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

Five Competitive Forces of Technology and Three Generic Technology Strategies: A New Theory of Competitive Technology Strategy

Amongst the various management theories, Michael Porter’s Theory of Competitive Forces is one of the most elegant theories ever expounded. It not only is the foundation for the broader theories of competitive strategy and competitive advantage but also provides a template for studying competitiveness in any domain. The author in his blog “Strategy Musings” how the Porter’s framework can be extended as well as supplemented to develop competitive strategies in several enterprise level and functional level approaches. One such extension by the author has been in the domain of talent management.  Reference may be made to the author’s blog post, “Five Competitive Forces in Organizational Talent Arena: Porter’s Competitive Strategy Framework Extended”, Strategy Musings, June 16, 2013, (http://cbrao2008.blogspot.in/2013/06/five-competitive-forces-in.html) which provides how the five forces model enhances the understanding of any domain and in the development of generic domain competitive strategies.

Technology, like talent, is another domain to which the Porter theory can be extended appropriately. Technology is a key driver of the five competitive forces. While it plays itself out directly in a force like the threat of substitute products, it is also a key factor in determining the way the other four competitive forces shape up. For example, the intensity of competition tends to be a result of commoditization of technology which enables several players entering the industry simultaneously.  Suppliers of superior technology could exert higher competitive power if their products have superior technological capability. Buyers can become more discerning and more demanding once they understand the power of technology. This is not to suggest that several other factors such as management and investment do not operate as primary or secondary drivers of competitive forces. However, technology is a key driver of competitiveness which could benefit from the application of the five forces theory for itself.

Technology as a driver

Technology brings new products and processes to fruition, creating markets and jobs. Technology drives competitive forces. Firms which are technologically innovative and competitive outsmart other firms, and inversely firms which are technologically laggards and uncompetitive erode their own markets and destroy employment. In between are firms which are technologically alert and agile; they tend to be fast followers and reasonably competitive. A large number of successful firms tend to be fast followers in technology domain. In the smartphone category, Apple reflects the first class of innovative competitive firms, Palm represents the second class of lagging uncompetitive firms and Samsung represents the third class of competitive fast-follower firms. Interestingly, firms can move between and across the three categories.

On an overall basis, each of the five competitive forces of Porter’s theory is a blend of technology and management, deployed in different proportions by the leadership of each firm. There has been some impressive level of theory and practice as to how management and leadership can be the variables that can be worked on. To the extent that both management and leadership are significantly related to persons and personalities, there is a trainable or developable human element as an influence on the managerial and leadership competitiveness.  Less understood are the forces that determine the competitiveness on the technology dimension. Does education drive technological competitiveness or does laboratory infrastructure drive; and, does experimental culture drive technological competitiveness or does risk-taking culture drive? Probably, these are too generic to explain the competitive forces of technology all by themselves.   

Five forces of technology

Fundamentally, the true and sustainable premise is that new competitive technology makes existing mature technology obsolete. There are five powerful forces that can be harnessed by a firm to develop new technology that could be competitive and rendering the existing technology obsolete.  These are (i) the power of new functionalities (ii) the power of substitute materials, (iii) the power of substitute processes, (iv) the power of operating system, and (v) the power of supportive ecosystem. Competitive forces are forces that need to be generated and harnessed by firms to attack or overcome the attacks of competitors.  Factors like science and technology levels, investment levels, and R&D commitment are underlying enablers but not the manifestations of competitive technology forces. Product functionalities, materials and components, manufacturing processes, operating systems and ecosystems, on the other hand, are the real sources of competitive force.

Product functionality

It is important for a firm to understand where and how the firm could be positioned with respect to each of the forces. The power of new functionalities clearly is the essence of new product and market development. There is an effective 2X2 approach for understanding how product functionalities can be developed. For a broader discussion of how a 2 dimensional matrix can effectively conceptualize and analyze any endeavor, please refer to the author’s blog post “The 2 Dimensional Matrix: A Universal Analytical Tool”, Strategy Musings, July 3, 2011, (http://cbrao2008.blogspot.in/2011/07/2-dimensional-matrix-universal.html).   Applying this to product functionality, the first dimension can be partitioned in terms of the first time discovery of a new functionality and the enhancement of an existing functionality. The second dimension can be partitioned in terms of convergence (multiple functionalities available equally) or crossover (amongst multiple functionalities, a few being dominant). The design philosophy as it works through the 2 dimensional product functionality matrix generates unique technological competitive force. 

