Beyond strategy: configuration as a pillar of competitive advantage.

One company can copy another's strategy. It can reverse engineer its technology and benchmark its systems. But it cannot copy the way strategy, technology, systems and routines are configured into a thematic, synergetic whole. It is this complex configuration among the parts that constitutes the most vital source of competitive advantage. And the ability to find a core theme that harmonizes these pieces distinguishes the great firms and leaders from all others. Developing such a core theme demands both the insights of the artist and the calculations of the planner.

The object of good configuration is always to develop a committed, enthusiastic cadre of people who collaborate seamlessly to get and keep customers who value their services. In this endeavor, the well-configured business takes on a life of its own, solving today's challenges while carrying within it the seeds of renewal.

Today, many companies pursue new management techniques only to get burned. They downsize and lose a vital competence or resource. They outsource key activities and thereby deny themselves vital opportunities for learning. And they acquire firms that in no way complement their abilities or market profile, or introduce products that hurt their reputation. In all these cases the techniques embraced - downsizing, outsourcing, acquisitions, and so on - may well be useful. But they are misapplied whenever managers fail to adapt them to what is most important to the company and its members, to what the company absolutely must do well, and to the identity of the company in the marketplace. What follows is an attempt to get back to these basics.

This article is about organizational wholes. It explores how, and how well, the elements of companies complement one another to produce the driving character of the enterprise. It is not a popular or well-explored topic among strategists. Previous work has tended to look only at parts of an organization, with little concern for the central themes and relationships that prioritize and orchestrate the parts. Perhaps that is why we have such a long way to go to understand what it takes to get a company to implement a strategy effectively. It may also explain the gap between the laundry list of attributes said to produce superior returns and the true life-blood of a great organization: the core vision and its orchestration that gives a company character and direction, harmonizes strategy and processes, and motivates people to work toward a common objective.

Many organizations lack profound character. They have no powerful unifying focus that gives them uniqueness, spirit and direction. They need a theme and integrative apparatus that harmonizes their elements to produce configuration. Such configuration, not strategy alone, is the most powerful source of competitive advantage - an important point that escapes advocates of organizational adhocracy, looseness, and chaos.

What Are Configurations?

In the abstract, configurations may be defined as constellations of organizational elements that are pulled together by a unifying theme, such as unequalled service or pioneering invention. The first constellation is called the core; it consists of the mission, the means (the fundamental abilities and resources required to accomplish the mission), and the market. These constitute the raison d'etre of the enterprise. The second constellation includes the systems, processes, and structures that support the core; we have identified seven elements in the support constellation that we will describe later. In a well-configured organization, there is harmony within and between the two constellations that creates the synergies required to make a company uniquely effective. In short, building configurations is about two things: (1) making choices about what a company does and how it will do it, and (2) ensuring that the things a company does reinforce each other. The essential properties of configurations are well illustrated by Marshall Industries, a firm that one of the authors has been observing for several years.

A Configuration in Action

Marshall Industries, a West Coast distributor of electronic components, exemplifies good configuration. Its product lines are not unique, nor does it have any intrinsic cost advantages. As a distributor, Marshall finds itself operating between several giants - its suppliers are Texas Instruments and other major electronics manufacturers, and its major customers are IBM, AT&T, and their ilk. Marshall's managers had flirted with a service differentiation strategy, talking vaguely of flexibility, adaptability, and customer focus. But about four years ago, the company had an epiphany that led it almost accidentally to a productive core theme and mission and a comprehensive expression of these throughout the firm.

Let's look first at the core. Marshall made a fundamental switch from selling undifferentiated products to helping customers solve problems. Hackneyed as it may sound, this overriding mission and theme gave the company great clarity of purpose. Managers now went to their markets to learn what the customers were doing that Marshall might do better and less expensively. They began bundling products and became a value-added outsourcer for many customers. In this sense, then, Marshall had a clear mission; it focused attention, activities, and resources on the means to achieve that mission; and it certainly created outputs that the market rewarded. From 1992 to 1996, its sales more than doubled, and its profits and price per share almost tripled.

Marshall made its configuration comprehensive by ensuring, via constant communication and education, that all of its managers and employees understood and embraced the mission deeply enough to make the right decisions on the spot. Subtly and indirectly, the firm was able to push decision-making close to the point of contact - lose to the work and to the customer. Employees at all levels of the firm now knew they had the power they needed to serve customers with sensitivity and speed.

Because the mission was so well understood, activities that were in no way instrumental to purposes were almost automatically discarded, and activities were added that were now needed. Marshall dramatized its core mission of solving customers' problems in a number of ways. It was the first in its field to use the World Wide Web to provide information and help customers; and it emphasized the global nature of its business by committing itself to being available to customers 24 hours a day. To support the massive changes it was making, Marshall invested heavily in an integrated information system that put all key information for decision-making at the point of contact with customers and eliminated the need for a heavy superstructure.

Perhaps the most striking example of the comprehensiveness of the configuration was the changes Marshall made in its reward system. Although the compensation system was market-driven, the company eliminated short-term financial rewards for numerically expressed objectives, which tended to hurt long-term relations with customers. Its criterion for differentiating rewards is now much more robust: If Marshall does well, everyone in the company, including the receptionist, the shipping clerk, and the janitor, shares in the reward. The change in the reward system was both the catalyst for change and the glue that held the other pieces of the configuration together.

Because the core of Marshall's configuration is so crisply defined, so thoroughly communicated, and buttressed by the reward and recognition system, activities there have taken on a life that seems independent of the classic management imperatives. The business has a rhythm that minimizes the confusion and conflict typical of firms that are not as well configured.

Even though Marshall shifted from distributor to value-added packager, in 1996 its administrative costs as a percent of revenues and its costs as a percent of operating margins dropped precipitously. The features of configuration highlighted by the Marshall example are shown in Figure 1.

