Do Rules Help Innovators? A Practical Paradox for the Digital Age

In the domains of strategy and innovation, the book titled “Ten Rules for Strategic Innovators” authored by Vijay Govindarajan and Chris Trimble, Professors at the Tuck School of Business, (Harvard Business School Press, 2005) provided an interesting thesis, ten years ago. The book was inspired by the authors’ belief (shared still by the author of this blog post) that innovation is at the core of economic vitality as it drives growth, creates jobs, builds wealth, provides purpose to employees and revitalizes organizations. The authors, in their work, held that innovation would enable companies to simultaneously enhance society and increase profits in two ways of improving productivity and commercializing new products and services. According to the authors, knowledge of the genetic code served as knowledge of the fundamental rules that guide human behaviour. Genetic code is, as then and to date, researched to cure illnesses more effectively, seek immunity from disease proactively and hopefully resist or reverse the ageing process itself. Ten years after the postulate in the book, human genetic understanding continues to hold promise with sporadic discoveries on the above lines.

Vijay and Chris proposed strategic innovation as the organizational code for exploring a set of experimental strategies that could help corporations reduce dysfunctions, sustain growth, and lengthen the average corporate life span beyond that of a human being. The authors held that strategic innovation differed from continuous process improvement, process revolutions and product or service innovations in that, unlike others, strategic innovation would involve unproven business models. Strategic innovation would be successful with or without the three other types of innovation, they held. They also cautioned that strategic innovation offered major challenges to entrepreneurs and professional CEOs, in terms of one-time career challenges in starting and growing a new company as part of, or distinct from, the core established company. The authors proposed ten rules for success of strategic innovation, therefore. Ten years after the postulates in the book, a wave of start-ups with disruptive business models and technologies validate the need for strategic innovation but also challenge us with a leadership paradigm that goes beyond any classic rules of innovation.

The ten rules

Vijay and Chris considered the case of innovation being driven by a new company (NewCo) set up by a big parent company and argued that the middle phase that would exist between ideation and execution required the typical NewCo to forget or unlearn some past practices, borrow the good practices and learn new relevant processes.  The organizational DNA comprising staff, structure, systems and culture was proposed as the compelling inner logic. All the rules, the authors stated, reflect learnings from various case studies of strategically innovative (but also challenged) companies that form the core chapters of the book. They proposed that understanding the relative roles of creativity (typically required at the beginning) and execution (typically required at the end), and the need for identifying the process of strategic innovation through the middle of converting ideas into actions.  The base assumption of parent-child relationship in fostering innovation limits the canvas of strategic innovation, however.

The authors, in their last chapter, distilled and emphasized ten rules (that are summarized herein), rule 1 and rule 10 being general rules. These rules are prescriptive as well as cautionary.  Rule 1 states that in all great innovation stories, the great idea is only Chapter 1. Rule 2 is that sources of organizational memory are powerful. Rule 3 is that large, established companies can beat start-ups if they can succeed in leveraging their enormous assets and capabilities. Rule 4 states that strategic experiments face critical unknowns. Rule 5 is that the NewCo organization must be built from scratch. Rule 6 is that managing tensions is job one for senior management. Rule 7 states that NewCo needs its own planning process. Rule 8 cautions that interest, influence, internal competition, and politics disrupt learning. Rule 9 suggests to hold NewCo accountable for learning and not results. Rule 10 is that companies can build a capacity for breakthrough growth through strategic innovation.

Ten years later…

As observed in the beginning, the book by Vijay and Chris was published in 2005. Today, in 2015, we witness a completely new dimension of innovation. Facebook founded in 2004, Twitter founded in 2006, WhatsApp founded in 2007 and Uber founded in 2009 as well as iPhone launched in 2007, which together represent a completely new dimension of start-up innovation bring into question some of the rules detailed in the book. Ten years later, there is now a clear recognition that strategic innovation, deploying disruptive technologies and disruptive processes, has already rewritten the rules of innovation. These start-ups which grew in less than a decade into mega phenomena (including the earlier ones such as Google and Amazon) came into being with no parentage or legacy and no prior brands or resources to leverage. They had nothing to forget and nothing to borrow from any established entity and everything to learn and everything to execute from their own inspiration. And, some of them have been dazzling successes.

