Letter C

Cadbury Committee Report: A standard reference point for any discussion on corporate governance. Prominent institutions in London concerned about audit and regulatory issues following a number of company collapses in the 1980s, set up a committee chaired by Sir Adrian Cadbury. To keep under control, over-powerful chief executives or overenthusiastic executive management, the committee's 1992 report advocated various checks and balances at the board level. These included:

• Wider use of independent non-executive directors;
• Establishment of an Audit Committee;
• Separation of the posts of Chairman and CEO;
• Use of a remuneration committee;
• Adherence to a detailed code of best practice
(See Corporate Governance)

Capacity Expansion: Growing an existing business often involves expansion of capacity, in terms of plant, human resources, technological infrastructure, R&D facilities, etc. Any major capacity expansion is a strategic decision that involves significant resource commitments and is often difficult to reverse. So such a decision has to be made carefully.

Capacity expansion is often narrowly applied to manufacturing. But in many businesses, there is no or little manufacturing. So, capacity needs to be understood in terms of the investments made in the most critical area of the value chain. Thus, in the pharmaceutical industry, capacity has to be defined in terms of scientific manpower and sales force. In a software development company, capacity has to be understood in terms of the number of programmers employed. In a Business School, capacity may be defined as the number of professors available to teach students.

According to Michael Porter, the decision to expand capacity has to take into account various factors: Some of them are:

• Future demand.
• Future input prices.
• Likelihood of technological obsolescence.
• Probable capacity expansion by competitors.
• Future industry capacity and individual market shares.

The main risk in capacity expansion is the creation of excess capacity. When there is excess capacity, competition intensifies as players try to increase capacity utilization and profits come down. Excess capacity may result because of various reasons:

• Capacity often has to be added in lumps, not in incremental fashion.
• Economies of scale or significant learning curve can prompt indiscriminate capacity expansion.
• Long lead times in adding capacity may motivate firms to add capacity even when future demand is uncertain.
• Changes in production technology may attract new firms even as older plants continue to operate due to exit barriers.
• Equipment suppliers, through price cutting and attractive credit schemes, can lure manufacturers into buying their products.
• Large buyers, by promising more business in future can tempt the suppliers to add capacity.
• In some industries, such as airlines, the firm which has the largest capacity may be able to grab a disproportionately large chunk of the market.
• When there are several players in the market, they may all try to increase market share, by increasing capacity.
• Firms often build more capacity than is needed in the initial stages when future prospects look favorable.
• Excess capacity often results when firms overestimate the potential of their competitors and want to preempt them by adding more capacity.
• Many manufacturing firms do not like to be left behind by competition and embark on a regular process of capacity expansion.
• Tax incentives sometimes motivate manufacturers to invest in plant and equipment.

Capacity expansion can be used as a pre emptive strategy to lock up a major share of the market and to discourage competitors from expanding and potential rivals from entering the industry. According to Porter, a preemptive strategy is risky. It tends to succeed only under the following conditions:

• The expansion of capacity is large relative to market size.
• There are substantial economies of scale and learning curve advantages.
• The firm’s strategy looks credible in terms of availability of resources, technological capabilities, past track record, etc.
• The firm announces its plans before competitors develop even a reasonable degree of commitment to the process.

A preemptive strategy is unlikely to succeed when competitors pursue non economic goals, consider the business to have strategic importance and are prepared to give up profits in the short run or have equal or better staying power.

Capital Structure: The relative proportion of debt and equity used by the company to run the business. Debt is borrowed capital and has to be returned to the investors in the short or medium term. Debt costs less. But as interest and principal payments are mandatory, there might be a lot of strain on cash flows especially in the early days of a company. Equity is more expensive. But it has to be returned to investors only under exceptional circumstances. Companies must arrive at the appropriate capital structure after making the necessary trade offs. For example, in technology businesses where the markets tend to be volatile and the business risk tends to be high, it may be necessary to reduce financial risk by having a large proportion of equity.
(See Financial Risk)

Cartel: Cartel is an illegal arrangement in which different market players come together and collude to fix the price or share the market suitably by limiting competition. One of the most famous cartels in business history has been the Organization of Petroleum Exporting Countries (OPEC)
(See Oligopoly)

Cash Cow: A business that generates more cash than what is required to maintain its earning power. Such a business is expected to continue to generate cash without providing significant opportunities for growth through reinvestment of profits. Cash flows from such a business can be pumped into more promising ventures.
(See BCG Matrix)

Chandler, Alfred DuPont: One of the most well known business historians of our times, Chandler explored the relationship between strategy and structure. He realized that the overload in decision making at the top was indeed the reason for creating a new structure. This overload resulted not from the larger size of the enterprise per se, but from the increasing diversity and complexity of decisions that senior managers had to make.

Chandler argued that growth without structural adjustment could lead only to economic inefficiency. As he wrote, “Unless new structures are developed to meet new administrative needs which result from an expansion of a firm’s activities into new areas, functions, or product lines, the technological, financial, and personnel economies of growth and size cannot be realized.”

