Firm
Size. Finally, that global reach associates with
narrower scope, an increase in specialization, and
increases in external partnering further triangulates
our findings. More deeply internetworked (and
larger—Firm Size strongly correlates with Firm
Global Reach, see Table 1) global firms are more
focused and more reliant on external partnerships.

Study limitations

Though the study has some interesting and valu-
able findings, some limitations must be acknowl-
edged. First, subjective perceptual data are used
to measure the study variables. While possibly
more accurate, gathering objective data of a similar
nature is challenging over such a diverse sample
and wide range of study variables. The use of a sin-
gle instmment to collect all variables also poses the
threat of common method bias. To allay this fear
we undertook an analysis of common method vari-
ance as proposed by Lindell and Whitney (2001).
After correcting for potential correlation inflation
from the common method the main effects noted

” tntemetworking Depth positively and strongly correlates with
Internetworking Duration (see Table 1, r = 0.41; p < 0.001). As expected, early adopters are more deeply internetworked than late adopters are, meaning that, ceteris paribu.i. Internet- working Duration should also positively correlate with Business Scope/Specialization, Hierarchy Reduction, and External Part- nering. It does not!

Copyright © 2004 John Wiley & Sons, Ltd. Strat. Mgmt. J.. 25: 429-451 (2004)

442 P. J. Brews and C. L. Tucci

in Table 2 held up at the same level of statistical
significance.

The integrity of the data is also supported by
a number of other factors. The high Cronbach
alphas of the three multi-item scales (reported
in Table 1; ranging from 0.85 to 0.92) attest to
their internal consistency and reliability. More-
over, that Firm Size, Firm Location, Firm Global
Reach, and Internetworking Duration (all easy-
to-measure categorical variables) positively cor-
relate with Internetworking Depth provides addi-
tional face validity to our measurement of Inter-
networking Depth.’^ Furthermore, factor analysis
performed on Business Scope/Specialization, Hier-
archy Reduction, External Partnering, Overall Firm
Performance, and Intemetworking Operating Per-
formance produced five factors, three correspond-
ing to the statement pairings that measured the
dependent variables, and the remaining two repre-
senting the two performance measures.”’ In addi-
tion, findings that accord with prior research or
our initial theoretical expectations (that Intemet-
working Depth and Internetworking Operational
Performance strongly correlate, see Table 1, r =
0.54, p < 0.001); that Internetworking Duration and Internetworking Depth are positively corre- lated; that Firm Size and Firm Location are nega- tively correlated; that both Internetworking Depth and Internetworking Operating Performance asso- ciate with Business Scope/Specialization, Hierar- chy Reduction, and External Partnering; and that External Partnering correlates with Firm Size) tri- angulate the data and add face validity to our measures and findings.

An additional limitation rests on the fact that
only single (or very few) responses per firm/divi-

‘̂ For example, One-way ANOVA using Firm Location as the
independent (grouping variable) indicated the Internetworking
Depth score means differed. The average Internetworking Depth
score for North American firms was 32.74, while for other
developed countries it was 27.66. Less developed country firms
averaged 22.39. A post hoc comparison of means using the
Scheffe test indicated that the three scores differed from each
other at the 0.05 level. Similar results were noted for Firm Size
(consistent with Varian et al., 2001), bigger firms have deeper
Internetworking Depth); Firm Global Reach (the more global
the deeper Internetworking Depth is); and for Internetworking
Duration (the earlier internetworking is introduced, the deeper
Internetworking Depth is).

” We performed a factor analysis on the dependent and perfor-
mance variables (using the principal factor method with varimax
rotation) and the interitem covariance for the three dependent
variables ranged from 0.33 to 0.48; the dependent variables
exhibit both convergent and discriminant validity. Details of this
factor analysis are available from the study authors.

sion/business unit were gathered. Though the
scales are valid and reliable between firms,
multiple respondents from the same firm on a
larger scale would permit within-firm validation
of the study scales.”* Moreover, the relatively
low adjusted R^s of our models (0.12 or
less) are also a limitation. However, the low
explanatory power is not surprising given that
many variables beyond those included in the
study explain the scope/specialization, hierarchy
levels, and partnering behaviors of firms. Finally,
the exploratory nature of the study must be
acknowledged. Notwithstanding this, important
new constructs are introduced (Internetworking
Depth and IOP) and strong insights into the
nature of the relationships under investigation are
provided, free of any obvious biases and consistent
with theory.