Recognizing what a fresh mind and innovative thought can achieve, the start-up ecosystem has been attracting some of the largest investments ever. The start-up wave has clearly been raising in India, long seen as a country of professional preferences for the tried and tested as well as safe and secure options. While there are certain bubbled up expectations, there is no doubt that not only individual firms but also whole segments of industries (be it the Internet or Biologics) are being built on, and around, start-ups. The sentiment even among the large corporations seems to be to neither compete nor mimic start-up characteristics in their established ecosystems but instead let start-ups come up their own way and acquire them at an opportune time. We have two challenges now, relative to the base case with which Vijay and Chris started a decade ago. The first is that start-up firms need rules that help them make them successful. Secondly, both the large and start-up firms need helpful rules of engagement in the event of acquisition or merger.

The new ten rules

Ten years later, the rules of strategic innovation, according to the author of this blog post, need to be completely different. These are as follows:

Rule 1: Innovation does not necessarily come from new discovery; it would emerge from digital development of physical and biological processes. From email which digitized physical mail to Uber which digitized taxi hiring, digital face of innovation is evident. 

Rule 2: One has to only look around, but extremely perceptively, for the multiple opportunities that exist for strategic innovation. Every physical or biological activity will one day or the other ‘virtually’ mapped to a digital activity. Keeping a health track of biological parameters is just the beginning.

Rule 3: The route to innovation in the digital age is not necessarily perfection; once the core clicks, the rest easily falls into place. Twitter moving from mere text tweets to hashtags and vine is an example.

Rule 4: In the new age, collateral earning capability of a strategically innovative platform is as important as the fulfillment of core business need. Each product or service tends to be a purveyor of social networking. On-line newspapers are an example.

Rule 5: Strategic innovation may have several chapters but passion is the binding thread of all the chapters; from idea to delivery, through several chapters of execution. When passion starts ebbing, practicality, including sell-off, begins as can be seen from the increasing trend of early sell-out of start-up stakes.

Rule 6: Strategic innovation may be aided by establishment of R&D Centres and creation of Innovation Offices but it is nurtured only with an organization-wide culture of innovation. The inner DNA of an innovative organization condones failure as much as it seeks success.

Rule 7: Unlike established organizations where management’s primary responsibility is to resolve intra-organizational tensions, the primary responsibility of managements of experimentally innovative businesses is to resolve the tensions between themselves and their investors. The issues faced by certain start-ups are reflective of this.

Rule 8: Frontend digital innovation can come about only when there is someone to back it up with innovation in both back-office and shop floor. Without huge fulfillment centres and competitive products, for example, it is impossible to snap billions of deals!

Rule 9: Innovative organizations must be established and run almost as academic laboratories where the talent has no obsession other than bringing the products and services through successful pilots, betas and eventual commercialization.

Rule 10: Whether it is portfolio investors or established companies, the firms betting on strategic innovation should aim at more than one initiative of strategic innovation, for in respect of some, others could be ahead of them, and in respect of others, their own initiatives could be ahead of time. 

 

The rules reflect the reality that while digital is the new dimension of strategic innovation, digital alone cannot provide the complete solution. Classic corporate stuff, from physical brick and mortar to human aspirations and ambitions would be an integral part of strategically innovative firms.

Innovate to live or morph?

Logically, leadership of strategic innovation requires a talent landscape that covers more than conversion of innovative ideas to commercial fruition; it requires leadership that not only dwells deeper into the core of product or service innovation but also connects the dots of innovation across the business value chain. It is a high intensity leadership that finds not only inspired internal owners in the organization but also like-minded external sponsors amongst investors, vendors, buyers, bankers, regulators and so on. The greater the intensity of competition in the innovation space, the greater would be the need for a leadership bench that is actually deeper and broader than that exists solely in either the classic, established and brick and mortar businesses or the neo, emerging and digitally driven businesses.