Materials and components

Materials and components play a significant role in determining the efficiency, durability, reliability, maintainability and elegance of a product, be it industrial or consumer. Two products of similar functionality can be differentiated by the use of materials and components of different technological characteristics. Two cars can be equally well-designed in terms of traction but if one is a solar powered hybrid because of solar overwrap materials, clearly the latter would be a differentiated car. The extent to which a firm understands the material and component technology would determine if the firm would be able to synergize the forces of materials with that of product functionality. Clearly, to the extent that a material or a component is also a product, the five competitive technological forces would be relevant to the material and component firms as well. One of the most striking examples of how material technological force can override product functionality has been evident in the evolution of flat panel televisions, and later in the evolution of flat panel screens themselves in terms of plasma, liquid crystal display, light emitting diode and organic light emitting diode screens.     

Manufacturing processes

The relationship between product industry and manufacturing equipment industry tends to be less integrated than the relationship between product industry and materials/component industry, relatively speaking. Quite commonly, manufacturing process is seen as a derivative of the capability of manufacturing equipment, and as having the objectives of better tolerances and higher productivity.  This may provide operating efficiency and competitive advantage in the normal course but if process is understood and deployed as one of the five important competitive technological processes, the outcomes would be significantly superior. It has been well established, for example, that automobile firms  which have engineers of different domains such as machine tool, electronics and instrumentation technologies (besides core mechanical and automobile engineering) and pharmaceutical firms which have chemical and instrumentation engineers (besides core pharmaceutical scientists) are able to generate and harness the competitive technical force as a competitive advantage.

Operating system

The unique aspect of any product in the contemporary digital world is that it is governed by a “brain” of its own, which may be called the operating system. From having mechanical toggles and electronic switches to programming logic controls and computer controls, there had certainly been efforts to govern the functioning of a product in the past too. However, structuring a product uniquely around an operating system and developing operating systems to govern products is the new reality of the contemporary digital world. This trend, however, is unlikely to stop here. Strides in artificial intelligence are likely to develop products that are not merely code controlled but are also speech responsive, gesture reactive, thought guided and intent managed. Strategic alliances for customized operating systems could be the next frontier for managing the competitive technology force.

Ecosystem

The traditional technology relationships have been simple; a firm and its customer are connected by a product, and a product and a customer are connected by the match between customer need and product performance. In the contemporary and emerging scenarios, however, just as people are seamlessly connected by social networks, products are connected by technology networks.  The performance of products can go beyond what they are designed for if they are placed in the right ecosystem. The system of technology-driven ecosystems is somewhat akin to a system of technology democracy wherein independent technologists motivate themselves to develop a host of applications for what they believe are virtuous products, thus creating a totalistic ecosystem.  The extent of the ecosystem, or the lack of it could be a significant competitive technology force, positive or negative for firms.

Generic technology strategies

Porter suggested cost leadership, differentiation and niche as the three generic competitive strategies available for a firm to cope with the five competitive forces. In the context of the five competitive technology forces as discussed herein there is a need for formulating generic technology strategies too. It would be tempting to develop mirror generic strategies in terms of technological followership, technological innovation and niche. However, such an approach, besides offering nothing new, does not also address the impact and implications of the five technology forces. A more appropriate model would postulate three generic technology strategies: functional technology, experience technology and customized technology. These three generic technology strategies would manage the competitive technology forces in varying degrees and provide competitive advantage also in varying degrees.

