C.K.

Prahalad

The late C.K. Prahalad was more than an academic; he was one of the foremost business thinkers
of our time. He was the Paul and Ruth McCracken Distinguished University Professor of
Corporate Strategy at the Ross School of Business, where he taught for more than three decades.
He was elected as the most influential living management thinker in 2007 and 2009 by Thinkers
50, compiled by The Times of London and Suntop Media. During his long career, he wrote five
seminal books on strategy. His 1987 book, The Multinational Mission (coauthored with Yves Doz)
set the framework for understanding global business. His book with Gary Hamel, Competing for
the Future, hailed as the best business book of 1994, first introduced the idea of "core
competencies." He coauthored (with Venkat Ramaswamy) “The Future of Competition” in 2004.
Business Week described it as a book "full of disruptive ideas". Business Week and Strategy +
Business voted it as one of the best business books of the year. His book The Fortune at the
Bottom of the Pyramid was voted the top business book of 2004 by The Economist, Fast Company
and Amazon.com editors. As the book's title suggests, Dr. Prahalad pointed out that the corporate
sector can help the poor — profitably. He coauthored (with M.S. Krishnan) “The New Age of
Innovation: Driving Co-created Value through Global Networks” in 2008. He won the McKinsey
Prize four times for the best article in Harvard Business Review and received honorary doctorates
in economics (University of London), engineering (Stevens Institute of Technology), and business
(Tilberg, The Netherlands and Abertay, Scotland). He was a member of the UN Blue Ribbon
Commission on Private Sector and Development. He worked with CEOs of the world’s leading
companies and sat on the boards of NCR Corporation, Pearson, plc., Hindustan Unilever Limited,
TVS Capital, The World Resources Institute, and The Indus Entrepreneurs.

Excerpts of C K Prahalad‘s Best Harvard Business Review articles;

Source: www.hbr.org
“BEST PRACTICES GET YOU ONLY SO FAR” from April 2010

Companies identify best practices, particularly those of market leaders, and try to implement them.
Such benchmarking has a role to play in business, but I’m not exactly a fan of the process. It may
allow enterprises to catch up with competitors, but it won’t turn them into market leaders.
Organizations become winners by spotting big opportunities and inventing next practices—as I’ve
pointed out to CEOs for over two decades now.

Next practices are all about innovation: imagining what the future will look like; identifying the
mega-opportunities that will arise; and building capabilities to capitalize on them. Apple’s Steve
Jobs and Tata Motors’ Ratan Tata do just that.

Most executives believe it’s tough to identify breakthrough opportunities. However, several are
pretty obvious; Peter Drucker once said that the best opportunities are “visible, but not seen.” I
help executives unearth opportunities by focusing them on big problems that their companies will
benefit from by tackling. They must ask six questions:

• Is the problem widely recognized?

• Does it affect other industries?
• Are radical innovations needed to tackle the problem?
• Can tackling it change the industry’s economics?
• Will addressing this issue give us a fresh source of competitive advantage?
• Would tackling this problem create a big opportunity for us?

Inclusive development is an obvious mega-opportunity by this (or any) yardstick. About 4 billion
people on three continents are trying to join the organized economy. By focusing on low-income
consumers in China, India, and elsewhere, smart companies have come up with inexpensive
products and services such as $2,000 cars, $100 laptops, $30 cataract surgery procedures, $20
hotel rooms, and cell phone calls that cost $0.002 per minute.

Sometimes, the sheer size of the market for an innovation creates fresh capabilities. For instance,
an unprecedented 5 billion people will be using cell phones by 2015, and ubiquitous mobile
connectivity is transforming industries such as financial services, retailing, media, education, and
health care. It has fostered the development of mobile applications—such as financial transactions
that can be executed by text messaging and remote diagnostics in developing countries.
Not surprisingly, multinational giants are rethinking their geographic focus. Unilever and Procter
& Gamble, for instance, each project that by 2020, poor people in the developing world may
account for around 50% of their global revenues.

The focus on microconsumers and microproducers is forcing companies to confront the link
between inclusive growth and sustainability. If the planet is in peril because of an industrial system
that has served some 1.5 billion people for two centuries, adding 4 billion consumers and
producers will place unsustainable stresses on it in the future. Sustainable development is therefore
another mega-opportunity.

Sadly, many companies fail to “see” these “visible” opportunities. They view inclusive
development as a corporate social responsibility—not as a path to growth. They don’t try to use
connectivity as an enabler of new business models or as infrastructure for engaging people in
collective innovation. And they insist on treating sustainability as a problem rather than an
opportunity to innovate.

If you look for ways to develop next practices, opportunities abound. In fact, executives are
constrained not by resources but by their imagination
“THE RESPONSIBLE MANAGER” from January–February 2010

The global financial crisis of the past two years has triggered an unprecedented debate about
managers’ roles. While discussions about managerial performance, CEO pay, and the role of
boards have been fierce, scant attention has been paid to managers’ responsibilities.

For the past 33 years, I have ended all my MBA and executive education courses by sharing with
participants my perspective on how they can become responsible managers. I acknowledge that
they will be successful in terms of income, social status, and influence, but caution that managers
must remember that they are the custodians of society’s most powerful institutions. They must
therefore hold themselves to a higher standard. Managers must strive to achieve success with
responsibility.

My remarks are intended to serve as a spur for people to reexamine their values before they plunge
into their daily work routines.

Take a minute to study them:

• Understand the importance of nonconformity. Leadership is about change, hope, and the
future. Leaders have to venture into uncharted territory, so they must be able to handle
intellectual solitude and ambiguity.
• Display a commitment to learning and developing yourself. Leaders must invest in
themselves. If you aren’t educated, you can’t help the uneducated; if you are sick, you
can’t minister to the sick; if you are poor, you can’t help the poor.
• Develop the ability to put personal performance in perspective. Over a long career, you
will experience both success and failure. Humility in success and courage in failure are
hallmarks of a good leader.
• Be ready to invest in developing other people. Be unstinting in helping your colleagues
realize their full potential
• Learn to relate to those who are less fortunate. Good leaders are inclusive, even though
that isn’t easy. Most societies have dealt with differences by avoiding or eliminating them;
few assimilate those who aren’t like them.
• Be concerned about due process. People seek fairness—not favors. They want to be heard.
They often don’t even mind if decisions don’t go their way as long as the process is fair
and transparent.
 • Realize the importance of loyalty to organization, profession, community, society, and,
above all, family. Most of our achievements would be impossible without our families’
support.
• Assume responsibility for outcomes as well as for the processes and people you work
with. How you achieve results will shape the kind of person you become.
• Remember that you are part of a very privileged few. That’s your strength, but it’s also a
cross you carry. Balance achievement with compassion and learning with understanding.
• Expect to be judged by what you do and how well you do it—not by what you say you
want to do. However, the bias toward action must be balanced by empathy and caring for
other people.
• Be conscious of the part you play. Be concerned about the problems of the poor and the
disabled, accept human weaknesses, laugh at yourself—and avoid the temptation to play
God. Leadership is about self-awareness, recognizing your failings, and developing
modesty, humility, and humanity.

Every year, I revisit my notes about the responsible manager, which I first jotted down in 1977.
The world has changed a lot since then, but I haven’t found it necessary to change a word of my
lecture. Indeed, the message is more relevant today than ever.
“WHY SUSTAINABILITY IS NOW THE KEY DRIVER OF INNOVATION” with Ram
Nidumolu & M.R. Rangaswami from 2009

There’s no alternative to sustainable development.