Marshall's configuration - its mission, means, and market focus - centers on customer service. But there are many other kinds of effective configurations. To take two additional examples, pioneering companies such as Intel and Biogen have product development and market dominance at their core. They adopt as their mission the development of new products and technologies that will change industry standards, so a great deal of attention and resources are devoted to the means of developing such products. And much of the market success of the firms is attributable to the currency of their products, as will be shown in Figure 2.

By contrast, companies that lack a solid core focus and a corresponding well-integrated system to back it fail to attain excellence in any endeavor and scatter their resources ineffectively. At AT&T, for example, the absence of a core theme or a clear set of priorities seems to have prevented the corporation from excelling at any one business or function. AT&T has pursued too many paths, none with great conviction or distinction. So the jack-of-all-trades company is being bypassed by its more focused rivals.

Core themes, we should add, are not the stuff of bloodless plans but of powerful, ideologically embedded priorities that pervade an organization, impelling its people to embrace consistent values and purposes. They also instill what we call organizational simplicity - a tendency to work toward the most critical aims, activities, and markets. Thus, in addition to determining a core focus that makes a company distinctive, effective configurations also delineate what not to do - which services, products, market niches, and competitors to ignore.

Ballets are inspired by music and dramatic plot, but choreographed by plans and practice routines. In a similar fashion, organizational configurations are inspired by a core theme but implemented by plans, routines, and systems. Thus, a second quality of effective configuration to be seen from the Marshall example is comprehensive support around the core - an administrative structure and set of practices and systems that reinforce, implement, and complement the central theme.

At pioneer companies such as Intel and Biogen, numerous rituals, routines and administrative vehicles are used to facilitate new product development. Information systems are tailored to keep managers on the cutting edge of technology. And hiring practices, promotion criteria, and reward systems are designed to attract and motivate those with the greatest innovative talent. Such elaboration of a configuration embeds a theme, making it compelling and driving out clashing motifs. AT&T has lacked such support systems, so some units have talked up quality but rewarded cost control; others have advertised performance, but performed only at advertising.

Three typical configurations used by some famous companies are presented in Figure 2 on the next two pages. They show themes of pioneering invention, effective marketing, and high quality, which imbue cores and support systems alike. There are, of course, a great variety of possible configurations, but the three that follow - the Pioneer, the Salesman, and the Craftsman - are especially thematic.

BUILDING EFFECTIVE CONFIGURATIONS: COMPOSING THE CORE

The Many Seeds of Configuration

Configurations are not built like buildings, with rational, step-by-step plans. Instead, most of them arise from an admixture of chance, insight, inspiration, and trial and error. Indeed, there are many possible starting points in forming configurations: the recognition of an unserved market need, a new invention, an important talent or technology, even a novel administrative process. But once an important idea or resource is in place and enough key people are convinced of its potential - that is, once a core has attained critical mass - it can take on a life of its own and grow into a full-blown configuration.

Sometimes a configuration emerges because a crisis causes a theme to surface and forces the pieces of a company to adjust to one another. One author took over as Chief Operating Officer of a troubled large supermarket chain. In his determination that a marketing and service focus could address the chain's problems, he decided that stores should remain open 24 hours a day. This created immense logistical problems that would tax the ingenuity of the functional areas of distribution, store operations, purchasing, and marketing. These problems forced once warring departments to cooperate, or be exposed.

The new service mission was clear: Get the right products to the right stores at the right time. The distribution function was impelled to alter its delivery schedules to suit stores' needs better. Store operations then agreed to help the pressured deliverers unload trucks. They also developed an informal feedback system to inform purchasing and marketing about product movement. These systems of mutual support did not require additional staff, so costs fell as a percent of revenues. More importantly, the benefits of the improved cooperation among functions were transmitted to the consumer: higher volume meant fresher merchandise; better communication resulted in a better product mix, and the new can do spirit improved customer relations. The company grew and prospered as its parts began to complement each other.

Sensitive managers are able to exploit a wide variety of opportunities to assemble the critical mass of a configuration. But whatever the initial stimulus, for effective configurations to blossom managers must play an active role: for example, they might capitalize on a crisis, resource or competitive situation to articulate a cogent mission, develop the means to attain it, and connect with a viable target market.

The Mission of the Firm

All configurations must embody a mission: something to focus attention - to tell people what is and is not critical. "Encircle Caterpillar" was the mission that effectively focused the now powerful Japanese competitor, Komatsu. Configuration is impossible to achieve without such a strong sense of priorities or without people sharing a clear purpose. When a common purpose is absent, it is difficult to fit the pieces together; and even when joined, the pieces tend to come apart.

Mission encompasses goals, values and ideals. Hackneyed as these words may seem, it is imperative that employees understand and generally support the values and goals that direct the enterprise. A good crisis manager will tell you that a shared sense of urgency, a commitment to act, and a dedication to the enterprise that transcends self are imperative for a successful turnaround. Military leaders echo this, as do the bosses of top-performing enterprises. For instance, even though there is a great diversity among the people within corporations like General Electric, AlliedSignal, Marshall Industries, and Xerox, you will find that most of the people know, understand, and generally support the core values and goals of the company.

Means: Core Competences and Activities

Means constitute the very basis of an organization's identity, both to its employees and its customers. Means - technologies, procedures, programs, and unusual talents or resources - shape the tasks and interactions of everyone in the organization. They not only dictate the foci of everyday working life but constitute the bases for what people pay attention to and take pride in. Means help define work and its value to employees. They can connect employees to "something that matters" and make them feel more special.

And when they are distinctive, means create unique products and services that set a firm apart and instill client loyalty. Indeed, far from being mere servants of a mission, means often serve as the very basis for a configuration, shaping mission and market alike. Four conditions help means contribute vitally to the core of a configuration: excellence, thematic complementarity, development, and salience.