Functional technology strategy

Generic functional technology strategy aims at sticking to functionalities that are essential to deliver performance that users “require”.  These functionalities could, depending on the essential purpose of the product, focus only on some of the five competitive technology forces. A water submersible pump would focus on the highest materials and process technological power to provide failure-proof performance by the pump under the rigorous operating conditions for which it is intended. An on-the-ground pump would, on the other hand, focus on a different set of performance metrics such as high throw and low noise. By focusing on functional technologies, firms are likely, but not necessarily be able, to optimize on investments and cost leadership. Functional technology strategy is thus different from the generic cost leadership strategy. The former, even if functional, could require advanced technologies with high investments and high product costs. Only in some cases of the former, cost leadership could be a correlated strategy. On the other hand, in cost leadership as a strategy, the starting and finishing objectives would focus on cost-competitiveness choosing only relevant technologies. Firms following the generic functional technology strategy are upfront clear about the customers and product needs they seek to serve with top-of-the-flight technologies for the chosen dimensions. Firms following generic functional technology strategies are required to stay focused in terms of technology development and investment commitment to cover target market segments to achieve an optimal investment-revenue-profit relationship.

Experience technology strategy

Generic experience technology strategy aims at providing the broadest set of users with total high-end product performance complete with product elegance. The experience strategy goes beyond the known essential purposes of a product, and in the bargain focus on all the five competitive forces. The generic experience technology leader generates a product leader, from all the dimensions one can possibly consider.  One of the most recent striking examples of experience technology strategy is Sony’s Xperia Z Ultra smartphone-tablet (a segment called phablet). It has the fastest processor (2.2 GHz quad core) in the industry and the largest screen  (6.4” or 16.3 cms diagonal display) in a device that can double up both as a phone and tablet. It incorporates the latest proprietary Sony Triluminos display technology with OptiContrast Full HD 1080p LCD touch screen, an 8 MP rear HD camera with Exmor sensor and a 2 MP front HD camera with virtually all the connectivity options. It also has on offer thousands of songs and movies from Sony’s media empire.

Sony Experia Z Ultra pushes the design envelope further, being the slimmest (at 6.5 mm thickness) and the lightest (at 212 gms) in the tablet category, with an elegant but compact form factor (the only tablet that can be held and operated by one hand).  It also is the only device that has scratch-proof and shatter-proof glass for both the front and rear casings. The construction is almost bezel-less enabling the largest screen in the smallest form factor. To cap it all, it marks a new high for all communication devices with its unique water and dust resistance (IP 58 certified). As the example of Sony Xperia Z Ultra demonstrates, experience technology strategy involves marshalling of all the five technology forces in terms of all the conceivable functionalities at high-end performance levels, state-of-the-art materials, exacting manufacturing process ensuring elegance with water and dust resistance, a full-function latest generation Jelly Bean 4.2 Android Operating System and the expansive Sony media and entertainment ecosystem. Experience strategy requires firms to have scientists and technologists from multiple domains and ensure tightest technology networking to achieve the fastest go-to-market (even beating the nimble Koreans at the game for once) and also invest aggressively to achieve the technology goals. Experience technology strategy as a competitive strategy is more expansive than differentiation as the former seeks and achieves differentiation in all the dimensions, and not just one or two. Firms following experience technology strategies are required to commit large investments to cover multiple market segments to achieve pan-market domination which could be investment-intensive but offer reasonably high market share and high profitability.   

Customized technology strategy

In contrast to both the functional technology and experience technology strategies, generic customized technology strategy seeks to achieve the heights of perfection in any chosen area of operation. The relentless quest of Bose Corporation to develop audio systems that capture, process and deliver real, pure, rich and deep sound is an example. The pioneering initiative of Toyota to develop hybrid and electric cars that meet all the exacting parameters of automobile performance with green technologies of exceptional fuel-efficiency is another fitting example. The decision and determination of Amgen to specialize in new biological drugs when large molecule drugs represented a nascent technology is another example. Customization does not mean that firms need to be reactive to market research; on the other hand they must be responsive to their “inner technology voices” that require products to meet human sensory and life needs. Generic customized technology requires that firms invest in fundamental sciences and technologies to achieve increasing levels of perfection. Firms typically would be required to commit resources to develop laboratories of fundamental research organically or invest in strategic alliances with such laboratories in universities. Firms following customized technology strategies are required to commit large investments in narrow market segments which could be risky but offer premium pricing and returns to firms.  