Even so, many companies are convinced that the more environment-friendly they become, the
more the effort will erode their competitiveness. They believe it will add to costs and will not
deliver immediate financial benefits.

Talk long enough to CEOs, particularly in the United States or Europe, and their concerns will
pour out: Making our operations sustainable and developing “green” products places us at a
disadvantage vis-à-vis rivals in developing countries that don’t face the same pressures. Suppliers
can’t provide green inputs or transparency; sustainable manufacturing will demand new equipment
and processes; and customers will not pay more for eco-friendly products during a recession.
That’s why most executives treat the need to become sustainable as a corporate social
responsibility, divorced from business objectives.

Not surprisingly, the fight to save the planet has turned into a pitched battle between governments
and companies, between companies and consumer activists, and sometimes between consumer
activists and governments. It resembles a three-legged race, in which you move forward with the
two untied legs but the tied third leg holds you back. One solution, mooted by policy experts and
environmental activists, is more and increasingly tougher regulation. They argue that voluntary
action is unlikely to be enough. Another group suggests educating and organizing consumers so
that they will force businesses to become sustainable. Although both legislation and education are
necessary, they may not be able to solve the problem quickly or completely.

Executives behave as though they have to choose between the largely social benefits of developing
sustainable products or processes and the financial costs of doing so. But that’s simply not true.
We’ve been studying the sustainability initiatives of 30 large corporations for some time. Our
research shows that sustainability is a mother lode of organizational and technological innovations
that yield both bottom-line and top-line returns. Becoming environment-friendly lowers costs
because companies end up reducing the inputs they use. In addition, the process generates
additional revenues from better products or enables companies to create new businesses. In fact,
because those are the goals of corporate innovation, we find that smart companies now treat
sustainability as innovation’s new frontier.

Indeed, the quest for sustainability is already starting to transform the competitive landscape,
which will force companies to change the way they think about products, technologies, processes,
and business models. The key to progress, particularly in times of economic crisis, is innovation.
Just as some internet companies survived the bust in 2000 to challenge incumbents, so, too, will
sustainable corporations emerge from today’s recession to upset the status quo. By treating
sustainability as a goal today, early movers will develop competencies that rivals will be hard-
pressed to match. That competitive advantage will stand them in good stead, because sustainability
will always be an integral part of development.

It isn’t going to be easy. Enterprises that have started the journey, our study shows, go through five
distinct stages of change. They face different challenges at each stage and must develop new
capabilities to tackle them, as we will show in the following pages. Mapping the road ahead will
save companies’ time—and that could be critical, because the clock is ticking.

Stage 1: Viewing Compliance as Opportunity

The first steps companies must take on the long march to sustainability usually arise from the law.
Compliance is complicated: Environmental regulations vary by country, by state or region, and
even by city. (In 2007 San Francisco banned supermarkets from using plastic bags at checkout;
San Diego still hasn’t.) In addition to legal standards, enterprises feel pressured to abide by
voluntary codes—general ones, such as the Greenhouse Gas Protocol, and sector-specific ones,
such as the Forest Stewardship Council code and the Electronic Product Environmental
Assessment Tool—that nongovernmental agencies and industry groups have drawn up over the
past two decades. These standards are more stringent than most countries’ laws, particularly when
they apply to cross-border trade.
“CO-CREATING BUSINESS’S NEW SOCIAL COMPACT” with JEB BRUGMANN from
February 2007

In early 2005, we met privately with the chairperson of one of the world’s biggest banks to discuss
business opportunities in catering to poor people. The chairperson responded bluntly. “We don’t
care about making profits [on such a business],” he said, with the bank’s CEO sitting beside him.
“There’s something even distasteful about the idea of making money off people who earn less than
$1 a day.” He raised a related issue that, unexpectedly, became the topic of our discussion that
morning: how the bank could create, manage, and scale up a program to support elementary
schools for poor children in a certain developing country. We were a little surprised that a banker
was so preoccupied with a problem that usually keeps not-for-profit, nongovernmental
organizations (NGOs), rather than large corporations, up at night.

A week later, we spent a day with representatives of three relatively small NGOs in India. One
specializes in infrastructure development and postdisaster reconstruction. Another focuses on the
cultivation and processing of herbal medicines. The third provides business support to rural
enterprises. Together, the three organizations also manage several self-help savings and loan
groups involving around 50,000 women. The NGOs and their business advisers, some of them
executives working for a large global company, wanted our help in deciding which businesses to
set up. They had conducted research and market tests on opportunities in the financial services and
insurance, construction, consumer products, and health services industries. By the end of the day,
the NGOs decided to go ahead with three businesses: selling insurance products, retailing
groceries, and providing sanitation facilities to people whose income is around 50 cents a day. We
were impressed by the NGOs’ desire and readiness to organize local communities so they could
manufacture and sell products in the marketplace—just like good entrepreneurs.

Those two meetings, we’re convinced, captured more than a fleeting role reversal; they symbolize
an enduring shift in the practices of corporations and social groups and, perhaps, in their attitudes
toward each other. That may sound like a startling claim. Since the protests against globalization at
Seattle and Davos in the late 1990s, people have assumed that the gulf between the private sector
and the civil society, as the media call NGOs, has been growing. After all, despite social groups’
protests, more countries have opened up to foreign investment, and governments have continued to
privatize industries. Meanwhile, companies, especially Western multinational corporations, have
come under a dark cloud. Their recent shenanigans—fraud at Enron, insider trading at WorldCom,
and inept governance at Hewlett-Packard, not to mention a rash of social, environmental, and
health-related controversies at blue-chip companies such as Nike, Shell, and McDonald’s—have
led to a near crisis of confidence in the role of the modern corporation in society.
However, a countertrend has emerged. Over the last five years, some corporations have started to
pay attention to customers at the bottom of the economic pyramid. As the pioneers move into inner
cities and villages, their middle managers are spending more time than you might imagine on
acquiring local knowledge, value engineering, developing low-cost business models, and
community-based marketing. Meanwhile, several NGOs have set up businesses to provide jobs
and incomes in order to free people from the tyranny of poverty. Product development, logistics,
project management, and scaling techniques are some of the mechanisms they’re using to kick-
start socioeconomic development in long-neglected communities.

Realizing that they each possess competencies, infrastructure, and knowledge that the other needs
to be able to operate in low-income markets, companies and NGOs are trying to learn from and
work with each other. For example, Danone has set up a joint venture with Bangladesh’s Grameen
Bank to manufacture and sell bottom-of-the-pyramid dairy products. Microsoft has tied up with the
NGO Pratham to deliver personal computers to Indian villagers, while Intel and two large Indian
information technology firms, Wipro and HCL Infosystems, have launched the Community PC in
partnership with other NGOs to do the same. Nestlé has joined hands with health professionals and
NGOs in Colombia, Peru, and the Philippines to deliver educational programs on nutrition and
nutritionally fortified food products to the poor.

The Three Stages in the Convergence between the Corporate Sector and the Civil Society

As their interests and capabilities converge, these corporations and NGOs are together creating
innovative business models that are helping to grow new markets at the bottom of the pyramid and
niche segments in mature markets. These models, we believe, will lead to novel frameworks that
can renew the corporation’s social legitimacy even as they allow for sustainable development and
accelerate the eradication of poverty. This convergence is making it imperative that managers in
both sectors understand the opportunities and risks in working together.

