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which had three theoretical premises, which are by now outdated.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.
Co-integration
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.
Co-development
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.
Co-fulfillment
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.
Co-diversification
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.
Co-saturation
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:
Hi,
It’s really informative post. I like the way you describe this. Thanks for sharing. . .
movers and packers vapi.
Post a Comment