Chandler’s book, “Scale and Scope,” which was published in 1990, provides several insights on the evolution of the modern industrial enterprise. Chandler pointed out that major industrial corporations clustered in industries in which high-technology production processes made it possible to exploit the cost advantages of economies of scale and scope. These tended to be capital-intensive rather than labor-intensive. In these industries, large-scale, low-cost producers operated at a much greater cost advantage than smaller, labor-intensive producers. As these capital-intensive producers grew in scale (volume), scope (diversification), and consequently, complexity, they also began to invest in their own distribution networks. Over time, scale and scope demanded suitable changes in structure for effective management.
(See Economies of Scale, Economies of Scope, Organizational Design, Organizational Structure)

Change Management: In a rapidly changing business environment, organizations must learn to adapt themselves quickly. Change is necessary to ensure survival, growth and profitability of' the business enterprise. But change is difficult for many reasons. Change requires effort and a new mindset. People find it difficult to adjust to changing status and power relationships. There is also a tendency to avoid change as it might be interpreted as a tacit admission of the failure of past policies.

As Michael Porter mentions , change is extraordinarily painful and difficult for any successful organization. The past strategy becomes ingrained in organizational routines. Information that would modify or challenge it is not sought or filtered out. As the past strategy becomes rooted in company culture, suggesting change is equated with disloyalty. Successful companies often seek predictability and stability. They become preoccupied with defending what they have. Supplanting or superseding old advantages to create new ones is not considered until the old advantages are long gone. Change often involves a sacrifice in financial performance and unsettling, organizational adjustments.

A clear corporate vision is the starting point in any major change management initiative. It helps employees to understand why change is needed. That way, change can be introduced proactively instead of being introduced as a fire fighting measure. Symbolic gestures tend to reinforce change by telling employees that the management means business. To bring about change, it is also essential that responsibilities are clearly allotted. Accountability puts pressure on individuals to move fast. Metrics are also needed to track performance. Change initiatives must focus on a few critical areas to prevent resources from being spread too thin.

Culture plays an important role in change management. Culture refers to the beliefs and values of employees. People have set notions about what is to be done and how it should be done on the basis of these beliefs and values. Culture is built up over a period of time and it cannot be changed overnight. But strong leadership which sends out the right signals can hasten the process.

Christensen, Clayton M: Best known for his book, “The Innovator’ Dilemma”, Christensen’s writings reflect highly insightful thinking on innovation and is a marked departure from conventional wisdom. Christensen’s main argument is that successful companies lose their competitive edge over time because they try to pamper existing customers by adding more features, instead of looking at new customer segments which are looking for something simpler or cheaper, that has to be necessarily delivered by a new business model. But, it is not easy for successful companies to take actions which threaten their existing business model. This is what gives rise to the Innovator’s Dilemma.

Based on his research in a variety of industries, including computers, retailing, pharmaceuticals, automobiles, and steel, Christensen shows how truly important, break-through innovations – or disruptive technologies – are initially rejected by mainstream customers because they cannot currently use them. This makes it difficult for firms with a strong focus on existing customers to find new markets for the products of the future. Even as they let go these opportunities, more nimble, entrepreneurial companies emerge to catch the next great wave of industry growth.

The Innovator’s Dilemma presents useful insights for dealing with disruptive innovation. These insights can help managers determine when it is right not to listen to customers, when to invest in developing lower-performance products that promise lower margins, and when to pursue small markets at the expense of seemingly larger and more lucrative ones. “The Innovator’s Dilemma” together with “The Innovator’s Solution” and “Seeing What is Next”, form a trilogy that is compulsory reading for companies serious about innovating and creating value for their shareholders.
(See Innovation, Innovator’s Dilemma, S Curve in Technology Evolution, Technology Risk))

Clusters: In a globalized economy, companies can access capital, goods, information and technology from all parts of the world. Thanks to faster methods of transportation and communication, physical location has become less important. Yet, there are geographic concentrations of industrial activities. For example, Silicon Valley in California is reputed for its cluster of computer hardware and software companies. Even though it is a very expensive location, many tech companies continue to perform their key value adding activities in this region.

Michael Porter uses the term “clusters” to describe geographical concentrations of interconnected companies and institutions in a particular business. Clusters include suppliers of components, machinery, services and institutions which provide specialized infrastructure. Sophisticated, demanding customers who keep companies on their toes can also be considered a part of the cluster. So can the local government, universities, research centres and think-tanks who play a vital role in encouraging innovation and creating suitable conditions for more efficient value addition.

Clusters help in improving productivity, due to the superior quality of the local infrastructure. Other aspects which give a location a head start over other centers include a high quality transportation network, which facilitates fast and efficient movement of goods, availability of skilled, educated and trained manpower, a sound legal system and favorable tax rates.

Many leather goods, footwear, apparel and accessories companies operate out of Italy because of the country’s reputation for fashion and design. France is an important country for cosmetics, since it has highly sophisticated customers. In a location with well-established marketing networks, companies can also take advantage of referrals. Clusters help companies to improve as competition with rivals keeps them on their toes. The presence of companies engaged in related value chain activities, downstream and upstream, facilitates effective coordination even without vertical integration. Proximity also builds a greater degree of trust among the various players.

