Thursday, May 31, 2012

From Competition to Collaboration: Porter’s Five Forces Theory Revisited

The human race, as Charles Darwin hypothesized, is governed by the survival of the fittest dictum. Corporations, the new icons of the progress of civilization, reflect this dictum to an even greater degree. It is not surprising, therefore, that the works by Michael Porter on Competitive Strategy which seek to advise corporations on strategies to gain competitive advantage have been runaway hits. Though over thirty years have passed since they appeared on the strategy scene, Porter’s theories continue to dictate management thought in the strategy domain. There are, however, two major inadequacies in the theoretical prescriptions that need to be addressed. Firstly, the generic strategies that are propounded by Porter are by now well understood by, and remain applicable to, all corporations. Probably, focused execution rather than strategizing per se determines relative success amongst the corporations. Secondly, in a resource constrained economic situation, emphasis on fiery competition which consumes continuous investments by all the players probably becomes self-defeating over time.

Porter’s Five Forces Theory identifies the following five forces as the determinants of the level of competition in an industry. These are: the threat of new competition, the threat of substitute products or services, the bargaining power of customers (buyers), the bargaining power of suppliers, and the intensity of competitive rivalry, all of these analyzed within the framework of an industry. Porter’s framework brims with the spirit of competition wherein each stakeholder is constantly jockeying to get the better of a relationship, strategic or tactical. In a sense, Porter’s Five Forces Theory is like Theory-X of organizational behavior, bringing out the negative nuances of corporate growth and economic development. The industry environment and technological attributes have changed so dramatically over the last ten years that the traditional, including Porter’s, view of firms and industries not talking to each other is no longer valid. There is a clear need to redefine the Porter Model to meet the new environmental needs in terms of collaboration, rather than competition.

Networked industries and firms

Today, industries and firms are more networked than ever. Firms communicating through social networking sites such as Facebook , You Tube, and Twitter on one hand and the willingness of such social networking sites (such as Facebook) developing applications for hardware (such as Apple iPad) are visible examples of networked firms collaborating to develop business jointly. A few operating systems supporting a wide variety and range of cellular phones no longer smack of monopoly domination; on the other hand, they seek to enhance business potential by enabling others’ business through their core competencies. Search engines and navigation systems as well as electronics manufacturers support a mechanical equipment industry such as automobile as never before. Use of electronics in the automobiles has improved the safety and convenience of the users. Usage of electronics also increases the luxury and comfort to the riders. The cars manufactured presently contain more than 1000 electronic components, it is said!

Along with specialization came the need for firms to diversify their market base, for example a forging manufacturer making parts for giant ships as well as small scooters. Similarly, end product manufacturers began to concentrate on only certain core competencies and leverage others’ core competencies to finish up the products. At the same time, customer needs are multiplied in terms of convergence (many needs fulfilled by one device), specialization (one device for one predominant need) and diversity (many needs and many products). These trends are making firms to develop their own networking strategies to share resources and avoid redundant strategies in the context of continuously changing customer dynamics. Whichever way the current industrial environment is viewed, competition is tempered with collaboration. A strategic theory which redefines the forces governing the industry in terms of collaboration needs to be explored.

Five forces of collaboration, a different model

In the new paradigm, the five forces of collaboration can be stated as: the opportunity of market expansion with competition, the synergy of substitute products or services, the collaborative power of customers (buyers), the collaborative power of suppliers, and the balance of collaborative and competitive rivalry, all of these analyzed within the framework of a networked industry definition. The author would like to call this model Five Forces Theory of Collaboration. The important differences of the collaborative model with the competitive model are as follows. It sees competition not as evil but as a driver of market expansion. It views new products as a bundling opportunity and as a transition to enhanced customer experience. It also views customers and suppliers as being collaborative, rather than combative, with the firm. Finally, it proposes that collaboration and competition coexist in a firm, with the balance between the two forces determining the growth energy of the industry.

In the collaborative model, industry is not narrowly defined as in the Porter’s competitive model. For example, the Porter model encourages us to define the automobile industry as narrowly as car, truck, bus and motor cycle industries on the basis that each product is not a substitute for the other. The collaborative model, on the other hand, considers all passenger serving industries as one, not only whether these are car, bus and motor cycle but also inclusive of supportive industries such as navigation, electronics, telecommunication and entertainment. Does this lead to complexity of analysis based on boundless on collaboration, moving away from the competitive model of simplicity based on focused narrowness? Probably yes, but the reality of today’s world is complexity of integrating multiple technologies to provide the needed customer satisfaction.

Five forces illustrated

The five collaborative forces are grounded in reality of contemporary and emerging competition as illustrated below.