Means must be objectively powerful; whether they are technologies, skills, or processes, they must communicate excellence along a market-pleasing dimension: high quality at a Craftsman firm, bold inventions at a Pioneer firm, or alluring products at the Salesman firm. Means producing such outcomes become sources of superior competence and competitive advantage. They also are important within a firm, where they become rallying points - integrative targets that galvanize attention and prioritize activities and resources.

More important, means must reflect a central theme and complement one another, thereby harmonizing a great many aspects of strategy. The true pursuit of quality, for example, has implications for a wide range of activities beyond engineering and production. To ensure quality, R&D operations must favor painstaking refinement over risky novelty. A quality emphasis also demands judiciousness in adding new products to make sure overall reputation is not eroded. Thus, product line expansion and experimentation will not be excessive. Moreover, quality goods may permit higher prices and push firms toward customers who value excellence and durability; distribution and advertising must be targeted accordingly. The quest for quality also circumscribes outsourcing policies - restricting any such activity to uncritical components. It may even require backward integration to guarantee the excellence of key inputs. In short, thematic means must give rise to a whole interconnected set of prescribed and proscribed activities; they must reify a central focus; and they must discourage the inconsistent and nonessential.

In his 1996 Harvard Business Review article "What Is Strategy?" Michael Porter did a superb job of articulating how the elements of strategy at a successful firm such as IKEA were configured to fit together. IKEA's policies of low product variety, few auxiliary services, low pricing, subcontracted manufacture, and creative merchandise display all complemented one another to give the firm a distinctive product that would be very hard for rivals to duplicate.

Means must also incorporate methods for learning and improving. They must encompass not only a talent or approach, but also a way of nurturing and developing it - and ensuring its continued relevance in a changing world. In fact, even if means are compelling and sharply distinctive, they can remain so only by continual renewal and adaptation. By incorporating ways of learning, means must contain within them the seeds of their own revitalization. The interaction of scientists at many great technology companies ensures that one invention will lead to another.

Finally, unless means are made in some way salient and remarkable to the employees who must implement and develop them, they will fail to inspire and will lose their value. To instill pride and rally organizational effort, means must call attention to themselves. This is most apt to happen when they are closely tied to the mission, reflect great skill, or embody cherished values. Vagueness, mediocrity, and bureaucracy are anathema to salience.

For years, Caterpillar Tractor was famous for its ability to manufacture super-durable, high-quality heavy equipment. The theme of quality and reliability was reflected in the company's manufacturing methods, design practices, and advertising and distribution. The far-flung distribution network ensured that spare parts could be sent anywhere in the world within 24 hours. And quality assurance routines were airtight and in a state of continual refinement. Although product lines were quite stable, everyone was committed to making improvements to ensure that Cat stayed ahead of its competitors.

Market: Matching Capability with Customer Needs

Means matter only when the market values them, and especially when competitors cannot match them. A firm's central talents or resources must be amply rewarded by outside parties; otherwise a configuration will be useless and sterile. Indeed, most effective configurations are built with specific niches or customer needs in mind.

We are not suggesting that firms should poll customers and simply react to what they want. That would enforce eternal followership and prevent a company from exploiting its theme. Instead, we urge managers to strive for deep insights into their customers and the problems they face. Firms must discover needs they can fulfill better than their competitors - or identify a market gap that dovetails with their special skills and resources. This allows them to lead their customers, suggesting to buyers where they want to go before they realize it themselves. But leadership must be based on understanding true market needs, both present and evolving. And that often requires intensive face-to-face customer contact, not only via avid market research but by on-site visits and regular dialogues as well.

At Bandag Corporation, a large tire retreader, CEO Martin Carver discovered that customer costs were largely a function of an entire set of activities for operating and maintaining tires. It became clear to Carver that Bandag should no longer define its business as tires alone, but stress how its product interacted with other parts of the system. So Bandag got closer to its fleet managers to understand their needs, and set up dealerships that sold total solutions, not just tires. In this way, the firm's strength of producing durable and economical tires was augmented greatly by improving the reliability of the delivery and maintenance systems used by the customer and the dealer. Bandag's configuration extended all the way to the final use and user of the product.

Although firms vary in whether they ponder mission, means, or market first, all of these components must converge in the core. What use is a mission of innovative leadership in a company that cannot develop sufficient means for research or creativity, or that operates in a market unwilling to pay for same? If corporate priorities, talents, and sources of advantage in the market do not converge, there can be no effective configuration.

BUILDING COMPREHENSIVE SUPPORT

The seeds of configuration are unlikely to take root unless they are cultivated and nurtured by an appropriate support structure. Such support includes rituals and ceremonies, the power and reporting structure, plans and information systems, human resource policies, and administrative routines. This need for support is dramatically illustrated by a recent intervention conducted in a company with a faltering Pioneer configuration.

The Zimmer Inc. subsidiary of Bristol-Myers Squibb manufactures orthopedic implants and the surgical instruments required for their insertion. Although it was the market leader, Zimmer realized it had to get new products to market much faster than before. Its mission, means, and market were clear and complementary, but it lacked an appropriate administrative and collaborative support structure to develop new products quickly and efficiently.

To remedy the situation, one of us was brought in to help the division reconfigure the unit to develop a new hip implant. He found Zimmer's structure and systems wanting. Process, design, and manufacturing engineers all reported vertically, slowing and distorting communication. The functions were separated geographically and cross-functional communication was too rare. R&D, marketing, HR, manufacturing, and finance all communicated via the top, so those doing the work had constantly to wait until the functional heads ironed things out.

