An industry is composed of multiple players who together define the structural dynamics of the industry. Whichever way the industry is defined, narrowly or broadly, it is not untypical to have at least two competitors. Monopoly is almost non-existent in the current times while duopoly could exist in certain sunrise or technology intensive industries. In most cases, however, oligopoly typifies the industry structure in contemporary era. As the students and practitioners of management are aware, an oligopoly falls in between a monopoly, where there is only one firm in an industry, and the perfectly competitive industry, where there are several firms. The entry and growth are the most challenging in a monopolistic industry structure where competitive moves are often dictated and overwhelmed by the monopolist firm. In the perfectly competitive industry, entry is relatively easy and the competitive moves of the firms are affected more by market conditions than by each other’s moves. Growth, however, is tough in a perfectly competitive industry. In contrast, in an oligopoly which falls in between a monopoly and a perfectly competitive industry, firms tend to have several options in their pursuit of entry and growth.
Michael Porter in his work on Competitive Strategy (1980) prescribes a framework for developing and countering competitive moves. According to Porter the firm in an oligopoly often faces a dilemma. It can pursue the interests (for example, profitability) of the industry as a whole (or of some subgroup of firms), and thereby not incite competitive reaction, or it can behave in its own narrow self-interest at the risk of touching off retaliation and escalating industry competition to a battle. A firm needs to resolve the dilemma by choosing a balance between industry level cooperation (to avoid profit eroding warfare) and firm level competition (to avoid giving up potential revenues and profits). Arguing that in an oligopoly, the firms are mutually dependent in respect of competitive moves, Porter outlines a series of competitive moves that firms could typically follow. These are broadly classified by him as being cooperative or nonthreatening moves, threatening moves, and defensive moves. Porter also hypothesizes that the nature of competitive moves is influenced by the industry instability on one hand (influencing the likelihood of competitive warfare) and the commitment of the industry members to the industry (influencing the likelihood, speed, and vigor of competitive moves). Amongst the three types of competitive moves, Porter lists several competitive options under threatening moves. While Porter’s framework of competitive moves is quite useful in developing competitive strategy, this blog post suggests an entirely different and potentially more useful framework for analyzing and developing competitive moves.
Porter’s approach of listing competitive moves under different heads is centered on the firm rather than the competition. It also has the underlying theme of generic approach (which is a common theme throughout his Competitive Strategy Work) rather than an approach customized to the nature of competitors. For example, it talks of moves being offensive or defensive based on a judgment of whether the firm is able to make its moves on a preemptive basis or on a responsive basis. The framework proposed by Porter is limited to functional strategies such as Timex conceptualizing a different channel strategy than its Swiss competition could. While doing so, Porter rather simplifies the competitive paradigm by suggesting that retaliatory competitive moves could be lagging by the lead time that is required to implement them. He suggests, for example, that responding to a long lead competitive move such as a new automobile model or a new blast furnace would intrinsically carry a lag time in retaliatory response. This approach is deficient in the sense that even without having perfectly competitive industry conditions, the contemporary industrial scenario is marked by perfect information. In today’s world, therefore, retaliatory responses to any competitive moves of the firm could take place with as small a lag time as a couple of months, which in fact could even be overcome with better execution by the competitors. Porter’s theory also implies somewhat erroneously for the current situation that a firm’s competitive move would have similar advantage over each of the competitors and that each of the competitors makes a similar assumption.
In addition, Porter’s framework is limited by the fact that the today’s firms are well anchored in concepts of continuous product improvement or yearly model changes. No firm, therefore, waits for the other firm to make a move. All firms in an oligopolistic industry structure would be capable of undertaking competitive actions in more or less a simultaneous manner. For example, automobile makers not only undertake annual model renewals but also introduce multi-level product families (say, sub-compacts, compacts, sedans, and SUVs). Computers, mobile devices and tablets have new product introductions on almost a quarterly basis. The differentiators for firms in the contemporary oligopolistic structure would therefore be more in terms of levels of innovation in product development, effectiveness in marketing, excellence in manufacturing, and efficiency in marketplace delivery. Certain core competencies of the firms, rather than generic functional strategies, distinguish the more competitive firms from the less competitive ones. This hypothesis leads us to the development of an analytical framework that does not start with the categorization and listing of competitive moves in a functionally generic methodology as suggested by Porter; rather it crystallizes a new theme of this blog post that the players in the industry must first be classified on the basis of their positioning in terms of their core competencies and the contingent business results. Understanding the competitors in a broad typology would be an essential foundational step in analyzing and defining competitive moves in the new framework.
All the players in an industry can be categorized in terms of two critical dimensions. The first one is their ability to influence the market while the second one is the ability to compete with the other firms. On the dimension of market influence, firms in an industry tend to be one of the following: market creators, market maintainers or market destroyers. Market creators have their core competency in product innovation and create an entirely new market through their products. Apple is an outstanding example of market creator in the communication and computing devices industries. Market maintainers are competent enough to be successful product followers keeping the market live and expansive through their product followership. Most firms in an oligopolistic structure belong to this class. Samsung is perhaps a good example of a firm in this class, both in communication and computing industries. Market destroyers are companies which are faced with declining competencies and are unable to influence positive market development. Market destroyers through their dated or dysfunctional products cause customers to develop a negative image of the industry. Firms which are flooding the tablet computer market with cheap devices of low functionality constitute a striking example of market destroyers. Not every industry would have firms belonging to all the categories all through the years. One instance of a market creating firm may be followed by several annual instances of market maintaining firms and a few instances of market destroying firms.
