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Although coordination and targeting constitute important means by which managers are, in pat, engineering their firms’s environments, they are difficult to alter in the short run: Rules of thumb guide managers’ advertising budgets and charitable and political contributions; it takes time for students to absorb information; forming relationships and systematically influencing regulators, judges, and legislators can pay off only in the long run. Strategic coordination and targeting, although valuable in coping with competition, prove less useful in contending with shortrun environmental changes. For faster operational benefits, managers forging strategic alliances with competitors.
In the last decade, we witnessed an explosive increase in the frequency and volume of direct collaborative deals being struck by firms in many U.S. industries. Cooperation was eased by the Reagan administration’s inclination to follow the early lead set by postwar Japan and many European countries in recognizing that competition unfolds on a global level. With antitrust laws out of favor, U.S. regulators found themselves supporting the formation of strategic alliances, particularly evident in the deregulated airline, financial services, and telecommunications communities.
In contrast to informal agreements and other forms of cooperation among competitors, alliances consist of formal contractual relationships that managers form to manage heightened competition and uncertainty and acquire capabilities at minimal expense.
Choosing Allies
Firms experience two principal forms of interdependence: horizontal and vertical. Horizontal interdependence binds competing firms into an industry: All managers in the industry perceive a sense of shared fate because the actions of any of their firms directly and negatively impinges on either the market share, the product, or the prices of its rivals. Increases in car sales at General Motors generally mean decreases at Ford and Chrysler, so auto manufacturers are horizontally interdependent. Much like competition between sports teams, horizontal interdependence produces in managers perceptions that their firms’ fates are negatively linked, that they should act to obstruct competitors’ effective actions and resist providing assistance.
In contrast, vertical interdependence is a form of mutualism. Firms whose activities are vertically related share an interest in each others’ actions: Both perceive gains and losses in similar ways. So environmental developments that threaten the market of U.S. auto manufacturers, for instance, also endanger firms in vertically related industries, be they safety glass and mirror manufacturers, parts suppliers, or tire makers. More akin to partners in a relay race, vertically related firms’ managers strive for mutual benefit, focus on their long-term interests, provide mutual assistance, and often act to prevent each other from making ineffective actions. The fashionable marriages of suppliers to their manufacturers and distributors forces a convergence of interests that translates into a common world view among managers.
Historically stable horizontal and vertical linkages can change suddenly as firms experience rivalry from industries producing increasingly close substitutes. In the late 60s, the once placid metal canning industry faced dramatic increases in horizontal and vertical interdependence due to technological developments in the production of styrofoam, glass, plastic, and paper containers. Similarly, synthetic fabrics developed by chemical companies such as Du Pont represented diagonal intrusions that increased horizontal and vertical interdependence in the textile industry in the late 1950s, disrupting relationships between weaving mills and their cotton and wool suppliers.
As managers have detected increasing horizontal and vertical interdependence, they began by forging bilateral alliances, the two most common forms of which were licensing and joint venture agreements.
Managers licensed rivals’ technologies when they proved too difficult either to imitate or supersede. Licensing provides a low cost means of filling customers’ demands, and frequently occurs between horizontal competitors operating in different markets: In 1982, for instance, over 31,000 overseas firms held licensing agreements with U.S. firms. Licensing has been the preferred mode of interfacing around mature and peripheral technologies in which firms faced little threat from rivals’ knowledge acquisition. More critically, licensing has featured prominently as a competitive tool in recent cutting-edge technologies where managers license widely to promote a product standard and dominate a market.
