suite

The Whole Versus the Parts

The analysis we have described focuses on decomposing the firm into parts—discrete activities. In the final step of exploring options, however, the management team must work vigilantly to build a vision of the whole. After all, competitive advantage comes from an integrated set of choices about activities. A firm whose choices are internally inconsistent is unlikely to succeed.

We have found a landscape metaphor helpful to describe the dilemma facing managers who are searching for a favorable set of choices.³⁸ In conceptual terms, the managers of a firm operate in a high-dimensional space of decisions. Each point in this space represents a different set of choices, a different configuration of activities.

The elevation corresponding to each point is the added value generated by that configuration. The goal of the senior management team is to guide its firm to a high point on this landscape—a set of decisions that, together, generate a great deal of added value.

The search for high ground is made difficult by the fact that the different choices interact with one another: production decisions affect marketing choices, distribution choices need to fit with operations decisions, compensation choices influence a whole range of activities, and so forth.

Each interaction implies that a choice made on one dimension affects the cost and willingness-to-pay impact of another choice. Graphically, the interactions make the surface of the landscape rugged with lots of local peaks.

The ruggedness of the landscape has a couple of vital implications. First, it suggests that incremental analysis and incremental change are unlikely to lead a firm to a new, fundamentally higher position. Rather, a firm must usually consider changing many of its activities in unison in order to attain a higher peak. To improve its long-run prospects, a firm may have to step down and tread through a valley.

(Consider the wrenching and far-reaching changes required to turn around IBM during the mid-1990s.) Second, the ruggedness implies that there is often more than one internally consistent way to do business within an industry.

There is certainly only a limited number of viable positions, but when the interactions among choices are rich, there is usually more than one high peak. In the retail brokerage business, for instance, both Merrill Lynch and Edward Jones succeed, but they do so in very different ways.

Merrill Lynch operates large offices in major cities, provides access to a full range of securities, advertises nationally, offers in-house investment vehicles, and serves corporate clients. Edward Jones operates thousands of one-broker offices in rural and suburban areas, handles only conservative securities, markets by means of door-to-door sales calls, produces none of its own investment vehicles, and focuses almost exclusively on individual investors.³⁹ The two firms occupy quite different peaks on the landscape of the financial services industry.