The presence of demanding customers in a cluster motivates companies to innovate, while the presence of competent suppliers and partners helps in bringing innovations to the market faster. A company within a cluster can source what it needs much faster, closely involve suppliers and partners in the product development process and obtain relevant technical and service support.
(See Comparative Advantage, Global Value Chain Configuration, Strategic Advantage)
Coase, Ronald: A British economist and the Clifton R. Musser Professor Emeritus of Economics at the University of Chicago Law School, Coase graduated from the London School of Economics in 1931. He received the Nobel Prize in Economics in 1991. Coase is best known for two articles "The Nature of the Firm" (1937), which introduces the concept of transaction costs to explain the size of firms, and "The Problem of Social Cost" (1960), which suggests that well defined property rights can overcome the problems of externalities.
Code of Ethics: Well managed companies take various steps to enforce high ethical standards among employees. The Corporate Code of Ethics defines the company's core values and guiding principles and often describes how employees are expected to behave in different circumstances. Through a Corporate Code of Ethics, the firm can publicly display its commitment to high standards of moral excellence.
(See Business Ethics)

Commoditization: As industries mature, the scope to differentiate reduces. The offerings of different players begin to look increasingly alike. Price based competition intensifies. This phenomenon is called commoditization. Companies can deal with commoditization in various ways. One way is to wrap value added services around the core product. Differentiation of the core product may be difficult but there may be scope to innovate in packaging, delivery, customer experience or supply chain management. In the highly commoditized PC industry, Dell has succeeded largely because of its excellence in supply chain management. Online auctions may look like a commodity business but ebay has done well by building a community and providing a great customer experience. A second way of preventing or reversing commoditization is to reposition the product. Repositioning helps change the perceptions of customers and also in differentiating the product.
(See Blue Ocean Strategy, Differentiation)

Company Profile: A company must have a good understanding of its capabilities and expertise. Effective strategies can be formulated only by developing the company profile accurately and aligning it with corporate mission and environmental factors. One way to develop the company profile is to examine each function and key components under each function critically. See table below.

Marketing Product range, Sales organization, Distribution network, pricing strategy, after sales services etc.
Finance & Accounting Fund raising capabilities, Cost of capital, Tax planning, cost control, Costing system etc.
Operations Raw material availability and costs, supplier relationships, Inventory control systems, Sub contracting, etc.
Personnel Employees' skills, morale, Industrial relations, manpower turnover,
specialized skills, etc.
General management Structure, communication systems, control systems, culture, decision making, strategic planning systems, etc.
(See Environment Analysis, SWOT Analysis)

Comparative Advantage: The ability to cut costs by the suitable location of value chain activities. Global companies can realize comparative advantages by locating value chain activities in cheaper locations. Some automobile companies have preferred to locate their assembly plants at cheaper locations in Asia and Latin America, rather than North America or Europe. Many companies trying to enter the European Union (EU), including Dell and Intel, have preferred to locate their plants in Ireland, a cheaper location, compared to more developed countries such as France and Germany. Texas Instruments has set up a software design subsidiary at Bangalore in India to access the relatively low cost, highly skilled technical workers available locally. Many global companies such as General Electric (GE) and Citigroup are locating their back office operations in India.
(See Strategic Advantage)

Competitive Advantage: The key message in Michael Porter’s theory of competitive strategy is that firms must be able to create a defendable position in an industry, in order to cope successfully with competitive forces and generate a superior return on investment. Superior performance within an industry can be achieved through Cost leadership, Differentiation or Focus.

Cost leadership involves becoming the lowest cost producer in the industry by pursuing strategies such as economies of scale, process automation, supply chain efficiency, etc. Differentiation means being unique in the industry along some dimensions that are widely valued by buyers. Differentiation can be on the basis of product, distribution, sales, marketing, service, image, etc. Focus means being the best in a carefully chosen segment or group of segments.

Firms should pursue one of these strategies and take care not to get stuck in the middle. But care must also be taken to maintain a proper balance between cost leadership and differentiation. Thus a cost leader should not be seen to be offering distinctly inferior products, compared to rivals who are competing on the basis of differentiation. A differentiator cannot afford to have a very high cost structure. The costs should not exceed the price premium it receives from the buyers.

The sustainability of competitive advantage depends on three conditions. The first is the particular source of the advantage. There is a hierarchy of sources of competitive advantage in terms of sustainability. Lower-order advantages, such as low labor costs or cheap raw materials are relatively easy to imitate. Higher-order advantages, such as proprietary process technology, product differentiation, brand reputation and customer relationships are more durable. Higher-order advantages involve more advanced skills and capabilities such as specialized and highly trained personnel, internal technical capability and often close relationships with leading customers. Such advantages also demand sustained and cumulative investment in physical facilities and specialized intangible assets.

The second determinant of sustainability is the number of distinct sources of advantage a firm possesses. If there is only one advantage, competitors can more easily nullify this advantage. Firms which sustain leadership over time, tend to proliferate advantages throughout the value chain.

The third, and most important basis for sustainability is constant improvement and upgrading. A firm must keep creating new advantages at least as fast as competitors can replicate old ones. The firm must improve relentlessly its performance against its existing advantages. This makes it more difficult for competitors to nullify them.