Sony’s failure to license Betamax technology, for instance, ultimately led to its defeat by the alliance of firms forged in 1975 by JVC and Matsushita with Hitachi, Sharp, and Mitsubishi, which was centered around the alternative VHS technology. AT&T’s managers gambled on the competitive advantage licensing could provide when it decided to compete with IBM’s proprietary operating system for personal computers by licensing its UNIX operating system to an alliance of rival manufacturers.
While joint ventures enabled firms to tap a competitor’s technology, distribution system, or market, they were also beneficial to managers whose firms had complementary skills or assets. Although joint ventures occurred between direct competitors, they were more likely to result between vertically related firms. Conservative estimates by the U.S. Department of Commerce, for instance, place the number of joint ventures involving foreign companies in 1982 at 16,000. In most of these ventures, managers sought to combine the market or distributional knowledge of a competitor with their firms’ complementary knowledge about products or technologies.
Selection of joint ventures appears strongly influenced by the specificity of the assets managers were required to commit to the transaction. The more specialized the commitment managers had to make, the more likely they were to fear that their partners in the transaction would behave opportunistically, and the more they insisted on a joint venture rather than a contract. The joint venture created a superior framework for monitoring and enforcing partners’ gains from tha° transaction than did a simple contract.
Moreover, joint ventures could be either symmetrical or asymmetrical: Symmetrical joint ventures link partners horizontally; assymetrical joint ventures bind firms vertically. Many symmetrical joint ventures occurred between European banks interested in penetrating the U.S. market; Philips/Du Pont Optical, however, is an asymmetric joint venture between both firms established to manufacture and sell compact disks-a horizontal investment for European disk manufacturer Philips, and a diversification into consumer electronics for Du Pont.
As interdependence intensified further in the 1980s, managers participated in more multilateral alliances. Trade associations are one such form of multilateral link. However, trade associations could seldom alter the strategic positions of their member firms. Take the highly competitive TV networks. In election years, each has traditionally spent millions of dollars in conducting independent voter surveys. In a much-criticized break with tradition, ABC, NBC, CBS, and CNN formed a multilateral alliance to conduct voter surveys in 1990 and produce vote projections across the country. Since each network based its projections on the same information, their artificial competition was eliminated, with no network gaining an advantage over the others.
The National Cooperative Research Act of 1984 officially authorized U.S. competitors to pool resources into research consortia. Most notable has been the successful chip making consortium Sematech, funded jointly by member companies and $500 million from the U.S. Pentagon. In the 1980s, managers formed a number of such consortia because interdependence required more than the simple centralization and coordination of information that could be obtained through traditional trade assocations. Consortia can enhance firms’ competitive strength by enabling them to capitalize on economies of scale and reduce risk, frequently in research.51 In recent years, managers have relied heavily on research consortia to keep up with new developments, to acquire new technologies, and to cultivate industry-wide product standards and prototype technologies. The latest round of U.S. budget proposals has spawned renewed debate about government’s role in boosting R&D spending to create a level playing field for American firms competing with European and Japanese rivals whose governments actively nurture domestic
industries.
Finally, many managers in the 1980s committed their firms to complex shared equity arrangements. Multilateral equity ownership in a newly created firm is justified principally when specialized assets must be dedicated to the activity, when transactions between all the firms are likely to recur, and when uncertainty is high. In complex spider-web shared equity ventures, for instance, a large number of firms network around a single pivotal equity partner.’
In 1990, entrepreneurial biotech specialist Genentech was swallowed up by cash-rich Roche Holdings, parent of pharmaceuticals giant Hoffman-La Roche. It thereafter turned away from its historically self-reliant posture and formed diverse alliances. To capitalize more quickly on technological developments in related areas, the company invested minority stakes in a network of start-ups. Recent accounts suggest that its managers are considering setting up an in-house venture capital fund of its own to actively search and promote these kinds of collaborations.