Liberalization’s Unexpected Consequences

Companies and NGOs have arrived at the same place by different routes. Over the last two
decades, as many countries opened their economies to foreign competition, often at the behest of
the International Monetary Fund and the World Bank, business and the civil society fought
bitterly. At first, both sides battled vociferously and publicly with governments over the need for,
the nature of, and the pace of economic reforms. While companies, especially multinational
corporations, wanted governments to reduce tariffs sharply and allow foreign investment into
every sector immediately, the civil society argued that liberalization should take place slowly and
only in some industries. Then, as governments softened labor, environmental, and investment
regulations to attract foreign investment, the two sectors waged a shadow war over the reforms’
future. Finally, as governments played less and less of a regulatory role, corporations and NGOs
fought each other directly, debating the boundaries within which socially responsible corporations
should operate. Those battles led to three unanticipated consequences.

First, NGOs emerged as the corporate sector’s de facto regulators, occupying the vacuum that
governments were leaving behind. They aren’t newcomers to the task; for many years, NGOs have
influenced markets in areas such as chemical regulation, oil spill liability, air emissions, liquid
waste, pharmaceutical and food standards, child labor, and employment discrimination. Their
influence has created a regulatory framework tougher than the legal requirements corporations
face. NGOs may be small, but through the Internet, even a single person or organization can
coordinate “smart mobs,” as Howard Rheingold calls them in his 2002 book of the same name,
allowing NGOs to mount actions on several fronts simultaneously. For instance, local NGOs
attacked the Coca-Cola Company over its use of water in the village of Plachimada in Kerala,
India. As accounts have spread from Web site to Web site, the dispute has grown into a worldwide
battle over the brand’s presence in universities and schools. The escalation of the campaign from
market to market and from issue to issue has, as the Wall Street Journal wrote, cost Coca-Cola
“millions of dollars in lost sales and legal fees in India, and growing damage to its reputation
elsewhere.”
“STRATEGIC INTENT” with GARY HAMEL from July–August 2005

Sixteen years ago, when Gary Hamel, then a lecturer at London Business School, and C.K.
Prahalad, a University of Michigan professor, wrote “Strategic Intent,” the article signaled that a
major new force had arrived in management.

Hamel and Prahalad argue that Western companies focus on trimming their ambitions to match
resources and, as a result, search only for advantages they can sustain. By contrast, Japanese
corporations leverage resources by accelerating the pace of organizational learning and try to attain
seemingly impossible goals. These firms foster the desire to succeed among their employees and
maintain it by spreading the vision of global leadership. This is how Canon sought to “beat Xerox”
and Komatsu set out to “encircle Caterpillar.”

This strategic intent usually incorporates stretch targets, which force companies to compete in
innovative ways. In this McKinsey Award–winning article, Hamel and Prahalad describe four
techniques that Japanese companies use: building layers of advantage, searching for “loose
bricks,” changing the terms of engagement, and competing through collaboration.

Today managers in many industries are working hard to match the competitive advantages of their
new global rivals. They are moving manufacturing offshore in search of lower labor costs,
rationalizing product lines to capture global scale economies, instituting quality circles and just-in-
time production, and adopting Japanese human resource practices. When competitiveness still
seems out of reach, they form strategic alliances—often with the very companies that upset the
competitive balance in the first place.

Important as these initiatives are, few of them go beyond mere imitation. Too many companies are
expending enormous energy simply to reproduce the cost and quality advantages their global
competitors already enjoy. Imitation may be the sincerest form of flattery, but it will not lead to
competitive revitalization. Strategies based on imitation are transparent to competitors who have
already mastered them. Moreover, successful competitors rarely stand still. So it is not surprising
that many executives feel trapped in a seemingly endless game of catch-up, regularly surprised by
the new accomplishments of their rivals.

For these executives and their companies, regaining competitiveness will mean rethinking many of
the basic concepts of strategy.1 As “strategy” has blossomed, the competitiveness of Western
companies has withered. This may be coincidence, but we think not. We believe that the
application of concepts such as “strategic fit” (between resources and opportunities), “generic
strategies” (low cost versus differentiation versus focus), and the “strategy hierarchy” (goals,
strategies, and tactics) has often abetted the process of competitive decline. The new global
competitors approach strategy from a perspective that is fundamentally different from that which
underpins Western management thought. Against such competitors, marginal adjustments to
current orthodoxies are no more likely to produce competitive revitalization than are marginal
improvements in operating efficiency. (The sidebar “Remaking Strategy” describes our research
and summarizes the two contrasting approaches to strategy we see in large multinational
companies.)

Remaking Strategy

Few Western companies have an enviable track record anticipating the moves of new global
competitors. Why? The explanation begins with the way most companies have approached
competitor analysis. Typically, competitor analysis focuses on the existing resources (human,
technical, and financial) of present competitors. The only companies seen as a threat are those with
the resources to erode margins and market share in the next planning period. Resourcefulness, the
pace at which new competitive advantages are being built, rarely enters in.

In this respect, traditional competitor analysis is like a snapshot of a moving car. By itself, the
photograph yields little information about the car’s speed or direction—whether the driver is out
for a quiet Sunday drive or warming up for the Grand Prix. Yet many managers have learned
through painful experience that a business’s initial resource endowment (whether bountiful or
meager) is an unreliable predictor of future global success.

Think back: In 1970, few Japanese companies possessed the resource base, manufacturing volume,
or technical prowess of U.S. and European industry leaders. Komatsu was less than 35% as large
as Caterpillar (measured by sales), was scarcely represented outside Japan, and relied on just one
product line—small bulldozers—for most of its revenue. Honda was smaller than American
Motors and had not yet begun to export cars to the United States. Canon’s first halting steps in the
reprographics business looked pitifully small compared with the $4 billion Xerox powerhouse.

If Western managers had extended their competitor analysis to include these companies, it would
merely have underlined how dramatic the resource discrepancies between them were. Yet by 1985,
Komatsu was a $2.8 billion company with a product scope encompassing a broad range of earth-
moving equipment, industrial robots, and semiconductors. Honda manufactured almost as many
cars worldwide in 1987 as Chrysler. Canon had matched Xerox’s global unit market share.

The lesson is clear: Assessing the current tactical advantages of known competitors will not help
you understand the resolution, stamina, or inventiveness of potential competitors. Sun-tzu, a
Chinese military strategist, made the point 3,000 years ago: “All men can see the tactics whereby I
conquer,” he wrote, “but what none can see is the strategy out of which great victory is evolved.”
“THE END OF CORPORATE IMPERIALISM” with Kenneth Lieberthal from Aug 2003

When large Western companies rushed to enter emerging markets 20 years ago, they were guided
by a narrow and often arrogant perspective. They tended to see countries like China and India
simply as targets—vast agglomerations of would-be consumers hungry for modern goods and
services. C.K. Prahalad and Kenneth Lieberthal call this view “corporate imperialism,” and they
show how it has distorted the operating, marketing, and distribution decisions multinationals have
made in serving developing countries. In particular, these companies have tended to gear their
products and pitches to small segments of relatively affluent buyers—those who, not surprisingly,
most resemble the prototypical Western consumer. They have missed, as a result, the very real
opportunity to reach much larger markets further down the socioeconomic pyramid. Succeeding in
these broader markets requires companies to spend time building a deep and unbiased
understanding of the unique characteristics and needs of developing countries and their peoples.
But such time is well spent. Not only will it unlock new sources of revenue, it will also force big
companies to innovate in ways that will benefit their operations throughout the world.