It was noted in the beginning of the blog post that Vijay and Chris wrote their book in 2005 hoping to institutionalize a rule set of strategic innovation that helps firms reduce dysfunctions, sustain growth, and lengthen the average corporate life span beyond that of a human being. The reality, just ten years later, is that highly innovative companies are a complex set of universe; some have such compelling power of universal innovation that they have become the new mega corporations with new rules of perpetuity while several others are not necessarily looking for life beyond the next decade, let alone beyond the average human life span. It is, however, becoming increasingly clear that established firms as well as the new mega corporations need smaller but sparkling innovative firms and entities in increasing measure to stay relevant in the digital age.

Given the amazing pace of innovation and the frenetic entrepreneurial zeal, it is not surprising that the book by Vijay and Chris finds itself overwhelmed in just a decade of its writing. It is certainly clear that any book on strategic innovation would need to be rewritten every two years!

Posted by Dr CB Rao on October 24, 2015 

Leaders and Dealers: Learning to Develop, and Developing to Learn!

In English language, by virtue of use as well as by perceptions of communicators, certain words tend to acquire meanings beyond what they originally were signifying. It would be semantically interesting and intriguing if such words are made up of a common set of letters, formed in different ways. Such triviality apart, the words ‘Leader’ and ‘Dealer’ represent two words that are derived from the same set of letters but become ‘leader’ and ‘dealer’, depending on where the two letters ‘l’ and ‘d’ are placed. More importantly, the word ‘leader’ gets appreciated by most people in a very rarefied meaning signifying high position, high power and high visibility, engaging in transformative endeavours while the word ‘dealer’ gets seen in a transactional sense, signifying an obsequious approach to carry out one’s bidding (real or assumed), often in a surreptitious manner.  

As with several other semantic or communication fallacies, both perceptions represent incorrect pictures and interpretations of the reality. Leaders, in common perception, are vested with the attributes, responsibilities and accountabilities summarised above but not all those who are so vested tend to be leaders, in the real sense of the term. Probably this is one reason why all organizations, businesses and states are not equally successful, and some even end up being adverse for others. Dealers, in common perception, are seen as entities and persons who are not creative beyond acting as agents for someone else, making a livelihood out of others’ need to buy and sell. Typically, corporations designing, manufacturing and marketing products tend to be leaders, and their frontend dealers tend to be followers. While dealers do act as per the manufacturers’ or buyers’ bidding, they actually represent the most important bridge between the supply and demand sides of an industrial economy,

Broad canvas

One may postulate that leaders and dealers would live up to the core distilled meanings of their terms depending on their competencies, skill-sets and resources. More importantly, however, they would achieve their full potential depending on how they see their representativeness with reference to their structural positions. If leaders see their representativeness in a narrow way, they fail to reflect leadership in letter and spirit. In a democracy, for example, leaders represent their people. This does not mean that they can do all the things to all the people. They would, for example, need to (i) generate options, make choices and set priorities, (ii) incentivize as well as regulate the rich to promote growth with equity, and (iii) subsidize as well as mobilize the poor to enable prosperity with sustainability. The same would apply with respect to organizations and businesses. If they see their responsibilities aligned to only one class of stakeholders or only to hierarchy, the true leadership potential would not be felt by the organizations and businesses they run. 

    

The same is the case with dealers. If they see themselves as mere representatives to sell products, providing prescribed floor space and people to help buy-sell transactions, they just become proxies to sellers and buyers. If, on the other hand, they see themselves as an important connect between the product and customer as well as between the customer and manufacturer, they can expand the envelope for all the stakeholders. This is one reason why front-ranking companies would like to operate their own chain of experience stores to impact customer-product-manufacturer triage more insightfully. Even in the very commoditized sense of a dealer doing something at someone else’s bidding (say, as a lobbyist), there could be opportunities to enhance one’s own as well as others’ awareness through a process of expanding the envelope of accountability to the broader cause and the wider society.  There are many cases where what seems to be for sectarian or individual good, in fact, turns out to be a catalyst for more effective public policy.

