Richard A. D'Aveni, Professor of Strategic Management

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Spheres of Influence: Constructing a Forcefield to Deflect Competitors

Constructing a forcefield to deflect competitors: Spheres of influence can create a profitable business environment while pushing rivals into a corner, writes Richard A. D'Aveni: Author: D'Aveni, Richard A Publication info: Financial Times [London (UK)] 16 Aug 2002: 10.

Abstract: A sphere of influence goes beyond existing portfolio planning methods focused on exploiting core competences, creating synergies or transferring funds from cash cows to star businesses. A well-constructed sphere of influence can manoeuvre competitors into a corner, reduce price wars through the equivalent of "mutually assured destruction", encourage rivals to grow in non-conflicting markets, and shape the industry to partners' mutual advantage. A sphere of influence consists not only of core geographic and product markets and vital interests, but also pivotal zones, buffer zones and forward positions, each serving a particular strategic intent.

Vital interests are geographic or product zones critical to the core. They might be complementary products, or businesses that provide resources such as know-how, raw materials or skilled labour. For example, Microsoft's operating systems for networks (NT) and portable-device operating systems (CE) are vital interests. Microsoft must win in these markets because of the close relationship between them and its core market in desktop operating systems, graphical user interfaces and internet browsers. Otherwise it will lose its hold over its core, in which inter-operability of desktops, networks and handheld devices is crucial. They are also vital because they exploit the same programming code as Microsoft's core software.

Today P&G has the Pampers brand of nappies and sufficient knowledge of surfactant chemistry to enter baby shampoo and soap. This threatens J&J's core business of baby products. But J&J owns Neutrogena, a niche company offering wholesome, mild adult soap and shampoo products that fit the J&J image. Neutrogena acts as a forward position that threatens P&G's adult soap and shampoo business. J&J's acquisition of Neutrogena created an overlap of the two companies' spheres of influence that guaranteed mutually assured destruction if either moved farther into the other's core markets. P&G's potential threat to J&J's core market contributes to this balance of power.

Full Text: Has constant innovation and revolution in your industry destroyed the stabilityand structure that used to provide profitability? If so, you're not alone. Chaotic change can sometimes be creative, but it can also be wasteful or profitless. Many perceptive top managers have concluded that it's time to create order in their competitive environments. But how should they go about it?

The answer is to build a strong and rational sphere of influence. Throughout history spheres of influence have been used in managing political relations between countries, and nations continue to try to create them. They are also the best way for successful businesses to establish and maintain order and create profitable industries today - though managers may not recognise the term.

A sphere of influence goes beyond existing portfolio planning methods focused on exploiting core competences, creating synergies or transferring funds from cash cows to star businesses. A well-constructed sphere of influence can manoeuvre competitors into a corner, reduce price wars through the equivalent of "mutually assured destruction", encourage rivals to grow in non-conflicting markets, and shape the industry to partners' mutual advantage. A sphere of influence consists not only of core geographic and product markets and vital interests, but also pivotal zones, buffer zones and forward positions, each serving a particular strategic intent. The core product market is the centre of an effective sphere of influence. Companies hope to dominate them in both market share and value leadership. 

Vital interests are geographic or product zones critical to the core. They might be complementary products, or businesses that provide resources such as know-how, raw materials or skilled labour. For example, Microsoft's operating systems for networks (NT) and portable-device operating systems (CE) are vital interests. Microsoft must win in these markets because of the close relationship between them and its core market in desktop operating systems, graphical user interfaces and internet browsers. Otherwise it will lose its hold over its core, in which inter-operability of desktops, networks and handheld devices is crucial. They are also vital because they exploit the same programming code as Microsoft's core software.

Pivotal zones are markets that could tip the balance of power in the long run to a combative competitor if action is not taken. Microsoft maintains positions in several pivotal zones it doesn't yet dominate. These include electronic portals and commerce (MSN) and internet-desktop interoperable systems (such as Microsoft.net).

Buffer zones are defensive positions, that is, expendable markets that protect against expansion by rivals. For example, applications and games help Microsoft cope with potential incursions by killer application providers who could threaten Microsoft's core by bundling an operating system with an application with universal usage.

Forward positions are front-line products or services, typically near the core of a big rival. They can be used to attack the core of the rival, but can also create stability when each rival maintains a forward position near the other's core strong enough to be taken seriously, but not so strong as to start an all-out war. This situation creates mutual forbearance, which operates just as mutually assured destruction preserved the fragile peace of the cold war.

