Michael Porter had in 1980 formulated a landmark framework for generic competitive strategies. Central to Porter’s theory of competitive strategy is the framework of five competitive forces. These five forces are the bargaining power of suppliers, the bargaining power of customers, the threat of new entrants, the threat of substitute products and the competitive rivalry within the industry. These represent five important external competitive forces that influence competitive intensity in an industry. Each of the competitive forces typically has several components to it. A good understanding of the five competitive forces enables a firm to respond with appropriate generic competitive strategies. The ability of the firm to leverage or address the competitive forces leads to firm-level competitive strategies in terms of cost leadership, differentiation or niche, as postulated by Porter.
My blog, “Strategy Musings” featured several posts by me that address certain weaknesses of Porter’s framework or tweak the framework to be in step with the contemporary environment. Some of these are: “Beyond Porter’s Darwinism: The Sixth Competitive Force”, http://cbrao2008.blogspot.in/2009/08/beyond-porters-darwinism-sixth.html, Generic Competitive Strategy and Specific Competitive Advantage: Viable Paradigm or Visible Paradox?” http://cbrao2008.blogspot.in/2011/07/generic-competitive-strategy-and.html, and “From Competition to Collaboration: Porter’s Five Forces Theory Revisited”, http://cbrao2008.blogspot.in/2012/05/from-competition-to-collaboration.html. Though several other aspects of Porter’s generic competitive strategy have also been addressed by the author, the above cited posts have a direct treatment of the five forces framework. The blog posts point to the solidity and the adaptability of the five forces framework to a changing environment.
From macro to micro
Porter’s strategy is essentially aimed at a macro level understanding of the firm and its environment. However, the framework can be applied at functional and micro levels as well. At each functional level (be it manufacturing, research, supply chain or human resources, for example), there could be relevant competitive forces that can be captured in terms of the Porter framework. One of the important applications could be addressing the industry’s war for talent. In emerging markets such as India which are aiming at faster economic and industrial development, talent is a scarce factor that is hotly competed. Three macro factors dictate the talent competition. Firstly, the pace of foreign direct investments in India would only go up with global firms increasingly looking to Indian operations to provide products and services for their global needs. Secondly, there would be a renewed interest to capture the burgeoning Indian market as India promises to become the most populous country of the world, overtaking China by 2028. Thirdly, Indian companies would globalize more aggressively to achieve market access and geographic diversity.
At a micro level, the talent wars would place a premium on readily deployable talent as more companies vie for the Indian pie and more Indian companies vie for the global pie. With business models being limited and competition relatively unlimited, the availability of ready-to-use skills would be a key factor. As companies realize the challenge, there would be a greater emphasis on operational excellence and product or service level innovation to achieve differentiation. The micro level strategies of the firms are bound to accentuate the pressures on talent. With universities churning out candidates with only generic skills, availability of candidates with customized, industry specific skills becomes a key requirement for firms seeking competitive advantage. Corporate human resources leaders need to understand the five competitive forces that govern the talent scenario and influence firm level competency to attract talent. The five forces of talent are: bargaining power of candidates, bargaining power of service providers, threat of competitors, threat of new knowledge, and competitive rivalry in talent pool. These are considered below.
Bargaining power of candidates
While at a gross level there are more candidates than available jobs, when it comes to skills that are required for effective job performance highly competent candidates do wield considerable bargaining power. In India particularly, a combination of technical and commercial knowledge, operating and strategic skills, and communication and collaboration skills is hard to get in candidates, particularly as one considers middle and tiers of management. It is not surprising, therefore, that the limited talent pool of this particular combination of candidates exercises considerable bargaining power. HR leaders are required to balance the premium that is required to be paid for such talented candidates with the value that such candidates would be able to bring about in the particular organizational settings. In certain cases, this requires a broader review of organizational culture; organizations that are home to multi-faceted talent tend to have an equally potent value proposition for such multifaceted candidates. Recruiters need to focus as much on creating a star organization as on recruiting star performers. Neither should they baulk away from the costs of building high performance organizations and recruiting high performing talent.