We decided to dramatically reconfigure both the structure and the process for the hip project, choosing a Lockheed-type "skunk works" (a cross-functional team reporting to one leader) and adding a few special provisions. First, all team members were assigned full-time to the project, from inception to completion. For example, quality control people who were normally brought in only at the end of a project came in to make recommendations right from the beginning. The apparent inefficiencies of this arrangement were ameliorated by two factors. First, the entire assignment could be carried out speedily because information was shared so widely and communication was so swift. Second, everyone became a "generalist" and could contribute to many tasks. These advantages were facilitated by locating everyone in the same space. Design engineers sat beside process engineers, and so on. Almost all communication was oral rather than written. A climate of collaboration soon ensued in which everyone felt free both to seek help and give advice - not by long memos but by discussion.

Capital budgeting and control systems were also made more friendly. The hip project team was given control of its own budget. Everyone realized controls would be needed, so all committed to a series of milestones developed to trigger corporate reviews. Time-consuming ad hoc reviews with detailed presentations to top management were eliminated. To control quality and ensure that the product design would be acceptable to customers, 19 surgeons were recruited from around the world as team members. It was understood that all team members - including a sales force of 25 - had quick access to the surgeons for the duration of the project.

The result of this reconfiguration of the support structure was that it took Zimmer only 29 months to complete the hip project - about one-third the time it took to develop its knee system. This example shows the kind of system that can support complex pioneering projects that demand close collaboration among a wide range of specialists. Companies producing simpler, stabler offerings would require quite different support structures. Our main point is that organizational support systems must be tailored in a multifaceted way to the core of the configuration. The three configurations of Figure 2 give some examples of how this can be done. They suggest that supports can be broken down into six key parts to direct: attitudes, influence, resources, motives, attention, and effort.

Directing Attitudes: Rituals and Ceremonies. The goals and priorities of top managers will have little effect unless they shape the values and attitudes of most other members of the organization. This is often accomplished using an elusive phenomenon called organizational culture. By regularly celebrating certain achievements, firms call attention to the importance of fundamental goals and values. Pioneers celebrate new patents; Craftsmen have ceremonies for quality awards. Vehicles for embedding important values include: bull sessions to discuss ideological or strategic priorities; training programs; symbolic actions by an inspiring leader; celebrating figures or feats via rituals and ceremonies; slogans and special vocabularies; company newspapers; and even advertising that defines a firm's image and distinctiveness. Most of all, culture must create a sense of common purpose that inspires targeted effort toward the corporate mission. And that comes more from the actual work environment than from company pronouncements.

Directing Influence: The Power and Reporting Structure. Organization structure specifies how responsibility and authority are to be distributed. In well-configured firms, it is used to give those with the most important tasks the discretion and influence to perform them. Structure also signals which units and individuals - and hence which priorities and tasks - are especially critical. For instance, by funneling power toward selected divisions, a firm stresses the significance of a particular product or niche. By favoring a department with extra discretion, a firm establishes the primacy of a specific function. Biogen and Intel give great scope for initiative to their R&D people. And power gravitating to the operating level signals the importance of a specific task to a firm's mission - such as customer service at Marshall.

Marshall's managers knew their aim of becoming a solutions company required a shift of power from headquarters functions to the real point of contact: the field representatives. But they also knew this transition could not occur by simple edict. So they are upgrading their field force to ensure that all representatives have the skill to deal with complex customer problems. As the field force is upgraded, it will gain more respect in the company, thereby making the transfer of power more appropriate and more acceptable to other organizational members.

Through the grouping of tasks and specification of hierarchies, structure also determines how easy it will be for different specialties or departments to collaborate; recall the Zimmer example. Such hierarchies also influence the speed and flow of information. Pioneering firms must have fewer levels of hierarchy to promote easier collaboration among different functions, liberate initiative, and foster quicker decision making. Collaboration is also facilitated by integrative devices such as teams, task forces, and committees - other important elements of structure. In situations of crisis, clear lines of communication and authority are especially important.

These examples demonstrate how the support systems must reflect the core, and they again dramatize that designing good configurations is as much art as science. There are no hard and fast rules. But there is always the need to harmonize the organizational elements.

Directing Resources: Strategic Plans and Budgets. Configurations must be operationalized by plans and programs that break down strategic priorities into sub-objectives and sub-tasks. Central activities feature most directly in strategic plans, while more peripheral concerns are given less prominence. To be effective, however, such plans must be linked to capital and operating budgets that allocate funds, personnel, and other resources to key activities. In this way, core concerns are accorded the resources that give them life and, just as important, extraneous activities are starved and eliminated. Biogen, Microsoft, and Intel likely spend well over 10 percent of their sales on R&D, leaving little doubt about the pioneering theme that pervades their configurations.

Directing Attention: Information Systems. Good configuration demands that managers pay special attention to particular kinds of information. Information systems, whether formal or informal, need to be designed to direct managers' attention to the trends, facts, and issues most central to their missions, means, and markets. Salesman companies must assiduously collect information on customers, sales breakdowns, and competitors; cost-focused companies must gather crucial data on efficiency, expenses, capacity use, productivity, and such. Information systems reinforce configurations by directing managers' attention, informing their interpretations, and telling them how well they are accomplishing their mission. Moreover, they keep different departments thinking about similar concerns, facilitating communication and collaboration.

Information systems, however, include far more than formal financial reports; they are the means by which organizational members acquire and share their knowledge - the cornerstones of organizational learning. According to Peters (1994), McKinsey & Company has evolved an extremely thorough means of documenting the new information garnered in each of its consulting assignments, then making the information available to others in the firm. There are information managers and resource people in the firm whose sole job it is to collect this information, package and index it in the most convenient and accessible way, find experts within the firm to give additional support, and make sure those who need help receive it within 24 hours.

