Strategic Management: Formulation and Implementation

The Concept Of The Center Of Gravity

Jay R. Galbraith proposed an alternative framework for conceptualizing strategic diversity: the Concept of center of gravity, more implementation oriented in character. This concept is a marriage and extension of the concepts of driving force (Such as market served, products offered, or process technology) and nexus the value-added industry supply chain.

According to Galbraith, building upon the various stages of vertical integration chain, each firm can be said to have center of gravity that arises from the firmls position of success, strength, and dominant operations. The center of gravity provides strategic focus and order. Strategic changes take place through moves around and from this center of gravity. The firm can have more that one center of gravity, if separated and run as subsidiaries. Each industry has its stages.

To further explain the concept of gravity, the employed example represents a modified value-added supply chain. The chain begins with a raw material extraction stage (oil, iron ore, logs). The second stage is primary manufacturers (petrochemicals, steel, paper pulp, or aluminum ingots). The third stage fabricates commodity products from primary materials (polyethylene, cans, sheet steel, cardboard cartons, and semiconductor components). The next stage is the product producers, who add value usually through product development, patents, and proprietary products features. The nest stage is the manufacturers and marketers of consumer products. Next come to distributors and finally, the retailers, who sell to the final consumer.

The line splitting the chain into two segments divides the industry into upstream and downstream halves. The differences between the upstream and downstream stages are striking. The upstream stages add value by reducing the variety of raw materials found on the earthls surface to a few standard commodities. The purpose is to produce flexible, predictable raw materials and intermediate product from which an increasing variety of downstream products are made. The down stream stages add value through producing a variety of products to meet varying customer needs. The downstream value is added through advertising, product positioning, marketing channels, and R&D.

The reason for distinguishing between upstream and downstream companies is that the factors for success, the lessons learned by managers, and the organizations used are fundamentally different.

The upstream and downstream companies face very different business problems. The mid-set of upstream managers is geared toward standardization and efficiency. They want to standardize to maximum the number of end users and get volume to lower costs. In contrast, downstream managers try to customize and tailor output to diverse customer needs. They want to target particular sets of end users. These and other fundamental differences are listed in the table below.

In general, the upstream and downstream companies are very different entities. The differences lead to differences in organizational structure, management processes, dominant functional structure, management processes, dominant functions, succession paths, and management beliefs and values.

UpstreamDown stream
Maximize End UsersTarget End Users
Low-Cost ProducersHigh Margins
Sales Push Marketing Pull
Line-Driven OrganizationLine / Staff
Process InnovationProduct Innovation
Capital BudgetR&D / Advertising Budget
Capital Intensive People Intensive
Technological Know-How Marketing Skills
Supply & Trading/Manufacturing & Engineering Product Development / Marketing