As they search for growth, multinational corporations will have to compete in the big emerging
markets of China, India, Indonesia, and Brazil. The operative word is “emerging.” A vast
consumer base of hundreds of millions of people is developing rapidly. Despite the uncertainty and
the difficulty of doing business in markets that remain opaque to outsiders, Western MNCs will
have no choice but to enter them. (See the table “Market Size: Emerging Markets Versus the
United States.”) During the first wave of market entry in the 1980s, MNCs operated with what
might be termed an imperialist mind-set. They assumed that the big emerging markets were new
markets for their old products. They foresaw a bonanza in incremental sales for their existing
products or the chance to squeeze profits out of their sunset technologies. Further, the corporate
center was seen as the sole locus of product and process innovation. Many multinationals did not
consciously look at emerging markets as sources of technical and managerial talent for their global
operations. As a result of this imperialist mind-set, multinationals have achieved only limited
success in those markets.

Many corporations, however, are beginning to see that the opportunity big emerging markets
represent will demand a new way of thinking. Success will require more than simply developing
greater cultural sensitivity. The more we understand the nature of these markets, the more we
believe that multinationals will have to rethink and reconfigure every element of their business
models.
Market Size : Emerging Markets Vs USA
Product China India Brazil USA
TV (million units) 13.6 5.2 7.8 23.0
Detergent:
kgs / person 2.5 2.7 7.3 14.4
million Tons 3.5 2.3 1.1 3.9
Shampoo ( $ billions) 1.0 0.8 1.0 1.5

Pharmaceuticals ($ billions) 5.0 2.8 8.0 60.6

Automotive (million units) 1.6 0.7 2.1 15.5

Power ( mw capacity) 236,542 81,736 59,950 810,964

So while it is still common today to question how corporations like General Motors and
McDonald’s will change life in the big emerging markets, Western executives would be smart to
turn the question around. Success in the emerging markets will require innovation and resource
shifts on such a scale that life within the multinationals themselves will inevitably be transformed.
In short, as MNCs achieve success in those markets, they will also bring corporate imperialism to
an end.

We would not like to give the impression that we think markets such as China, India, Brazil, and
Indonesia will enjoy clear sailing. As Indonesia is showing, these markets face major obstacles to
continued high growth; political disruptions, for example, can slow down and even reverse trends
toward more open markets. But given the long-term growth prospects, MNCs will have to compete
in those markets. Having studied in depth the evolution of India and China over the past 20 years,
and having worked extensively with MNCs competing in these and other countries, we believe that
there are five basic questions that MNCs must answer to compete in the big emerging markets:

• Who is the emerging middle-class market in these countries, and what kind of business
model will effectively serve their needs?
• What are the key characteristics of the distribution networks in these markets, and how
are the networks evolving?
• What mix of local and global leadership is required to foster business opportunities?
• Should the MNC adopt a consistent strategy for all its business units within one country?
“SERVING THE WORLD’S POOR, PROFITABLY” with Allen Hammond from Sep 2002

Consider this bleak vision of the world 15 years from now: The global economy recovers from its
current stagnation but growth remains anemic. Deflation continues to threaten, the gap between
rich and poor keeps widening, and incidents of economic chaos, governmental collapse, and civil
war plague developing regions. Terrorism remains a constant threat, diverting significant public
and private resources to security concerns. Opposition to the global market system intensifies.
Multinational companies find it difficult to expand, and many become risk averse, slowing
investment and pulling back from emerging markets.

Now consider this much brighter scenario: Driven by private investment and widespread
entrepreneurial activity, the economies of developing regions grow vigorously, creating jobs and
wealth and bringing hundreds of millions of new consumers into the global marketplace every
year. China, India, Brazil, and, gradually, South Africa become new engines of global economic
growth, promoting prosperity around the world. The resulting decrease in poverty produces a
range of social benefits, helping to stabilize many developing regions and reduce civil and cross-
border conflicts. The threat of terrorism and war recedes. Multinational companies expand rapidly
in an era of intense innovation and competition.

Both of these scenarios are possible. Which one comes to pass will be determined primarily by one
factor: the willingness of big, multinational companies to enter and invest in the world’s poorest
markets. By stimulating commerce and development at the bottom of the economic pyramid,
MNCs could radically improve the lives of billions of people and help bring into being a more
stable, less dangerous world. Achieving this goal does not require multinationals to spearhead
global social development initiatives for charitable purposes. They need only act in their own self-
interest, for there are enormous business benefits to be gained by entering developing markets. In
fact, many innovative companies—entrepreneurial outfits and large, established enterprises
alike—are already serving the world’s poor in ways that generate strong revenues, lead to greater
operating efficiencies, and uncover new sources of innovation. For these companies—and those
that follow their lead—building businesses aimed at the bottom of the pyramid promises to provide
important competitive advantages as the twenty-first century unfolds.

Big companies are not going to solve the economic ills of developing countries by themselves, of
course. It will also take targeted financial aid from the developed world and improvements in the
governance of the developing nations themselves. But it’s clear to us that prosperity can come to
the poorest regions only through the direct and sustained involvement of multinational companies.
And it’s equally clear that the multinationals can enhance their own prosperity in the process.
Untapped Potential
Everyone knows that the world’s poor are distressingly plentiful. Fully 65% of the world’s
population earns less than $2,000 each per year—that’s 4 billion people. But despite the vastness
of this market, it remains largely untapped by multinational companies. The reluctance to invest is
easy to understand. Companies assume that people with such low incomes have little to spend on
goods and services and that what they do spend goes to basic needs like food and shelter. They
also assume that various barriers to commerce—corruption, illiteracy, inadequate infrastructure,
currency fluctuations, bureaucratic red tape—make it impossible to do business profitably in these
regions.

But such assumptions reflect a narrow and largely outdated view of the developing world. The fact
is, many multinationals already successfully do business in developing countries (although most
currently focus on selling to the small upper-middle-class segments of these markets), and their
experience shows that the barriers to commerce—although real—are much lower than is typically
thought. Moreover, several positive trends in developing countries—from political reform, to a
growing openness to investment, to the development of low-cost wireless communication
networks—are reducing the barriers further while also providing businesses with greater access to
even the poorest city slums and rural areas. Indeed, once the misperceptions are wiped away, the
enormous economic potential that lies at the bottom of the pyramid becomes clear.

Take the assumption that the poor have no money. It sounds obvious on the surface, but it’s wrong.
While individual incomes may be low, the aggregate buying power of poor communities is
actually quite large. The average per capita income of villagers in rural Bangladesh, for instance, is
less than $200 per year, but as a group they are avid consumers of telecommunications services.
Grameen Telecom’s village phones, which are owned by a single entrepreneur but used by the
entire community, generate an average revenue of roughly $90 a month—and as much as $1,000 a
month in some large villages. Customers of these village phones, who pay cash for each use, spend
an average of 7% of their income on phone services—a far higher percentage than consumers in
traditional markets do.

