MANAGEMENT POLICY REVIEWER

I.

INTRODUCTION

For the rest of this chapter, let us look in detail at the meaning of business policy and the
importance of establishing major policies for a firm.
First, it will be useful to define a number of terms. Many books have been written in the
United States on the subject of business policy. Some of them are voluminous books on the
principles of management. Others are merely collections of cases about all aspects of
management. Still others are concerned almost entirely with business strategy-very broadly
defined.
The authors of this book feel the study of business policy presupposes a significant prior study
in business administration. They assume that the student or practitioner is already familiar with
general management principles and with such functional areas as marketing management,
financial management, production management, and personnel management. Managerial policy
"ftas become an integration of the above which forces the individual to draw on these prior
pieces and to study the central management of an enterprise from the viewpoint of the chief
executive.
Not many people who use this book are now, nor will they become, chief executives. Why
then should all these other people study business policy? There are, first of all, many people
who, though at the lower ranks of a company, must understand .the policies and goals -the
central purpose of the organization. Whether they be departmental manager, or specialists far
down the ladder of hierarchy, they must have a sense of the mission, character and
importance of the company as a whole. After all; if the individual does not know the larger
purpose for which he serves, he cannot serve it well.
II.

RESPONSIBILITIES OF CHIEF EXECUTIVE

The chief executive of a firm is primarily concerned with six categories of action:
1. He, working closely with the board of directors, must elaborate the major policies of a

firm.
2. He, working closely with the board of directors and his top managers, must define
3.
4.
5.
6.

the objectives of the firm.

He, working closely with his top manager, and develop strategies and the long-range plan
for achieving these objectives.
He must develop an organization which most efficiently carries out the company's strategic
plan.
He, working closely with those top managers, must develop the operating policies
which ease the burden of decision-making to carry out the plan.
He, depending upon his philosophy. of management (degree of decentralization of
authority and responsibilities), will also be involved in controlling the operations of the
firm and in problem-Solving

Definitions
1 Major policies- Major policies (or "company" policies) deal with the firm's fundamental nature,
its identity, and the direction in which it is expected to move. They provide a framework
within which the objectives can be established.
2.. Objectives-The firm's objectives or goals (these are two terms used interchangeably) specify,
usually in quantitative terms (e.g.; dollars, percentages, or time periods), where the firm
expected to be at some time in the future.
3. Strategy-Business strategy is the approach developed to achieve the objectives which have
been defined. The development of the strategy is a critical part of long-range planning. A
firm's strategy (its strategic plan) defines in detail how the firm is to get from where it .is
now to where the objectives state it should be at some time in the future
4. Operating policies-Operating policies are, guides for Decision-making.
The operating
policies of a firm flow out of its objectives, its strategy, and its organization. The objectives,
plus the policies, define the character or personality of the firm. They provide a framework
within which management can make decisions that are consistent in themselves and are in
accordance with the strategic plan and its objectives. Operating policies will be discussed further
in Chapter 5. The following .discussion focuses on the major policies of the firm.
III.

STRATEGY OF USING FOREIGN INVESTOR AND LICENSEES:

PHILIPPINES PERSPECTIVE

One of the key areas of strategy for a f i r m in a developing country is to use

existing foreign companies in achieving many of its objectives. Cooperation with a
foreign company can provide a shortcut; it can permit the attainment of certain goals
which the local company could possibly achieve with its own resources but at ,a
lower cost and in much less time. It avoids the necessity of inventing the wheel again
and again .
Any form of cooperation with a foreign firm presents certain risks or potential
problems. Before such cooperation can be effected, the government's approval must
usually be obtained first. And , a mutual agreement cannot be secured unless the goals
of the foreign company are also satisfied.
This, then, is the essence of strategy. Within the context of the changing environment and
considering the firm's own strengths and weaknesses, how can a Philippine firm best
achieve its goals while also satisfying those of the Philippine government and the
foreign firm? The Philippine firm must examine the alternative strategies and choose
what the optimum from its point of view is.
There are a number of joint ventures or managing agency agreements in the
Philippines that are leftovers from the pre-Independence days. After independence,
however, the usual practice was for a' foreign firm to export its products to the
Philippines through a local agent, Then at some point, either because of strong
competition from other foreign firms, or because of new import controls imposed by
the Philippine government, the foreign firm began to consider manufacturing its

products in the Philippines. It either had 100% control, or it had a local parties. The
local partner was usually the former importing agent, had some capital and some
selling know how but knew nothing about manufacturing and little about managing. a
company. In any case, the foreign firm usually had the initiative and got all the advantages.
Invariably, the result was an agreement that 'was very favorable to the foreign firm.
Many agreements (joint-venture, licensing, etc.) that are too propitious to the foreign partner
can be changed in future negotiations but only if the Philippine firm transaction,
examines the possibilities of using foreign partners, develops its own strategy, and has
alternative open to it.
III.1Company goals
What goals of the Philippine company might be satisfied through some sort of arrangement
with a foreign company? Or, to put it in another way, what are the potential benefits that
can be derived from some form of cooperation with a foreign firm?
1. the Philippine company may want access to the patent rights or manufacturing

rights for a certain type of product .That product might be manufactured in a number
of different countries and by several firms in each country, each firm having its own
patents. There is, then, a choice of firms which the Philippine company can approach.
The least complicated arrangement would be an outright, cash purchase of the rights to
manufacture, without any further payments involved.
Or, the local company may know that a certain brand of a foreign product is selling
very well in the local market. The trademark. In order to manufacture and sell the
product in the local market under the foreign trademark, an agreement must be reached
with the specific foreign company owner. In such a situation, it is more difficult to
obtain the right to do so with" a cash payment; the foreign firm will not want its
tradem.ark used unless it has an. Assurance that its quality standard can be maintained
The foreign firm will usually insist more on a license agreement or equity
participation with accompanying rights to inspect, as well as concurrent royalty
payments
The Philippine company may wish to start manufacturing a new product where technical
assistance is required. In this case, a technical services agreement will usually
accompany a license to manufacture.