In the long run, competitive advantage can be sustained only by expanding and upgrading sources and by moving up the hierarchy to more sustainable types. To sustain competitive advantage, a firm may have to destroy old advantages to create new, higher-order ones. A company must learn to exploit industry trends and close off the avenues along which competitors may attack by making pre emptive investments.
(See Cost Leadership, Competitive Strategy, Differentiation, Focus)

Competitor Analysis : Analyzing competitors is an integral part of strategic planning. Porter’s book, “Competitive Strategy,” gives various insights in this regard. In identifying current and potential competitors, firms must consider several important variables:

• How do other firms define the scope of their market?
• How similar are the benefits offered by the products and services to those of other firms?
• How committed are other firms in the industry?
• What are the long-term intentions and goals of competitors?

Certain pitfalls must be avoided while doing competitor analysis. These include:

• Focusing on current and known competitors while ignoring potential entrants.
• Concentrating on large competitors while ignoring smaller players.
• Assuming that competitor behavior will not change with time.
• Misreading signals that may indicate a shift in the focus of competitors or a refinement of their present strategies or tactics.
• Excessive focus on the tangible assets of competitors, while ignoring their intangible assets.
• Assuming that all the firms in the industry have the same constraints and opportunities.
• Getting too obsessed with outsmarting the competition, instead of focusing on customer needs and expectations.

The first step in analyzing competition is to understand the goals of competitors, whether they are satisfied with their current position, whether they are likely to change strategy and also how they will react to competitor’s moves. Porter draws a distinction between threatening and non threatening moves. Moves are non-threatening if competitors do not notice or are not concerned. In contrast, threatening moves are taken seriously by rivals. Before making such moves, it is important to estimate the likelihood, timing, effectiveness and extent of retaliation and assess whether the retaliation can be countered effectively. The response of a firm which gives importance to profitability is likely to be different from another, which emphasizes market share. Some strategic moves can threaten certain competitors more than the others, given their goals. In that case, there is greater likelihood of retaliation. The stated and unstated financial goals, capabilities and psyche of competitors of the industry must be studied carefully.

Analysis of competitors' goals helps a firm to avoid retaliatory moves that can trigger off intense rivalry. For instance, a move to gain market share from a firm divesting its business, would not provoke any retaliation. On the other hand, rivalry may intensify if an attempt is made to grab market share from a firm which is trying to build the business. A low cost producer is likely to respond very aggressively to the price cutting moves of a competitor. On the other hand, a firm which focuses on differentiation and customer loyalty is less likely to retaliate.

It is important to understand the capabilities and psyche of competitors thoroughly. These include the competitor's beliefs about its relative position, historical and emotional identification with particular products/policies, cultural factors, organizational values, the extent to which a competitor believes in conventional wisdom, etc. Historical information on the competitors' past financial performance, track record in the market place, areas of success, past reactions to strategic moves etc. can also be very useful. It is also important to gain greater understanding about the top management, the types of strategies that have worked for the management in the past, other businesses with which the top management had been earlier associated, the events which have influenced top management in the past, the technical background of the management, etc.

A firm, serious about a competitive move must communicate clearly that it is committed to the move and has the necessary resources. Then rivals are more likely to resign themselves to the new position. Similarly, if a firm says it loud and clear that it will react strongly to moves by competitors, it may be able to deter them from making competitive moves. The greater the certainty with which the competitor sees the commitment being honored, the greater the deterrent value of the commitment. Competitors should understand that the firm has both the resources and resolve to carry out the commitment quickly.

Based on all these considerations, a firm has to select its strategy. An ideal strategy would prevent competitors from reacting. Such a situation arises when the legacy of the past makes some moves very costly for competitors to counter. Small and new firms often have little stake in the strategies practiced by industry leaders. These challengers can benefit substantially by pursuing strategies that penalize competitors for their stake in these existing strategies.
(See Competitive Strategy)

Competitive Strategy: Thanks to Michael Porter, companies today have a considerable amount of knowledge on how to take offensive or defensive actions to compete effectively in an industry. For Porter, the essence of competitive strategy formulation is understanding the industry structure and relating the company to its environment.

Industries differ widely in the nature of competition and opportunities for sustained profitability. The structural attractiveness of an industry depends on five factors, which form Porter’s famous Five Forces model:
• The entry of competitors. How easy or difficult is it for new entrants to enter the business?
• The threat of substitutes. How easily can the company’s product or service be substituted?
• The bargaining power of buyers. How strong is the position of buyers?
• The bargaining power of suppliers. How strong is the position of sellers?
• The rivalry among the existing players. Is there intense competition among the existing players?

The second central concern in strategy is position within an industry. Some positions are more profitable than others, regardless of what the average profitability of the industry may be.

At the heart of positioning is competitive advantage. In the long run, firms succeed relative to their competitors if they possess sustainable competitive advantage. There are two basic types of competitive advantage: lower cost and differentiation. Lower cost is the ability of a firm to design, produce and market a comparable product more efficiently than its competitors. Differentiation is the ability to provide unique and superior value to customers in terms of product quality, special features, after-sale service, etc. Differentiation allows a firm to command a premium price which leads to superior profitability, provided costs are comparable to those of competitors.