FUTURE DIRECTIONS AND
CONCLUSION

Our findings indicate internetworking has definite
specialization, de-layering, and partnering effects.
Internetworking is a technological innovation that
influences the overall form and internal struc-
ture of established organizations. Failure to Inter-
net enable might over time reveal that lack of
focus, too much hierarchy, and an inability to
partner render organizations uncompetitive in the
face of more specialized, less hierarchical, and
more partnership-intensive competitors. Our find-
ings also underscore the need for research on inter-
networking’s effect on established firms. Some
believe that following tbe dot.com demise sus-
tainable ‘New Economy’ productivity will only
be realized once ‘Old Economy’ firms convert
to Internet-based infrastructures.’^ Given the chal-
lenges faced in accomplishing such a conversion
there is no shortage of problems to investigate.
These include whether internetworking is driving a
new wave of restructuring independent of the other
strategic/structural variables that have propelled
restructuring in the past, and how information tech-
nology and strategic/structural variables interact in
the process of organizational change. Methodolog-
ical issues also requiring attention include how

‘•* We ran regressions with robust standard errors correcting for
respondents from the same firms with virtually identical results.
” For popular press confirmations of this sentiment see Business
Week (2001) and Ecotwtnist (2001).

Copyrighl © 2004 John Wiley & Sons. Ltd. Strat. Mgmt. J.. 25: 429-451 (2004)

well the subjective perceptual measures used in
this study correlate with more objective measures,
and whether similar findings are noted when objec-
tive measures are used.

Beyond the scope of this study an even wider
array of research opportunities exist. Identifying
intemal and external factors that promote and/or
inhibit the development of intemetworking capa-
bility would be helpful, as would identification
of the steps managers might take to promote
internetworking, and whether industry or other
extemal effects moderate intemetworking levels.
Any research that helps managers increase the
rate of establishment of internetworking infrastruc-
tures would also be of value. In a related vein,
and following our call for a more evolutionary
TCE theory noted above, work that details the
various dimensions of internetworking infrastruc-
tures and describes how these develop and deepen
over time would be invaluable—as firms move
to more market-based coordination, do organiza-
tional forms evolve randomly, or do they follow a
particular pattem, pace, and timing? Here the unit
of analysis is not only the firm—as twenty-first-
century commerce is more likely to be conducted
by cellular grouping, clusters (in addition to indi-
vidual firms) are more appropriate units of anal-
ysis. Finally, how internetworking influences eco-
nomic performance is also worthy of investigation.
Though investigation of the information technol-
ogy/organizational performance relationship has a
long and rich tradition (see, for example, Chan,
2000; Lee and Menon, 2000; Brynjolfsson and
Yang, 1996; Hitt and Brynjolfsson, 1996), intemet-
working’s performance effects are yet to be estab-
lished. Moreover, whether deeply intemetworked
firms perform better than those less deeply inter-
networked is not the only important issue: the qual-
ity of the performance effects enjoyed is too. While
some allege internetworking can deliver enduring
competitive advantage (Brews, 2000; Brews and
Tucci, 2003), Porter (2001: 78) argues that inter-
networking most likely will become ‘table stakes’
required simply for survival. Under such condi-
tions performance gains will be traded away and
enduring performance benefits illusory. The first-
mover disadvantages noted in this study support
the latter perspective, and determining whether
internetworking’s overall performance gains are
temporary or more sustainable is crucial to man-
agers.

Structural Effects of Internetworking 443

ACKNOWLEDGEMENTS

This paper was inspired by the ‘Conversations on
Corporate Strategy’ session at the Academy of
Management Meeting in Washington, 2001, orga-
nized by David Collis and Sea-Jin Chang. The
authors would like to thank Allan Afuah, Ger-
ardine deSanctis, Arvind Malhotra, and Rachelle
Sampson for comments on prior drafts, and the
two anonymous SMJ referees for guidance on the
revisions.

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APPENDIX

(Scoring protocol iti bold)

Independent variable: Internetworking Depth

This section seeks information on the degree to which your firm currently uses the Internet. Please remem-
ber there is no one correct response. The responses sought are the ones that best or most closely describe
your firm. Underlined statements are phrases added in comparison to statement(s) in the previous box.

I. Please indicate the one box that most closely describes the level of Internet use at your firm.

Internet use at my firm mostly comprises employees communicating through Email or surfing the net
individually.

Internet use at my firm mostly comprises employees communicating through Email or surfing the net
individually, and customers ordering online.

Emplovees communicate using Email or surf the net individuallv. customers order online, and external
suppliers receive orders simultaneously when customers place orders online.

Employees communicate using Email and surf the net individually, customers order online, external suppliers
receive their orders when customers place them, and customers may check order progress/logistics online.

Employees communicate using Email and surf the net individually, customers order online, external suppliers
receive orders simultaneously when customers place them, and customers may check the progress of orders
online. After delivery, customer satisfaction/feedback information is also requested online.

t
2
3
4
5

2. Please indicate the one box that most closely describes your firm.

Customers cannot order online from my firm.

Customers can order goods/services online, but less than 25% of products/services are available online.

All/most firm products/services can be ordered online. Currently, however, less than 25% of orders are placed
online.