As markets have grown more competitive, managers have increased either segmentation of their business activities or customization of their product management offerings. To target buyers better, executives are developing products capable of meeting the needs of a narrower set of market segments either by customizing product features to targeted segments or by standardizing offerings across segments.’ By fragmenting market segments, changing environments pressure managers both to target carefully their products and to customize product features to local needs.
For U.S. soda giant Coca Cola, cutthroat competition with archrival Pepsico has meant that both firms have had to pursue aggressive strategies for building market share-introducing a wide range of new products targeted to ever narrower market segments-on the one hand, and, on the other, sponsoring extravagant promotions. Through its New Products group, formed in 1989, Coke hopes to snare various local markets from Pepsi with line extensions ranging from Fresca to New Coke and Caffeine Free Coca-Cola Classic K-Mart that appeal to the growing share of’ households with annual incomes less than $15,000. On the other side, their market is attacked by premium-priced outlets like Bergdorf Goodman and Bloomingdale’s expanding downward from their market of upper income households, and by specialty chains such as the Limited directly targeting the middle income market.
The Segmenting Solution
Companies differ in whether they attack a broad sweep or narrow niche within a market. At one extreme are generalist firms whose managers target multiple markets by standardizing the components that go into their products. Most car and cigarette manufacturers, for instance, do SO. Pursuing such a comprehensive strategy in times of environmental change, however, requires access to large pools of capital and human resources: Products must be tailored to the demands of each segment, calling simultaneously for standardized production and for customized packaging, marketing campaigns, and support services.
Most firms respond to environmental upheavals by specializing: They target their firms’ products to a limited number of segments. Geographical location often provides firms with such protected niches: The corner drugstore, dry cleaner, barber shop, or supermarket hold local monopolies that potential competitors find difficult to attack because of these firms’ established relationships to consumers. Publishing houses specializing in low-volume academic treatises, for instance, occupy a narrow but profitable niche within the larger college, trade, and mass-market segments of the industry, as the marketing strategy. In television, Fox has emerged as the United States’ fourth television network by targeting provocative, offbeat programming such as Married with Children and The Simpsons at kids, teens, and young adults-a market attractive to advertisers but relatively neglected by the three established networks. In pianos, Steinway holds a near monopoly in the limited high-priced segment for concert grands. It is increasingly threatened, however, by standardized manufacturers such as Yamaha who rely on innovative technology and automation to lower price and capture market share. Steinway has been slow to capitalize on its reputation to build market share in neighboring segments.
And look at Chemical Bank. Since 1983, under Walter Shipley’s leadership, Chemical Bank has followed a strategy designed to differentiate it from its large New York rivals. Rather than emphasize lending to larger companies, a more congested niche, Chemical executives went after the middle market business, a group of 10,000 firms whose sales range from $10 to $250 million. Chemical now claims to have relationships with over 36 percent of those firms, a result that places it at the top of the heap in the middle-market segment, with Citicorp and National Westminster in second place and, not coincidentally, makes it an ideal merger partner for Manufacturer’s Hanover.
As segments have proliferated, the niches within which firms compete have grown narrower and tighter. Throughout the 1980s, some firms with access to larger pools of resources found it attractive to broaden their scope by acquiring small-niche players. In book publishing, for example, McGraw-Hill purchased dozens of small businesses that provided access to specialized market segments. Integrating them into a coordinated whole, however, has proved to be a recurrent theme of McGraw-Hill’s reorganizations in the last few years, and should prove to be its key challenge in the years to come.
Customizing
More than before, competition is driving companies to customize their offerings to consumers within market segments. Take the software industry. As competition has intensified, industry leaders such as Lotus and Microsoft, once content to mass market their successful spreadsheet packages 1-2-3 and Excel, now gear their programs to specific customers. However, tailoring products means hiring specialists who lavish weeks and months on specific customers-a costly departure from their traditional mass market strategy.
Similarly, although globalization significantly increases the market reach of firms, it has pit managers against strong rivals, many of whom are more closely attuned to the characteristics of local markets. Increasingly, both national and transitional marketing require more careful targeting of local consumers. Gone, then, are the mass markets of yesteryear for which manufacturers produced standard, single-brand name, homogeneous products. In their place, mass customized markets are emerging.
In recent years, Procter & Gamble, for example, has responded to globalization by revolutionizing its own operations and targeting local market segments. Recognizing cross-cultural diversity, they regularly customize products to individual tastes by linking consumer data to product characteristics. They introduce product line extensions to capitalize on brand names and advertise in new media such as schools or cable TV to reach target populations. In the intertwined but culturally disparate economies of the world, this kind of customized production and targeted marketing should be key to achieving competitive advantage in consumer products. P&G has already shown how applying these techniques globally can pay off: Between 1985 and 1989, P&G’s earnings from foreign operations grew from 14 percent to 33 percent, on $8.4 billion in foreign sales.
Although the prospect of scale economies encourages many firms to globalize, achieving these economies also calls for a degree of product standardization. In the airline industry, United and American have emerged from the long era of deregulation as head-to-head competitors, vying for air supremacy. Scale economies have proven critical as both airlines, equally strong in their domestic markets, expand their operations on a global basis. So, in October 1990 United agreed to buy troubled Pan Am’s London routes in a deal valued at $400 million. Soon thereafter, American agreed to the purchase of TWA’s London routes for $445 million, demonstrating their intent to provide an identical service.
In many industries, however, scale economies have failed to materialize, partly because of pressure to customize, partly because of logistical barriers and transport costs associated with moving goods from centrally located plants to remote consumers and partly because efficient plant size precludes capturing additional scale economies. The washing machine industry in Europe, for instance, has demonstrated that local producers generally outdo competitors engaging in cross-border specialization because transport costs and management costs of larger factories seriously dampen the gains from scale they produce. In the apparel industry, competitive pressures make speed of delivery an important factor, encouraging production closer to end markets and making standardization difficult to achieve. Technological developments now offer some assistance. Computer controlled devices facilitate precise cutting of cloth, eliminating precious waste. Garment patterns, stored in computers, enable cost-effective production of small runs and even individual garment orders. And telecommunications can save time:
- A subsidiary of the Limited, a L1 .S. retail chain, now uses satellite transmission and highdefinition television to transmit pictures of the latest designs to factories in southern China, delivering finished garments within 6 weeks to U.S. stores.
Customizing also has become a familiar tune to airplane manufacturers like Boeing. Direct competition from McDonnell-Douglas and Europe’s Airbus has made the industry more competitive, demanding flexibility and efficiency in the design of airplanes to customer specifications. In one bidding auction to fill a $20 billion United Airlines order, Boeing, Airbus, and McDonnell-Douglas teams were provided a wish list of 54 demands and hundreds of subdemands for customizing a new long-distance aircraft. Competition was fierce to see who could best meet United’s needs.’ Airbus won. Indeed, defeated by Airbus in one too many such auctions, McDonnell-Douglas has actively sought an infusion of cash that would enable it to strenghten its product development efforts. In November 1991, it petitioned Congress for authorization to pursue an equity joint venture with Taiwan Aerospace (a government-backed operation), who agreed to provide $2 billion in exchange for 40 percent of ‘a new subsidiary. The aim of the joint venture is to produce and market aircraft for the rapidly growing Asian region.