It is difficult, though not impossible, to achieve lower cost and differentiation simultaneously relative to competitors. So a trade off is involved. However, any successful strategy must pay close attention to both types of advantage while excelling in one. A low-cost producer must offer acceptable quality and service to avoid having to give discounts, while a differentiator’s cost position must not be so far above that of competitors as to offset its price premium.

A key variable in positioning is competitive scope. A firm must choose the range of product varieties it will produce, the distribution channels it will employ, the types of buyers it will serve, the geographic areas in which it will sell, and the array of related industries in which it will also compete. Most industries are segmented, with distinct product varieties, multiple distribution channels and several different types of customers. These segments have frequently differing needs. Serving different segments requires different strategies and calls for different capabilities. Competitive scope is also important because firms can sometimes gain competitive advantage by exploiting interrelationships by competing in related industries through sharing of important activities or skills.

Both industry structure and competitive position are dynamic. Industries can become more or less attractive over time, as barriers to entry or other elements of industry structure change. Industry attractiveness and competitive position can also be shaped by a firm. Successful firms not only respond to their environment but also attempt to influence it in their favor.

Achieving competitive advantage requires a firm to make choices. If a firm is to gain advantage, it must choose the type of competitive advantage it seeks to attain and the scope within which it can be attained.
(See Competitive Advantage, Generic Strategies)

Concentration Ratio: A measure of the degree of competition in an industry. Thus the four firm concentration ratio is the percentage of the market accounted for, by the top four players.
(See Herfindal Index, Oligopoly)

Concentric Diversification: Diversification into related areas. A less risky strategy compared to conglomerate diversification. The new business may be related to the existing business in terms of product, technology or both.
(See Diversification)

Conglomerate Diversification: Diversification into unrelated areas. Firms sometimes enter a new business simply because it represents the most promising investment opportunity available. The main concern here is the profit generating capacity of the new venture and financial synergies. For instance, businesses with sales patterns moving in opposite trends may balance each other. It is widely accepted that related diversification is more likely to succeed than conglomerate diversification. The key, of course lies in understanding what is related and what is not.
(See Diversification)

Contestability: The degree to which firms can enter or leave an industry. Contestability provides a measure of the effect of potential competition in an industry. Perfect contestability implies there are no barriers to entry. In the early 1980s, the economist W J Baumol pointed out that perfect contestability could yield the results of perfect competition in a market, even without having a large number of small firms. The airline industry is generally held up as an example of a reasonably contestable industry.
(See Barriers to Entry)

Contingency Planning: The development of a management plan that uses alternative strategies to ensure the success of a project even in the event of things going wrong. Essentially, it means preparing for highly uncertain situations.
(See Adaptive Planning, Russell Ackoff)

Contract Manufacturing: Production on behalf of a client who owns the design and brand name. Contract manufacturing helps a company gain access to capacity in a cost effective way. On the other hand, the contract manufacturer does not have the burden of marketing the product and handling end customers.
(See Licensing)

Co-opetition: 'Co-opetition', a word coined by Ray Noorda (the founder of Novell), is defined by Brandenburger and Nalebuff as a new mindset that combines cooperation and competition. Cooperation generally leads to an expansion of the cake and competition to a slicing up of the cake. Both cooperation and competition are necessary. An exclusive focus on competition ignores the potential for expanding the market or creating new profitable forms of enterprise. A 'co-opetition' mindset actively looks for ways to change and expand the business, as well as newer and better ways to compete.
(See Dynamic Capabilities, Process Networks, Strategic Alliances)

Core Competence: A term coined by C K Prahalad and Gary Hamel . A core competence is a bundle of skills and technologies that enable a company to provide superior value to customers. A core competence is effectively a company's specialized capability to create unique customer value. This capability is largely embodied in the collective knowledge of its people and the organizational procedures that shape the way employees interact. Over time, investments made in facilities, people and knowledge that strengthen core competencies, create sustainable sources of competitive advantage.

A core competence should not be equated with a single skill or discrete technology. If a company identifies too many competencies, it is probably referring to discrete skills. At the same time, if it identifies only one or two competencies, the level of aggregation is too broad. Typically, a firm may have between five and 15 core competencies.

Skills which are a pre-requisite for becoming an industry player, should not be confused with core competencies. A core competence is also not a physical asset. For instance, a factory, a distribution channel, brand or patent cannot be referred to, as a core competence. The ability to manage these assets may, however, be a core competence.

A core competence should:

• Provide significant and appreciable value to customers, relative to competitor offerings;
• Be difficult for competitors to imitate or procure in the market;
• Enable a company to move into new markets or to develop new technologies.

Core competencies are not product specific. They can and should be leveragable to create new products/ services. Indeed, a core competence is truly core when it forms the basis for entry into new product lines/ businesses. Sony's core competence in miniaturization has enabled it to develop a range of popular consumer products. Reliance Industries' core competence in project management has enabled it to complete many complicated projects that span across industries ahead of schedule. The Aditya Vikram Birla group has a similar competence.