Short cuts

Although the core theory of excellence, whether for leaders or dealers, is so common and so simple to appreciate, not many would adhere to the theory in full and with passion. The human brain is genetically wired to a reward-effort principle. While individual variations due to education and upbringing do exist, the core human theme is to exert less to profit more. This makes leaders to focus on their most important stakeholder for maximal engagement, with only sporadic engagement with other stakeholders, that too in a manner of alignment with the need satisfaction of the primary stakeholder.  Leaders in large manufacturing organizations may, for example, personally engage with large investors continuously for support through business cycles while asking other lower level executives to ‘deal’ with other ‘less important’ stakeholders, including small investors. Leaders heading E Commerce forms may engage feverishly with markets and customers, almost to the point of self-aggrandisement through counts of clicks while ‘dealing’ only sporadically and opportunistically with other classes, including investors.

Dealers may see themselves as sellers of goods to, and collectors of cash from, customers, in which case they focus heavily on the company and the product. The huge advertisements by (or for) the dealers of high-end smart phones or luxury cars are examples of capturing customers at any cost, literally and figuratively. Similarly, if the dealers are viewed as buffers to hold inventories and smoothen sales cycles, they may never raise to the full potential of discovering and conveying visible and invisible signals from the marketplace to the manufacturers. On the other hand, if dealers find themselves accountable to a wider spectrum of market-product-corporate connectivity, the principles of engagement would be entirely different. The dealerships would then be as intellectually endowed and as structurally elegant as large organizations tend to be, making market research organizations in corporations or through outsourcing redundant. A firm is what it sees itself in terms of its boundaries; so would be a leader or dealer, in terms of the boundaries and limits set for oneself.

L D  

This blog post observed in the beginning that the difference between a leader and a dealer pertains to how the letters ‘l’ and ‘d’ are placed. We have reviewed above that a leader can bring oneself down to the level of a dealer (as colloquially understood) and a dealer can elevate himself to the level of a leader (as intellectually appreciated). By a coincidence, the letters ‘l’ and ‘d’ do matter in the journey of elevation; ‘l’ signifying learning and ‘d’ denoting development. Learning and development constitute a virtuous interlocked circle. That learning is required to develop oneself is rather easily understood. However, that one has to develop oneself to be in a frame of mind to continuously learn at all stages of life is less easily understood. Learning is the process of acquiring knowledge and absorbing it. Development is the process of applying knowledge into sustainable positive behaviours and practices. Learning makes the individual knowledgeable but development makes one impactful for his or her ecosystem. Learning requires a focused and targeted mind-set that is milestone driven but development demands a broader personality outlook that applies individual learning to team or social betterment.

It is quite possible, therefore, that people may be eager to learn but quite diffident to develop. An individual or entity, learning to develop as well as developing to learn has the greatest potential to develop a leadership bench that is both large and deep. It is immaterial whether one is a leader or dealer to benefit from this approach. The key metric for learning and development should be in terms of the development impact that the learning processes provide and the incremental learnings that are motivated by the developmental approach. More than learning, development needs continuous reinforcement from one’s own inner self as well as from peers and the broader organization. As one ages biologically, development requires less of knowledge acquisition and more of wisdom and statesmanship. In a simple, but not necessarily universal, algorithmic approach, learning peaks through the teens till the early career while development peaks through the mid-career till the end of the active career. The greater the biological overlap between learning and development, the greater would be the natural progression of leadership.

Big data

A revolution has already begun to sweep the industrial system, with technology recording in real time, through sophisticated sensors, the performance of various industrial systems. Giant corporations such as GE are gearing up to the critical importance of data capture and analytics, for the next wave of digital industrialization. It is evident that in a similar fashion, human interactions lend themselves to countless signal interfaces which provide valuable inputs to the participants in their self-active and interactive processes. Unfortunately, however, humans seem to be becoming more robotic than robots themselves even as technology, invented by humans, is enabling robots capable of signal recognising and signal processing. The emphasis in human interactions tends to be more in terms of conveying the message rather than absorbing the response at every relevant stage.