One of the most important factors in analyzing assets is determining the degree of risk they involve. Risk is often defined in terms of loss or injury, or the degree of uncertainty of the outcome.
Assets may be associated with different types of risk.

Economic risk

Assets will react to various economic changes. During inflationary periods, costs increase and consequently, purchasing power declines. The opposite occurs during depressions or severe recessions because prices decline. Thus, the value of assets can increase or decline during economic cycles.

For example, with inflation the value of real estate increases. On the other hand, in a depression, real estate prices decline. When the price of a parcel of real estate falls below its outstanding debt, the owner will often walk away from it. This happened many times during the depression.

Interest rate risk

Many interest-producing assets, such as bonds, CDs, and preferred stocks, pay a fixed return over a period of time. As interest rates increase or decrease, the market value of these assets changes. For example, a 10-year, 12 percent government bond is assured of a 12 percent annual return over the life of the bond. But a sharp rise in prevailing interest rates would batter its resale value in the bond market. Of course, the bondholder in this case would suffer no loss of principal if he held the bond; but he would forego the higher interest return.

Business risk

Exposure to competition in the marketplace-or simply an unforeseen event-can dramatically affect a company’s operations or a specific industry as a whole. When this occurs, net cash flows and profits can decrease and the potential for default on the company’s outstanding debt can increase. An example of a very competitive industry is computers. Some investors obtained high profits by investing in new companies in this field, yet others lost money when a major industry shakeout took place in 1984.

Liquidity risk

Liquidity is the ability to quickly sell an asset at its current market price. Marketable securities are an example of a liquid asset because they can easily be traded at the current market price. (This, of course, does not mean that the securities won’t be sold at a loss.) Compare this situation to the sale of a nonliquid asset such as real estate or an art collection. It may take several months or more to find a buyer who will pay the current market price. This type of asset could probably be sold quickly if the current market price were greatly reduced.

Taxation risk

Some assets will generate no tax liability, such as the sale of personal residence by a person age 55 or over. Other assets, such as certain tax shelters, can generate enormous problems at the time of acquisition or sale. Knowing the potential or incurred tax liability is essential in matching assets to objectives and in considering repositioning assets.

Political risk

Government actions can have a negative impact on assets. Through regulations, tax code changes, excise taxes, etc. the government can change the profitability of companies and the market value of assets.

Market risk

The mood of the investing community often fluctuates in dramatic and unpredictable ways. The market values of real assets and marketable securities are subject to these moods. For example, when the economy goes into a recession, investors become pessimistic about the future, and the stock market value of most companies declines-even of companies that are showing record profits.

To charge fees for analysis, a financial planner, or his or her firm, must be a Registered Investment Advisor (RIA) listed with the Securities and Exchange Commission (SEC). State registration may also be necessary. To become an RIA requires a fee, filling out form ADV in triplicate, and submitting both to the SEC. At this time (1986), there are no specific testing requirements. Charging fees for specific investment advice without being an RIA is a violation of the Securities Act of 1940.
For those who sell products, it is essential to possess the appropriate license. For example, to sell securities it is necessary to pass one of the exams administered by the National Association of Securities Dealers (NASD). There are numerous categories of tests that must be passed, depending on the type of product one wishes to sell. A Series 7 exam enables planners to sell stocks, bonds, mutual funds, real estate investment trusts, and limited partnerships. The other exams are more limited in scope and allow only a specific product to be sold, such as mutual funds (Series 6), commodities (Series 3), and limited partnerships (Series 22). A word of warning: Planners should not attempt to circumvent these registration requirements by selling products that they do not personally classify as securities. However, determining whether an investment should be classified as a security is not always easy. According to one official from the California Department of Corporations, “when in doubt, consider everything to be a security.” Thus, if financial planners wish to sell products, they must be properly licensed.

To take the securities exam, an individual must first be associated with a broker/dealer. Broker/dealers are individuals or organizations that have met the SEC’s financial and regulatory requirements. They are engaged in buying and selling securities, both for their own accounts and for those of others. As a matter of course, the NASD will not allow individuals the opportunity to sit for most of the exams unless they are sponsored by a broker/dealer. (Note: an exception is provided through the Series 2 exam, which is for non-broker/dealer members.) On successful completion of the test, the individual is then a registered representative of the broker/dealer.

To promote high ethical standards, broker/dealers are required to join the NASD, which is a self-regulating organization. The NASD oversees the professional conduct of its members. Furthermore, all broker/dealers must become members of the Securities Investor Protection Corporation (SIPC). The SIPC is a nonprofit corporation created by Congress in 1970. It offers certain protections against financial loss to the clients of broker/dealers that fail. Protection limits are $500,000 per client, with the exception of cash accounts which are limited to $100,000 per customer.

