Johnson & Johnson, a company that is almost synonymous with baby care products, doesnt have

its own brand of diapers for babies. Procter &Gamble Co., known for its soaps and shampoos,
doesnt 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 others 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 others 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 companys 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 companys overall financial performance, and by extending this logic
into a strategic framework. Recognizing that these financial models do not capture the full
opportunities for value creation, many other companies have also looked for technological,
marketing and operational synergies by leveraging core competencies in R&D and customer
knowledge, consolidating back-office operations or information systems, and building similar
manufacturing facilities and processes.
Because these synergies are difficult to achieve and complex businesses can be confusing to
investors and management, synergy approaches often fail. Companies such as America Online
Inc. and Time Warner Inc. have sought to draw together related businesses, but what seemed
related turned out to have few synergies due to conflicting management cultures, differing
strategic interests of the business units and difficulties in managing the resulting behemoth.
Because of such challenges, other companies have pursued a logic characterized by tight focus,
leveraging a small set of competencies in a narrowly focused set of businesses to build
economies of scale and market power. Anything that doesnt reinforce this focus is jettisoned as
excess baggage.
But all these approaches to portfolio planning either ignore competitors or, at best, treat them
lightly. A stick-to-your-knitting approach or a synergy-seeking strategy provides little insight
into how a companys competitor selection and geographic and product positioning can allow it
to defend against potential attacks, facilitate growth and influence a rivals portfolio.
This article examines a systematic approach to developing and managing corporate portfolios
that integrates and moves beyond these traditional models (see About the Research). While
taking into consideration economies of scale, synergies and market power, this approach is based
upon the strategic intent and competitive impact of selecting a set of market positions. How do
the different parts of the business support one another in an effort to defend against entry by
competitors? How does the portfolio build a platform for growth, while preventing rivals from
capturing the high ground in an industry? How can a companys portfolio be used to mold the
portfolios of rivals to create a more favorable industry structure?
About the Research
The conclusions discussed in this paper are based on a series of more than 30 case studies of
industry leaders done since the publication of Strategic Supremacy: How Industry Leaders
Create Growth, Wealth and Power through Spheres of Influence by Richard DAveni (The Free
Press, 2001). American, Japanese and European companies in a wide variety of industries were
studied, including Samsung (Electronics), Sony, France Telecom and EADS (Airbuss parent).
Data were gathered from publicly available sources as well as from off-the-record interviews
with industry experts and senior managers of the studied companies as well as those of their
rivals.
The cases were analyzed by creating story boards a series of visual depictions of each firms
sphere and those of its major rivals at different points in time to detect what McGill
University Prof. Henry Mintzberg would call emergent strategies. Then, looking for evidence
of what Tuck School of Business Prof. James Brian Quinn calls logical incrementalism, the
competitive logic of each portfolio was examined, including its implicit competitor selection and
explicit impact on rivals and their positions. Subsequent competitive interactions (entries, exits
and aggressive moves in the markets of rivals) were then examined to determine their
consistency with the imputed logic.
Finally, the story boards and their imputed logic were iterated in discussions with interviewees
and research team members using a Delphi technique until consensus was reached.
See less

What Is a Sphere of Influence?

The sphere of influence is a concept borrowed from geopolitics1 and the subject of recent
research in the management literature.2 It offers a framework for examining the strategic intent
of the companys portfolio and its implications for competitive strategy. A sphere is a product
and geographic portfolio on steroids a portfolio with influence over where and how
competitors fight within their competitive space.
Spheres of influence in geopolitics have been used for centuries to manage relationships between
countries. In business, a well-constructed sphere of influence can maneuver competitors into a
corner, reduce price wars through the business equivalent of mutually assured destruction, and
shape the industry to the players mutual advantage.
Like nations, companies build spheres of influence that protect their cores, project their power
outward to weaken rivals and prepare the way for future moves. To be effective, the sphere must
contain a secure power base a core market that can be used as a platform. And it must
invest in other markets that are used for defense of the core and for migration or growth. Viewed
in that way, elements of a portfolio exist not just to contribute financial return to the corporation.
In fact, some parts of a portfolio may create minimal or even negative return, but they may
preserve value elsewhere in the portfolio, just as Poland and Cuba, while a drain on the Soviet
economy, served, respectively, as a buffer against Western Europe and as a forward position
against the United States. Microsoft Corp., for example, has maintained its positions in less
profitable businesses such as Internet services (MSN) and television network broadcasting
(MSNBC), not as a major source of revenue but because of their strategic implications in helping
to defend against attacks and offering outposts for moving in new strategic directions.
Thinking in terms of building a sphere of influence forces managers to draw together corporate-
and business-level strategic analyses that are often treated separately. The corporate-level
concern about where to fight and the business-level concern about with whom and how to
fight to win are brought together into a coherent view in which where to fight is how and with
whom you fight.
While portfolio planning is often done only at the corporate level in large companies, the sphere
of influence concept can be applied at multiple levels of an organization by looking at single
business units or at smaller geographic areas. Small companies can also build localized spheres
against other small concerns or become allies or satellites in the spheres of larger companies. For
example, open-source pioneers using Linux have made progress against Microsoft because of
support from IBM, Intel and other companies that would like to see Microsofts influence over
the industry reduced.
Not every company establishes a stable and secure sphere of influence, and not every company
needs one. A few fast-moving companies can constantly migrate to new ground as their core
products and customers are lost to more powerful rivals. Niche players can often survive without
a sphere of influence in the short run, but often need to figure out an alliance structure that will
counterbalance those players with strong spheres of influence. For any company that wants to
lead its industry, however, a well-constructed sphere of influence is essential.