True learning and development occurs when human minds are receptive and perceptive enough to apply the principles of big data analytics to human interactions. Big data as a concept is relevant for leaders or dealers equally. There are very interesting cases in certain industries (for example, automobiles, food chains and white goods) where dealers have been very progressive and could share industry leadership with the end-product manufacturers. There are also industries in which progressive dealers (for example, electronics, telecommunications and pharmaceuticals) went on to evolve into end-product manufacture itself. Essentially, it is not a question of where one originally chose or was ordained to start the journey but is a matter of how they all through their journey learnt to develop and developed to learn, in terms of themselves and others!

Posted by Dr CB Rao on October 21, 2015

    

Delta of Aspiration over Affordability (DAA): A Positive Driver of Socio-Economic Development

Human beings are genetically wired to aspire more than what one can afford. This delta between aspiration and affordability (called DAA, for the purpose of this blog post) is something that causes stress and distress as well as progress and prosperity. People who achieve wisdom and equanimity at an early age are able to understand the positive and negative consequences of such a delta and are able to minimize it largely through a moderation of aspirations. People who achieve growth and prosperity at an early age believe in keeping this delta real and challenging so that they can continue to work towards better living standards. This management of delta tends to be a largely individual matter but great leaders have made, and continue to make, helpful efforts to take the concepts of delta management to the masses. Individuals and leaders, when aligned in their appreciation of DAA, support wealth creation of higher order.

Great sages and philosophers have, from their early years of life, understood the impact of delta on human sorrows and joys. Many of their teachings, therefore, emphasise the need to be less materialistic and more frugal in the approach to life. Even emperors and kings driven to conquests by greed had eventually understood the need for egalitarianism to prevail over capitalism. Modern economies have a different paradigm to contend with. Burgeoning population requires more jobs which means it requires more products and services. This, in turn, requires more investment and more consumption. Even if humans learn to understand philosophically the need to compress the delta of aspiration and affordability with moderation of expectations, the human race is now economically wired to widen the gap with acceleration of expectations. Leaders of corporations and nations can contribute enormously to socio-economic development by leveraging DAA.

Aspiration drivers

Aspiration, in a positive sense, is driven singly or jointly (in any combination) by three factors: knowledge, comparison and capitalism. When one understands what products and services can do to improve life, and seeks to possess them for such reason, knowledge is in play, driving aspiration. When one compares oneself with others possessing products and utilizing services that one does not, one may seek to have them too. In this case, comparison (or benchmarking) drives aspiration. When one is driven by a desire to create and deliver products and services for others to consume, and create wealth in the process, one may be seen to be driven by capitalism. When these three factors operate in combination the drive for aspiration gets accentuated. To manage one’s aspirations in a constructive manner, one has to develop an understanding of which of the factors and in what combination are driving the aspiration.

Aspiration driven by capitalism or comparisons alone will be ineffectual and stressful. Knowledge is an essential driver for aspiration to be converted into achievement. However, only knowledge without a drive for wealth creation would not fulfil potential. Aspirations tend to be often driven by comparisons which may not be bad at all. The race to be among top performers is, in fact, majorly driven by comparisons. However, only when comparisons are fuelled by knowledge and capitalism, aspirations work out to be good for society. Aspirations would be well merited and most effectively converted into achievements when they are driven by a combination of knowledge, comparison and capitalism. Aspirations would be most sustainable when they are also backed by certain degree of introversion; aspiring to develop knowledge to next levels, making comparisons more meaningful and making capitalism work for broader society. 

Achievement enablers

Besides aspiration itself (without which one would not know what to achieve by design), there are three enablers of achievement. These are: competency, collaboration and communication. Intellectual capital and practice based one’s specialization develops unique competencies in people. Competencies make people sought after for their skills and expected contributions to organizations. Competencies, however, require two other factors to translate themselves into achievements: collaboration and communication. Both these factors are indispensable not only for team working but also for individual contribution. An interactive trainer, for example, tends to be not merely competent in his domain but also have the ability to collaborate with his audience and add greater value through multilateral communication.