Competition-led market expansion

New competition, in an industry scenario of well balanced players only serves to expand market. In India, entry of new automobile players helped the market exponentially grow from 500,000 cars per year in the peak Maruti-Suzuki days (late 1990s) to around 3 million cars in 2011. By the same token, entry of luxury car makers such as Benz, Audi and BMW made the Indian luxury car market to grow to 30,000 from next to nothing, in a matter of just five years. The global smartphone sales galloped to 500 million units in just a matter of ten years, again from next to nothing, based essentially on entry of several smartphone makers in a market amazingly opened up by Apple. Entry of new competitors is an unmitigated gift of market expansion to the consumers as also to the incumbent players. Even an innovator firm cannot fulfill the total market demand despite a monopoly position. In an innovative product market segment such as tablets, for example, the pioneer-leader Apple iPad would have only one-third of the 760 million tablets in 2016, according to expert forecasts.

Synergy of substitute products or services

Porter considers substitute products or services as threats to existing businesses. In matter of fact, except for a few predominantly mechanical apparatus such as telex and dot matrix printer, it is not usual to see certain basic product concepts getting completely threatened. Once the only dominant computing system, the mainframe computer got progressively supplemented by personal computer, laptop, netbook, tablet and ultrabook. Yet, all the computing devices exist in one form or the other even today, each gaining from the competencies of the other. Despite the scorching pace of growth of around 50 percent per annum, tablets in installation base could be I billion compared to 2 billion personal computers in use, even by 2016. In fact, substitute products help incumbents who are either innovators or smart followers to diversify their product-market segments. Ultrabook is an example of how computers could reinvent themselves taking design cues from the later generation tablets.

Collaborative power of customers (buyers)

When firms and industries exist for customers it is ironic that customers are considered a competitive force by Porter. In a sense of demand leading to competitive entry by other firms or consumers switching between products, brands and firms, customers do have a competitive impact. However, the predominant bond between firms and consumers ought to be one of collaboration. Consumers simply love a great product and collaborate with the firm through patronizing of successive generations of products. Firms which view consumers as an extended family through a variety of feedback and feed-forward communication mechanisms have seen the consumers provide a major collaborative force for business and technological development of firms. The release of beta versions of new software for consumers is an example of how firms now appreciate the need for consumer involvement to achieve better products for full scale commercial launch.

Collaborative power of suppliers

The notion that the end-product manufacturers are at the mercy of their suppliers is also not relevant in the contemporary scenario. Specialization in materials and component technologies has enabled the component makers lead the development of new products. Smartphone makers are increasingly setting up pre-release collaborations with application developers to develop the right ecosystem. Collaborative planning emphasizes an approach by which suppliers and firms work together to avoid over or under bidding of positions and instead seek to maximize end-product opportunities in the marketplace with right products, right pricing and right volumes.

Balance of collaborative and competitive rivalry

Porter’s model considers that the competitive rivalry in an industry increases as the fifth force with the number of firms in the industry and the intensity of the four competitive forces. On the other hand, it is also possible that a few, if not all, of the firms in an industry could collaborate even while competing in the marketplace. Sharing of production sites, sharing of marketing channels, co-branding, co-marketing, exchange of components and cross-licensing of intellectual property help firms pool resources while keeping the individual identities discrete. Such collaboration helps companies bring down costs. An equitable balance between collaboration and competition in an industry occurs as the industry evolves rapidly.

From competition to collaboration

The discussion in the blog post is not to suggest that firms should or can cease to compete, and that business development would happen only through inter-firm collaboration. On the other hand, the blog post suggests that all of corporate strategy need not be, and should not be, only comprised of a strategy of competition. Competition must exist but should be more in the nature of product, process and delivery innovation. This strategy alone delights customers and expands markets. The strategy, however, requires significant investments. The model of collaborative strategy can help firms optimize their investments by sharing resources while retaining distinct identity. Firms can derive synergy by looking for areas of collaboration with their stakeholders, be they the customers or suppliers, and their competitors, whether they are followers in an existing product line or innovators of new substitute products and services.

While the model of five collaborative forces as enunciated herein has significant validity, it is open to further study if it can be followed up with generic collaborative strategies, on the lines of generic competitive strategies. In the collaborative model, cost leadership and product differentiation or niche remain as the ultimate competitive goals and there need to be generic strategies of collaboration to reach the competitive goals. For example, product collaboration, process collaboration and marketing collaboration could be the three principal collaborative strategies which could be resorted to by competing firms to great advantage. The differentiators for each firm, despite the collaborative sharing, will be design uniqueness, operational excellence and delivery efficiency.

Posted by Dr CB Rao on May 31, 2012

2 comments:

willson said...

The craze for luxury cars in India is continuously increasing.Aston Martin, Ferrari, Maserati, Koenigsegg, Porsche are all here in India now, selling their multi crore cars. These supercars look beautiful and are superfast, but are more of a showpiece than practical vehicles for Indian roads. But this thing is not sufficient reason which can reduce the enthusiasm of people to buy these cars.Mercedes Benz is getting huge success in India.

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