Directing Motives: Recruitment, Training, Promotion, and Compensation. Configurations are best sustained when people enthusiastically direct their efforts toward a common purpose. This is achieved in part by strategic human resource management. On the one hand, recruiting policies must address the compatibility of new people with the organization; they must seek out individuals with skills especially appropriate to the core theme who complement one another. Salesman firms must attract and reward superb marketers; Pioneers must go after technical wizards. But on the other hand, especially in changing industries, managers must avoid any tendency to look for clones. Diversity and independent thinking are required if the firm is to move forward and adapt. Promotion policies too must be guided by the need to reward talent for existing priorities, while motivating those who will master opportunities that are just emerging.

Compensation policies may pose the greatest challenge of all. High merit is rewarded with high pay, and the highest pay, often quite aptly, goes to the most critical tasks or functions. But the configural view also recognizes that firms are complex systems of interdependency. Even the most proficient individual needs the willing support of many coworkers. And such harmonious collaboration demands that all employees be rewarded for their contributions. Widespread ownership in the firm via stock options, or stock ownership or universal bonuses for all in the company, are ways of enlisting everyone's participation (recall the Marshall example). But perhaps the most important compensation a company can give is that which is intrinsic - that which comes from the work itself and its meaning to the employee. And this relies on most of the aspects of configuration that we have already discussed.

Directing Effort: Administrative Routines. Routines serve as primary tools for directing human effort and ensuring compatibility in the activities of different departments and decision makers. There are routines for almost everything - from purchasing supplies to filling orders, from training to hiring, from collecting to disseminating data, from creating new products to discontinuing old ones. Routines not only guide the performance of most tasks, they also channel the perceptions and assumptions of the people performing them - assumptions about what is worthy of attention. By shaping thoughts and actions throughout a firm, routines can serve as powerful devices for ensuring conformity to a clear set of priorities. Indeed, they may be said to implement or enact the priorities embodied by a configuration. For example, the administrative routines in a bank mirror its responsibilities of protecting depositors' funds and preserving its capital. The routines of a pioneering high-tech firm will, of necessity, be less formal and more geared toward encouraging research and creativity. Managers should strive to shape routines in a great many areas around the core means and mission. But because most firms must address ever-changing internal and market needs, routines must be continually reexamined for relevance, currency, and dangerous side effects.

CONFIGURATION AS A PILLAR OF COMPETITIVE ADVANTAGE

Configuration can be a potent weapon. Indeed, the heart of distinctive competence and competitive advantage may lie not in the possession of specific organizational resources or skills, which can often be imitated or purchased by others, but in the power of the orchestrating theme and the degree of complementarity it engenders among the elements we have introduced: mission, means, market, and support systems. In fact, companies may be seen as systems of interdependency among these elements, all of which must be harmonized to compete effectively. It is he subtlety and range of these interrelationships that give firms like Marshall capacities that are distinctive and tough to copy. We have found six primary competitive advantages of good configuration.

Clarity of Direction. The sharp, well-communicated, and well-diffused mission of a highly configured firm gives employees a shared perspective on where the firm should be going and how to get there. When employees at all levels believe in the essential priorities of their organization, they work hard to achieve the most critical aims and do not waste their time on trivial matters. Common values also reduce the need for bureaucratic rules and close supervision, replacing compliance with conviction, liberating initiative and creativity, and speeding decision making.

Smooth Collaboration. When employees share common values and have a thorough understanding of core priorities, they are able to work together toward common objectives. Petty disputes are rare, and organizational politics takes a back seat to accomplishing an overriding goal. So highly configured firms can react quickly to challenges in the marketplace, even when such challenges demand the collaboration of different departments and areas of expertise.

Solid Commitment. Configurations are united by complex networks of personal relationships and interdependencies, the intensity and durability of which create real advantages. Tightly knit working groups or interdepartmental teams embody such interdependencies. Within them, people come to rely so much on one another that irresponsibility is rare. A commitment to "do the right thing" further reinforces trust and opens communication, making these teams increasingly effective.

A second type of commitment is not of people to each other, but of resources to a long-term endeavor. Configured firms do not scatter their resources over time or projects; they concentrate on major priorities. This resolute commitment of resources not only builds significant competencies and products that are hard to imitate, it also tells competitors that a firm is there for the long haul and will not be deflected from its plans or market. The chances of whimsical onslaughts from rivals are thereby reduced.

Core Competency. Configured companies, because they distinguish sharply between thematic and peripheral activities, are able to focus their resources to develop powerful and unique competencies. It is neither feasible nor productive for most firms to try to become jacks-of-all-trades. Instead, managers must prioritize activities and allocate resources to what their companies do especially well. This gives firms a lasting edge. It propels them along a trajectory of constant learning that hones the most critical skills and processes. In short, being enduringly great at something often demands the focus and dedication of highly configured firms.

After the Second World War, Rolls Royce became the most innovative aircraft engine manufacturer in the world. It retained this position for almost 30 years, largely because it put so much attention and resources into innovation. The innovative mission was heralded throughout the company; an astounding 22 percent of sales went to R&D, and successful engineers became heroes. The firm was dominated by managers with considerable technical expertise, and information systems - formal and informal - kept everyone abreast of scientific developments. Everything about the firm reflected its innovative focus.

Market Superiority. Configured organizations, because they have a good command of their strengths, are able to beat their less integrated rivals. Not only do they possess core competencies, but the intense dedication of their staffs enables them to reach out to customers and closely tailor these competencies to competitive and market needs. The more managers understand and believe in their core strengths, the more they are apt to use their initiative to build on them to serve customers and surpass rivals. In short, good configurations include the customer.

Enduring Originality. Business scholars have argued that the primary sources of long-term profitability are talents or resources that competitors cannot imitate. Abilities or resources that are easily copied soon lose their value. But the core competencies, competitive advantages, and synergies that inhere in a tight configuration are very hard to imitate. In part, this is because configurations creatively combine many elements - mutually reinforcing means, cohesive teams, complex administrative structures, and elaborate systems. These elements are tough to duplicate, as is the complementarity among them.