All/most firm products/services can be ordered online. Currentlv, between 25-50% of firm orders are placed
online.

All/most firm products/services can be ordered online. Currently, more than 50% of firm orders are placed
online.

1
2
3
4
5
Copyright © 2004 John Wiley & Sons. Ltd. Strat. Mgmt. J.. 25: 429-451 (2004)

Structural Effects of Internetworking 447

3. Please indicate the one box that most closely describes your firm.

No suppliers are connected to my firm through the Internet.

Less than 25% of suppliers are connected to my firm through the Internet.

In order to do business with my firm, a supplier must be Internet enabled and connected to my firm’s intranet.

In order to do business with my firm, a supplier must be Internet enabled and connected to my firm’s intranet.
When necessary (and if needed) my firm helps suppliers become Internet enabled so that they can join our
network.

My firm’s supply chain is comprehensively managed and integrated through our intranet. Partners/suppliers are
key members of an extended virtual enterprise, with access to my firm’s databases, production/service
schedules, inventory management, and logistics systems.

1
2
3
4
5

4. Please indicate the one box that most closely describes your firm.

Few employees at my firm have firm supplied personal computers with online access.

Mainly managerial and/or office/white collar personnel have firm supplied personal computers with online
access.

Both managerial and non-managerial employees have firm supplied personal computers with online access.

Both managerial and non-managerial employees have firm supplied personal computers with online access.
Some operate home offices and telecommute from home.

All employees have firm supplied personal computers with access to my firm’s intranet. No employee would
be able to perform effectively without Internet access and proficiency.

t
2
3
4
5

5. Please indicate the one box that most closely describes your firm.

Employee benefit choices/data are administered by HR personnel based on employee submitted documents.
Employees go through HR professionals to access information or change choices.

Employee benefit choices/data are administered by HR personnel based on employees’ submitted documents.
Employees go through HR professionals to access information or change benefits choices. Work is underway
to place these processes online.

Some employee benefit choices/data are maintained online and employees personally access/select/change
elements of their benefits online.

Employees personally access/select/change elements of their benefits online. Employees routinely go online to
manage their personal affairs and needs.

Employees routinely access/select/change elements of their benefits routinely online. Employee performance
review or individual employee development plan compilation is also done online.

1
2
3
4
5

6. Please indicate the one box that most closely describes your firm.

Expense re-imbursement claims are filed using paper-based documentation with expense receipts attached.

Though expense claims are computerized, claimants submit original paper based claim document(s) that are
captured by data administrators. Upon approval, checks are mailed out, reaching payees a month or longer
after the claim is filed.

1
2
Copyright © 2004 John Wiley & Sons, Ltd. Strat. Mgmt. J.. 25: 429-451 (2004)

448 P. J. Brews and C. L. Tucci

Employees file expense reports/claims online.

Employees file expense reports/claims online. Unless the expense policy algorithm highlights a discrepancy
re-imbursement is authorized automatically and a check is mailed.

Employees file expense reports online. Unless the expense policy algorithm highlights a discrepancy,
re-imbursement is authorized automatically and where possible the employee’s credit card/bank account is
electronically credited.

7. Please indicate the one box that most closely describes your firm.

Financial results are not available online. Managers typically receive results on a ‘need to know’ basis more
than a week after close of books.

Financial results are not available online. Managers typically receive results on a ‘need to know’ basis more
than a week after close of books. Work is underway to place the data online.

Some financial results are available online. Data are available online so managers can review results, make
decisions, and instruct employees accordingly.

Financial results are available online on a daily/weekly/monthly basis. Where applicable (for example sales
data or daily operating data) previous day/time period ‘flash’ reports are sent to relevant employees so that
negative trends are highlighted and acted upon immediately.

8. Please indicate, by checking ‘yes’ or ‘no,’ whether the activities described in each box below are/can be performed
online at your firm.

Employee training and/or job skills development

Job postings/recruitment through electronic resumes

Employee individual development plan formulation

Employee performance reviews

Employee bonus/annual pay reviews

Employee travel requests and planning

Employee product/service training or education

Internal corporate event advertisement and online registration

Yes

1
1
1
t
1
1
1
1

No

0
0
0
0
0
0
0
0

Compilation/modification/ongoing review of budgets

Business planning/strategy development

Employee expense claims/re-imbursement

Financial/management accounting reporting/reviewing/analysis

Capital budgeting requests/approvals

Payment of account receivables/payables (to debtors/creditors)

1
1
1
1
1
1
0
0
0
0
0
0
Copyright © 2004 John Wiley & Sons. Ltd. Strat. Mgmt. J.. 25: 429-451 (2004)