Such a technical services agreement may carry any or all of the following pro visions:

help in the design and construction of the plan.t;

provide training for the company's skilled workers, technicians, engineers, and
managers;

help in product redesign;

help in technical advertising;

Provide for full-time or part-time production engineers to help maintain quality and
productivity.

2. Another situation is when a Philippine company feels that it needs to improve its

management system. Its choices are to attempt to do so without outside assistance,

or with the help of local management consultants, or by using foreign management
consultants. (The latter can be very expensive.) Sometimes the most efficient way of
obtaining modem management know how is to have a management contract with a
foreign manufacturing company.
A management contract often grows out of a situation where in a foreign company is
given a "rum-key" co!!fact to design and build a plant, train the necessary people,
supply some key technicians and managers, and maintain full responsibility for
operating the plant until it has reached and sustained the designed and desired capacity.
Under the management contract, the foreign partner has no equity participation, but it
is charged with the full responsibility for total management of the Philippine firm, with
authority to hire and fire people, sign contracts, etc. Or, the contract may assign
accountability only for a certain aspect of management such as production
management or marketing management.
The management contract may have no connection with the construction of a new
plant. It may simply be in connection management or marketing management
Some Philippine firms are now manufacturing consumer products and are actively
exporting them. Problems arise, particularly in the U.S. and European markets, when
the goods have rapidly-changing styles or designs. Here, some form of cooperation with a
foreign company helps in obtaining advice on trends in styles, plus assistance in
marketing.
Access to foreign marketing channels can be one of the most important factors in a
firm's profit potential, as well as in the Philippine's overall economic development.
Part of the strategy used by large foreign multinational firms which have control of
significant segments of many markets is to manufacture in a number of countries to
diversify risks, for one reason, and to seek new sources of production That offer cost
or other advantages. If a Philippine firm on convince such multinational that there are
significant gains to be made from manufacturing in the Philippines, very substantial
amounts of exports can be assured. The key question then is the type of arrangement
between the multinational and the Philippine firm, while the key variables are the degree
of equity participation by the foreign firm and the quantity of exp0rts which can be
promised.
When a Philippine firm is planning to expand or diversify, additional capital is often
required. . This may be difficult to obtain under ordinary circumstances, so that this is where
some form of agreement with a foreign firm can prove beneficial. Usually, securing equity
participation from the foreign firm may be the very key. A joint-venture arrangement of
such nature, or even a licensing agreement, may provide easier access to local financial

institutions. Moreover, a joint-venture agreement will facilitate borrowing from foreign and
international institutions.
When the political climate for private investment deteriorates as when the government shifts
to a more socialistic stance - a joint venture with a foreign firm will often provide
protection from nationalization. A government will usually hesitate to nationalize foreign
assets because of potential repercussions f r o m the international financial community.
However, having a foreign partner can be a negative factor if it is from wrong country;
sometimes, foreign-owned properties from certain countries become specific targets of
nationalization because these provide large domestic political gains.
Therefore, a partnership with an international institution, such as the International Finance
Corporation (the industrial investment subsidiary of The World Bank), is probably the best
security from this type of risk because obviously, nationalization of such a company would
jeopardize relations - as in this case - with The World Bank.
Finally, it should be noted that Philippine firms can benefit from joint venture and
licensing agreements with firms in Asian and African countries which are less
industrialized -where the Philippine firm invests in aforeign joint venture or provides
technical and managerial assistance to the foreign firm.
III.2 Poten tial problems
Any type of arrangement with a foreign firm will incur some negative elements which, at
least partially, offset the benefits. Thus, it is important that management consider all of
the negative factors so that an intelligent and rational strategy can be selected.
The first and most prevalent negative result will be a loss in the degree of control by
the Philippine owners.
When the foreign partner has no eq ity - where there is only a licensing agreement on
patent rights - there may be no loss of control. At the other end of the scale, a joint
venture with the foreign partner having the majority ownership can result in loss of
managerial, as well as equity control. In between, all combinations are possible.
.,
This question of "control" will be discussed at length in a later section. At this point, it is
sufficient to note that the Philippine owners need not agree to a loss of control unless
they" feel that it is to their best interest.
Most other potential problems grow out of the problem of control.
For example, disagreements may arise with the foreign joint-venture partner over the
percentage of profits which should be paid out as dividends, or disagreements over the
need for additional' capital expansion. Or, the operating agreement may have specified
that certain parts or raw materials be purchased from the foreign partner; however, it
becomes apparent over time that other less costly sources of supply are available.

The problem ultimately evolves into one wherein the Philippine firm, feeling that it has
gained all it can from the arrangement and wishes to regain its freedom of action, now
wants to buy out the shares of the foreign partner (but at what price) or to seek an early
termination of the license agreement (but at what penalty, if any).
III.3Point of view of foreign company
It is vital for the chief executive of the Philippine company to understand the point of view of
the foreign firm. Why did the latter take the initiative of contacting the former (if such
was the case), or, what can the Philippine company offer the foreign firm in term of the
latter's strategy for growth and diversification?
What are the general concerns of the foreign firm?
1.General concerns

The first premise one can base his reasoning on is that the foreign company is not
concerned about providing foreign aid. Its action is not altruistic; after all, it is not a
philanthropist. One of its major goals must then be a reasonable return on its
investment. The rate of return that it will want on invested capital is related to its
view of the risk involved and its view of the risk will differ from that of the Philippine
firm. For instance, if it has exaggerated fear nationalization, it will thus want a
payback period of only three to five years.