Broker/dealers are important to financial planners. They serve as the first screening level for products. If a security is not on the broker/dealer’s list of approved products to sell, it is illegal for a financial planner to sell the investment to clients.

There are many legal restrictions on selling products or charging for financial advice. However, government regulatory bodies are uncertain as to their overall responsibility in terms of financial planning. Compounding these legal issues is the fact that, although warned against earlier, some planners claim immunity from security laws and therefore do not register.

Against this background, many states have introduced legislation to regulate financial planning. Regulation is becoming a hotly contested issue, with certain industries seeking to be excluded. However, it appears legislation may eventually require that individual financial planners:

• Pass an examination.
• Possess at least minimum education or training.
• Have a certain level of experience (as through an internship).
• Participate in continuing education courses.
• Provide written disclosure of commissions, fees, or special interests.

These regulations indicate that, as with all emerging professions, financial planning is undergoing dramatic changes. Currently, there are no “typical” or “required” methods of performing services. But, as fiduciary responsibilities are better defined and the industry achieves more recognition, financial planners will need increasing knowledge. The basic information financial planners must possess is the subject of this book.

Education is the foundation for continued growth in the field of financial planning. Many institutions across the country coordinate programs in this area. Both Golden Gate University (San Francisco) and California State University at San Diego offer a graduate degree program. Brigham Young University (Provo, Utah) has offered an undergraduate degree in financial planning for several years.

The University of California, through its Extension Division, offers a statewide certificate program in financial planning. Some of the other institutions offering degree programs in financial planning include: California State University at Fresno, Georgia State University, Drake University, Des Moines, Iowa, and Wright State University, Dayton, Ohio.

The College for Financial Planning in Denver originated the Certified Financial Planner (CFP) program, which is one of the most widely recognized designations in the industry. The American College in Bryn Mawr, Pennsylvania, sponsors a series of courses leading to the designation of Chartered Financial Consultant. The designation of Chartered Financial Analyst (CFA) can be earned on completion of a three-part home study program.

Several other institutions are beginning financial planning programs. Some offer courses through the business department, others in the home economics or family science department. In addition, the American Institute of Certified Public Accountants is studying the field in terms of recognizing financial planning as an accredited specialty. Growth in the field reflects recognition of the need for technically trained planners in a complex financial world.

Responding to this need, the College for Financial Planning and the Institute of Certified Financial Planners have formed the International Board of Standards and Practices for Certified Financial Planners (IBCFP). The new board is responsible for establishing educational and testing standards for the CFP examinations, as well as awarding the CFP designation.

The CFP examination is now open to those enrolled in financial planning programs approved by the IBCFP. The board intends that these open CFP examinations will bring uniformity in national testing and provide the standard for regulating financial planners.

A strategic change and a strategic planning is not enough: Much is required to get there. After all, old habits die hard. Current resource deployments constitute commitments around which employees and shareholders form work and career expectations. Previously announced goals, pay practices, recruitment systems, and administrative procedures place firms on strategic trajectories that create both inertia and momentum and inhibit change. To turn away from these trajectories requires, not only skill in selecting the most promising strategic changes, but also skill in overcoming inertia and remodeling institutions. Resistance to change results because history constrains the conduct of firms and institutions. Much as geological crystals form when basic elements experience intense physical pressure, so, too, do firms’ features crystallize from historical pressures on their internal capabilities and control systems. As companies grow, their features tend to move into alignment: Managers design control systems to capitalize on their capabilities, and patterns of specialization induce employees to hold particular values. Over time, firms’ capabilities, controls, and cultures fuse, creating inertia and building momentum that propels them along strategic trajectories.

To carry out change also means to come to grips with the emotional implications of living through revolutionary circumstances. Transformations that disrupt the established order invariably create uncertainty and threaten vested interests, and so generate panic. Coping with the personal sentiments of employees is therefore one of the key challenges facing managers attempting to effect strategic change. To reinvent their firms, managers find themselves manipulating four key internal features: capabilities, controls, culture, and conduct. Change in any of these features generates emotional resistance.

Take Corning. In 1983, the company famous for its temperature resistant glass products earned 70 percent of its declining profits from cyclical slow-growth businesses. In the following 8 years, under CEO and top shareholder James Houghton’s tenure, the company redefined its strategic conduct by divesting marginal businesses, pursuing higher market share businesses, and forming a global network of over 19 marketing and technological alliances. It also transformed its basic capabilities by consolidating its operations into four groups: communications, laboratory services, consumer products, and specialty materials.

To overcome the emotional resistance and parochial tendencies of a functional structure in a company town, internal controls were changed to emphasize product quality and innovation: All employees were sent through quality training programs; a 25-percent target was set for revenues derived from new products. And Houghton spearheaded the effort to revitalize the culture: The company’s unions participated in key decisions involving plant design; barriers between research functions in different businesses were dismantled to enable technology sharing; managers strengthened relationships with minority groups and with the local community.