Parts of the Sphere

Designing a sphere requires assigning a role or strategic intent to each part of the portfolio. (See
Establish Strategic Intent for Parts of Your Sphere.) In addition to core geographic and product
markets, there are vital interests, buffer zones, pivotal zones and forward positions, each serving
a specific strategic intent. There also are potentially important power vacuums that may lie just
outside a sphere of influence. An examination of Microsofts sphere of influence illustrates each
of these aspects. (See Microsofts Evolving Sphere of Influence.)

ESTABLISH STRATEGIC INTENT FOR PARTS OF YOUR SPHERE

 View Exhibit

MICROSOFT'S EVOLVING SPHERE OF INFLUENCE

View Exhibit

CORE:

The core of a sphere is the product or geographic market that is the basis of the companys power
and generates the vast majority of its revenues and profits. It is, of course, where the company
focuses on creating its critical core competencies, but having a core competence is not enough to
create a sphere of influence. It requires dominance over and value leadership in a core market.
Without that, a companys sphere is weakened or ineffective. In the 1980s, Microsofts MS-DOS
formed its core. The company gradually expanded its core to include the Windows operating
system, the Office suite of applications and the Internet Explorer Web browser. To keep control
over its sphere, a corporation must put down any assault on its core, just as Microsoft has tried
aggressively to counter the Linux operating system.

VITAL INTERESTS:

These are geographic or product markets that provide the core with critical, often
complementary, strengths that create economies of scope and integration, as well as support or
leverage core initiatives and competencies. They might be complementary products or businesses
that provide resources such as know-how, raw materials or skilled labor. For Microsoft, its
network (NT) and portable device (CE) operating systems are vital interests that leverage,
support or complement its core desk-top operating system and graphical user interface. They are
vital to Microsofts continued dominance of operating systems for microcomputers and other
such devices.

BUFFER ZONES:
These defensive positions provide insulation against attack by another player that might enter the
core. They include blocking brands and products used to create barriers to entry. Buffer zones
are expendable (unlike vital interests), because they make up a small percentage of a companys
revenues. If battles must be fought and territory lost, its better done in the buffer zone than in
the core. Buffer zones protect against expansion by known and unforeseen rivals that could
leverage their position in a nearby geographic market or related product markets in order to enter
your core markets. In the 1980s and 1990s, Microsoft moved into PC applications such as the
Office suite and created a buffer against incursions from companies with killer applications
that could have bundled them into operating systems to challenge Microsofts core. These
applications eventually became part of its core, and it is now building buffer zones in anti-virus,
firewall and anti-spam solutions that are the killer applications du jour.
Buffer zones can also be fighting brands designed to minimize and localize the impact of a
price-based entrant. For example, when the Japanese company Kao Corp. entered the diskette
market, 3M launched Highland, a flanking brand of low-priced diskettes. Price-sensitive 3M
customers, who likely would have switched to Kaos product, switched to Highland instead,
preserving a good deal of revenue for the parent company. Also, by not overreacting and cutting
its core product prices across the board, 3M retained its sales to non-price-sensitive customers at
the higher price point. With these moves, 3M made sure the battle would be joined at the low end
of the market, effectively reducing Kaos capability and motivation to enter the less price-
sensitive part of the market.