It’s also incorrect to assume that the poor are too concerned with fulfilling their basic needs to
“waste” money on nonessential goods. In fact, the poor often do buy “luxury” items. In the
Mumbai shantytown of Dharavi, for example, 85% of households own a television set, 75% own a
pressure cooker and a mixer, 56% own a gas stove, and 21% have telephones. That’s because
buying a house in Mumbai, for most people at the bottom of the pyramid, is not a realistic option.
Neither is getting access to running water. They accept that reality, and rather than saving for a
rainy day, they spend their income on things they can get now that improve the quality of their
lives
“CO-OPTING CUSTOMER COMPETENCE” with Venkatram Ramaswamy from Jan-Feb ‘02

Business competition used to be a lot like traditional theater: On stage, the actors had clearly
defined roles, and the customers paid for their tickets, sat back, and watched passively. In business,
companies, distributors, and suppliers understood and adhered to their well-defined roles in a
corporate relationship. Now the scene has changed, and business competition seems more like the
experimental theater of the 1960s and 1970s; everyone and anyone can be part of the action.

The shift away from formal, defined roles is already occurring in business-to-business
relationships. Major business discontinuities such as deregulation, globalization, technological
convergence, and the rapid evolution of the Internet have blurred the roles that companies play in
their dealings with other businesses. Consider the relationship between Ford and its main
suppliers. Far from being passive providers of materials and parts, Ford’s suppliers have become
close collaborators in the development of new vehicles. At the same time, however, they compete
for value by negotiating the prices for the parts and the materials they supply. Some suppliers are
starting to compete directly. For example, Markham, Ontario-based auto-parts giant Magna
International has the ambition—and the potential—to assemble automobiles itself.

The story’s the same for distributors. For example, Wal-Mart does more than just distribute Procter
& Gamble’s goods. It shares daily sales information and works with P&G in product warehousing
and replenishment to ensure that consumers can always find the goods they want at low prices. In
some product categories, however, Wal-Mart competes head-to-head with P&G. For instance,
Wal-Mart last year rolled out its own brand of detergent, Sam’s American Choice, which competes
nationally with P&G’s popular Tide brand.

The changing dynamics of business has been the focus of managerial debate the past few years.
Practitioners and scholars talk about companies “competing as a family.” They talk about
alliances, networks, and collaboration among companies. But managers and researchers have
largely ignored the consumer, the agent that is most dramatically transforming the industrial
system as we know it. (See the exhibit “The Evolution and Transformation of Customers.”)

Thanks largely to the Internet; consumers have been increasingly engaging themselves in an active
and explicit dialogue with manufacturers of products and services. What’s more, that dialogue is
no longer being controlled by corporations. Individual consumers can address and learn about
businesses either on their own or through the collective knowledge of other customers. Consumers
can now initiate the dialogue; they have moved out of the audience and onto the stage.
Customers are fundamentally changing the dynamics of the marketplace. The market has become a
forum in which consumers play an active role in creating and competing for value. The
distinguishing feature of this new marketplace is that consumers become a new source of
competence for the corporation. The competence that customers bring is a function of the
knowledge and skills they possess, their willingness to learn and experiment, and their ability to
engage in an active dialogue.

The concept of competence as a source of competitive advantage originated in studies of the

diversified firm.1 Managers started to conceive of the company as a collection of competencies
rather than as a portfolio of business units. In this way, managers were able to identify new
business opportunities and find new ways to deploy the company’s intellectual assets. Managers
eventually came to realize that the corporation could also draw on the competencies of its supply-
chain partners. During the last decade, managers have extended the search for competencies even
further; they now draw on a broad network of suppliers and distributors. Over time, then, the unit
of strategic analysis has moved from the single company, to a family of businesses, and finally to
what people call the “extended enterprise,” which consists of a central firm supported by a
constellation of suppliers. But the recognition that consumers are a source of competence forces
managers to cast an even wider net: competence now is a function of the collective knowledge
available to the whole system—an enhanced network of traditional suppliers, manufacturers,
partners, investors, and customers. (See the exhibit “The Shifting Locus of Core Competencies.”)
Customers as a Source of Competence

Some industries have already gone further than others in drawing on the competencies of
customers. Consider the software industry, in which companies have moved from testing products
in usability laboratories to testing them in customer environments. For example, more than
650,000 customers tested a beta version of Microsoft’s Windows 2000 and shared with the
software giant their ideas for changing some of the product’s features. Many of those customers
were even prepared to pay Microsoft a fee to do this. Working with the beta software helped many
of those customers understand how Windows 2000 could create value for their own businesses.
The beta tests also helped clear the glitches from early versions of the software. The value of the
collective R&D investment by Microsoft’s customers in co-developing Windows was estimated at
more than $500 million worth of time, effort, and fees.
“The New Meaning of Quality in the Information Age” with M.S.Krishnan from Sep-Oct 1999

It’s surprising how blasé many managers still are about Y2K. The legal problems alone associated with
the date-change problem are so large and complex that some corporations could face damages running
into the billions of dollars. The Securities and Exchange Commission, recognizing the potential for long-
term litigation associated with Y2K, now requires that companies disclose any liability in their 10K
statements and may hold directors personally responsible for Y2K failures. Because of legal and other
costs, some observers predict the Y2K problem will cause the GDP of the United States to shrink by as
much as 0.3% in 2000. And the global dimension of business only aggravates the situation: as U.S.
companies become more dependent on international suppliers, they are subject to a bigger millennium
risk in the short term.

Yet the most important thing about Y2K isn’t its direct cost—severe as it is—but the warning it sends
about how a company’s software applications are rapidly emerging as its central nervous system. It is a
warning that managers can ignore only at their own peril. Software is increasingly determining the nature
of the experiences customers, employees, partners, and investors have with a company, its products and
services, and its operations. Therefore, positive software-mediated experiences are critical for retaining
customers, motivating employees, collaborating effectively with partners, and communicating with
investors. Intranets and electronic commerce have upped the ante; these Internet-based applications are
having considerable impact on all companies, whether they sell computers, flowers, or cars.

But in most organizations, CEOs and senior line managers are late in confronting software issues. As a
result, many companies have accumulated an unwieldy number of incompatible, customized software
systems designed to handle the same applications. For instance, the CIO at General Motors estimates the
organization has installed more than 7,800 distinct software systems worldwide, and more than 1,800 of
those systems are dedicated to financial applications. Merely having that many systems doing the same
tasks can be problematic. When the systems aren’t compatible, transferring and sharing data, let alone
trading knowledge, become almost impossible.

But GM and traditional companies like it aren’t alone. IT companies can face the same problem,
particularly if they have grown rapidly through a series of acquisitions. For instance, networking
company Cisco Systems acquired 28 companies between 1993 and 1998 and had to create a special unit
to ensure that the acquired groups complied with Cisco’s configuration standards for software,
communications, and hardware.

Fixing these problems incurs very real direct costs, as Cisco discovered after it spent about $100 million
to standardize its information infrastructure and then spent another $100 million to create a Web-based
user interface. But the direct costs pale beside the opportunity costs. Consider a typical modern bank. In
every transaction that it undertakes, the bank obtains information about its customers. In principle, a
bank should be able to track its customers throughout their lives and should be able to market
appropriate products: say, a credit card at age 18, a car loan at 23, and a mortgage at 30. But most banks
can’t even cross sell products—for example, selling a mortgage to a checking account customer—let
alone provide life-stage services. The applications and databases in their information technology
infrastructures were built for each individual business line and are often incompatible. Similarly, a large
Japanese consumer electronics company found that the consumer data it collects are never used because
the company doesn’t have the software installed to engage in an ongoing dialogue with its customers. As
one manager in the company remarked, “We collect all this data and then stuff it in a shoe box, never to
see it again.”