Corning is just one example. In general, research suggests that firms successful in implementing strategic change do a good job of addressing:

1. Whether resources were reallocated in ways that enhanced firms’ competitive capabilities.

2. Whether underlying structural controls supported the new strategic direction.

3. Whether careful attention was paid to the implications of the strategic change for firms’ internal cultures.

4. Whether top managers showed visionary leadership and an ability to mobilize employees as they sought to redefine their firms’ strategic conduct.

Altering firms’ capabilities involves reallocating resources to projects more likely to assist in coping with changing environments. But it’s tough to teach an old dog new tricks: New capabilities take time to build into the repertoires of established firms. So cultural resistance abounds. To produce strategic change, shrewd managers therefore instrumentally disseminate values throughout their firms. They discuss their rationales for change and try to persuade employees to buy into their interpretations. Studies conducted by the Business Roundtable (1988), for instance, suggest that to cope with environmental policy concerns over firms’ social responsiveness, corporate leaders have been increasingly conveying an ethical posture in their speeches. They try to galvanize employees into showing concern for customers and sensitivity to firms’ other stakeholders.

So strategic change requires transformational skills: the ability to shape a vision of the future, mobilize employees behind the vision, and guide the company’s different systems toward achievement of the vision.A large body of evidence suggests that to fully involve employees is the surest way to produce a more mobilized work force, one willing to abandon established fiefdoms and hard-won perks in the pursuit of their firms’ effectiveness. In contrast, isolation from decision making tends to breed emotional hostility and resistance, and sometimes active sabotage.

Both action and inaction by managers take on symbolic meaning and shape lower-level employees’ interpretations about key events. Managers successful at carrying out strategic change point to the significance of active participation, coalition building, and up-front communication.

Change damages the political clout of some individuals and groups while increasing the visibility and prospects of others. Revised budgets disrupt ongoing relationships and the distribution of power among managers, producing internal machinations, negotiations, and coalitionbuilding activity. So even when a strategic change can be justified by declining economic performance or forecasts that warn of gathering storms, proponents invariably get embroiled in complex political dynamics. The choice to invest more deeply in distinguishing a firm’s products in the marketplace, for instance, not only means dedicating more resources to advertising, merchandising, and customer service, but also promises enhanced political clout for the firm’s marketing managers, often at the expense of the firm’s financial and operations managers. They will oppose the change.

Similarly, programs for retiring outmoded factories, investing in capital projects, or deepening new product development all favor different groups of employees within a company. Reorientations empower some managers while they disenfranchise others. Just as elected officials find themselves routinely subjected to the political pressures of diverse interest groups, so, too, are senior managers lobbied by subordinates and pressured to conceive, select, and implement strategic programs that favor parochial interests.

Established firms often build up a reserve of slack resources from prior successes, which produces entrenched managers and sluggishness. In these firms, change easily gets mired in complex internal politics, so boards of directors frequently opt to hire outside executives for senior slots. Outsiders have fewer vested interests and so are more likely to redirect the firm toward objectives that the board favors. Symbolically, to hire an outsider is also to signal analysts, reporters, and rival firms about a no-nonsense commitment to change.

So successful efforts at accomplishing strategic change appear to require three skills: (1) generating shared interpretations about firms’ environments, (2) revising strategic postures, and (3) engineering the change

Program itself

Failure can occur as managers misinterpret their firms’ competitive circumstances, miscalculate rivals’ actions, and misguide the process of change. Increasingly, savvy managers recognize that to overcome these barriers requires mobilizing all employees, shareholders, and key constituents to stand squarely behind managers’ efforts. And that means extensive communication. Such a catalytic role may be the single most important function senior executives play when guiding their firms through strategic turning points.

Trigger response is technique developed by George Muller, director of design at Ford Motor Company.A group or groups of 8 to 12 people are established. Each group defines the problem it’s working on. All groups may work on the same problem or on separate problems, sometimes with a large group of people. The entire group can decide on the problem to solve, then break into teams of 8 to 12 people. Once the problem is defined and the desired solution clearly stated, each group draws two lines down a piece of paper. This gives three columns. Each group lists in the first column all the solutions to the problem group members can think of. Each group gets 8 to 10 minutes to write down solutions. A feeling of pressure needs to be created to encourage quick solutions.

Someone is picked at random from one of the groups to read the list. All other groups strike out duplications and at the same time write down in column two any new ideas triggered. The process is repeated once again to fill column three.

After each group has completed the process, the lists are collected and discussed with all participants to see if any other thoughts occur. The final lists are then given to an interdisciplinary group of executives to discuss and evaluate. This is basically a form of “forced relationship” brain-storming and can be executed in various ways to stimulate creativity.