For example, the cohesive teams one finds in many well- configured companies are very hard to copy. Hiring away several team members would do a rival little good; it is the context within which these members work, and the interpersonal and organizational knowledge they have, that are the primary sources of strength.

In summary, there are major advantages to effective configuration. Highly configured organizations possess a clear sense of direction. Their goals inspire, their strategies are clear, and their efforts are well-targeted. So employees are committed and coordination is graceful. Add the synergy present within configurations to these other advantages and we get firms with distinctive competences and products that competitors cannot imitate. Configuration can be as great a competitive advantage as any other aspect of strategy.

When There Is Too Much Configuration

For all their strengths, highly configured firms risk becoming too simple - too dominated by a single viewpoint, too monolithic, too driven by one talent or function. Once a central theme takes hold, Darwinistic processes often rise up to reinforce congruent elements and expel all others. In bureaucracies, for example, formal rules multiply as systems become more targeted and routinized. Meanwhile, innovation and discretion are extinguished. When a configuration becomes too narrow or simple, a firm loses its resilience and its relevance, becoming too focused to address the complexity of its market.

Excessive configuration can be indicated by many things: a preponderance of resources going to a particular activity or function; an intolerant culture that expels dissenters; a narrow set of hiring and promotion criteria; and a stifling array of programs and routines. One skill or issue may become too dominant, one group too powerful, and one objective too exclusive. Thus, as outlined in Figure 3, there arises excessive consensus, inadequate skepticism, and an incapacity to recognize and respond to the need for change. An abridged audit for assessing a firm's quality of configuration is presented in the Appendix on pages 16-17.

Reconfiguration

Perhaps one of the most important things about a good configuration is the possibility it allows for ultimate reassessment and reconfiguration. A configuration is not forever; it must constantly be renewed. Moreover, its elements are interdependent. If the market shifts, the mission and means must shift. If there is a change in the means - say, a technological breakthrough - the mission and the market approach must be adapted accordingly.

These changes in the core mission, means, and market will require changes in the support systems: budgets and plans will be affected; recruiting, training, promotion, and compensation practices must be adapted; information systems will need to be brought up to date; structure might be affected; even rituals and ceremonies may have to change. Many of these changes will be subtle, but essential nonetheless.

Such reconfiguration has been taking place at General Electric. CEO Jack Welch believes improved quality will reduce unit costs and improve customer relations. He also senses that traditional manufacturing and process operations are vulnerable. So in addition to the quality initiative, he has mandated that all divisions develop consulting skills and marketing services. To make sure these core changes are sustained, Welch has begun to revamp support systems. The new corporate heroes are those who attain "six sigma" quality or excel at marketing auxiliary services. Corporate-wide training and recruiting reflect these new quality and service objectives, as do the information systems. And functional structures at some divisions are being supplanted by cross-functional teams to better pursue quality improvement.

The very heart of configuration demands that "the pieces be put together" in a way that ensures both harmony and creative dissonance: harmony for maintaining the system, creative dissonance for moving it forward. Selecting the right degree of configuration demands a complex balancing act. The need for continuity must be traded off against the need for change, requiring managers to embrace the future while respecting the past. Managers must also avoid the blandness or chaos of too little configuration as well as the obsession of too much. Salesman firms, for example, must be careful not to neglect cost or quality; Craftsmen must be sure to keep products relevant and costs in line; Pioneers must take care not to squander resources in pursuit of utopian ventures.

Excellent wines have complexity and nuance, blending together different tastes into a harmonious balance. They avoid clashing cacophonies of flavors as well as the strident dominance of a single sharp note. So too must it be for the configured company.

References

C. Hofer and D. Schendel, Strategy Formulation: Analytical Concepts (St Paul: West, 1978).

D. Miller, "The Architecture of Simplicity," Academy of Management Review, January 1993, pp. 118-138.

D. Miller, "Configurations Revisited," Strategic Management Journal, July 1996, pp. 505-512.

D. Miller, The Icarus Paradox (New York: Harper Business, 1990).

T. Peters, Liberation Management (New York: Fawcett, 1994).

M. Porter, Competitive Advantage (New York: Free Press, 1985).

M. Porter, Competitive Strategy (New York: Free Press, 1980).

M. Porter, "What is Strategy?" Harvard Business Review, November-December 1996, pp. 61-81.

C.K. Prahalad and G. Hamel, "The Core Competence of the Corporation," Harvard Business Review, May-June 1990, pp. 79-91.

Figure 1

Some Indicators of Configuration

Core

A clear MISSION and set of priorities and goals that are shared by many managers.

Focusing attention, activities, and resources on the primary MEANS for attaining these goals.

A viable target MARKET that values the outputs the means create.

Comprehensive Support

Directing attitudes: A corporate culture that engenders widespread enthusiasm for the mission, means and market.

Directing attention: Information systems that flag issues most central to the mission.

Directing influence: A structure that empowers and facilitates collaboration among those performing primary tasks.

Directing resources: Strategic plans that identify, fund, and staff the most important activities and functions.

Directing motivation: Recruitment, training, and reward practices that support primary tasks and goals.

Directing effort: Routines that delineate and monitor key activities.

