Sunday, March 24, 2013

A New Theory of Generic Collaborative Strategy: Adding Value to Porter’s Generic Competitive Strategies

Michael Porter has been the Darwinian advocate of strategy. He proposed in the 1980s with great insight, and to considerable success, that companies (much like human beings) compete to succeed and in the big aggressive world of business competition it is the game of the survival of the fittest. As a strategy guru, he prescribed three competitive strategies of cost leadership, differentiation and niche for companies to compete and derive competitive advantage in an industry. While Porter’s rather easy-to-follow strategic prescription is universally available, companies are not universally successful even if they follow Porter’s competitive strategies. Execution is often cited as the reason for this; two firms following the same broad generic strategy could have vastly different execution profiles.

This blog post hypothesizes that the relative performance success or superior competitive advantage is not merely related to execution but is even more importantly to collaboration. If generic competitive strategy drives cost or differentiation advantage or a mix thereof, generic collaborative strategy drives value up for firms, and even the industry as a whole. Generic competitive strategy is an extremely firm-centric approach which exhorts a firm to maximize its performance by maximizing its competitive power vis-à-vis all the power of its industry stakeholders (suppliers, customers, new entrants, substitute products and industry players). Generic collaborative strategy, on the other hand, is a refreshingly industry-oriented approach which advises a firm to maximize its performance by optimizing its collaborative network not only within its industry but also across a broad range of industries. While the need for a firm to be competitive will never go away, the need to be competitive by optimizing its network is now greater than ever before. 
Lifecycle drives collaboration
The generic competitive strategy was set in an industry environment of three decades ago which had three theoretical premises, which are by now outdated. Firstly, it encouraged monopoly power and scale economics as the drivers of competitive efficiency. This is the reason for the competitive strategy theory viewing the original equipment manufacturer (OEM) and vendor relations in terms of conflicting power play rather than one of mutual dependence. Secondly, it considered new product and new entrants as being industry antagonist, rather than as consumer protagonist. This is the reason for Porter’s competitive strategy viewing substitute products and new entrants as threats to industrial stability rather than as enablers for market expansion. Thirdly, it considers industry evolution from monopoly state to fragmented state as a phenomenon to be controlled by powerful incumbent firms rather than as one of new firms adding to consumer choice as much as to industry competition. In sum, Porter’s generic competitive strategy tends to defend status quo.
The generic collaborative strategy derives its relevance in a contemporary industry environment that has three theoretical premises, which are positively futuristic. Firstly, it recognizes that monopolies are a thing of the past even though scale continues to offer economies. This is the reason for the collaborative strategy theory viewing the OEM and vendor relations in terms of mutual dependence rather than one of conflicting power play. Secondly, it considers new products and new entrants as market expansive for the industry, even if share erosive for firms. This is the reason for the collaborative strategy theory accepting timed and coordinated launch of new products as a structural reality of market expansion rather than as an industry destabilizing factor. Thirdly, the generic collaborative strategy views technology as a more widely available input leading to early formation of oligopoly. This is the reason for the collaborative strategy theory to continuously seek re-segmentation and re-structuring of industry to counter fragmentation.
The generic collaborative strategy postulates five collaborative value drivers. These five collaborative value drivers are the values of co-integration, co-development, co-fulfillment, co-expansion and co-saturation. These value drivers are achieved collaboratively with suppliers, innovators, customers, new entrants and also all the players within the industry. By leveraging the collaborative value drivers, a firm can ensure competitive operations, optimized investments, innovative products and processes, enhanced consumer choice and larger market. As opposed to competitive strategy which seeks to increase the value of the firm on a relative basis at the cost of related as well as competing stakeholders, collaborative strategy drives up the value of the firm and its stakeholders simultaneously.
In an ideal scenario, a firm can achieve maximum competitive efficiency with respect to its products if all of its components and systems are manufactured in-house. A fully integrated development and manufacturing value chain operating at the highest scale possible is the dream of any monopoly player. The automobile industry in the mechanical age and the electronics industry in the digital age have demonstrated how outsourcing can help optimize investments. In the former case, an unconnected OEM and component industrial structure demonstrated how maximization of respective competitive positions, caused essentially by non-sharing of respective positions on volumes and costs, could dilute mutual efficiencies.  In the latter case, a complete farming out of all critical components and systems demonstrated how maximization of dependence on external manufacture, caused essentially by the belief that integration of software and hardware is more important than integration of components, could diffuse a firm’s core competency. The golden mean between a firm being troublingly reclusive and dangerously open is provided by the concept of co-integration. Co-integration is based on the concept that limited co-exclusive relationships between OEMs and suppliers provide for scale and scope so that they are dovetailed to collaborate rather than compete.