Typical educational and work systems emphasize individual performance through grades (while in college) and through ratings (while at work). Despite the emphasis on team work, the deeply embedded grading and rating systems act as barriers to development of collaboration and communication. The jettisoning of performance ratings by a few large corporations in recent times is a step in the right direction. The real transformation would, however, occur when achievement is built into all kinds of activities, from daily throughput to annual revenue. Newspaper publishing is a thoughtful example of how every department can achieve something unique and creative on a daily basis, creating a lasting attachment with the readers. Whether it is layout setting, headline making, cartooning, editorial, crossword puzzle or open page, a newspaper of repute knows how to make achievement a daily routine for everyone connected with the newspaper.

Aspiration-affordability delta

Clearly, in a society where aspirations are set high and achievements seek to keep pace with aspirations, despite affordability constraints, progress is possible. India now has several aspirations; from Swachh Bharat to Make in India, and from smart cities to high speed rails. The delta of aspiration over affordability may look formidable, given the billions of dollars of investments required for each of the initiatives and the current levels of resource spend and low achievements in infrastructure building. However, it is the large delta of aspiration over affordability that serves as the driver of superior growth. This works in two ways. Firstly, the higher the aspirations, the greater is the responsibility for achievement. Secondly, even the highest aspirations are achievable if they are unitized and micronized to daily achievement level. At a national level, such aspirations cannot be the responsibility of the Union Government alone; States and people need to collaborate too. Crowd-funding of ideas to qualify as ‘smart cities’ is an example of how aspirations can be channelled in unison across the nation.

At individual level too, the delta of aspiration over affordability drives progress. Students from weaker sections tend to emerge as strong academic achievers when they set for themselves high aspirations. Late former President Dr Abdul Kalam has been a great example of soaring aspirations leading to sterling achievements, overcoming the economic constraints and traditional social systems. Indeed, there have always been several successful leaders who can trace their origins to humble beginnings. The delta of aspiration over achievement never ceases to exist even after certain levels of achievement. The achievers can continue to deploy it to propel themselves to higher trajectories and/or provide the needed emotional and economic support to others to overcome their own deltas. When successful persons participate in activities of social responsibility, they tend to take social aspirations and achievements to higher levels. Clinton Foundation and Gates Foundation, for example, have been demonstrating how private initiatives of this nature can support social equity.

Aspirational planning

Planning is the foundational step for growth. Conventional wisdom of planning in India has been that planning has to be consistent with resources that can be generated. Successive Planning Commissions in India had done a highly responsible job of guiding India’s growth. Many feel that India’s post-independence preoccupation with socialism, licensing and controls was responsible for India’s slow growth. The real reason could lie in the planning model that was moderated growth plans to stay within the resource constraints rather than aspiring to soar beyond them. There are two elements in setting the aspirations. The first is the scale, and the second is the time. Aspirations that are driven by higher scale in smaller timeframes are the most challenging to achieve but also are the most satisfying for the society. Aspirations that have a sound socio-economic logic would be able to generate resources and commitments despite the seemingly large delta of aspiration over achievement.

India’s Pradhan Mantri Jana Dhana Yojana is an example of what aspirational planning can achieve. Announced by the Prime Minister Narendra Modi in his first Independence Day speech on August 15, 2014, and launched on August 28, 2014, Jana Dhana Yojana could achieve a mammoth 18 crore new accounts in just an year with deposits exceeding RS 22,000 crore (USD 3.3 billion), which is indeed an exceptional achievement as the scheme was targeted at economically weaker sections of the society. It is not surprising, therefore, that Prime Minister Narendra Modi, during his recent US visit, took enormous pride in citing Jana Dhana Yojana as an example how India could make things to work exceptionally fast if the Nation put its heart into it. Taking this example as a cue, India at a national level, corporations at enterprise level and the public at individual level must jettison other forms of guided and constrained planning in favour of aspirational planning. This is the only way by which India can take a quantum jump into a future of superlative growth without getting weighed down by concerns of affordability.