The model of the five competitive technology strategies and the three generic competitive technology strategies, which to the author’s mind is a first in management literature (as a unique reinterpretation and extension of Porter’s five forces theory) , has the potential to lead a more powerful deployment of technology for superior business performance and enhanced competitive strategy.

Posted by Dr CB Rao on August 18, 2013    

A Framework of Generic Competitive Talent Strategies: An Extension of Porter’s Generic Competitive Strategies

In my last week’s blog post titled “Five Competitive Forces in Organizational Talent Arena: Porter’s Competitive Strategy Framework Extended”, Strategy Musings, June 16, 2013, I proposed that Porter’s theory of five competitive forces can be applied remarkably well at functional level too, and not merely at a firm or an industry level.  This hypothesis was formulated with specific illustration of talent management as a domain of application (http://cbrao2008.blogspot.in/2013/06/five-competitive-forces-in.html). Towards the end of the discussion, I also stated that an understanding of the five competitive forces in the talent arena would need to be followed up with generic competitive talent strategies. This blog post develops a framework of generic talent strategies which can help firms to cope with the five competitive talent forces, namely, bargaining power of candidates, bargaining power of service providers, threat of competitors, threat of new knowledge and competitive rivalry in talent pool.

Generic competitive strategies are those strategies that are broadly available to firms when they face industry level competitive forces. While each firm is unique, strategies themselves tend to be generic as firms, by and large, tend to fulfill similar customer goals and have access to industry level and environment level strategic information with no particular firm level superiority. As a result, while all firms may choose one of the available generic strategies, the competitive advantage for a firm arises from how effectively it executes with reference to the generic competitive strategy chosen by it. By definition, each generic strategy would have a set of enablers, which again may not be unique, but would provide significant challenge and opportunity for individual firms to vary the emphasis and execution. For example, the generic competitive strategy of cost leadership may be derived by any or all of enablers such as product standardization, high scale, lean manufacture and integration.

Triggers for generic competitive strategies 

Any generic strategy must provide competitive advantage to the firm. Cost leadership, for example, enables a firm to be the lowest cost producer of functional products, other factors like quality being the same as industry standard, thus insulating the firm against future adversities. Differentiation, on the other hand, enables a firm to offer a diversified, feature-rich product or service range, with a premium user experience. Niche, on the other hand, enables a firm to be known for something unique to the firm. On a similar analogy, any generic talent strategy must deliver competitive advantage on the talent front. Unlike firm level competitive strategies which use factor resources including people to address markets, firm level talent strategies must address market factors to deliver people resources. An understanding of the five competitive forces of talent is, therefore, vital to construct generic talent strategies.

The triggers for that process are two questions: how can employees generate value for their firms, and how can firms generate value for their employees. In an ideal situation both these concerns are self-aligned and self-supporting. In reality, however, there tends to be misalignment between these two value objectives due to the varying influences of the five competitive forces. This blog post proposes value leadership, career differentiation and competency niche as three appropriate generic competitive talent strategies. As with generic competitive strategies, talent strategies must bear some nexus with business models pursued by firms. Generic talent strategies cannot be replicas of generic competitive strategies, however. Just because a firm pursues a cost leadership strategy it cannot pursue cost leadership in talent acquisition too; in fact, such a mimic could produce disastrous results! Similarly, for a firm it being a most differentiated employer need not necessarily translate to a generic strategy of differentiation at the firm level. Niche would be even more inappropriate to mimic.

Value leadership

Value leadership is a generic talent strategy that rewards the employees for the value they generate for the company. Value can be interpreted and quantified in various ways depending on the nature of the business and sophistication of the measurement system. It could be as simple as a rating through an annual performance appraisal system or as complex as a multidimensional analysis covering individual performance, peer evaluation, team performance, business unit performance and corporate performance. Value leadership strategy is direct and creates a nexus between an individual's perceived value to the organization and the business performance. Given the emphasis on keeping the individual happy and contended, value leadership strategy is a vital component of companies getting perceived as the best employers to work with.