The possibility of devaluation (which means a loss in terms of the foreign currency
of the investor) will prompt the foreign investor to minimize his exposure to devaluation
risks. Thus, he may wish to minimize his initial cash outlay by borrowing as much
capital as possible within the Philippines and by capitalizing tothe greatest extent
possible-his contributions in the form of patents, trademarks, manufacturing knowhow, etc.

Most foreign companies -if they are at all interested -will prefer an equity
investment in which they have majority- ownership, or wherein there are provisions
for them to increase their investment to a majority if the venture proves -successful.
Many foreign companies with international experience have found that a licensing
agreement entails as much time and expense for negotiation and for transferring
management and technical know how as would be required for a major investment project
that would promise much greater returns.
A.s a general observation, smaller foreign companies rather than large ones are more
likely to be interested in a license agreement and hence, in a minority position in a
joint venture. Also, companies more likely to be satisfied with a license agreement
are those which undertake a lot of research and development and those which have
little or no foreign investments.

2.Specific goals

Besides return on investment, a foreign partner may have other more specific
goals. For example.

one goal of the foreign company may be to undertake local manufacturing so as

to penetrate the local market
In this situation, the Philippines may have previously been an export market, but actual
local manufacture was later deemed necessary either to keep the market or to expand
total market sales.

Another goal may be to set up a manufacturing base in the Philippines in

order to avail of low-cost labor or materials to produce, not only for the local
market, but also for other countries as well as for the investor's home country.
This would be a more likely strategy for a large multinational firm than for small
foreign company -but not necessarily so. The foreign firm may also wish to take
advantage of the low wages to produce certain parts, all of which are exported for
assembly with other parts in one or more other countries into the finished
product .This would be a goal primarily of a large .multinational firm
In a more restricted sense, the foreign firm may wish to establish a manufacturing
base in the Philippines partly for the Philippine market and partly to gain access to any
other market areas for which the Philippines offers peculiar advantages in view of
international political reasons. For example, it may be easier for Japan to export to
the United States from the Philippines. And, the Philippines may offer an excellent
base from which to export to China because of its large Chinese community.
It was noted earlier that most foreign firms will prefer an equity investment over a
license agreement It may be useful then to briefly review the positive and negative
factors of licensing from the viewpoint of foreign companies.

The factors in favor of licensing are that it permits the company:

to obtain extra income;
To spread research and development costs;
To retain established markets and reach new ones;
To pave the way for future investment;
To safeguard against infringement of patents in the Philippines; and/or
to possibly acquire reciprocal benefits in technical know-how from the Philippine
partner.
On the other hand, many foreign companies are against licensing because :
they have a tradition or a policy of 100% or majority equity investments;
they fear that they are helping to establish a competitor and that they will lose the

market entirely once the license expires;

they fear loss of goodwill if the licensee does not maintain quality standards; and /or
they may feel that they have the organization and resources for a direct investment, so
why should they settle' for less potential income?

III.4Point of view of the government

The Philippine government, like the governments of most other developing countries,
is concerned with and involved in the negotiations between a local firm and foreign firm.
As government approval is required for most of such agreements, it is obvious that
government goals and strategies are an important factor in the development of the best
strategy for the firm. We cannot, at this point, discuss all of the aspects of the
government's strategy of development, or even of industrial development but several of the
more important points can. be touched on.
'
1.Balance of payments effects
The critical question will usually be on the balance of payments effects. of the partnership
arrangement.
First

Questions:
To what extent is. foreign exchange earned or saved?
How much foreign capital is brought in by the foreign partrier?
How much foreign exchange is saved by manufacturing locally what had been
imported previously?
How much foreign exchange is earned by exporting semi-finished goods which
were not previously exported?

Second Questions

how much foreign exchange is expended and over what period?

How much equipment must be imported? Is

What credit terms are available to pay for it?

Can the equipment be paid for by company exports?

Will some parts have to be imported for assembly in the Philippines?

Will raw materials have to be imported?

What is the expected rate of outflow of dividends: royalties, and fees?

it new or used?

2. Economic development effects

'
The government will be concerned with the number of jobs created in all countries.

How many new unskilled and skilled workers will be employed?

How much training will be provided to increase the number of skilled workers in the
country?
What training will be provided, and in what capacity will local technicians and engineers
be used?
If foreign managers are involved initially, what plans exist for their gradual replacement
by Philippine Managers?
The partnership venture will hopefully have other spill-over effects outside the
company?For example, to what extent will the company purchase local raw materials,
resulting in the domestic exploitation of natural resources?
And, will the company seek to purchase parts from other local suppliers, thereby
creating more jobs, or even new companies?

3. Political effects
Finally, it is clear that equity interests by a foreign firm will have political overtones. This
is usually determined per industry. The government may have a policy of excluding or
discouraging foreign investment in certain industries, particularly those which are sensitive
(e.g., military-related or basic industries) Or, there may already be too much foreign
investment concentrated in certain industries. Or, foreign investment may be acceptable from
certain countries, but not from others. Finally, there will be a general tendency to decrease
foreign industry, and the government will tend to favor agreements which contain a plan for
phasing out foreign ownership and control.
III.5 The use of strategy
For decades there have been complaints that foreign companies exploit developing
countries. This need not persist. The flow can be balanced.
The firms in the developing countries should instead find ways of exploiting, to a certain
extent, the foreign ' companies. In this situation, the term "exploitation" can be used to the
,extent that the Philippine firm engages in a partnership arrangement with a foreign firm
where the benefits to the Philippine firm exceeds the costs.
In a real sense, it is not really exploitation of the foreign firm because the foreign firm
must also feel that the benefits it will gain from the agreement outweigh the costs;
otherwise, it will not enter into the arrangement Likewise, the government must feel the
same way, or the agreement will not be approved. ,
It should be clear to all parties, therefore, that the negotiation of licensing and joint-venture
agreements should not and cannot - if the agreement is to succeed in the long-run be
looked upon as a zero-sum game. All parties to the agreements must have a sense of net
gain. From the point of view of the Philippine firm, role of strategy then is to select the