The concept of co-development is that technologies of components and systems will develop at an exponential pace, making specialization the forte of outsourcing while a well-integrated OEM product provides the scale economics for all value chain players. The current paradigm of technological development is one of fits and starts of technological flourishes, many of them uncoordinated. Probably, the initiative for ultra notebook is one of the few coordinated strategic technological developments, strangely driven by the chip manufacturer to withstand the competition from tablet computers. Co-development, however, needs to be a more widespread initiative.  If computer makers were to take the challenge of making tablets thinner than smart phones it would require coordinated development amongst all the component makers of a notebook maker, to develop a breakthrough generation of new components,  from unbreakable and unbendable screens and ultrathin imaging components to custom built super chips and wafer-thin battery packs. Similarly, operating system developments, instead of going through continuous improvements every six months, must aim at breakthrough changes to achieve leading edge connectivity and computing power.  
The traditional concept is that companies develop products based on market research and customers accept or reject them depending on how they are perceived and utilized. Steve Jobs overturned the established practice and demonstrated that brilliantly designed and manufactured Apple products create new needs or fulfill existing needs better. In both cases, it is the singular mind of the lone firm that imagines new technologies and new products. The concept of co-fulfillment is that a cluster of all the firms in the industry not only work together but also individually and collectively work with the consumers to identify the current and future needs. This collaborative process generates a far more intensive and far more effective understanding, and hence far more effective fulfillment of consumer needs. This requires an enlightened and non-egoistic approach by all the stakeholders to analyze and question themselves at the hands of consumers. Even the greatest innovator Apple has held on too long to its pet technological positions and refused to recognize the need for co-fulfillment with consumers as a result of which the company lost some of its momentum.
Porter’s theory advocates that the force of substitute products is a key competitive force rendering existing products obsolete and even modifying industry structure. Co-development as outlined above enables firms and component makers to proactively identify unfulfilled as well as emerging needs. New products that emerge out of a different way of fulfilling the need is a collaborative and proactive way of handling product transition that is superior to the practice fighting an inevitable change. The dated prescriptions like BCG grid institutionalize past technologies. The rate of technological change is so rapid and the changing consumer preferences are so decisive that preserving the past oftentimes distracts from shaping a future. The watch industry, the imaging industry, the printing industry and scores of several other industries are examples. Just to detail one example, the change from mechanical to quartz to analogue to digital has been an inexorable movement in watch movement technologies. The watchmakers who partnered the change in a timely manner progressed while those who refused to see the writing on the wall (or, on the dial?) had serious setbacks.
Sunrise industries evoke interest but rarely attract big ticket investments by incumbent firms who are in fact best positioned to take those little risks. Paradoxically, smaller startups take larger risks to develop sunrise technologies but when these risks are rewarded larger firms rush into the space with acquisitions of such startups. Growth industries and growth markets evoke even greater rush for firms, big and small alike. Porter’s theory advocates that such excessive competition increases competitive intensity in an industry and drives down industry profits. Firms must, in Porter’s strategic framework,   adopt competitive strategies that edge out smaller firms and dominate the available market. The generic collaborative strategy, on the other hand, welcomes newer and additional competition as it only expands markets, often creating new segments. Samsung’s strategy of introducing “phablets” is as revolutionary contributor to market expansion as Apple’s first smart phones. Co-saturation is the concept that incumbent firms must view entry of new players as an opportunity to co-saturate the market and expand as well as diversify product range. Market share in such co-saturated markets is less important than expanding volumes for every player. 
Collaborate to compete
As product lifecycles become shorter and investments to retool become larger, a generic strategy of only competing to vanquish others is a less relevant option than collaborating and competing.  Treating all the stakeholders in the industry, be it suppliers, customers, innovators or new entrants, as helpful elements in expanding and diversifying product-market scope works to the benefit of the firm. Porter’s generic competitive strategy considers industry competition as a win-lose game where the fittest only survive whereas this blog post’s generic collaborative strategy considers industry collaboration as a win-win game where everyone elevates the game and serves the consumers even better with more products and services that are more fulfilling than ever.
Posted by Dr CB Rao on March 23, 2013

1 comment:

Unknown said...

It’s really informative post. I like the way you describe this. Thanks for sharing. . .
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