In terms of the five competitive talent forces, the value leadership strategy addresses the bargaining power of candidates the best and establishes a benchmark to assess the bargaining power of substitute service providers. It responds to the threat of competitors but does not adequately address the threat of new knowledge. At a broader level, the value leadership strategy ensures that the competitive forces are anchored around tangible and visible metrics of compensation. In the overall, value leadership enhances the intensity of competition in the talent pool. The biggest criticism of the value leadership strategy is that it focuses far too much on the past track record of the individuals, their current performance and the short run performance of the businesses they are directly involved with. Long term value building for the organizations and employees is somewhat lost sight of.

Career differentiation

In contrast to value leadership which focuses on the metrics of credentials, performance and compensation, career differentiation addresses talent issues in a career prism. An organization subscribing to career differentiation strategy takes a holistic and long term view of career development of individuals as opposed to short run talent-results match. In India, Tata Group, Hindustan Unilever, ITC, L&T and a few other firms have a track record of building careers, right from the induction stage of talented youngsters. Rotating people through a number of challenging assignments in different functions, businesses and sites, such companies provide long term careers as opposed to day-to-day jobs to aspirants. It is interesting that the governments, especially the Indian Administrative Service (IAS) followed career diversification as a competitive talent strategy.

Career differentiation addresses the five competitive talent forces in a manner different from leadership. While not ignoring the importance of compensation, career differentiation focuses on other motivators such as professional empowerment, responsibility with accountability, diversified experience and leadership opportunity to inspire individuals. Career differentiation helps in a virtuous iterative cycle of fulfillment and actualization, building strong roots and loyalty between the individuals and the corporation. Over time, such companies get known as differentiated employers where careers are made rather than jobs executed. Needless to say, career differentiation works best when the corporation has a sustainable growth agenda. Career differentiation works the best when employees and the organizational ecosystem consider long term sustainable growth as being more important than short term spikes in performance.

Niche competency

Niche competency as a generic talent strategy works best when firms are highly specialized in terms of business domain. Firms specializing in drug discovery, design and development, and contract manufacture as well as research oriented higher education institutions and such other highly focused activities rely on pools of experts who can deliver on the needed goals. A standalone design studio, for example, will be quite distinctive compared to a research department located in a larger integrated company. Generic talent strategy of niche competency looks for a rare fusion of innovation with a highly homogenized talent. A design house, for example, would have doctorates in science and engineering as reflective of homogenization but each is expected to be highly innovative, breaking new ground each time.

Generic competitive talent strategy addresses the five competitive forces in a unique way. First of all, the way the entire organization is designed with highly standardized yet creative talent reduces the tendency of individual bargaining power. It also addresses the other forces such as the bargaining power of service providers (as no vendor can be better than in-house talent in such niche companies) and the threat of new knowledge (as the environment of innovation fosters continuous learning and knowledge development). It also enables a moderate level of competitive intensity within the talent pool as such organizations are managed in a collegial manner. Niche competency as a strategy, however, is susceptible to poaching by competitors who may tend to replicate the model by transplanting the talent en bloc. Niche competency requires deep attachment of the individuals to their work and results just as all great scientists were wedded to their discoveries.

Talent, the core paradigm

The talent paradigm is the most critical challenge for an organization’s progress. No wonder, therefore, that the five competitive forces of talent rank almost on par with the competitive forces that influence the evolution of firms and industries. As with generic competitive strategies, generic talent strategies offer help in coping with the talent forces. Each of the three generic talent strategies, value leadership, career differentiation and niche competition has a role depending on the firm’s strategy. Each of these strategies requires proactive and front-ended investments in talent management which will be well worth the while for organizations.

Posted by Dr CB Rao on June 19, 2013         

Five Competitive Forces in Organizational Talent Arena: Porter’s Competitive Strategy Framework Extended

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

           

 

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.

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

Structural Analysis within Industries: Strategic Groups and Mobility Barriers

Michael Porter in his work on Competitive Strategy (1980) postulates that structural analysis at the industry level provides several useful insights into the five competitive forces and the broad methodologies by which the competitive forces can be managed by individual firms. He also suggests that industry level structural analysis by itself is not adequate to explain why some firms facing the same industry environment are more profitable than others.  Porter proposes that structural analysis within industries would be a useful adjunct to structural analysis of the industries to explain differences in the performance of firms in the same industry.