By understanding core competencies, a firm can identify which businesses to strengthen and which to divest. Identification of core competencies can also lead to greater clarity on potential entrants into the industry who may be using similar core competencies to make other products.

To sustain competitive advantage, competencies need to score well on four dimensions:

Appropriability: The degree to which the profits earned by a competence can be appropriated by someone other than the firm in which the profits were earned. The lower the appropriability of the asset, the more sustainable the profits.

Durability: How durable is the competence as a source of profit? Shortening product and technology life cycles make most competencies less durable than they were, a decade earlier.

Transferability: The easier it is to transfer the core competencies and resources, the lower the sustainability of its competitive advantage.

Replicability: If it is possible, by appropriate investment or by purchasing a similar asset for a competitor, to construct a nearly identical set of capabilities, the competitive advantage is not sustainable.

Examples of core competence
Company Core Competency Products

Sharp/Toshiba Flat screen display Lap Top Computers, Television;
Videophone
Sony Miniaturisation Personal Audio
Federal Express Logistics Management Courier Services

Walmart Logistics Management Discount Retailing

Motorola Wireless communication Cellular Phones
Ranbaxy Labs Reverse Engineering Generic drugs

Honda Combustion Engineering Motor Cycles, Cars, Generators
Gujarat Ambuja Cements Energy Management Cement

Some management scholars feel that core competence has several limitations. It is more useful in explaining why something has gone right or wrong and less useful in predicting what will be right or wrong. For instance, Clayton Christensen, the innovation guru, feels that core competence is too internally focused. Instead of asking what they are good at, companies must ask what customers value. Accordingly, they must develop new competencies when circumstances demand, instead of continuing to exploit existing ones. Prahalad, himself, has warned of core competencies becoming core rigidities. A dramatic structural change in an industry can substantially reduce the value of a core competence. That is why, it is important to assess the value of a core competence by the benefits it generates for customers rather than the technicalities underlying the core competence.
(See Diversification)

Core Ideology: A term coined by Collins and Porras in their book “Built to Last”. Core Ideology describes an organization’s identity that transcends all changes related to its relevant environment. Core ideology consists of two notions: Core Purpose – the organization’s reason for being – and Core Values – essential and enduring principles that guide an organization, its behaviors and actions.
(See Corporate Purpose, Corporate Values)

Core Values: Core values are the basic or central values of an organization. They serve to guide the company and have a profound influence on how people in that organization think and act. As long as actions are aligned with core values, no external justification is required. These core values define the organization in terms of what it is and what it does and give the organization an unique identity. In other words, core values provide the glue that holds an organization together. Core values are an organization's essential and enduring tenets that should not be compromised for financial gain or short-term expediency. Even during hard times, the values should not be diluted. These values should undergo modification only in the most exceptional situations.
(See Core Ideology, Corporate Purpose, Culture)

Corporate Governance: Corporate governance has been a hot issue in recent years. The series of corporate scandals involving Enron & WorldCom in the US, Parmalat in Italy, etc., has alarmed stakeholders. In India too, corporate governance is attracting a lot of attention.

Corporate governance is the subject that deals with the responsibilities of senior managers, directors and shareholders. Directors are expected to safeguard the interests of shareholders by monitoring the actions of managers. But time and again, directors have not been able to impose necessary checks and balances. That explains why boards have come for sharp criticism and independent directors have become so important.

In the United Kingdom, the importance of good corporate governance came into the public domain after a series of corporate collapses and scandals in the 1980s and 1990s. The functioning of boards was criticized and the importance of independent, impartial non-executive directors was highlighted. Following the publication of the Cadbury committee report in 1992, a code of best practices was established. Although it is voluntary, all listed companies are expected to comply with it. Since the Cadbury report, a number of other committees have established best practices in specific areas like director's pay.

In the US, the Sarbanes Oxley Act 2002 (SOX) has been framed to enhance and enforce corporate accountability, transparency and disclosures in all the activities and transactions the company undertakes. SOX requires the CEO and the CFO of a publicly listed company to certify in the Annual Report that all the disclosures made are accurate and true.

In India too, various codes of corporate governance have been formulated through committees like the Kumara Mangalam Birla committee on corporate governance (2000). This report has made various recommendations, both mandatory and non-mandatory for publicly listed companies with respect to the structure and composition of the board, the audit committee, the remuneration committee, accounting and financial reporting standards, functions of the management and shareholders' rights. For instance, the company's half-yearly declaration of financial performance including a summary of the significant events in last six months must be sent to each shareholder. (See Agency Theory)

Corporate Image: Corporate image refers to the way the business of an organization is perceived by the investors and customers. A positive corporate image represents a major intangible asset. For example, the Tatas have successfully leveraged their positive image to enter various businesses. Corporate image is shaped by an organization’s history, its beliefs and philosophy, its ownership, its people, the personality of its leaders, its values and its strategies. Public relations play an important role in building a company’s image by explaining what the organization stands for, to the stakeholders. A company’s advertisements, statements made by the leaders, relations with stakeholders and the website all contribute to image building. The financial community, business community, consumers, other ‘thought’ leaders, top managers, employees, shareholders and the government must all be kept in mind, while shaping the corporate image.