Synectics

In 1961 William J. J. Gorden wrote Synectics, The Development of Creative Capability, published by Harper & Row Publishers, Inc.’ Synectics, from the Greek, means the joining of different and apparently irrelevant elements. Synectics theory applies to the integration of diverse individuals into a problem-stating problem- solving group. It is difficult for a company to employ synectics as a creative technique without a trained leader. The synectics approach is based on four key concepts:

1. Listen: Unstructured meetings are often long on talking and very short on “active listening.” Synectics encourages listening through a skilled moderator writing on a flip chart, reinforcing to make sure no ideas are lost, and controlling the discussion so all members can express their views fully.

2. Spectrum Policy: This is the concept that most ideas may be bad but can be moved along a spectrum by identifying and building on good points until an acceptable solution is reached.

3. Common Understanding: The process uses role playing between the leader, the group, and someone designated as the “client” with the problem or need. This forces a common understanding and attention on a central issue.

4. Group Leader: As mentioned previously, a skilled group leader is critical to facilitate the process and avoid the usual jockeying for leadership that subconsciously or consciously occurs in group dynamics.

A typical synectics session runs for two or three days and the basic flow is repeated many times. The group is usually composed of personnel from inside the organization, but outsiders, including consumers, can be useful group members. One of the major benefits of a good synectics session is its ability to integrate marketing, R&D, engineering, and manufacturing points of view.

During the course of new products pioneering, emotions can range from wild enthusiasm to frustration and discouragement. Development team members can view their projects and ideas as exciting breakthroughs one day and the next day wonder why anyone would be interested in the product. Changing conditions, both inside and outside the company, can also influence day-to-day perceptions of an idea’s potential. Changes in team members and management can bring in new opinions. Yesterday’s pet project can become today’s sinkhole for wasting money. Product design and test results may indicate performance or durability far removed from original targets. Competitors may introduce new products with similar benefits. The economy may shift gears, enhancing certain market and industry segments and hurting others.

A consistent evaluation process used in various phases of product development is a way to add some stability to the emotions and changing business conditions. There are at least four stages of evaluation in a typical product pioneering effort-preliminary screening, market business evaluation, product evaluation, and final business review.

Preliminary screening is generally based on secondary research data (information available from publications and historical surveys), technical feasibility review (R&D judgment), and management judgment (formal or informal group consensus, ranking, or rating). The goal at this stage should be to eliminate obvious losers quickly, not to kill ideas that may have potential. The people involved in a screening evaluation should be thoroughly familiar with the company mission or goal, the product development criteria or charter, and the reasoning behind both. In addition, they must have a broad business viewpoint, a flexible attitude, and a degree of creativity. A good policy at this stage is to require unanimous or at least a majority consensus before eliminating ideas.

If an idea passes a preliminary screening review, it means that management is willing to invest some time and money to explore the idea in greater detail. A market/business evaluation is a detailed review of external market and internal business factors to determine the magnitude of the opportunity and the degree of risk associated with it. This review can include comprehensive market research, and it attempts to evaluate two key variables: How attractive is the market opportunity? How compatible is the idea with the business, goals, and criteria?

Product evaluation is needed because the R&D process of new product pioneering can be just as much an art as marketing is. Product characteristics will change during the development process, and a variety of technical evaluations must be made to determine the potential success of the idea in meeting or creating market needs. These evaluations can include prototype reviews, cost studies, consumer use tests, or simply technical, judgmental assessment of probabilities.

The final business review can include a detailed sales forecast, pricing analysis, expense and investment projections, probability and sensitivity analysis, and final check against company goals and project criteria. It should provide a “go/no go” decision on market introduction.

Each stage of evaluation should include both qualitative and quantitative thinking and should combine objectives and criteria with experience, past benchmarks, and good judgment. To avoid getting lost in detail and losing sight of vital issues, it helps to keep in mind a few common elements of any new product success: market size and need, competition, and the uniqueness of the idea. The Forum Corp., a leader in management development and marketing and sales training, utilizes an evaluation system built around three simple questions: Is it real? Can we win? Is it worth it?

The decision-free framework utilized by The Forum Corp. in product planning seminars designed to help a company adapt unique considerations for evaluating and managing a product development project.’ Regardless of which detail factors are analyzed and evaluated, if these three questions are kept in mind throughout a project, the chances of success will increase dramatically.
A. David Silver, a widely known venture capitalist, has developed a disciplined method of reviewing business deals that might also apply to new product evaluation. He suggests there are three laws of venture capital that should be committed to memory:

1. Accept no more than two risks per investment.
2. V = P X S X E, where V = valuation, P= the size of the problem, S = the elegance of the solution, and E = the quality of the entrepreneurial team.
3. Invest in big P companies, because the public market will accord to them unreasonably high V’s, irrespective of S and E.