Porter suggests the following thirteen strategic dimensions as being capable of providing companies within an industry with varied strategic options to differentiate themselves. These are: specialization, brand identification, push versus pull, channel selection, product quality, technological leadership, vertical integration, cost position, service, price policy, leverage, relationship with parent company,  and relationship to home and host government. Porter states that the level to which each of the strategic dimensions plays out is related to the nature of the industry while in some cases the strategic dimensions are, in fact, related.

Thereupon Porter proposes that characterization of the strategies of all significant competitors in an industry along these dimensions is the first step in structural analysis within industries. This activity, he holds, allows for mapping of the industry into strategic groups. A strategic group is defined by Porter as the group of firms in an industry following the same or similar strategy along the strategic dimensions. There could be just one strategic group in an industry, if all firms follow the same strategy or each firm could constitute a strategic group if each firm follows an entirely different strategy.

According to Porter, the strategic group is an analytical device designed to aid in structural analysis. It is an intermediate frame of reference between looking at the firm as a whole and each firm separately. Strategic groups are claimed to explain differences in performance and profitability of firms in a more perceptive manner. In a concept analogous to entry barriers, Porter proposes mobility barriers as barriers that prevent a firm shifting strategic position from one strategic group to the other. Porter hypothesizes that firms in strategic groups with high mobility barriers will have greater profit potential than those in strategic groups with lower mobility barriers. He states that strategic groups and mobility barriers change over time.

Reapplying concepts of structural analysis, Porter proposes that strategic groups experience all the concepts of industry level competitive forces, namely, bargaining power of buyers, bargaining power of suppliers, threat of substitutes, threat of entry and rivalry among firms.  The firm’s profitability is seen to be a resultant of the interplay of common industry characteristics, characteristics of the strategic group and firm’s position within its strategic group. Other related concepts relate to scale and cost position of strategic groups. Porter proposes structural analysis within industries together with the concepts of strategic groups and mobility barriers as a powerful analytical tool to explain causes of firm profitability and formulate c3B line-height: 115%; mso-bidi-font-family: Calibri;">As can be seen, the twelve dimensions of the author are more perceptive of strategy, and hence better qualifiers for strategic grouping. More interestingly, each of these can be well defined and well measured. Product specialization can be defined in terms of sales per product family. Manufacturing integration can be defined in terms of value added in-house.  Import intensity is defined as consumption of imported materials and components as a percentage of sales. Export orientation is defined as export income as a percentage of sales. R&D intensity is seen in terms of R&D expenditure (capital and revenue) as a percentage of sales. Financial leverage could be shareholder funds as a percentage of total capital employed.  There could be other leading and lagging indicators too. Patent applications made, patents granted or patents commercialized as well as new product counts could reflect the R&D intensity, for example.  

Constraints of multiple dimensions

The essence of strategic grouping is to correlate the strategic dimensions of a firm to its performance. It would be of interest to compare a group of firms which are mapped on the dimensions of product specialization and manufacturing integration to other groups at different levels in terms of their physical and financial performance. A study of the Indian automobile industry suggests that strategic groups which are high on product diversification (ie., low on product specialization) and high on manufacturing integration scored better on physical and financial performance. Similarly, groups which are low on import intensity and high on export intensity tended to do better on performance. Groups which are high on R&D intensity and low on financial leverage also scored well.

Strategic groups being two dimensional have their limitations in predicting the impact of multiple variables on firm performance. Porter tries to circumvent the limitation by suggesting that strategic groups of firms which are mapped on any two dimensions could be further elaborated by bubbles which denote the size of the business and adding other parameters into the description of the group. For example, in a strategic grouping drawn on the dimensions of specialization (narrow line, full line) and vertical integration (high vertical integration and assembler) could be further described in terms of manufacturing cost (low or high), customer service (low or high) and quality (low or high). Despite Porter’s prescription strategic groups serve as a descriptive analytical tool rather than a quantitative analytical tool.