Corporate Philanthropy: Corporate philanthropy refers to the involvement of business firms in charitable activities through contributions in the form of time, money, goods, or services. Corporate philanthropy is not merely about spending money. It is also about getting the best returns and the best results for the money spent and involving the larger community, especially NGOs. One of the best examples of corporate philanthropy is the Bill Gates and Melinda Gates foundation which has taken up various laudable initiatives across the world, especially to improve healthcare in poor countries.
(See Corporate Social Responsibility)

Corporate Purpose: As defined by Collins and Porras in their book, “Built to Last”, corporate purpose is the organization's fundamental reason for existence. The primary aim of corporate purpose is to guide and inspire the company. The corporate purpose should not be confused with specific goals or business strategies. Two companies could have a very similar purpose but operate in different ways in different businesses. A visionary company continues to pursue, but never really reaches its purpose. As Walt Disney once remarked, "Disneyland will never be completed, as long as there is imagination left in the world."

Unilever's corporate purpose states :
• Unilever's mission is to add vitality to life. We meet everyday needs for nutrition, hygiene and personal care with brands that help people feel good, look good and get more out of life.
• Our deep roots in local cultures and markets around the world give us our strong relationship with consumers and are the foundation for our future growth. We will bring our wealth of knowledge and international expertise to the service of local consumers – a truly multi-local multinational.
• Our long-term success requires a total commitment to exceptional standards of performance and productivity, to working together effectively, and to a willingness to embrace new ideas and learn continuously.
• To succeed also requires, we believe, the highest standards of corporate behaviour towards everyone we work with, the communities we touch, and the environment on which we have an impact.
(See Core Ideology, Mission, Vision)
Corporate Renewal: Because of organizational inertia and inflexibility, many companies continue to bet on the strategies that have worked in the past, taking customers and competitors for granted. Corporate renewal implies proactive change management that involves both tightening belts from time to time and inspiring employees with a powerful vision. Leaders must set stretch targets for their employees and constantly encourage them to question the basic assumptions of the business. At the same time, they must move people in a clear direction through an inspiring vision.

Organizations need to renew themselves continuously as the external environment changes. But they often do not do so, persisting zealously with what has succeeded in the past. Managers have a tendency to support structures, systems and decisions that have ensured the company's success in the past. This tendency is reinforced by a belief that customers are captive and competitors are weak.

Great organizations facilitate renewal, by setting stretch targets and articulating a powerful vision that encourages people not to see themselves in terms of the past, but in terms of the future potential. They go beyond the task of ensuring alignment of existing resources to providing new challenges. They create organizational disequilibrium. And most importantly, within the turmoil, they are willing to make choices and commitments to new options and opportunities.
(See Corporate Restructuring)

Corporate Restructuring: Over time, as the industry structure changes and markets evolve, the internal profile of an organization may need a major revamp. Corporate restructuring refers to the various actions involved in realigning the organization in the light of emerging market trends. This may include a new organizational structure, divestment of unviable businesses, alteration of capital structure, reduction of headcount and outsourcing of non core activities. Change management is often a key ingredient of corporate restructuring.
(See Change Management, Corporate Renewal)

Corporate Social Responsibility (CSR): For any medium sized or large company, society is an important stakeholder. Though companies are primarily guided by the profit motive, they cannot act without considering the larger interests of society.

Several years ago, the famous economist, Milton Friedman argued that the social responsibility of a business is to make profits. Friedman was clear that corporate actions motivated by anything other than shareholder wealth maximization threatened the well being of shareholders. Today, that view is considered somewhat extremist. Most businesses accept that they have a responsibility towards society. A responsive corporate social policy may not only enhance a firm's long-term viability but also preempt restrictive government regulations.

Ardent supporters of CSR argue that, when a company behaves responsibly, there is a direct impact on the bottom line. Some CSR activities do have tangible economic benefits. Expenses incurred on CSR are often tax deductible. Some socially responsible practices such as recycling of water may even generate cost savings and, as a result, increase profits. For example, recycling may reduce input costs and pollution simultaneously. Corporate philanthropy can also lead to intangible benefits such as goodwill. However, there is no guarantee that CSR will automatically lead to an improvement in profitability, especially in the short run. At the same time, there is a wide acceptance that CSR will generate a positive impact in the long run.
(See Corporate Philanthropy)

Corporate Venturing: This occurs when a large firm decides to invest in a smaller, but promising venture. Corporate venturing provides an alternative way of generating growth and tapping expertise that would otherwise take time to develop. Corporate venturing enables a company to develop products to expand the core business, to enter new industries or markets, or to develop breakthrough technologies that could substantially change the industry. Corporate venturing can be done by taking a passive, minority position in an outside business, by taking an active interest in an outside company, by building a new business as a stand-alone unit or by building a new business inside the existing firm, with independent management.