Structural Effects of Internetworking 449

Sales and revenues forecasting

Scheduling for customers to view/test products/services before purchase

Customer tracking of product/service delivery logistics

Customer product/service support

Customer product/service user training

Customer history/contact record compilation

Customer satisfaction/feedback surveys

Customized new product/service marketing to existing customers

Yes
1
1
1
1
1
1
1
1
No
0
0
0
0
0
0
0
0

Demand reporting/scheduling with suppliers/partners

Product/services change processes with suppliers/partners

Product design and/or development

Supplier/partner product manufacturing status reports

Supplier/partner service delivery status reports

Product or services delivery/installation logistics information

Supplier education and training

Factory operations management/process control

Supplier/partner factory operations management/process control

Centralized firm-wide purchasing of common supplies/materials

Supplies/materials purchasing with outside partners to increase buying power

Key supplies/materials ordering from external vendors

1
1
1
1
1
1
1
1
1
1
1
1
0
0
0
0
0
0
0
0
0
0
0
0
Dependent variables

Please check the box that best describes the degree of your agreement to each statement.

My firm’s scope of business is
narrowing and its degree of
specialization is deepening. Many
non-core activities have been/are
being outsourced.

My firm is entering into many
more extemal strategic
partnerships/alliances/joint
ventures than it did a few years
ago.

Strongly
disagree—
the opposite
is true

1

Disagree

2

Neutral

3

Agree

4

Strongly
agree

5
Copyright © 2004 John Wiley & Sons, Ltd. Strat. Mgmt. J.. 25: 429-451 (2004)

450 P. J. Brews and C. L. Tucci

Managerial levels/hierarchy are
decreasing/have decreased
noticeably at my firm.

Bureaucracy is decreasing/has
decreased noticeably at my firm.

The frequency of
mergers/acquisitions/disposals has
increased noticeably at my firm.

Many low value added/low skill
jobs are being/have been
eliminated at my firm.

Strongly
disagree—
the opposite
is true

Disagree Neutral Agree Strongly
agree

Control variables
Internetworking Duration

Please indicate how long ago your firm started actively using the Internet/internetworking capabilities reported in
(Section 1) above.

Less than
a year ago

1

Between
1 – 2 years
ago

2

Between
2-3 years
ago

3

Between
3-4 years
ago

4

Between
4-5 years
ago

5

Between
5-10 years
ago

6

More than
10 years
ago

7
Firm Size

Less than
IOO
employees

1

Between
100-500
employees

2

Between
501-1000
employees

3

Between
1001-5000
employees

4

Between
5001-25,000
employees

5

Between
25,000-
100,000
employees

6

Greater
than
100,000
employees

7
Firm Location

North America
United States and Canada

1

Other Developed Countries:
Australia, Germany, United
Kingdom, Switzerland, Japan,
Sweden, France, Luxembourg,
Belgium, Austria, Finland,
Singapore, Hong Kong, Iceland

2

Developing Countries: Russia,
Brazil, Bahrain, China, Saudi
Arabia, Thailand, Argentina,
Columbia, Estonia, Sri Lanka,
Poland, Venezuela, Morocco,
South Africa, Indonesia,
Kenya, Mauritius, Lesotho,
Malaysia.

3
Copyright © 2004 John Wiley & Sons. Ltd. Strat. Mgmt. J., 25: 429-451 (2004)

Structural Effects of Internetworking 451

Firm Global Reach

Please indicate the box that best describes your firm.

Single/focused
business with no
international
customers or
operations.

1

Single/focused
national business with
a few international
customers.

2

Single/focused
business with
customers and
operations worldwide.

3

Division/subsidiary/
affiliate of a
multidivisional.
multi-national firm
with customers and
operations worldwide.

4
Overall Firm Performance

Please check {^) the one box in each line that best indicates how your firm currently compares to peers in your
firm’s primary industry. If not applicable, check the box included for this purpose. Please be as accurate and objective
as possible.

Performance
Characteristic

Overall profitability
or financial
performance

Stock price
performance

Overall firm
performance/success

Compared to peers in your primary industry today

Not Applicable

xxxxxxx

xxxxxxx

Lowest 20%

1

Next 20%

2

Middle 20%

3
Next 20%
4

Top 20%

5
Internetworking Operational Performance

Please rate your firm’s performance according to the factors below, applying the following scale:

Very low or none

1

Low

2

Low to moderate

3

Moderate

4

Moderate to high

5

High

6

Very high

7

Satisfactioti amotig firtn’s tnetnbers with your firtn’s IT itiitiatives/applications.

Degree to which IT/internetworking has etnpowered/enabled employees.

Degree to which IT/intertietworking has enabled your firm to reach/empower customers.

Degree to which IT/intemetworking has enabled your firm to reduce costs.

Degree to which IT/internetworking has enabled your firm to reduce headcount.

Copyright © 2004 John Wiley & Sons. Ltd. Strat. Mgmt. J.. 25: 429-451 (2004)

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