Of course, competitive advantage depends on the nature and sophistication not only of application
software but also of the rest of a company’s information infrastructure—its data sources, databases,
operating systems, and hardware. Wal-Mart provides an ideal example of how an integrated information
infrastructure can successfully affect business decisions. For example, the integration of the retailer’s
supply-chain software with its data mining and data warehousing applications ensures on-time and
efficient delivery of products to stores. The applications are driven by information stored in Wal-Mart’s
huge commercial databases on the back end—50 terabytes at last count. And Wal-Mart isn’t alone in
reaping the benefits of a highly evolved information technology infrastructure. Dell, Eastman Chemicals,
Amazon.com, and the Gap are all using information technologies to change the rules of the game. In our
work, we see a direct link between companies’ IT infrastructures—in particular the quality of their
application software—and the quality and speed of managerial decisions.

One of the main reasons managers pay too little attention to software is because they often don’t have a
framework to help them make decisions about it. For a start, senior line managers have no shared view of
what determines quality in software. General concepts of quality have evolved and have gradually
become more sophisticated. In the 1970s, a product-centric, conformance view of quality emerged; it
suggests that products and services meet clear specifications such as size, weight, color, finish, battery
life, or mean time between failures. The idea is that consumers can expect the product to perform
reliably. But as the service sector grew, many companies had to develop a different model of quality—
one in which quality was judged according to a company’s ability to change to meet the expectations of a
diverse customer base. Most recently, a few high-tech companies have been promoting a third approach
in which a product’s quality is judged according to its ability to support innovation through
experimentation. (The sidebar “The Evolving Concept of Quality” more fully describes the different
approaches to quality). Today a new view of quality—one that synthesizes the conformance, service, and
innovation approaches—is needed to assess an organization’s IT infrastructure and software.
The Evolving Concept of Quality

The quality of the software in an information infrastructure can be judged by focusing on the user, the
technologies the software is drawn from, and what the software was designed to do—also known as its
domain. A product’s domain can be defined as the general body of knowledge about a user’s needs and
expectations for the product. It takes into account the profile of a user and the functionality of a product.
Every product has a domain; software applications are special because the functions of and expectations
for a piece of software can vary a great deal. Given the importance of domains in software, we will begin
by identifying some basic domain characteristics. Then we will look at how software users and
technology shape these characteristics. Finally, we will review the quality risks specific to the use and
design of software. Our goal is to help managers determine what application software to include in their
portfolio and the performance standards they can expect from it.
“COMPETING FOR THE FUTURE” with Gary Hamel from Jul-Aug 1994

Look around your company. Look at the high-profile initiatives that have recently been launched, the
issues preoccupying senior management, the criteria and benchmarks by which progress is measured,
your track record of new-business creation. Look into the faces of your colleagues, and consider their
ambitions and fears. Look toward the future, and ponder your company’s ability to shape that future in
the years and decades to come.

Now ask yourself: Do senior managers in my company have a clear and shared understanding of how the
industry may be different ten years from now? Is my company’s point of view about the future unique
among competitors?

These are not rhetorical questions. Get a pencil and score your company.

If your scores fall somewhere in the middle or off to the left, your company may be devoting too much
energy to preserving the past and not enough to creating the future.

When we talk to senior managers about competing for the future, we ask them three questions. First,
what percentage of your time is spent on external rather than internal issues—on understanding, for
example, the implications of a particular new technology instead of debating corporate overhead
allocations? Second, of this time spent looking outward, how much do you spend considering how the
world may change in five or ten years rather than worrying about winning the next big contract or
responding to a competitor’s pricing move? Third, of the time devoted to looking outward and forward,
how much do you spend working with colleagues to build a deeply shared, well-tested perspective on the
future as opposed to a personal and idiosyncratic view?
The answers to these questions typically conform to what we call the “40/30/20 Rule.” In our experience,
about 40% of a senior executive’s time is devoted to looking outward and, of this time, about 30% is
spent peering three, four, five, or more years into the future. Of that time spent looking forward, no more
than 20% is devoted to building a collective view of the future (the other 80% is spent considering the
future of the manager’s particular business). Thus, on average, senior managers devote less than 3%
(40% x 30% x 20%) of their time to building a corporate perspective on the future. In some companies,
the figure is less than 1%. Our experience suggests that to develop a distinctive point of view about the
future, senior managers must be willing to devote considerably more of their time. And after the initial
burst of energy that they must expend to develop a distinct view of the future, managers must be willing
to adjust that perspective as the future unfolds.

Such commitment as well as substantial and sustained intellectual energy is required to answer such
questions as: What new core competencies will we need to build? What new product concepts should we
pioneer? What alliances will we need to form? What nascent development programs should we protect?
What long-term regulatory initiatives should we pursue?

We believe such questions have received far too little attention in many companies, not because senior
managers are lazy—most are working harder than ever—but because they won’t admit, to themselves or
to their employees, that they are less than fully in control of their companies’ future. Difficult questions
go unanswered because they challenge the assumption that top management really is in control, really
does have more accurate foresight than anyone else in the corporation, and already has a clear and
compelling view of the company’s future. Senior managers are often unwilling to confront these
illusions. So the urgent drives out the important; the future is left largely unexplored; and the capacity to
act, rather than to think and imagine, becomes the sole measure of leadership.
“STRATEGY AS STRETCH AND LEVERAGE” with Gary Hamel from Mar-Apr 1993

General Motors versus Toyota. CBS versus CNN. Pan Am versus British Airways. RCA versus Sony.
Suppose you had been asked, 10 or 20 years ago, to choose the victor in each of these battles. Where
would you have placed your bets? With hindsight, the choice is easy. But at the time, GM, CBS, Pan
Am, and RCA all had stronger reputations, deeper pockets, greater technological riches, bigger market
shares, and more powerful distribution channels. Only a dreamer could have predicted that each would
be displaced by a competitor with far fewer resources—but far greater aspirations.

Driven by the need to understand the dynamics of battles like these, we have turned competitiveness into
a growth industry. Companies and industries have been analyzed in mind-numbing detail, autopsies
performed, and verdicts rendered. Yet when it comes to understanding where competitiveness comes
from and where it goes, we are like doctors who have diagnosed a problem—and have even found ways
to treat some of its symptoms—but who still don’t know how to keep people from getting sick in the first
place.

Consider the analogy. The first step in understanding competitiveness is to observe competitive
outcomes: some companies gaining market share, others losing it, some companies in the black, others
bleeding red ink. Like doctors taking a patient’s blood pressure or temperature, we can say whether the
patient is well or ill, but little more.

The next step is to move from observation to diagnosis. To diagnose competitive problems, we rely on
industry structure analysis. A company’s market position—the particular market segments in which the
company participates—broadly determines the potential for profitability and growth. Within any
particular market segment, it is the company’s relative competitive advantage that determines actual
profitability and growth.

Industry structure analysis points us to the what of competitiveness: what makes one company more
profitable than another. As new whats have been discovered, companies have been exhorted to strive for
six sigma quality, compete on time, become customer led, and pursue a host of other desirable
advantages. In diagnosing a specific competitive disease, we may conclude that a company is in an
unattractive industry segment with a cost disadvantage and subpar quality. This is a bit like determining
that a patient has Parkinson’s disease: the diagnosis may point to a cure, but it isn’t the cure itself and
certainly won’t prevent disease.

