Corporate Spheres of Influence

Johnson & Johnson, a company that is almost synonymous with baby care products, doesn’t have its own brand of diapers for babies. Procter &Gamble Co., known for its soaps and shampoos, doesn’t offer a major baby shampoo. These companies appear to be missing obvious ways to leverage their manufacturing, branding and other core competencies through extensions into synergistic areas. What could they be thinking?

These gaps suggest that there may be a deeper logic to building strong portfolios than simply leveraging competencies or assembling related businesses. It appears that Procter & Gamble (P&G) and Johnson & Johnson (J&J) may have established a standoff — similar to the nuclear age concept of “mutually assured destruction” — in which they implicitly agree to stay out of certain of each other’s markets to avoid direct confrontation and to devote their energies to battles on other fronts. P&G can devote more attention to confronting Unilever and Kimberly-Clark. J&J can concentrate on more profitable battles over medical equipment and hospital supplies rather than fight in consumer products.

While these moves may not make sense from the logic of leveraging the competencies of the organization, they may reveal a deeper strategic logic for designing portfolios and establishing a balance of power in an industry. For P&G and J&J, that strategic logic is, in short, that each has tacitly established its “sphere of influence” on different aisles of the supermarket, secured that sphere from attack from the other, and expanded its sphere in directions that do not conflict with the other’s ambitions, so they can divert their resources against other rivals.

The implicit division of the diaper and shampoo markets as well as the standoff between P&G and J&J highlight a central strategic concern of any organization: For a company’s portfolio of businesses and geographic market positions, what overall logic can be used to stake out and defend a favorable position within its industry or industries? Many companies have tried, with only partial success, to answer this by developing a financial logic for drawing together a portfolio of businesses in a conglomerate model in which every business is expected to contribute positively to the company’s overall financial performance, and by extending this logic into a strategic framework.

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References

1. H.J. Morgenthau, “Politics Among Nations: The Struggle for Power and Peace” (New York: McGraw-Hill, 1985); Z. Brzezinski, “The Grand Chessboard: American Primacy and Its Geostrategic Imperatives” (Basic Books, 1997).

2. H. Ma and D.B. Jemison, “Effects of Spheres of Influence and Firm Resources and Capabilities on the Intensity of Rivalry in Multiple Market Competition,” unpublished working paper, Bryant College, Smith-field, Rhode Island, 1994; R.A. D’Aveni, “Strategic Supremacy: How Industry Leaders Create Growth, Wealth and Power Through Spheres of Influence” (New York: Free Press, 2001); R.G. McGrath, M.J. Chen and I.C. MacMillan, “Multimarket Maneuvering in Uncertain Spheres of Influence: Resource Diversion Strategies,” Academy of Management Review 23, no. 4 (1998): 724–740; R.A. D’Aveni, “Mapping and Managing Competitive Pressure Systems,” MIT Sloan Management Review 44, no. 1 (fall 2002): 39–49; and I.C. MacMillan, A.B. Van Putten and R.G. McGrath, “Global Gamesmanship,” Harvard Business Review 81 (May 2003): 63–71.

3. R.A. D’Aveni, “The Balance of Power,” MIT Sloan Management Review 45, no. 4 (summer 2004).