PIVOTAL ZONES:

These are market areas in which the future balance of power may reside. Taking a position in a
pivotal zone is making a bet on the future, although not necessarily with a specific rival in mind.
Microsofts code-named Longhorn operating system and graphical user interface represents such
a position. It is based on a still-secret new concept that moves away from the desktop analogy
that was originally created by Apple Computer Inc. for managing files. Longhorn aims to
incorporate greater security features as well as powerful integrated search functions locally and
across the Internet, creating a faster and more seamless user interface. The goal is to create the
operating system that will replace DOS and extinguish the threat from Linux by superseding it. If
it works, Longhorn will someday become Microsofts next core.

FORWARD POSITIONS:

These are offensive, front-line positions typically located near the vital interests or core of a
specific identifiable competitor. They can be used to weaken the core of a rival, but they can also
be used to create stability when each rival maintains a forward position in the others core to
build mutually assured deterrence. The forward position can also be used to harass, distract or
divert a rivals resources or attention. Microsoft holds a wide range of forward positions to
counter large rivals such as AOL, Sony and Palm, or Hewlett-Packard/Compaq in personal
digital assistants (PDAs). All are building their own operating systems or graphical user
interfaces to challenge Microsofts core, so Microsoft is attacking their core markets using MSN,
gaming systems (Xbox) and handheld devices. It is even investing in smart consumer products
such as watches. Microsoft is not likely to displace these players as leaders in their industries, but
it can deter or weaken these companies by undermining the profitability of their cores.

POWER VACUUMS:

Finally, while they are not actually part of a companys portfolio, there are parts of the
competitive space that might not be controlled by any major player. These power vacuums are
not yet pivotal zones, but it is important to be aware of and monitor them. For example, Chinas
software market is not yet pivotal for Microsoft, because little revenue can be generated from a
market where piracy is so prevalent and Chinese written characters present costly programming
problems. Depending upon how Chinese government policy evolves on issues of piracy,
intellectual property rights, and software and technology standards, however, the competitive
landscape could change rapidly. China does have a number of small software development
companies and if one were allowed, for example, to become a national monopolist based on
building and selling a rival operating system using modified Microsoft code without paying
royalties, it could have tremendous global impact, given the potential size of the emerging
Chinese market. Power vacuums are often places where small upstarts arise and become stronger
(the Japanese automakers and consumer electronics companies are examples), so attention needs
to be paid to them, even if the established company deems them too unimportant to take action.
Different parts of the portfolio can serve more than one function. For example, a forward
position into another competitors core can also serve as a defensive buffer zone against attack
from that same competitor. MSN serves as both a vital interest (helping to make Microsofts core
browser better connected to Internet content) and as a buffer zone against AOL. The distinctions
between different parts of the sphere are often a matter of degree, so there is naturally some
blurriness, just as boundaries in geography are often much less clear than the lines on a map.
Defining the role for each part of a companys portfolio can force it to clarify its strategy, assess
the logic of its mergers and acquisitions, and help defend against competitive threats. (See
Mapping and Assessing Your Sphere of Influence.) Assessing the parts of the sphere can also
focus the attention of a company that has leveraged a competency into a number of businesses,
and, in the process, accumulated many new competitors that expose the business to numerous
threats.
Mapping and Assessing Your Sphere of Influence
The sphere of influence analysis can be done at many different levels: for large concerns at the
corporate level, for a small company fighting to protect its niche, for a global product division or
for a country-based subsidiary within a multinational corporation. Small players that do not have
their own spheres can analyze those of larger rivals to create strategies for coexisting with them
and ultimately building their own spheres of influence.
See more

Four Spheres of Influence

The parts of the sphere come together to provide a coherent strategic positioning of the company
and competitive maneuvering against rivals. Among the threats to Microsoft are a revolution by
Linux in operating systems and the rise of smart consumer electronics and handheld devices.
Microsofts strong sphere of influence can help it respond to these attacks by buffering the
moves of rivals, creating its own incursions into competitors markets, and by helping to
strengthen, evolve or even migrate its core. Similarly, Anheuser-Busch, Nokia and Harley-
Davidson each have created spheres of influence in very different industries against very
different domestic or global competitors. Each has staked out and defended the high ground
the best place to be in the market and used its sphere in competitive maneuvering to dominate
its rivals. (See Four Spheres of Influence.)

FOUR SPHERES OF INFLUENCE

View Exhibit

ANHEUSER-BUSCH COS. INC.