Figure 2

The Three Configurations

PART 1: THE PIONEER CONFIGURATION

Core

Mission To create state-of-the-art products

* To be the technological leader in the industry

* To open up untapped markets with totally new products

Means - The ability to create great new products, perhaps via an exceptionally talented group of scientists or engineers and a mastery of R&D

* An ability to unearth commercially viable technological opportunities

* The capacity to patent, produce, and market innovations more quickly and effectively than rivals

Market - New products are designed to appeal to customers who demand the latest technology, or capitalize on unexplored market segments

Support Systems

Directing Attitudes - Rituals and ceremonies that celebrate new patents, inventions, product introductions, and scientific awards; scientist-leaders

Directing Attention - Information systems track technical or scientific advances; there is close interaction with labs and universities; a constant inflow of scientific and design talent keep the company at the technological cutting edge

Directing Resources - Significant commitment of resources to longer-term, higher-risk product development projects

Directing Motives - Recruitment, promotion, and compensation geared to finding technical whiz kids and giving them a stimulating and nonconfining work environment; recognition for invention and creativity

Directing Influence - R&D staff enjoy authority and influence; there are few levels of hierarchy; cohesive teams and task forces promote quick and easy communication and collaboration among people and functions

Directing Effort - Elaborate routines and programs for R&D, new product engineering, patent procedures, and project management

Exemplars - Biogen, Intel, Zimmer Inc. (subsidiary of Bristol-Myers Squibb), and, in their best years, Cray, Sun Microsystems, and Rolls-Royce Aviation

PART 2: THE SALESMAN CONFIGURATION

Core

Mission - To attract and serve customers better than anyone else

* To gain market share

Means - Quick and thorough responsiveness to customers

* Superb marketing via a powerful, well-trained sales force, effective advertising, and adept distribution

* Excellent customer support services

* Ability to adapt products quickly to changing tastes

Market - Products designed to have wide appeal, or carefully tailored to fit a special niche based on a deep understanding of customer needs

Support Systems

Directing Attitudes - Rituals and ceremonies celebrate sales and salesmen; tales of going "all out" for a customer; role model leaders with a marketing background

Directing Attention - Information systems find out what is happening in the market and how the firm can use resources to satisfy customers better. Systems track which product features are most and least appealing and to which buyers; they track market trends; and they encourage regular contacts with customers to ensure the fit of current and emerging products

Directing Resources - Significant commitment of resources to marketing, to building brand image, to market penetration, to "going the last mile" for the client, and to adapting products and services to customer needs

Directing Motives - Recruitment, promotion, and compensation geared to finding the kinds of people who love to interact with clients and who are exceptionally motivated to sell, promote, or give superb service

Directing Influence - Marketing prominently represented at top of hierarchy; much authority in the hands of sales managers and sales personnel to commit company resources; strong marketing influence on product design

Directing Effort - Routines, rules and programs for market research, approaching and servicing customers, expanding distribution, testing advertising, discovering potential new markets, redesigning products

Exemplars - Marshall Industries, Bandag, Microsoft, and, in the 1960s, General Motors, IBM, and Sears

PART 3: THE CRAFTSMAN CONFIGURATION

Core

Mission - To ensure the highest possible levels of quality

* To achieve a reputation as industry quality leader

Means - Superb design, engineering, manufacturing, and quality control abilities

* Marketing that convinces customers of the benefits of quality and conveys the superiority of the product line

* Ability always to improve quality faster and more economically than the competition

Market - Captures market segments that require, appreciate, and are willing to pay for top quality

Support Systems

Directing Attitudes - Quality circles, celebrations of design awards, tales of product outperforming its rivals, engineer-bosses

Directing Attention - Information systems that monitor the level, costs, and benefits of quality: customer surveys, test data, benchmarking; constant scouting for more reliable designs

Directing Resources - Significant commitment of resources: to design, production, and quality control projects and units: to quality enhancement teams; to benchmarking rival products; to process design

Directing Motives - Recruitment, promotion, and compensation geared to finding and keeping people who design, make, and test high-quality products

Directing Influence - Much representation of engineering and production functions in top management; a good deal of authority to those functions; close ties between design, engineering, and production departments

Directing Effort - Routines, rules, and programs for product design, testing, and quality control

Exemplars - Komatsu, Caterpillar Tractor, Honda, Toyota

Centripetal Forces from the Strategy Literature

Much of the recent strategy literature contains advice that might actually destroy configuration. Its recommendations constitute "centripetal forces" that must be guarded against. In this light, here are some hints for staying configured:

* Question fads. Change should not be based on what is au courant but on a firm's theme, resources, and talents, as well as what is good for its customers.

* Take care in mimicking rivals. Competitive advantage stems from thematic distinctiveness and fit. Resist destroying this by copying practices unsuited to the firm's means and market. Much benchmarking is simply irrelevant.

* Grow cautiously. Beware of growth that pulls the firm into unknown areas that do not take advantage of existing means and resources.

* Outsource strategically. Resist farming out operations that would help a firm develop its distinctive skills; outsource peripheral tasks instead.

* Be wary of acquisitions. These can dilute talent and create "cultural" disharmonies that destroy configuration.

* Be wary of manufacturing internationally. This is especially true if globalizing breaks up a winning team, creates disharmonies, or retards learning in a key area.

* Down with downsizing? Cost cutting and reengineering have their place, but only when a firm is so configured that it can differentiate essential from marginal activities and personnel. Balance the benefits of downsizing with the costs of destroying morale and dismantling cohesive teams.

Figure 3

Symptoms of Excessive Configuration

* Too much attention to a single narrow goal, such as efficiency or productivity, and neglect of too much else.

* Overly simple strategies that rely on too few competitive tactics, activities, or talents.

* Failure to reexamine assumptions and methods.

* A shrinking target market.

* Too much prestige or power residing in one executive, team, or department.

* Too many resources going to too few tasks or departments.

* Myopic information systems that miss key trends.

* Rigid criteria for hiring, promotion, and rewards that lead to too much homogeneity of thought and talent.

* Intolerance toward those with different ideas.

* Little discussion or reflection about major decisions.

* Processes and procedures that are sacrosanct.

* People, policies, and systems that reinforce each other so much, meaningful change is impossible.