Posted by Dr CB Rao on October 9, 2015  

A New Theory of Competitive Economic Forces: Supplementing Porter’s Aging Theory of Competitive Strategy

There is no doubt that Michael Porter’s Theory of Competitive Strategy (1980) is a landmark thesis in the domain of strategy, expressing the relationships between the firm and the environment as well as between the firms in an industry in a unique manner. Professor Porter identified five forces of competition, namely the threat of new entrants, threat of substitute products or services, bargaining power of buyers, bargaining power of suppliers and intensity of industry rivalry. Porter’s Five Forces theory draws largely on the structure-conduct-performance theories of industrial economics. Porter held that the five competitive forces vary based on the nature of the industry, the state of the industry and the state of the firm. He advocated that firms could deploy three generic strategies, namely cost leadership, differentiation and niche, for them to derive sustainable competitive advantage over the competitor firms.

Michael Porter also held that definition of the industry in which a firm operates in, and the levels of entry and mobility barriers within and across the defined industries, also influence the competitive strategy of a firm. Strategies of integration and diversification within an industry are proposed to influence, and be influenced by, the five forces. In a manner of saying, Porter’s theory of competitive strategy represents a domain that is at the intersection of industrial structure and business performance. Pathbreaking though Porter’s theory has been, there are certain critical shortcomings, especially with reference to contemporary industrial development. The first shortcoming is in viewing buyers, suppliers and competitors as distinct unrelated entities. The second is in the proposition that the higher the entry barrier the higher is the value or profit potential. The third is that industry or environmental volatility is low and predictable enabling firms plan their competitive strategies based on structural designs. More importantly, it is not calibrated to address the contemporary economic realities.

New realities

The new realities are that buyers, suppliers and competitors have multiple overlaps. Firms in the same industry competing at the product level tend to compete at component or materials level. While they may look for sourcing advantages or cost savings, brand premiums or sales discounts and design dependencies or independencies, they also tend to be aligned to maximize overall throughput individually and collectively. The smart device industry is an example with multiple layers of collaboration at component level amidst competition at product level.  Secondly, entry barriers need not necessarily represent value building opportunity. Steel industry may have the highest investment intensity and hence the highest entry barriers but typically offers meagre returns relative to low investment industries such as FMCG. The third is that industry structures are becoming increasingly impacted by economic trends, even as economic trends are getting increasingly governed by commodity and liquidity cycles as well as cross-border investments and exchange rate regimes are becoming increasingly volatile, impacting stability of strategies.  

The new realities could also combine two or more competitive forces into one and accentuate their combined impact. For example, new firms could enter the industry with substitute products or services (not just imitator products) thus increasing the competitive intensity more than proportionately. Buyers may start dumping their products in the exchange or used product schemes thus making firms more of substitutional sellers rather than incremental sellers. The intensity of industry rivalry could be more due to exit barriers (absence of bankruptcy provisions) rather than due to low entry barriers. Commodity and other economic cycles may mean that strategies such as cost leadership at design or manufacturing level may be differently impacted from time to time. An automotive design strategy developed at great cost for maximal fuel economy may become less powerful in a protracted phase of extremely cheap oil prices.

Macro versus micro

For Porter, industry-specific and firm mediated micro-environment provided for sharper articulation of corporate and business strategies, compared to woolly SWOT analyses that were in fashion in the 1960’s and 1970’s.  The issue, therefore, is whether industry level micro-environment as proposed by Porter in the 1980s or economy level macro-environment as is now emerging in the 2010s is more appropriate for formulating competitive strategy. The way the global economy is anticipative of US Fed rate hike or the entire Indian industry is exultant about RBI rate cut does indicate that macroeconomic factors do have an increasingly overarching influence these days. Similarly, the way the slowdown in China causes global demand tremors and stock market blues or how a taxation issue can fray or calm the nerves of portfolio investors in India are also proofs of global economic and industrial interconnectivity.