To find a cure, the medical researcher must unravel the workings of disease. The competitive analogy
lies in studying organizational structure and process: For example, what are the administrative attributes
of a speedy product-development process or a successful total quality management program? But
however deeply we understand the various elements of a company’s competitive advantage, we are still
addressing the what of competitiveness, not the why.
Understanding the what of competitiveness is a prerequisite for catching up. Understanding the why is a
prerequisite for getting out in front. Why do some companies continually create new forms of
competitive advantage, while others watch and follow? Why do some companies redefine the industries
in which they compete, while others take the existing industry structure as a given?

To answer these questions, another layer of understanding must be peeled back. If the goal of medicine
is to prevent rather than simply cure disease, a doctor must search for the reason some people fall ill
while others do not. Differences in life-style and diet, for instance, predispose some to sickness and
others to wellness. A company’s institutional environment is the industrial corollary here. Monetary and
fiscal policy, trade and industrial policy, national levels of education, the structure of corporate
ownership, and the social norms and values of a particular nation all have an impact on how well that
nation’s industries will compete.
“CORPORATE IMAGINATION AND EXPEDITIONARY MARKETING” with Gary Hamel from
Jul-Aug 1991

The global competitive battles of the 1980s were won by companies that could achieve cost and quality
advantages in existing, well-defined markets. In the 1990s, these battles will be won by companies that
can build and dominate fundamentally new markets. Speech-activated appliances, artificial bones, micro-
robots, cars that park themselves—products like these not only make the inconceivable conceivable but
also create new and largely uncontested competitive space. Over the next decade, more and more
companies that have not already done so will close the gap with their rivals—mostly Japanese—on cost,
quality, and cycle time. But without the capacity to stake out new competitive space, many will find
themselves interned in traditional, and shrinking, product markets.

Early and consistent investment in what we have called core competencies is one prerequisite for
creating new markets. Corporate imagination and expeditionary marketing are the keys that unlock these
new markets. A company that underinvests in its core competencies, or inadvertently surrenders them
through alliances and outsourcing, robs its own future. But to realize the potential that core competencies
create, a company must also have the imagination to envision markets that do not yet exist and the ability
to stake them out ahead of the competition.

A company will strive to create new competitive space only if it possesses an opportunity horizon that
stretches far beyond the boundaries of its current businesses. This horizon identifies, in broad terms, the
market territory senior management hopes to stake out over the next decade, a terrain that is unlikely to
be captured in anything as precise as a business plan. The early enthusiasm that several Japanese
companies brought to developing high definition television grew out of just such a vision. Careful and
creative consideration of the many new opportunities that might emerge if HDTV could be made a
reality led them beyond the traditional boundaries of the color television business to identify potential
markets in cinema production, video photography, video magazines, electronic museums, product
demonstrations, and training simulations, among others.

As this example demonstrates, a company’s opportunity horizon represents its collective imagination of
the ways in which an important new benefit might be harnessed to create new competitive space or
reshape existing space. Commitment to an opportunity horizon does not rest on ROI calculations but on
an almost visceral sense of the benefit that customers will ultimately derive should pioneering efforts
prove successful—a deeply held belief that “with all this benefit about, there must be a market in there
somewhere.” The more fundamental the envisioned benefits and the more widely shared the enthusiasm
for the opportunity horizon, the greater the company’s perseverance will be.

Sony persevered in its 13-year effort to commercialize charge coupled devices (CCDs) because it refused
to view the tiny, high-resolution, image-sensing chips in solely technological terms. Instead, CCDs were
seen internally as “electronic film,” with the potential to provide much the same range of benefits as
traditional chemical-based film and to open markets that Kodak and other companies had served in the
past. A similar “benefits view” of an emerging core competence (the pocketability of radios and other
consumer electronic products) prompted the company’s enthusiastic embrace of transistor technology
two decades earlier. Sharp’s commitment to mastering flat-screen display technology is likewise based
on a belief that high-resolution, thin, energy-efficient video screens will provide a wide range of benefits
to customers through many different product applications.

In Japan, the task of creating new markets dominates senior managers’ agendas, partly, perhaps, because
their domestic rivalry is so intense. New competitive space does not stay new for long. Building one new
business after another, faster than competitors, is the only way to stay ahead. The fruits of this obsession
are visible. Think of Yamaha’s strong position in electronic pianos, synthesizers, and other digitally
based musical equipment, Sharp’s strengths in pocket LCD televisions and ultrathin displays, or
Toshiba’s leadership in laptop computers.

Conventional wisdom says it is almost impossible for big companies to be truly innovative. New
businesses that wriggle out from under the deadweight of bureaucracy and short-term thinking exist
despite the system not because of it. Yet no one believes that big companies’ employees are any less
imaginative than their peers in smaller companies. So to protect imaginative individuals from corporate
orthodoxies, senior managers in many companies tend to isolate them in new venture divisions,
skunkworks, incubators, and the like.

The goal of such programs is to create a greenhouse in which 1,000 flowers can bloom. But the
greenhouse seldom has more than six inches of headroom, partly because of a lack of corporate
conviction about the opportunities being pursued and partly because the venture managers cannot tap the
company’s resources worldwide. Trying to leverage corporate competencies into new businesses while
at the same time protecting new ventures from corporate orthodoxies is a contradiction in terms. Rather
than move new business development off-line, the challenge of creating new markets must be met head-
on. Individual imagination must become corporate imagination.
“THE CORE COMPETENCE OF THE CORPORATION” with Gary Hamel from May-June 1990

The most powerful way to prevail in global competition is still invisible to many companies. During the
1980s, top executives were judged on their ability to restructure, declutter, and delayer their
corporations. In the 1990s, they’ll be judged on their ability to identify, cultivate, and exploit the core
competencies that make growth possible—indeed, they’ll have to rethink the concept of the corporation
itself.

Consider the last ten years of GTE and NEC. In the early 1980s, GTE was well positioned to become a
major player in the evolving information technology industry. It was active in telecommunications. Its
operations spanned a variety of businesses including telephones, switching and transmission systems,
digital PABX, semiconductors, packet switching, satellites, defense systems, and lighting products. And
GTE’s Entertainment Products Group, which produced Sylvania color TVs, had a position in related
display technologies. In 1980, GTE’s sales were $9.98 billion, and net cash flow was $1.73 billion. NEC,
in contrast, was much smaller, at $3.8 billion in sales. It had a comparable technological base and
computer businesses, but it had no experience as an operating telecommunications company.

Yet look at the positions of GTE and NEC in 1988. GTE’s 1988 sales were $16.46 billion, and NEC’s
sales were considerably higher at $21.89 billion. GTE has, in effect, become a telephone operating
company with a position in defense and lighting products. GTE’s other businesses are small in global
terms. GTE has divested Sylvania TV and Telenet, put switching, transmission, and digital PABX into
joint ventures, and closed down semiconductors. As a result, the international position of GTE has
eroded. Non-U.S. revenue as a percent of total revenue dropped from 20% to 15% between 1980 and
1988.

NEC has emerged as the world leader in semiconductors and as a first-tier player in telecommunications
products and computers. It has consolidated its position in mainframe computers. It has moved beyond
public switching and transmission to include such lifestyle products as mobile telephones, facsimile
machines, and laptop computers—bridging the gap between telecommunications and office automation.
NEC is the only company in the world to be in the top five in revenue in telecommunications,
semiconductors, and mainframes. Why did these two companies, starting with comparable business
portfolios, perform so differently? Largely because NEC conceived of itself in terms of ‘‘core
competencies,’’ and GTE did not.