Figure 4

Symptoms of Poor Configurations

Weak Core

* Mission: General confusion about priorities; ad hoc strategy shifts that follow fads or trendy growth opportunities.

* Means: Loss of leadership position because of failure to invest in core skills, technologies, processes, or infrastructure; lack of complementarities among elements of strategy; new product busts; rush to markets with inadequate skills, flawed technology, poor quality, or inappropriate distribution or logistics; loss of key executives to more crisply focused competitors.

* Market: Too many products or too many customers; chasing growth for growth's sake; no competitive advantage from serving a specific customer need.

Flawed Support Systems

* Directing Attitudes: No visible heroes that reflect core priorities; too few celebrations of small successes; poor communication with employees about goals, strengths, and challenges.

* Directing Attention: Misdirected, opaque, or unwieldy information systems; overemphasis on financial reporting for outside parties and underemphasis on internal needs regarding market data and trends, customer profitability, product profitability, productivity, etc.; inability of executives to use informal channels to transmit or receive data.

* Directing Resources: Excessive rigidity in plans and budgets causes frustration and missed opportunities; losses from excessive risk-taking because of inadequate control; resources directed more by power and politics than by strategic need.

* Directing Motives: High turnover of new hires as recruiting targets are set by Personnel Department rather than operating managers; frustration because promotions are determined by seniority, not excellence; irrelevant training programs; compensation that is determined by tradition rather than market, or that fails to reward all who contribute to performance.

* Directing Influence: Rigid hierarchies when a permeable organization structure is appropriate; too many teams or project groups when functional expertise is required; a failure to integrate functional areas; power that is too centralized.

* Directing Effort: Excessive programming of activity that quells initiative and robs employees of discretion; fuzzy operating procedures where precision is demanded.

Appendix

The Configuration Audit

Because there are no generic configurations, there are no generic audits. The high-tech startup will not look like Hewlett-Packard; Wal-Mart will not look like Kmart or Target - and certainly not like Saks Fifth Avenue. But a reasonably generic process can be used to determine whether there are problems with your company's configuration. The audit below is merely a suggestive set of opening queries. They probe into the genesis, mission, means, and market of your configuration and examine whether managers truly understand and agree on these things. Later questions probe into the adequacy of structure and support systems. All participants should be reminded, first, that diverse opinions will come from this process and, second, that no organization can do everything it knows and wants to do.

The best way to determine whether the configuration is appropriate is to talk to the people who are doing the work. The nature of organizations usually shields the most senior executives from the true picture, even when the following recognizable symptoms of disarray are known to others.

CORE

Mission

Convene a representative group, or series of groups, of managers and employees. Ask them to write briefly their understanding of the firm's mission without referring to any written mission statement. To allay any fears, assure respondents that replies will remain anonymous.

A brief review of the statements will determine the congruence of managers' beliefs with the company's published mission. If congruence exists, congratulations! If not, use the occasion to discuss areas of disagreement.

If consensus exists, ask the following questions: Is the mission so vague as to have few action implications? Is it so narrow as to prevent learning or adaptation? Is the mission still relevant in today's market? Or does the mission change so often as to have little credibility?

Market

Next, ask managers to write, in order of importance, the three most important markets for the company's products and services. Again, review the replies for congruence and use the review as a springboard to discuss the following questions: Who are the major actual and targeted customers? Are these distinct groups? Is the intended market so vague as to offer little guidance in formulating strategy? Is it so narrow as to limit growth or enhance vulnerability?

Means

* Discuss the means that are (a) essential to ensure viability in the market, and (b) those at which the company excels.

* Discuss the complementarities among the means - among the different tactics, practices, and policies in the areas of production, marketing, R&D, and so on. (The diagrammatic examples of Porter [1996] can be used as guides for mapping the complementarities.)

* Discuss how good the firm is at developing its means - at continual learning.

* Discuss how salient the means are to most employees.

Genesis

Now talk about the following issues with the group: Where does the company's configuration come from? What causes it to cohere? What is at its core - a skill, a leader, a market niche, a special technology, a mode of administration, etc.? What is missing? What are the most important sources or areas of vagueness, disagreement, or conflict.

Support Systems

Once a better understanding of the core mission has developed means and market, ask the participants to assess the adequacy of the support systems in reinforcing and sharpening the core. You could start by asking managers to position their answers on a five-point continuum ranging from "very good support" to "no support," and then to explain their rating. In discussing the results, give equal attention to areas of agreement and disagreement as well as to areas of good and poor support. Both will generate ideas for corrective action.

Here are some questions to start with:

* Do we recognize and celebrate the things that are important to support our core mission, market, and means?

* Are our formal and informal information systems appropriate? Why?

* Is our planning and budgeting system appropriate? How does it help or hurt configuration?

* Are our hiring, compensation, and promotion policies appropriate to our configuration?

* Is there a proper alignment between our performance measurements and rewards?

* Do our structure and power distribution support the core? Where are some problems and opportunities for improvement?

* Do our administrative practices support the core? If so, how?

The discussions this audit provokes should offer insights not only about the degree of configuration that exists, but also about how your configuration can be improved.

When a company has - or cares to develop - a special relationship with its customers and suppliers, these parties should be invited to participate in some of the audit discussions. We have found in our own sessions that on every occasion, these outside constituencies uncovered both surprising and useful insights.

Danny Miller is a research professor at l'Ecole des Hautes Etudes Commerciales, Montreal, Quebec, Canada, and at Columbia Business School in New York. John O. Whitney is a professor of business at Columbia Business School. The authors wish to thank Nida Backaitis, Martin Carver, Sheryl Conley, Bob Lear, Isabelle LeBreton, John O'Shaughnessy, Hal Parmelee, Dean Phypers, Rob Rodin, and Jamal Shamsie for their useful suggestions.

Gale Document Number:A55083925