Strategic grouping as a technique works well when firms in an industry are characterized by a few, preferably two, dominant dimensions that are the most important in terms of strategic calibration. For example, in the automobile industry, dimensions of product specialization and manufacturing integration are the two strategic dimensions that could be significantly varied across firms. Other dimensions such as quality and environmental friendliness could be seen as essential dimensions in any case. Strategic grouping also works well when there are a number of firms in an industry which facilitates plotting of the firms into several strategic groups.

Taking stock at this stage, the need to fix the foundation of Porter’s strategic grouping through more perceptive strategic dimensioning and more selective application to relevant industries needs to be noted. As with any theory, mere elegance of strategic thinking cannot translate itself into tangible analytical support that can be quantified. It would be better to recognize this limitation of strategic grouping. This awareness enables a better appreciation of the other two concepts of using strategic groups for establishing mobility barriers and analyzing competitive forces to complete the framework of structural analyv class="MsoNormal" style="margin: 0in 0in 10pt;">
Physical and financial performance, in fact, determines the mobility of firms across strategic groups. A firm in a high product specialization and low vertical integration strategic group should have high financial performance to be able to move to a strategic group that is defined by high product diversification and high vertical integration, which by the very nature requires high capital intensity. If the profitability of such a lean strategic group is weighed down by other factors, say a heavy dependence on high cost imports, the firm in such a strategic group would face high mobility barriers. Mobility barriers, therefore, are not external to strategic groups but are themselves intrinsic characteristics of strategic groups.

Just as an industry with high entry barriers enables monopolistic or duopolistic industry structure with superior profitability, a strategic group which has significant entry barriers would have higher potential for profitability. That said, compared to cross-industry movement cross-strategic group movement is a more common occurrence. A classic case is seen in white goods industry and fast moving consumer goods industry where firms constantly seek to move across strategic groups. Part of the reason is that most firms in these industries possess some common attributes in terms of product development capability, manufacturing capability, brand differentiation, investments in trade channels and so on. This enables the typical firm in these industries bridge the mobility barriers. As an axiom, mobility barriers can be interpreted in terms of core competencies required for strategic groups.

Strategic groups and derived power

Firms in strategic groups could get the energy to transcend mobility barriers through derived power. Such derived power accrues through being a subsidiary of a major corporation, being a part of a major conglomerate or being a corporation well respected by the regulatory bodies, including the governments. Access to external power as above helps firms move into different strategic groups more effortlessly, relative to standalone firms. As an example, Tata Motors would be able to introduce superior quality steel for its automotive purposes by virtue of having Tata Steel in its conglomerate fold. A subsidiary of a multinational corporation would have the ability to secure better financial leverage or hop across strategic groups requiring higher capital even if its current strategic group has little financial surplus to offer.

Inability to be mobile across strategic groups or even exit the industry drives industry consolidation. Equity relationships between needy firms and endowed firms, through mergers and acquisitions, lead to redraw of strategic groups. Shifting strategic preferences of firms also lead to structural reconfiguration. The acquisition of Henkel’s detergent business by Jyothi Laboratories is a case in point. Mobility across strategic groups has to be carefully thought through; otherwise there could be a risk of the acquiring or the acquired firm, or rather the merged entity, being in an inferior strategic group than they were in the pre-consolidation phase.

Globalization and strategic groups    

Globalization has added an entirely new strategic dimension to the theory of strategic groups. Strategic groups of the same industry tend to vary dramatically across nations. It is also not automatic that   characteristics of a multinational are exhibited in the same manner in all the countries the corporation exists. A corporation that is vertically integrated in the headquarters country need not be so in another country. Understanding of the local industrial characteristics helps companies with global corporations become better members of strategic groups. Global developments affect the principal and its subsidiaries differentially. Apart from different strategic dimensions pursued across nations, the extent to which countries are coupled (or decoupled) with global economic developments, especially of the developed world, have a major impact on how strategic groups are formed, how they perform and how they reconfigure.

Posted by Dr CB Rao on September 24, 2011