Rethinking the Corporation

Once, the diversified corporation could simply point its business units at particular end product markets
and admonish them to become world leaders. But with market boundaries changing ever more quickly,
targets are elusive and capture is at best temporary. A few companies have proven themselves adept at
inventing new markets, quickly entering emerging markets, and dramatically shifting patterns of
customer choice in established markets. These are the ones to emulate. The critical task for management
is to create an organization capable of infusing products with irresistible functionality or, better yet,
creating products that customers need but have not yet even imagined.

This is a deceptively difficult task. Ultimately, it requires radical change in the management of major
companies. It means, first of all, that top managements of Western companies must assume
responsibility for competitive decline. Everyone knows about high interest rates, Japanese protectionism,
outdated antitrust laws, obstreperous unions, and impatient investors. What is harder to see, or harder to
acknowledge, is how little added momentum companies actually get from political or macroeconomic
‘‘relief.’’ Both the theory and practice of Western management have created a drag on our forward
motion. It is the principles of management that are in need of reform.

NEC versus GTE, again, is instructive and only one of many such comparative cases we analyzed to
understand the changing basis for global leadership. Early in the 1970s, NEC articulated a strategic
intent to exploit the convergence of computing and communications, what it called ‘‘C&C.’’1 Success,
top management reckoned, would hinge on acquiring competencies, particularly in semiconductors.
Management adopted an appropriate ‘‘strategic architecture,’’ summarized by C&C, and then
communicated its intent to the whole organization and the outside world during the mid-1970s.

NEC constituted a ‘‘C&C Committee’’ of top managers to oversee the development of core products and
core competencies. NEC put in place coordination groups and committees that cut across the interests of
individual businesses. Consistent with its strategic architecture, NEC shifted enormous resources to
strengthen its position in components and central processors. By using collaborative arrangements to
multiply internal resources, NEC was able to accumulate a broad array of core competencies.
“COLLABORATE WITH YOUR COMPETITORS—AND WIN” with Gary Hamel, Yves L. Doz
from Jan-Feb 1989

Collaboration between competitors is in fashion. General Motors and Toyota assemble automobiles,
Siemens and Philips develop semiconductors, Canon supplies photocopiers to Kodak, France’s Thomson
and Japan’s JVC manufacture videocassette recorders. But the spread of what we call “competitive
collaboration”—joint ventures, outsourcing agreements, product licensings, cooperative research—has
triggered unease about the long-term consequences. A strategic alliance can strengthen both companies
against outsiders even as it weakens one partner vis-à-vis the other. In particular, alliances between
Asian companies and Western rivals seem to work against the Western partner. Cooperation becomes a
low-cost route for new competitors to gain technology and market access.

Yet the case for collaboration is stronger than ever. It takes so much money to develop new products
and to penetrate new markets that few companies can go it alone in every situation. ICL, the British
computer company, could not have developed its current generation of mainframes without Fujitsu.
Motorola needs Toshiba’s distribution capacity to break into the Japanese semiconductor market. Time
is another critical factor. Alliances can provide shortcuts for Western companies racing to improve their
production efficiency and quality control.

We have spent more than five years studying the inner workings of 15 strategic alliances and monitoring
scores of others. Our research (see the insert “About Our Research”) involves cooperative ventures
between competitors from the United States and Japan, Europe and Japan, and the United States and
Europe. We did not judge the success or failure of each partnership by its longevity—a common mistake
when evaluating strategic alliances—but by the shifts in competitive strength on each side. We focused
on how companies use competitive collaboration to enhance their internal skills and technologies while
they guard against transferring competitive advantages to ambitious partners.

About Our Research

There is no immutable law that strategic alliances must be a windfall for Japanese or Korean partners.
Many Western companies do give away more than they gain—but that’s because they enter partnerships
without knowing what it takes to win. Companies that benefit most from competitive collaboration
adhere to a set of simple but powerful principles.

Collaboration is competition in a different form.

Successful companies never forget that their new partners may be out to disarm them. They enter
alliances with clear strategic objectives, and they also understand how their partners’ objectives will
affect their success.
Harmony is not the most important measure of success.

Indeed, occasional conflict may be the best evidence of mutually beneficial collaboration. Few alliances
remain win-win undertakings forever. A partner may be content even as it unknowingly surrenders core
skills
“DO YOU REALLY HAVE A GLOBAL STRATEGY?” with Gary Hamel from Jul-Aug 1985

The Japanese competition attacked in the 1970s. U.S. and European companies were caught napping at
first, but quickly responded. U.S. auto companies source components, subsystems, and small cars from
the low-labor-cost countries like Mexico, South Korea, and Taiwan. Companies are also rationalizing
manufacturing operations to meet the new low-cost competitors. Buoyed by these kinds of global
strategies, companies firmly believe that they’ve met the Japanese challenge head on.

They’re wrong. According to these authors, the corporate response to Japan’s thrust has been half-
hearted and without appreciation for its long-term objectives. Many companies have miscalculated both
the timing and the workability of their strategies, in part because they don’t understand what global
strategy really is. So they continually fall behind and lose market share in most of the leading markets of
the future. Through a detailed analysis of the tire and television markets, the authors show that only by
thinking about strategy in a more analytic light can U.S. companies overtake the competitors.

The threat of foreign competition preoccupies managers in industries from telecommunications to

commercial banking and from machine tools to consumer electronics. Corporate response to the threat is
often misdirected and ill timed—in part because many executives don’t fully understand what global
competition is.

They haven’t received much help from the latest analysis of this trend. One argument simply emphasizes
the scale and learning effects that transcend national boundaries and provide cost advantages to
companies selling to the world market.1 Another holds that world products offer customers the twin
benefits of the low-cost and high-quality incentives for foreign customers to lay aside culture-bound
product preferences.

According to both of these arguments, U.S. organizations should “go global” when they can no longer
get the minimum volume needed for cost efficiency at home and when international markets permit
standardized marketing approaches. If, on the other hand, they can fully exploit scale benefits at home
and their international export markets are dissimilar, U.S. executives can safely adopt the traditional,
country-by-country, multinational approach. So while Caterpillar views its battle with Komatsu in global
terms, CPC International and Unilever may safely consider their foreign operations multidomestic.

After studying the experiences of some of the most successful global competitors, we have become
convinced that the current perspective on global competition and the globalization of markets is
incomplete and misleading. Analysts are long on exhortation—“go international”—but short on practical
guidance. Combine these shortcomings with the prevailing notion that global success demands a national
industrial policy, a docile work force, debt-heavy financing, and forbearing investors, and you can easily
understand why many executives feel they are only treading water in the rising tide of global
competition.
World-scale manufacturing may provide the necessary armament, and government support may be a
tactical advantage, but winning the war against global competition requires a broader view of global
strategy. We will present a new framework for assessing the nature of the worldwide challenge, use it to
analyze one particular industry, and offer our own practical guidelines for success.

Thrust and Parry

As a starting point, let’s take a look at what drives global competition. It begins with a sequence of
competitive action and reaction:

• An aggressive competitor decides to use the cash flow generated in its home market to subsidize
an attack on markets of domestically oriented foreign competitors.
• The defensive competitor then retaliates—not in its home market where the attack was staged—
but in foreign markets where the aggressor company is most vulnerable