scheme which will, over the long term give it the largest net gain while still giving the
government and the foreign partner room to feel that their minimum goals, at least, have
been achieved.
As noted in earlier chapters, the use of strategy usually comes in only after goals or
objectives have been established. We have seen that, for each goal, the strategist has to
list all of the various alternatives for achieving that goal and to select the optimum strategy
from there. In the case of using foreign investors and licensees, however, it will, perhaps be
necessary for managers to review the various, strategies (and their benefits) available and to
choose new goals which they may not otherwise have considered. This becomes possible
because the potentials of utilizing foreign partners greatly expand the horizons of the
managers and of their firms. New goals are suddenly seen as being attainable. (After
selecting their new goals, the managers must, of course, still go through the process of reevaluating all possible strategies and choosing the optimum one for achieving each new
goal.)
Types of strategies
There are five key sub-categories of strategies dealing with foreign partners. These are
discussed below. Each must .be considered separately and then combined into a major
strategy for the selection of a foreign partner and for negotiations with him.

IV.

THE TRAINING OF PHILIPPINE MANAGERIAL POWER

It may be said that Filipino managers have been trained for their responsibilities
as managers through one of three modes, or any combination of them:
(I) training through actual experience,
(2) training through the management education system, and
(3) exposure to training programs in industry
1.Actual experience
Many managers still take pride in claiming that they gained their managerial experience
through actual experience or - as they put it--"through the University of Hard
Knocks." These individuals have never been through any formal training in management.
They are, by and large, individuals who started their own businesses and somehow
managed to survive and .succeed through a process of trial and error. While managers who
belong to this category may still be considered significant in n umber, there is a current trend
toward developing an appreciation for more formal training in management.
The persistent growth of Philippine companies, the transfer of effective control of familyowned businesses from the older to the younger generation, the shift from a seller's to a
buyer's market in many industries, and the ever-present competitive pressure (both
internal and extern) have all been catalysts in the continuing transition from traditional to
modem approaches, from management by crisis to a more organized style, and from the
"seat of-the-pants" style to a more professional management approach.

2.M anagement education system

Many Filipino managers have undergraduate degrees in business administration. Others
have undergraduate degrees in various disciplines with graduate credits either in economics,
business, or public administration. Most of the leading schools are located either in the
Metro Manila area or in Cebu City' which is located in the central part of the country
(around 400 kilometers south of Manila).

Practically all the programs offered by different schools are designed for professionals
whohold jobs in various companies or government agencies.
The University of the Philippines (U.P.) pioneered in management education in the country.
Other schools which offer graduate programs intended for full-time students include the :
Asian Institute of Management,
Ateneo de Manila University
De La Salle University.
Some schools, likewise, offer non-degree executive or managerial development
programs to professionals with the objective of improving their managerial ability and
broadening their outlook and perspective by introducing new management techniques in
preparation for greater managerial responsibilities. Some universities have work-study
arrangements with a number of companies. Under these arrangements, the' companies have
agreed to give personnel who are taking degree programs time off for study during regular
office hours. The more fortunate and promising personnel are sometimes given an outright
scholarship by their respective companies to enable them to pursue full time studies.
3.Industry training programs
Some managers are exposed to training programs which industry or the firm itself conducts
for its managerial personnel. This type is used quite extensively as a supplementary effort
by foreign-owned (especially American) establishments. There are companies who devote
half a day during an entire summer for the 'purpose of making their key people attend
company-sponsored courses well as relevant seminars and courses that are offered by
various groups. Participation fees usually paid for by the companies. Management
consultancy firms occasionally conduct seminars and management development courses for
clients as well as for management personnel in general.
Some Philippine management consultancy firms include
John Clements Consultants, Inc.,
Joaquin Cunanan & Co., Development Specialists International, Inc.,
Economic Development Foundation, Inc.,
Fil-International Management, Inc.,
Konsulta Philippines, Inc.,
Leverage International (Consultants), Inc.,
U.P. Business Research Foundation, Inc.,
Philippine Investment Management Consultants,

EVSA Corporation,
SyCip, Gorres, Velayo & Co., and carlos J. Valdes & Co.

Some of the foregoing firms are affiliated with international management consultancy firms
which provide them with insights on the latest management practices in the world.The
proficiency of Filipino managers with English as a language has'; given them an
advantage over their Asian counterparts in evaluating the applicability of and adopting
modern management techniques in the Asian setting.

V.

GENERAL
POLICY

MANAGEMENT

PERSPECTIVE

AND

BUSINESS

Determine the direction of the organization, shape its future, and, when well
implemented, secure its achievement.
Today the subject of business policy if taught under wide range of names. At many
schools the title Strategic Management is used to relflect the body of research that has
been carried out in the last 15 years in that field. Elsewhere, the problems of economic
strategy are separated from those leadership. The research and- literature that
provide the foundation for this book, as well as its previous editions, find
the core problems of general management in the indivisibility of the twin
tasks of shaping the- purpose of the organization and mana8big the processes
by "1h.ich the organization operates. Except for
narrow pedagogical
purposes, it is not even right to separate from the study of the work of
general management the vital contribution the president can make by
leveraging the day-to-day performance of the organization.
It is precisely to emphasize the importance of process and action in the.
Functions and responsibilities of senior management that we have shifted
emphasis in this edition from the more analytic "business policy," with its
emphasis on the core concept of corporate strategy, to the more dynamic
"general management," with its balanced view of purpose and process
interacting.
V.1 A Concept of General Management
Even the brief review that we have made of general management
responsibilities reveals the comprehensiveness and complexity of the job of
chief executive. In order to make sense of the job and to study its
functions, it is useful to consider it in terms of
3 roles of CEO
1.Strategist
2.Organi zation buil der
3.Doer.