Industries and firms are impacted not merely by firm and industry specific competitive forces but also national and international economic forces. IPOs as well as follow-on offerings and stake sales by Public Sector Undertakings (PSUs) in India, for example, are affected by dips in Indian stock market sentiments which are, in turn, caused by dips in global stock markets.  Economic liberalization may have freed industrial development from public policy (notwithstanding residual macro regulations) but industrial development is impacted more than ever by national and international economic factors. There is probably no way to decouple Indian economy and industry from such vagaries but at least there must be a model that focuses the attention of firms and industries on such competitive economic forces. This blog post proposes a theory of five competitive economic forces as an adjunct to Porter’s theory of competitive strategy. 

Five Economic forces

Five economic forces impact industrial structure and performance. The first is the threat of inflation. The second is the risk of global capital flows. The third is the bargaining power of national technologies. The fourth is the bargaining power of national markets. The fifth is the intensity of national rivalry. Each of these has an impact on industry level competitive strategy. They also dictate a preferred drift in the generic competitive strategies. Competitive threat of inflation, for example, impacts the bargaining power of suppliers as well as that of buyers. It also supports cost leadership as a preferred generic competitive strategy. The competitive force of global flows influences market capitalization levels on bourses, and brings in or drives out more risk capital for expansion and diversification. Unlimited capital flows take the focus away from efficiency and promote differentiation and niche as generic competitive strategies.

Nations play a major role in licensing technologies, and generate major bargaining power over these. This is countered in part by the bargaining power of national markets. This interplay is evident usually in military technologies (eg., Rafale aircraft deal between France and India) but has extended to high end civilian technologies too (eg., China’s high speed rail technology for US to connect Los Angeles and Los Vegas). The latter at industry level was evident when major technology firms of US vied each with each other during Prime Minister Narendra Modi’s visit to US West Coast to invest and supply technologies for Indian markets. When nations compete to participate in emerging markets, rivalry is heightened, but to the benefit of the local industry. Governments can leverage such rivalry for national benefit. India, for example, can benefit from generating international interest and rivalry for building bullet train infrastructure or new capital cities. A firm, before applying Porter’s Five Forces Theory, must, therefore, apply the Five Economic Forces Theory to establish the correct perspectives for firm level competitive strategic analysis.   

Model within model

This blog post has proposed, probably for the first time in the history of strategic management, a theory of competitive economic forces as an overarching umbrella under which Porter’s theory of competitive strategy needs to be recalibrated. The big difference between the national economic forces and the industrial competitive forces is that the former are more volatile and unpredictable, and are additionally susceptible to public policy and governmental actions. While industrial competitive forces are more predictable they are swayed by how the economic policy framework changes. Some research is clearly needed to understand if and how the economic forces model can be linked to the industrial forces model. One way could be to choose a time horizon that starts with a major economic inflexion point and model the industrial forces until the expected next inflection point, and develop a calibrated industry and firm level model for the target timeframe. The author suggests that academia and practitioners of management, as well as economists and strategists must collaborate to assess the relevance and coupling of both these models; the new economic and the established industrial!   

For India, at this point a combination of competitive economic forces sets up the five force economic model, the forces being decelerating inflation (as is presently evident), declining portfolio investments (due to the much anticipated Fed rate hike), dependence foreign technologies (for next generation infrastructure), consumerisation of markets (with increased purchasing power) and increasing national rivalry to enter or expand in India (virtually every developed country desiring to have a share of India). Such an analytical framework sets the tone for recalibrating the basic Porter model. In the ultimate analysis, the issue is not one of choosing between a micro or macro model. Macro model is the missing piece in current strategy framework and must be provided for, as suggested herein. In addition, Porter’s micro model continues to be relevant but with two caveats. Firstly, industrial play is not only about forces of completion; it should be equally about forces of collaboration. Secondly, the five forces, and the entities causing them, are not independent of each other but could have overlaps, and be accentuated or attenuated based on overlaps.

Posted by Dr CB Rao on October 3, 2015