We would add a fourth law: Invest in businesses where there is an opportunity to capture a dominant market share-either a unique niche or an industry with fragmented competition. Silver considers a startup company to be exposed to five risks (and the same probably applies to new products):

1. The development risk: Can we develop the product?
2. The manufacturing risk: If we can develop it, can we produce it?
3. The marketing risk: If we can make it, can we sell it?
4. The management risk: If we can sell it, can we sell it at a profit?
5. The growth risk: If we can manage the company, can we
grow it?

Key questions are: How large is the potential market (or estimated trial purchases)? What are the important concept attributes? What is the best positioning for the product? Is the market segmented? How? What are the demographic, psychographic, and production standart class usage characteristics of target market segments?
Research techniques include: focus groups, small group discussions and reactions to concepts described verbally, visually, or in a three-dimensional model; quantitative surveys, either shopping malls intercepts, field survey office interviews, or mail surveys, all using concept illustrations, descriptions, or samples to elicit large sample responses; Design Inquiry u. King-Casey Inc., a New Canaan, Conn., industrial design and new product development company, has developed a proprietary technique that falls somewhere between qualitative focus groups and large sample techniques. The Design Inquiry process includes the following techniques and philosophy:

• Falls between qualitative and quantitative research.

• Utilizes large enough samples to yield limited quantitative data.

• Employs in-depth interviews-personal and/or groups.

• Involves open-ended questions for maximum consumer input.

• Gets at nuances and subtleties that might be missed in or
dinary quantitative research.

• Involves entire team of design, marketing, and research
personnel.

• Brings creative and design perspective to marketing and
research interpretations.

• Marries intuitive creative talents and pragmatic business
disciplines.

• Generates responses that can be acted on visually by the designers.

• Results in products and designs that are in tune with consumer needs and fulfills their expectations, and are the “right” solutions because they will sell the most merchandise at the best profit possible.

Regardless of which technique is used, the way the concept is illustrated and defined to the consumer is critical in generating usable results. The concept statement should clearly state the problem being solved, a definition of the type of solution the product provides, and the necessary supporting attributes that lend credibility to the product. Following are some guidelines:

Use normal language. Often the concept board will be used when no one is around to explain what a word or term means. Also, make sure the sentences are short. You’re not writing a traditional English composition. You are writing more in the style of advertising without attempting to interject creative twists (there are no slogans).

The verbal section of the concept board should have a number of paragraphs. Avoid long, involved paragraphs, particularly when referring to several kinds of supporting attributes. It is better to break them into paragraphs that contain one, or at most, a few kinds of supporting attributes.

It is best to avoid catchy names in concept statements, unless the name is an integral part of the product concept or aids in the communication of the concept. It is best if the name indicates the function of the product. For example “A SAFE TRICYCLE” will be better than “HEAVY WHEELS” if talking to mothers who are prospective purchasers of a tricycle type toy that will not tip over. Ultimately, you might want to call it something like “HEAVY WHEELS.” But that would be a result of what you learned in your positioning research. It almost never is a good idea to use names in concept statements. In some areas, though this may be tempered. In the area of cosmetics, the name often becomes a part of the total package.

Therefore, in areas like cosmetics and toiletries sometimes a name has to be part of the concept statement. It is an area in which good judgment is needed.
Finally, the concept should have a one- or two-sentence summary that puts the concept in perspective.’

Key questions include: What segments of need exist in the
market? What gaps exist in the competitive need fulfillment? What are
the dynamics of the need segments? What bothers customers? What benefits
are desired? What are the strengths/weaknesses? Several market research
techniques can be used. In a focus group, a skilled moderator leads
small groups of consumers/customers from the target market in a
discussion of problems, needs, product concepts, competitive brands,
and new ideas.
For market structure analysis/gap analysis, quantitative research is
designed to cluster product attributes benefit perceptions into basic dimensions, determine distance between basic groups, and identify groups where needs are not
being satisfied. It is multidimensional research that structures a
market on the basis of products, needs, and usage occasions with the
objective of defining and understanding the dynamics of a market beyond
traditional secondary data sources.

It answers questions such as:

What are the products in the market and how do consumers
react to them? How are the products used, by whom, when? Which products
compete/substitute for each other? What product attributes lead
consumers to use the products in the way they do?

Problem detection studies are quantitative surveys to define
problems in a category and rank them based on intensity (how bothersome
are they?), frequency (how often do they occur-and for how long?),
preemptibility (the extent to which products/services already on the
market can handle the problem).

Task analysis is a technique involving actual observation or
recall to identify steps involved in a project (baking bread, selecting
and opening a bank account, mowing the yard, painting the house) and
problems encountered. A consumer might be asked to list all tasks
involved in a project (with an incentive to get a quantity of tasks),
whether it was a pleasant or unpleasant task, why they feel that way,
and whether they would like to see it simplified or changed.