Walk into any supermarket, and you'll see the impact of mutual forbearance. In the US, Johnson & Johnson, known as "The Baby Company", does not make nappies. Procter & Gamble, "The Soap and Shampoo Company", does not make baby shampoo and soap. Why not? Because through a complex series of moves over decades, J&J and P&G have established mutually threatening forward positions and balanced their opposing spheres of influence.

Today P&G has the Pampers brand of nappies and sufficient knowledge of surfactant chemistry to enter baby shampoo and soap. This threatens J&J's core business of baby products. But J&J owns Neutrogena, a niche company offering wholesome, mild adult soap and shampoo products that fit the J&J image. Neutrogena acts as a forward position that threatens P&G's adult soap and shampoo business. J&J's acquisition of Neutrogena created an overlap of the two companies' spheres of influence that guaranteed mutually assured destruction if either moved farther into the other's core markets. P&G's potential threat to J&J's core market contributes to this balance of power.

Traditional approaches to portfolio analysis - based on exploiting core competences, building economies of scope, and on other synergies - cannot make sense of the strange but successful portfolios of P&G and J&J. The behaviour of the two companies can be understood only by thinking of their portfolios as spheres of influence, interacting in different ways according to the forces of the product market.

A sphere of influence is also a competitive weapon by which companies project power in ways that beget more power. By concentrating on their core businesses, Home Depot and Wal-Mart have projected their power to force rivals to find unoccupied niches rather than compete head-on. Establishing deals with selected suppliers based on their purchasing power, these companies get more variety, better prices, unique product selection and better service (delivery, displays, promotional advertisements and so on). Rivals are forced to look for different product categories and other retailing niches where profits are still available.

Another way of increasing the company's relative power is to add vital positions to undermine the cores of competitors by providing something of greater value than they do. One way is to hold businesses that allow the company to bundle extra products together with their own, or to acquire new products and services that complement the core. Intel's core is microprocessor chips, so it invests in applications that increase the need for powerful microprocessors. Microsoft bundles its browser (Explorer) with Windows. IBM bundles software and hardware to provide "solutions" to customers' problems. GM bundles cars with GMAC financing and On-Star satellite equipment. GM's bundles generate interest and monthly service fees that can be more profitable than the cars themselves.

As we can see, these bundles are not just about synergy. They serve to undermine the power of rivals' spheres. Bundling can influence the profitability of rivals who lack similar bundles, or the newly bundled products can be virtually given away (consider Microsoft's browser versus Netscape's Navigator), forcing rival spheres to prospect for profits elsewhere or face dwindling power over the industry.

But successful power projection relies most of all on buffer zones and forward positions. Buffer zones protect the core business, while forward positions - which sometimes fail to make money - might instead win the bigger war.

Sometimes forward positions are used to enhance the power to attack one rival by signalling to other rivals to create mutual forbearance so neither of you has to fight everybody at the same time. That is how P&G and J&J's balancing forward positions signalled each company to call a truce, leaving each free to fight on other fronts (such as against Unilever and American Home Products).

Buffer zones support forward positions in this role. They stop a rival from entering the core business by providing a market position that doesn't hurt overall prof itability too much if the company decides to stop the entrant in its tracks. Disney's foothold in children's book publishing is a vital position, giving it an option on potential characters for future animation projects. But it also acts as a buffer zone, keeping the fight over a future Mickey Mouse in the book world and out of Disney's core turf of children's movies and theme parks.

In addition, buffer zones can block potential moves by others who could weaken the company's sphere of influence. Disney's buffer zones in retail and digital distribution channels counter powerful potential competitors such as Mattel and Toys 'R' Us, which control children's toys and distribution channels that might enable them to integrate backwards into kids' characters and cartoons.

To sum up, a sphere of influence is more than a corporate portfolio of product markets. It is a powerful arsenal that enables a company to project its power and come to dominate the larger competitive space of its industry. The purpose of a sphere is to occupy a significant portion of the attractive markets in that space. It also enables astute managers to cajole those outside the sphere to settle into their own well-established borders.

Stability is a welcome consequence of this kind of settlement. It creates an industry free from the losses that typically accompany the chaos of constant entry into or interference with the cores of the leading participants. One doesn't have to look far to see that industries in the most turmoil are the least profitable. Companies that succeed in building and maintaining a sphere of influence will find their place in the balance of power among leading concerns. Getting there requires an understanding of patterns of tacit or formal alliances and mutually assured destruction between major rivals, and a willingness to pressurise or co-operate with less powerful rivals.

Richard A. D'Aveni is professor of strategic management at the Tuck School of Business, Dartmouth College. He is the author of Strategic Supremacy: How Industry Leaders Create Growth, Wealth and Power through Spheres of Influence, The Free Press Division of Simon & Schuster, 2001. Copyright Financial Times Limited 2002. All Rights Reserved.