These three roles encompass the tasks of

1.crafting the strategy of the organization and communicating it to the
organization.
2.managing -the resource allocation process so that it reflect the strategy.
3.managing the selection, training, and progress of the people organization and
building a positive work environment, designing the structure and systems that
provide .context for the operations both so that capabilities increase in areas that
permit moving 'toward strategic objectives.
4.Intervening personally where necessary to drive forward and raise the quality of
day to day performance.
We shall see as well that the job involves learning from the reactions of suppliers,
customers, competitors, and other constituents interested in the corporation as so to give
order to the process by which strategy evolves. This necessary to reflect while in action is
one of the most demanding aspects of the presidents job.
1.The General Manager as Strategist
Anyone who has taken part in any organized activity, from helping to push a car
out of a snow bank to working for a large corporation, knows that there is a
need. to coordinate activity around a common goal and that the goal had better
be realistic-. This is a key component of the work of leadership, and it
involves thinking about what needs to be done, communicating what has
been decided, and motivating others to contribute their efforts. When we
consider these activities from the perspective of shaping the purpose of the
organization , we speak of the general manager as strategist. While great
intellect is often required to lead the problem solving involved in crafting an
effective corporate strategy; the work of strategist is not merely analytic. An
effective strategy cannot be discovered in a library and delivered to an
organization on paper or in a speech to be implemented. Much as for Moses
after he acquired the Ten , Commandments from the Lord , time and effort are
required to convert a, wise vision into an informed organization. In today's jargon
we would say it is a "continuous process."
The role is daunting. To begin, many take part in the process. Their ideas and
knowledge need to be tapped. At the same time, careful thought about the future
reveals just how uncertain is our understanding of what may happen. Even if we
know with near certainty that particular conditions will develop, where and
when are highly unpredictable . .. Leaders soon discover that the strategic questions
that keep them awake at night are sufficiently frightening to be disabling to most
of their colleagues. While management theorists may value planning that is "outside

the box," leaders know or soon discover that most of their employees are more
than c ont e nt with the comfortable arrangements i n s i d e the box. Indeed, most
of their colleagues' careers are premised on the notion that the knowledge they have
accumulated will continue to be useful in organization that will only be
incrementally different in the future.
The Difference between great strategists and unemployed prophets is that the former
able to get others to see the .wisdom of their vision and build coalition that will act on it.
It is this aspect of strategic work rather than formulating the. Intellectual content of the
dynamic strategy falls almost uniquely on the chief executives shoulder. It _relates to the
work of marshaling and allocating resources so that the capabilities of thee
organization are directed in line with strategy And it involves to a critical degree
shaping the character of the people of the organization and the environment in which
they work. The strategic aspects of these task mean that they are not just the
province of the finance and human-resource management organizations.
2.General Manager as a Builder
Whether an organization is successful over time depends as much on its capabilities
as on what it is trying to do. Achieving more means that those capabilities must be
improved. We will see in the cases that sometimes the means to achieve objectives
can be acquired in the market as equipment or licensed technology. But the
capabilities that are critical to strategic progress reside in the processes and practices
of the organization what the organization knows how to do and is able to do.
Giving shape to processes and practices involves designing the organization and its
systems for measure and information, for planning, for budgeting and control, and for
reward and punishment. These architectural activities are complemented by choosing
ventures and projects that build the strength of the organization on. Two adages (both
framed before gender neutral language became prevalent) guide this highly idiosyncratic
process "A man 1st walk before he can run," and, "A man's reach must exceed his
grasp for what's a heaven for." The leader's responsibility for building the organization
requires not only driving it to take on ever more difficult tasks at a pace that is at least
the equal of competitors; but also assessing the consequences of failure so that the
inevitable unforeseeable setbacks will not destroy the company. When to develop a
new product line, when to enter a foreign market, and when to improve value added by
building a scarce skill center in-house are decisions that turn on judgments about the
ability of people to grow and the consequences of failure These vital decisions, in turn,
depend on judgments about the motivation and skill of people, and their ability
to
work together .
3.General Manager as a Doer
Though least glamorous and hardest to conceptualize, the way a general manager uses
time in the day has a enormous impact on the organization. He or her ethical and intellectual
standards, working hours, approach people, attention to customers, and consideration of
family are the models for the senior management. Their example is education for the

s u b o r d i n a t e e x e c u t i v e . In this w a y , the individual shapes the behavior ,of the

company and its reputation in the community.
The general manager also has a critical influence in his or her choices of where or when to
intervene. In case of this book we see general managers stepping out of their managerial
role 1n order 'to work as inventors, sales people, team leaders at critical moments in
the innovation process, risk takers, catalysts for change, and simple cheer leaders driving
people to feats that they did not know they were capable of achieving.
V.2 The Skills of the General Manager
In performing these three roles, general managers draw on many skills.' The list of useful
abilities is long, and few have all. General Managers must have sufficient analytic skill
to be capable of diagnosing both the economic and administrative components of a
situation. In doing so they must be able to deal with vital detail as well as the big picture.
Research on the intellectual skills of effective managers reveals that their particular
strength is the ability to see patterns in detail and link these to useful concepts.
General managers also need to develop good judgment .In effect, they need to be able to
apply their experience an analysis quickly and decisively so that problems get resolved
early. The cases include many examples of managers who have the courage to see that
something is not working well, and act on their intuition. C. Roland Christensen, an author
of earlier editions of this book , defined intuition as "knowledge and Experience
processed s o as to be instantly available wisdom." General managers learn quickly
that they must develop and rely on this resource.
Closely related to judgment but possibly different is the ability to apply special kinds of
intuition that Americans call street smarts because they are not taught in schools. Some
people are_ remarkably good at understanding the motives of individuals and are able to
anticipate on that basis how they are likely to behave. Reasoning in this fashion, they are
also able to deal with individuals and situations with remarkable effectiveness. This
particular set of skills is thought of as being acquired at birth or while growing up, but is
extremely valuable.
General Managers also need creativity, the ability to take risk and ability to integrate.
Repeatedly, the skills that distuigishes an effective leader is the ability to invent a solution
that turns a problem into an
VI.