On the dimension of competitive advantage, firms typically fall into one of the following three dimensions: share builders, share maintainers and share losers. Share builders are those firms which have their core competencies in marketing effectiveness, manufacturing excellence and delivery efficiency. Building on their product development capabilities, whether of innovation or followership, such firms achieve share building capabilities. Market builders are natural share builders as the market monopolistically develops around their innovative products. However, it is quite possible that market builders could fail to utilize the natural share building advantage if the core competencies in any or all of the domains of marketing, manufacturing and delivery are sub-optimal. Market maintainers, on the other hand, assiduously seek to create competitive advantage as share builders to compensate for the lower level of product innovation. Share maintainers are those firms which are in an equilibrium state in the oligopolistic structure. Many share maintainers possess a balanced portfolio of mid-range competencies that are capable of maintaining a reasonable market share in an oligopolistic market. Share losers are typically uncompetitive firms, lacking in any level of differentiation in product development, marketing, manufacturing, and product delivery.
The firm in a nine grid matrix
Typically, therefore, all firms in an oligopolistic industry can be categorized in various grids of the nine grid matrix. The most competitive firm is the one which is both a market builder and a share builder while the least competitive firm is the one which is both a market destroyer and a share loser. While only a few pioneering firms fall in the most competitive grid, and a few in the least competitive grid, most firms fall in any of the remaining seven grids. The essence of competitive moves of firms would be to move to grids that reflect a higher degree of competitive advantage. It would not be possible for firms to achieve such mobility without first analyzing where and how firms are positioned in various grids and then developing appropriate competitive moves. Once this grid is conceptualized and effectuated in the live industrial setting, Porter’s competitive strategy framework can be effectively applied. Competitive moves can be designed around core competencies that are required to qualify for the superior grids. Similarly, each grid would have its own entry barriers and mobility barriers, raising resource bars and adding challenge to the execution of competitive moves. The concepts of industry level instability and firm level commitment articulated by Porter can also be appropriately fitted on to the nine grid matrix.
The nine grid matrix tends to correlate with revenue-profit as well as market size-market share markers rather well. The most competitive grid corresponds to high revenue-high profit markers as much as high manufacturing scale-high market share markers while the converse is true for the least competitive grid. Once the fact of the nine grid matrix is recognized it is easy to appreciate that simple defensive or offensive functional strategies would be inadequate. Tata Motors, for example, is an Indian automobile firm that belongs to the category of market builder-share builder. From 1985 onwards, Tata Motors has been adding new products and new markets in the truck and bus market qualifying for a near permanent presence in the most competitive grid. Its principal competitor, Ashok Leyland has been a market maintainer and also a share maintainer, but occasionally transiting into the share builder class through superior manufacturing and market financing strategies. Volvo, on the other hand, has been an innovator in bus segment through its high performance, low floor buses but has just been a share maintainer despite having product innovation. New entrants into the heavy commercial vehicle industry such as Eicher, Navistar and Force Motors have been market losers as well as share losers due to an inability to develop the required core competencies. Competitive moves of firms in the superior grids tend to be a combination of offensive and defensive strategies while the firms in less competitive grids would need to follow a string of offensive strategies from model development to operational excellence and from channel building to brand building to transit to the superior grids.
Instability and commitment
Industry structure sets the basic parameters within which competitive moves are made by the firms in an industry. Industry instability arises from evolution of technologies, processes and resources as much as from entry of new players or exit of existing players. Industry instability is a relative term in the sense that a monopolistic structure faces mild instability as it transits to a duopolistic structure and a duopolistic structure faces significant instability as it transits to an oligopolistic structure. As an oligopolistic structure transforms into a perfectly competitive structure, however, the level of instability could reduce. Oligopoly offers an opportunity for competitive firms to dominate the industry, by way of a 20-80 rule (20 percent of firms dominating 80 percent of value), through appropriate competitive moves. The commitment of the firms to the industry, which is often demonstrated by investments in technology, infrastructure, capacity and talent, has a major role to play in determining the relative industry instability and relative firm stability. The lack of commitment of firms to the industry, on the other hand, leads to more number of share losers and eventual exits, actually stabilizing the industry in the process.
The Indian domestic airlines industry offers a great example of the framework of competitive moves and the concepts of industry instability and firm commitment that are discussed in this blog post. Until the 1990s the domestic airlines industry was the monopoly of only the State-owned Indian Airlines. However, with the economic liberalization, several private airliners were allowed to enter the aviation sector converting the industry into an oligopoly. For some years, it looked as though an industry shakeout would lead to a duopoly between the Indian Airlines and Jet Airways but eventually an oligopolistic structure emerged with different airlines becoming positioned differently (for example, Deccan Airways as a market maker through pioneering of low cost air travel, Jet Airways as a share builder with investments in capacity, technology and talent, Kingfisher and a few other airliners trying to be share maintainers while also being market maintainers on the plank of enhanced service. Despite the airlines industry being highly investment and lead time intensive, it is interesting to note that similar competitive moves (capacity expansion, aircraft modernization, trained crew, travel safety, price competitiveness, domestic reach extension, international routes, and electronic services) are being made by all the competitors to move to superior competitive grids.
Core competencies and competitive moves
Unlike the proposition made by Porter, competitive moves are not a set of functional actions or calibrated strategies that achieve superior position for firms. Competitive moves have to be necessarily based on a sub-structuring of the industry on the dimensions of innovation and excellence, and then specifically woven around the core competencies required to move from inferior competitive grids to the superior grids or to defend their presence in the superior competitive grids.
Posted by Dr CB Rao on August 28, 2011