The core of Anheuser-Busch initially was established in the premium beer segment, where its
Budweiser brand is the best-selling beer. As the premium beer segment lost share to light beers,
imports and other new entrants, Anheuser-Busch continued to expand its core and extend its
sphere of influence. In the 1980s and 1990s, it moved Bud Light and other brands into its core.
By 1997, Anheuser-Busch became the leading maker of light beer, and light beer constituted a
45% share of all its brands.
Anheuser-Busch established vital interests with its Michelob and Redhook Ale superpremium
brands to complement its core products with higher-end, higher-margin products. As import
rivals such as Heineken, Labatt and others gained ground, Anheuser-Busch created buffer zones
by purchasing an equity stake in Mexicos Grupo Modelo, maker of Corona, the best-selling
imported beer in the United States. It also countered attacks at the low end, with budget beers
such as Busch. Imports and budget beers are too small or too unprofitable to be vital interests,
but they are necessary to prevent brewers positioned in those markets from getting large enough
to move into the premium and superpremium markets.
Anheuser-Busch also moved into pivotal zones that could be potentially important to its future
with its line of malt liquors and ODouls nonalcoholic beer. Finally, the company countered the
threat of nonbeer malternatives such as Smirnoff Ice through forward positions using its
Bacardi Silver, Docs Hard Lemon and Tequiza brands. These moves have helped to sustain, and
even increase, its share of its core U.S. market, which reached 49% in 2002.
Nokia

Finlands Nokia has built the core of its sphere of influence around wireless telephone handsets
on the basis of global system for mobile communication (GSM) technology, allowing it to lead
in a very competitive industry of over 100 handset manufacturers. Nokia has supported its core
through vital interests in multi-media products such as imaging (Nokia is now the world volume
leader in digital cameras), PDA features, MP3 players, messaging and Web browsing. These
businesses support and strengthen its position in the core by providing the handset features and
functionality that users desire. Nokia has established buffer zones in wireless telecom
infrastructure as well as in its investment in the Symbian Sphere 60 operating system and
network, which helps defend against attacks from competing hardware and software systems that
could be bundled or used by rivals such as Microsoft and Palm or companies employing Linux-
based systems.
Nokia also has staked out forward positions to attack Motorola and Korean rivals such as LG
Electronics and Samsung by making low-priced, entry-level phones. Also, the company is now
moving into forward positions to attack rivals in business enterprise solutions that have built
strongholds in the commercial wireless telecom market. Through Nokia Venture Partners, Nokia
has established positions in pivotal zones in areas such as WCDMA phones (the wideband
standard that is seen as the successor to GSM), an area that might become important or offer
opportunities for Nokia to migrate its core in the future. Nokias sphere allowed it to build a 35%
global market share in handsets by 2002, with sales more than double those of industry founder
Motorola.

HARLEY-DAVIDSON MOTOR CO.

While Harley-Davidsons core has long relied on heavyweight (750-cubic centimeter, or cc)
motorcycles and a rebel image, it has evolved considerably in the century since its founding.
Although Harleys core products have remained similar, it has used and extended its sphere of
influence to encompass a more mainstream customer. Harley now serves a core customer base of
middle-age males with average incomes of approximately $80,000. By 2004, it had achieved
56% market share in the 750-cc motorcycle segment.
To support its core of enthusiastic riders, the company established a set of vital interests,
including the Harley Owners Group (H.O.G.), genuine Harley-Davidson clothing and other
accessories, a financing arm that added $211 million in revenues in 2002 and a dealer network
that offers service/parts and extends the Harley experience. These vital interests not only provide
revenue to the core but also reinforce the brand image and help draw in new customers. Harley
also created the Riders Edge training program to help first-time customers develop the riding
skills to move up to its large cycles.
To thwart attacks from companies such as American Honda Motor Co., which sell smaller and
performance cycles, Harley created a buffer zone by introducing the VRSC engine for
competitive racing and by purchasing a European company, Buell Motorcycle Co. The Buell
purchase also gave Harley access to key pivotal zones for the future, with smaller-cc products
targeted toward female, younger or first-time riders, none of whom are in Harleys primary
market but all of whom could become key emerging segments. Finally, Harley established
forward geographic positions by entering into the heart of the domestic markets of Japanese
rivals such as Honda, Yamaha and Suzuki. By early 1995, Harley had captured 20% market
share in Japan. The acquisition of Buell also served as a forward position that helped Harley
attack Hondas market leadership in Europe and in smaller motorcycles.
This sphere of influence has helped sustain Harleys dominance in the U.S. market, particularly
in the large motorcycle/thrill-seeker segment, with commanding margins of 27%30% as
compared with 2%8% for its rivals.