STRATEGIC ANALYSIS OF INDUSTRY STRUCTURE

Strategic analysis of an industry begins with a careful exploration of five forces listed:
1. The threat of Entry
Newcomers t o an industry are an importan1source of problems best, they are making
a new investment similar to the existing rivals a consequence they _ are eager to earn a
return. Sometimes, they misunderstand the economics of the industry and cause serious
problems while they are learning. This was true in the market for ammonia fertilizer when
oil companies entered, as discussed in Chapter1. Other times they bring new product
or process technology that seriously threatens existing participants. That is what
happened to the U.S. car producers when the Japanese entered the U.S. market.

Whether the threat of entry is serious depends on whether there are barriers of entry.
Barriers are structural forces that deter potential entrants. Some of the many factors that
can deter entry are the following:

Economies of scale

lf the scale of efficient facilities is high, potential entrants may find it im possible ' to
build a market position fast enough to pay back the required investment. As well-as
production, there may be economies in research (pharmaceuticals), advertising (mass
market consumer goods), and after-sales service (home appliances).

Absolute cost advantages.

Incumbents may have positions that are simply not available to entrants. It may be,
for example, that the good hydroelectric sites in a country or the places for a gas
station at a major intersection are taken. The producers of wine in the region of
Romanee Conti have had an unrivaled position since Roman times. There is no more
land there for planting vines. But another commonly ignored source of advantage
comes from constantly decreasing costs in process technology from learning or
experience (many manufacturing processes). Still other advantages unavailable to
entrants come from pioneer grants or subsidies from governments.

Capital requirements.

A related advantage to incumbents may come from the capital required to enter. Often
firms may have a sound business idea based on new technology o,r a market concept but
find it impossible to raise the capital needed to compete. This was the problem of Air
Products until it saw how it could use the collateral of long-term leases to enter the
industrial oxygen business.

Product differentiation.

Where an incumbent has invested heavily in unique product features (patented or

otherwise) or a powerful brand image, potential l entrants may find it difficult or
impossible to enter. 3M has managed to use its knowledge of abrasives and coatings to
create a stream of profitable niches for its "Scotch-b' randProducts. It is reputed that
Scotch tape earned more money for 3M than cellophane did for DuPont. The Walt
Disney characters have proved so popular that they create insurmountable barriers in
markets for all sorts of children's products.

Switching costs

An almost natural form of differentiation arises through the phenomenon of

switching costs. These are one-time cost incurred by a buyer when switching from one
supplier to another. The costs may arise from small physical differences in formulation
of a product, from distribution set-up costs such as a pipeline from the necessity
of testing the quality of anew supplier, or building a new relationship with their
trust required to handle contractual relationship with large stakes. Food packer
and brewers, for example, are very reluctant to change the coating us to protect

the inside of their cans; Entrepreneurs often find it extremely difficult to

change lawyers.

Access to distribution.

It is often hard to bring a new product. market. We see this with new consumer
products seeking shelf spa in supermarkets, but there are other examples
Sony found Matsushita could virtually shut it out of Japanese consumer mark .
and in response found it necessary to develop its transistor radial business
first in the United States. More dramatically, the OPEC nations found that their
power over world oil markets was somewhat limited by the control over the
distribution of gasoline and heating oil by the major international oil producers.

Government Policy.

Governments often choose to control entry their markets in favor of local

producers, but often they also selec t specific participants. The nations of East
Asia have restricted en . as part of their industrial and trade policy, but so have
most OEC nations. The United States, for example, licenses radio and ,
stations and confines the ownership of licenses to U.S. Citizen Until
deregulated under Jimmy Carter, airlines were awarded rout by the government in
a similar fashion. At a more mundane level many states license those who sell
liquor.

For a strategist, the threat of entry is a central consideration. For incumbent,

there is a constant question of whether to invest to create raise barriers; while
for an entrant, it is important to understand ho. expensive it may be to
compete effectively. While economists antitrust policy makers have tended to
regard high barriers to entry as serious cause for concern, it has been
remarkable how many industries .thought to be impenetrable have- succumbed
to clever, well-manage entrants. The U.S. markets for automobiles and steel
were both high concentrated and supplied by giant domestic producers, yet
Japan entrants-were able to succeed using new process and product technology It
was difficult, but clearly not impossible.
Concerns about entry affect how fast incumbents will expand, whether they
will license new technology to other firms, whether they integrate vertically,
and how they will treat international markets, perhaps most centrally, the
threat of entry is likely to affect pricing. Nothing deters an entrants more than
an incumbent that products and services of increasing quality low prices.
2. Threats of Substitution
Related to entry is the threat to an incumbent's market from products or services that
substitute f o r what they a r e offering. The great e c o n o m i s t Joseph Schumpeter
pointed out that the real threat to existing producers : was the ''gale of competition'.'
from innovation. Nylon stockings virtually eliminated silk; television news has reduced
the market for newspapers; aluminum beverage cans took most of the market from steel;
and powerful personal computers capped the market for mainframes.