Bargaining power of service providers
Certain skills lend themselves for outsourcing. Service providers in technical and management fields often emerge as short term and medium term alternatives to regular talent that seeks in-house employment. This alternative becomes particularly relevant for one-time burst activities and for specialized skill sets. Certain advanced geographies and certain global corporate houses tend to rely on service providers as a matter of course even as such service providers tend to be available in abundance thereon. In emerging markets and domestic companies the reliance on service providers is much less even as such service providers tend to be relatively scarce. From an organization’s viewpoint, however, it is a choice between two types of power rather than reduction of overall external power on the organization system per se. Progressive organizations may seek to strike a prudent balance between premium in-house talent (that could be both a perpetual cost and institutionalized value) and specialized external vendor support (which could offer specialized support at high cost but with a discretionary tenure). The resort to service providers as an alternative to in-house talent must be a carefully thought out strategy.
Threat of competitors
The talent paradigm adopted by competitors has a bearing on the competitive forces exerted in the talent scenario. At the very basic level the more companies seek a particular level of talent the more demanding and choosy the premium candidates become. At a more involved level, however, as companies innovate or begin to follow innovators they become competitors to incumbents and monopolists. Firms which are forced to defend their positions and firms seeking to dethrone them equally become hunting grounds for talent. In addition, during certain phases of industry evolution certain discrete skills tend to be sought after by all companies fiercely. For example, leaders with expertise in global selling and customer development became the highly sought after skills of Indian IT majors in the 1990s. For the Indian pharmaceutical industry in hot pursuit of Hatch-Waxman generic exclusivity opportunities, intellectual property expertise became highly sought after. As competitors follow successful business and operational models of industry leaders, the threat of competitors in terms of poaching talent or proactively attracting talent enhances the competitive intensity.
Threat of new knowledge
Managements are aware how technologies make laboratory and manufacturing assets obsolete. As new measuring technologies emerge metrology equipment pass through successive generations of obsolescence. As new machining technologies emerge machine tools become lighter and more flexible. Less realized, however, is the impact of new knowledge on the talent scenario. In the 1980s and 1990s, a new generation of computer savvy executives overtook more conventionally trained established manpower. In the 2000s and 2010s, a new generation of Internet savvy and highly networked executives is tending to dominate global executive scenario, overtaking standalone executives. Scientific and technology domains are, often, reinvented by new innovations. Firms which lay store on the talent trained years ago would find themselves obsolete as new knowledge shapes new business models. Construction firms which rely on conventional excavating, piling and stuttering practices may find themselves overtaken by firms which deploy mechanized excavation, ready-mix concreting and mechanized stuttering, for example.
Competitive rivalry in talent pool
Quite apart from the above four factors, firms and industries are affected by the competitive rivalry in the talent pool. By logic, firms and industries that are in an aggressive growth mode tend to experience competitive rivalry within the talent pool. If corporations are unable to clearly explain the individual talent - employee career - corporate growth paradigm with visible nexus between individual performance, career development and business results, individuals tend to jostle for visibility, enhancing rivalry. Firms and industries that have enjoyed rapid growth but are slated to slow down also are subject to competitive rivalry as talent seeks new avenues to satisfy its growth passion. Departure of successful key executives from firms encountering growth-plateau to companies desperate for reinvention leads to higher competitive rivalry in the industry in the overall as leaders seek to build their growth teams. Firms need to understand that their own internal career policies and external hiring policies could elevate the competitive rivalry in an industry and even create a talent bubble wherein competitive intensity for talent zooms far ahead of competency growth of the talent, leading to an unsustainable demand-supply balance.
Generic talent strategies
Porter suggested cost leadership, differentiation and niche as three generic strategies that are available to firms to cope with the five competitive forces that an industry faces. To manage the five competitive forces of the talent paradigm discussed herein, the author suggests three relevant generic talent strategies that firms can adopt. These are compensation leadership, career differentiation and niche. Each of these will have unique ways of talent management that offer alternative approaches for coping with the five competitive forces in the talent arena and optimizing organizational and business performance. A framework of such generic talent strategies would be the subject of a later day sequel to this blog post.
Posted by Dr CB Rao on June 16, 2013