Cost Leadership: A strategy that focuses on making the operations more efficient and cutting costs wherever possible. It may result from scale/scope efficiencies, tight overhead control, careful selection of customers, standardization and automation. Cost leadership aims at having the lowest costs in a market. This makes the company best placed to survive a price war and generates the highest margins if a price war does not occur. Gujarat Ambuja has pursued this strategy in the Indian cement industry. The largest retail chain in the world, Wal-Mart also believes in cost leadership. TISCO has been a cost leader in the Indian steel industry.
(See Generic Strategy)

Controlling costs systematically can lead to competitive advantage in industries where price is an important factor. If a company offers a standard product or service at a lower cost when compared to the industry average, the company will earn higher profits. Low cost can enable the company to compete on price if that is required. It can also generate profits that can be reinvested to improve the product quality while charging the same price as the average in the industry. Low cost producers are more likely to survive a price war. If suppliers hike prices, the low cost leader will not be squeezed as much as the other players. The firm’s low cost position may also act as an entry barrier, particularly if the potential entrant hopes to compete on price. A cost leader can also use price as a weapon to ward off threats from substitute products.

There are some risks associated with the cost leadership strategy:

• If the buyer perceives the product to be cheap or of low quality, then the company would have to reduce the price to sell it. In that case, cost leadership will not lead to superior profitability.
• Too much focus on costs can lead to the firm losing touch with the changing requirements of the customer.
• Many routes to a low cost position can be easily copied. Competitors can purchase the most efficient scale of plant. As industries mature, the experience curve effect confers fewer benefits. But perhaps the greatest threat comes from competitors who are able to price at marginal cost in the industry because they have other, higher profit-earning product lines to recover the fixed costs.
(See Generic strategy,Offshoring, Outsourcing)

Cost of capital: For a business to be set up and run, capital is needed. This capital must yield returns that exceed the costs incurred to create value for shareholders. So it is important to measure the cost of capital and keep tracking it on an ongoing basis. Debt is a cheaper source of capital compared to equity. Within debt, there are various instruments available. Corporate treasurers must choose the appropriate mix of debt instruments and equity to get to the targeted cost of capital.
(See Capital Structure)

Counterparry: A term coined by globalization guru, George Yip. Counterparry involves responding to a competitive attack in one country by retaliating in another country. The retaliation is done in a country where the competitor will be hurt most. To make a counterparry effective, a strong presence in important markets, especially the home countries of major competitors is desirable. Kodak used this strategy against Fuji.
(See Cross Country Subsidization, Global Leverage)

Country of Origin Effect: The special preference given by customers to goods produced in certain countries. Japan, for example symbolizes quality and reliability in the consumer electronics business. Similarly, Switzerland represents excellence in watch making and Germany in precision engineering.

Country Risk: The risk associated with a particular country, either because of an investment made, a loan given or some other commitment. Understanding and estimating country risk involves the examination of economic, political and geographical factors. Country risk is an important factor to be considered in international business.
(See Political Risk)

Critical Success Factor (CSF): Refers to those critical areas, where things must go right for the business to flourish. For example, the ability to attract and retain talented people is a critical success factor for Indian IT services companies like Infosys, TCS and Satyam. Similarly, the ability to control freight costs is a critical success factor for steel manufacturers like Tata Steel. The ability to manage R&D effectively is a critical success factor for global pharma companies like Merck. Supply chain management is a critical success factor for large retail chains like Food World.

Cross Country Subsidization: Using profits from one country to subsidize losses in other countries. This strategy is closely related to counterparry. Global companies, thanks to their presence across countries, have this capability.
(See Counterparry)

Cross Holding: The holding of equity shares by companies in each other. In countries like India, this is a common practice that enables promoters to retain management control of a company with minimal investment. It also provides opportunities for tunneling, i.e. movement of funds across subsidiaries. Cross holding is considered bad for corporate governance because there is an imbalance between control and cash flow rights. Cross holding also leads to unrelated diversification resulting in unwieldy conglomerates, which often generate less than satisfactory returns to shareholders.

Customer Relationship Management (CRM): An age old concept, which has become hot in recent times because of the rise of information technology. CRM refers to efforts by companies to understand their customers and manage them in the most profitable way. CRM aims at improving customer retention, offering differentiated products based on customer needs, clever customer acquisition and reward programs, and better customer service programs. CRM usually uses information technology to manage large amounts of customer data and automate various steps, to prevent human error. Data collected through CRM enables firms to serve target segments more effectively by tailoring products to closely match customer needs. CRM also provides data to educate employees, align their incentives, and make a company better placed to profit from evolving market needs.

Customer Switching Costs: The costs that tend to tie buyers to the current supplier. These costs tend to be high when the product needs specialized inputs, when the customer has invested a lot of time and energy in learning how to use the product, or when the customer has made special-purpose investments that cannot be used elsewhere. Enterprise Resource Planning (ERP) software falls in this category.
(See Barriers to Entry)

Cusumano, Michael: Well known for his work on business strategy, especially in the computer software industry, Cusumano has extensively studied tech companies across the world, including Microsoft, Netscape, and Intel. Based on his research, he has contributed valuable insights on the strategic management of tech companies. Cusumano argues that strategic planning is important even in a fast changing world like Information Technology. The only difference is the planning cycles have to be shorter. Among the ideas for which Cusumano is famous are Platform leadership and knowledge transfer across projects.
(See Platform Leadership)