For general managers, substitute is a pervasive strategic consideration. There are

almost always alternative ways-for c ustomer to deal with a problem. Good public
transit is a substitute for automobile travel if the cost is too high. Railroads fight
truckers over the width and length of vehicles allowed on public roads.
Interestingly, shifts in prices change the feasibility of substitutes. In 1994, with the
near demise of old growth forests, the price of lumber for home building had risen to
the point where steel-which was always available -began to penetrate the home
building market successfully. The awareness of earthquakes and hurricanes has also
increased the demand for steel's strength and flexibility. Naturally, lumber companies
will work to find ways of lowering costs and increasing strength. The use of
laminate beams is one example. But also important will be the attitudes of builders and a
distribution system capable of teaching those builders how to use the substitute product.
3. The Power of Suppliers and Customer
The idea of a series of links from steel manufacturer to builder high lights the extent
to which the success of a company at one point in the chain from raw materials to
final consumer depends upon others in that chain. The health of the entire chain is
important to profitability. Thus when U.S. car manufacturers lost share to the
Japanese, their component and raw material suppliers lost share as well even though
the Japanese component suppliers were not present in the U .S. market. (They only
entered later when the Japanese manufacturers who were their customers began to
manufacture in the United States.)
Perhaps more fundamental, the value of the entire chain is determined by the price
for the f i n a l consumer. The profitability of i n dividual industries in the chain
is determined by the relative power of that industry vis-a-vis its suppliers and.
customers. Powerful suppliers can extract value from an industry by raising prices,
while powerful customers exercise their force by driving prices down The relative
power of the . Players depends upon structural forces
Sources of supplier power are scale .and concentration relative to the Industry sold to,
lack of direct competition due to product differentiation and lack of substitutes, high
sensitivity of customer. Performance to supplier quality, high switching costs, and lack
of dependence on customer group. Relative profitability .can a lso influence power sin
customers without profits have a very high 'incentive to cut input cost while high
profits can operation the opposite fashion. U.S. discount retailers are famous, for
example as brand killer. They use the tremendous volumes to drive down
manufacturers' prices. But when the process they destroy the image of the
discounted products, the discover the importance of the temperate use of their
power to present the profit in the total chain.
Sources of buyer power are the reverse of the coin:scale concentration
relative to suppliers, availability of direct competition and substitutes, low
sensitivity to supplier quality, low switching cost, and lack of dependence
on the supplier group. The threat ii backward integration is an important

entry threat for customers Historically the automobile industry has exercised
awesome buyer power in most countries. High scale and concentration coupled
with very real threat of vertical integration have enabled car manufacture to
extract most of the profit from their transactions. Indeed, in the United States, the
companies that manufacture tire.s for the B.ig Three seldom make any profit at
all on their original equipment business Nonetheless; they compete doggedly for
.every point of OEM market share because final customer loyalty means they
have the chance t earn decent profits in the replacement tire market. The tire
industry particularly instructive on this point because, viewed by itself
concentration and barriers to e n t r y w o u l d lead one t o e x p e c t h i g h ( profits
As is clear in the Firestone case, however, the power of the buyers has made it a
very d ifficult industry in which to make money)
4. Government
While Michael Porter does not include the government as an independent force in
his framework for industry analysis, we believe that general managers should and
that wise ones look at the government as a six force, especially those managers
working outside the United States . For many managers, it is hard to think
systematically about the government. As already noted, many have ideological
blinders. But it is also difficult for managers that gather their experience in the context
of a company its markets to understand the way electoral and legislative politics
pl out, the way these intersect with the workings of administrative agencies and the
way both political and administrative forces affected by the judicial system.7

an,

Almost always companies that want to understand the strategic impact of government
on their prospects find it useful to bring in outsiders who have spent their careers
developing a grasp of the many aspects of government a s it .affects 'their industry.
All .governments adopt policies and regulation that have a powerful force on the
structure and hence .profit potential of industry; By way of example, how the
current health care debate in the United States is reflected in legislation will have a
dramatic affect on the fortunes of enterprise in an arena representing one-sixth of
the economy .In the meanwhile, pharmaceutical companies seeking to innovate find
the behavior of the Food and Drug Administration to be a powerful drag on structural
change. And in a much more mundane arena, how the courts treat the packaging
used by Cott for its generic attack on Coca-Cola may have an important impact on the
soft drink industry.
5. Rivalry Among Competitors

The threat of entry a nd substitutes, buyer and supplier power, and governments
provide the context for an industry. How profitable an industry turns out to be has a
great deal to do with the nature of the battle among the incumbent companies. In some
industries substantial cooperation creates conditions of profit that can be fought for. In
other cases, cutthroat competition leads to profitless growth.

The ultimate determinant of profitability is the nature of competition among an

industry's incumbents. A good example of the range of possibilities is provided by the
cement industry as described in a paper by French researchers. They compared the
performance of a regulated cartel among three U.K. producers with intense rivalry
among four French gentlemanly oligopoists, a less concentrated group of German
producers, and cutthroat competition among U.S. rivals. Prices were lowest, energy
conservation the highest, and pollution the lowest in France. Germany was the next
best performer, the legal cartel the next, and bloodthirsty competition the worst. By the
1990s conditions had become much more homogeneous across countries, but
ownership of the U.S. industry was now largely in European hands. Profit was
increasingly under pressure as coastal nations such as Greece subsidized the growth of
industries built to export.
Even where structure and national context of industries is virtually identical: research
has shown that profit can be very different. For example, Figure 2-3 compares
prices and costs in ethylene oxide and propylene oxide, two .chemical intermediates
produced by large concencentrated producers. While there are slight difference in buyer
power between the two industries. Participants explain the difference by calling
attention to the behaviors of the leading companies.
The d i f f e r e n c e s
in q u e s t i o n h a v e t o d o w i t h
pricing and c a p i t a l
i n v e s t m e n t over time. In one case the leader tended to keep, prices high until
high capacity utilization made building new capacity attractive. There resulting
overcapacity led to intense price competition making recovery of cash costs
difficult. In the other case, the leader built capacity ahead of the demand and priced
so as to earn acceptable profits for itself but not so high as to encourage overbuilding.
Its management was also careful to def end its market share fiercely when attacked
but to avoid price wars with incumbent.
These differences reveal that the dimensions over which firms compete strategically
are quite complex. They point to the role of industry and Competitor a n a l y s i s in
the development o f c o r p o r a t e strategy.
VII.