Geographic Spheres

Although the above examples have focused on spheres that are primarily related to products and
market segments, spheres of influence can also be examined through a geographic lens. While
Anheuser-Busch, Harley-Davidson and Nokia all have created geographic spheres of influence
on the basis of U.S. or European markets, the development of a geographic sphere of influence
can perhaps best be illustrated by the global success of Monterrey, Mexico, cement company
CEMEX S.A. de C.V. (See CEMEXs Globalization Moves.)

CEMEX'S GLOBALIZATION MOVES

View Exhibit
CEMEX built a global sphere of influence in four logical phases: consolidation of a core market,
protection of its cores north and south flanks, establishment of a forward position near the core
of its major rivals to create mutually assured deterrence, and movement into pivotal zones to
ensure the necessary growth for continued leadership in the marketplace of the future. In 1989,
CEMEX completed the consolidation of a stronghold in its domestic market in Mexico through
the acquisition of the No. 2 player based in central and southern Mexico. To protect its Mexican
base, it created buffer zones in the Southwestern United States and Southern California, and as
well as in Central and Northern Latin America. In the U.S. buffers, CEMEX created what it
called a firewall with foothold entries, including the acquisition of a one-million-ton plant in
Texas to reinforce its presence in the U.S. ready-mix business. To pin down two rivals that held
small positions in the Mexican market, Holderbank and Lafarge, CEMEX also used cheap
Mexican and Chinese imported cement distributed through its West Coast terminals. This kept
them distracted in the United States and diverted their resources to fighting CEMEX outside of
Mexico. And with similar moves in Latin America, CEMEX became the No. 1 player in Panama,
Costa Rica, Venezuela and Colombia, conceding Argentina and Brazil to local competitors and
Holderbank and Lafarge, as well as containing CEMEXs rivals in southern South America.
In response to rising competition from European corporations on its northern and southern
flanks, CEMEX established a forward position in Spain. Although CEMEX has not yet begun to
market products to France, Italy and Germany the homes of its major European competitors
its base in Spain gives it the capability to do so if the Europeans become too aggressive in
Mexico or in CEMEXs buffer zones. Finally, CEMEX created leading positions in emerging,
high-growth pivotal zones such as the Philippines, Indonesia and Egypt in order to grow at a rate
that would help it stay a global industry leader.
By building a coherent global sphere of influence, CEMEX went from being a minor player in
1985 to the No. 3 player in the industry on the basis of capacity by 1999, as well as the worlds
largest international cement trader with the highest margins in the industry. Its rivals have
weaker spheres than CEMEX, suffering from numerous problems that impede their profitability,
including having cores in less favorable locations, being spread too thin, lacking dominance in
their cores, unwisely selecting pivotal zones in emerging economies and failing to establish
buffers against entry from rivals in adjacent countries.
In the future, CEMEX faces many choices for strengthening its sphere of influence. Power
vacuums such as China and India, where no one company holds more than a 1% market share,
might offer opportunities to create additional pivotal zones if those governments allow entry and
the distribution infrastructure improves. CEMEX must also decide whether to press further into
Europe using its low-cost methods, state-of-the-art information and communication systems, and
its superefficient logistics systems to capture market share outside Spain. This would turn a
forward position intended to create a standoff with European competitors into an invasion that
could weaken the cores of selected rivals, perhaps softening one of them for acquisition as the
industrys global consolidation continues. CEMEXs sphere of influence demonstrates how the
creation and extension of the sphere can be used to structure an industry by dividing it
geographically. Industry dominance is then maintained by establishing equilibrium on some
fronts, while focusing competitive resources on others.

The Balance of Power

As the CEMEX example illustrates, the sphere of influence is not just a platform for a
companys offensive or defensive maneuvers. It determines how much power a company holds
in relation to rivals. A well-designed sphere orchestrates a companys grand strategy, balancing
its market power in relationship to its rivals so it can continue to maneuver freely without fear of
retaliation and indeed mold the evolution of its industry structure in ways most advantageous to
itself.3
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ABOUT THE AUTHOR

Richard A. DAveni is professor of strategic management, Tuck School of Business, Dartmouth

College, and author of Strategic Supremacy: How Industry Leaders Create Growth, Wealth and
Power Through Spheres of Influence (Free Press, 2001). Contact him at Richard.A.DAveni@
Dartmouth.edu.
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How Industry Leaders Create Growth, Wealth and Power Through Spheres of Influence (New
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Maneuvering in Uncertain Spheres of Influence: Resource Diversion Strategies, Academy of
Management Review 23, no. 4 (1998): 724740; R.A. DAveni, Mapping and Managing
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