RELATING TO OPPORTUNITOES TO CAPABILITIES

Returning to our main theme, general managers face the problem of giving
strategic direction and meaning to their corporation's activities. Industry and
competitor analysis provides an orderly way to figure out the rules of the
competitive game in a business: What do customers want and what will it take
to win their business in a battle with the other firms out there? As such, this
rather formal economic analysis is a way to sort out where opportunities lie and
where viability is threatened, as well as to clarify what kinds of capabilities will
be required to succeed in the battle
VII.1 Opportunities and Threats

Usually when one examines an industry in this fashion, there is a certain

clear logic to the positions among the competing firms that represents their
inheritance and their current capabilities. Sometimes a strategic weakness will
be revealed that must be overcome if disaster is to be avoided . General Motors,
for example, spent a good deal of the 1980s learning that it was a high cost
producer of uninteresting cars. Fixing both problems was strategic but did not
involve a change in strategy. Most incumbent participants can gain a lot by
executing better. Costs can be lowered, working capital can be reduced,
f inancing can be improved and operating and innovating cycle times can be
shortened. The differences can be staggering.
But the opportunity for unusually high sustained profits or the threat of quick
destruction almost always develops because an industry is in transition . An
industry thought to be mature may .be exposed to new technology that will
permit dramatically lower costs, which in turn :will permit new uses in new
markets. This is what happened t o the shoe industry with the advent of
innovative and stylish athletic footwear. An industry thought of as highly
profitable may change as critical develop
VIII. VALUES ARE KEY LEGITIMATE ACTION
At roughly the same time that Lehman was in trouble, the venerable Morgan Guarantee
bank began a metamorphosis that transformed it from a traditional commercial bank
focused on large corporate and country customers to an investment bank with a very
aggressive trading operation. But because there was a shared understanding of what the
organization was trying to accomplish, and because the values o the institution were
preserved, there was none of the uproar that tore Lehman apart. The Leadership of
Morgan was able to recognize on coming changes in the financial markets and plan
changes that were quite dramatic involving new kinds of people, modifications of
compensation, and a new culture. The values and needs of investment bankers and
traders were integrated into the firm. Yet for the members of the old organization the
core of Morgan remained.
This is a difficult feat to manage. In many companies, the decade of the 1980s seemed to
involve abandoning all but economic values, defined as that would pay the most for the
common shares this week. During the 1960s and 1970s several countries in East Asia
led by Japan developed highly competitive export-oriented economies. The large open
markets of the U.S. were their primary target: The power of this attack was com
pounded by a highly overvalued dollar. American manufacturers discovered that their
cost structures were totally inappropriate to the trading conditions in which they found
themselves wages were too high, and tiers of middle management and staff were not
only costly but also interfered in the design of an effective competitive response.
The restructuring of our major corporations has involved massive layoffs. For
managers and workers who lost jobs, the experience-has been one of a broken contract.
Somehow, the world in which they were promised income for a lifetime if they showed

up and worked hard was shattered . It seemed that the managers who remained were paid
large, bonuses for destroying the lives of the losers who were paying the price for the sins
of past company and macroeconomic mismanagement. These sentiments were captured in
the sobriquet given to Jack Wekh, the chief executive General Electric. In the first four
years of his leadership, the firm laid off 70,000 workers. -Welch was called "Neutron
Jack" because "he killed the people and left all the buildings." He fell the name was
distinctly unfair because the alternative for GE if it did not become a nimble, lean,
innovative giant was even more damaging. The losses would have been far greater, Welch
believed, had he not driven GE to become a high-productivity company.
But notice that the legitimacy of these painful actions taken for economic reasons is not
just shareholder return. The principal justification is competitive conditions. Welch did not
use the language of shareholders value to explain his actions. Instead his entire thrust
do whatever was necessary to make GE strong global competitor.
The cases in this book describe managers in the rich countries like Europe and
the United States competing against wonderfully educated hardworking, lowsalaried
Asians. Devising a n e f f e c t i v e r e s p o n s e e v o l v e s d i f f i c u l t
e t h i c a l d i l e m m a s . The managers know that they' deliver to their customers
goods and services of equivalent quality price
despite very different
employment costs. In m a n y c o u n t r i e s in Europe, managements ability to
respond is substantially constrained legislation. A social safety net going back to
.Bismarck institutionalizes contract that promises reasonab1e income and medical
care in retuning willingness to participate in the industrial system. How is a
manager make a company competitive if this seems to involve a set of working
conditions that violate the social contract?
Research that has examined the challenges faced by managers in midst of
restructuring industries reveals that establishing legitimacy is key task for those
involved in shutting down capacity or me companies. The manager who leads
this work must believe like surgeon-that the destruction associated with the
cutting is vital to survival and future health of the patient
Executives with the required fortitude are rare. In one industry that studied, steel in
the United States, a substantial portion of the restructuring of the long products
sector (about half the capacity of the integrated manufacturers) was accomplished
by one man, Tom Graham, as he move from LTV to USX to Armco. Mr. David
Roderick, his superior while USX, commented on the problem.
Most executives tied to steel probably won't make hard decisions that spent
their whole lives in steel plants, that came up through the have too many friends,
too many neighbors, too many ties. They close to these people to make rational
decisions.
Our values give us the courage to make hard choices that will influence the lives
of those we are responsible for managing.