A New Approach to Competitive Advantage: The Strategically Balanced Corporation

Corporations are established and developed based on a combination of vision, strategy and execution. Amongst these three, strategy sets the pathway to accomplish the vision through execution. Strategy differentiates one firm from the other, not necessarily in terms of performance but more in terms how it seeks to achieve its vision. Firms are commonly viewed as specialized, diversified, integrated, local, global, and so on. Strategy, in its core elements, has not altered much over the years but the environmental information and internal awareness that sets the tone for strategy has not only become more complex but also volatile. The number of players has also significantly increased in any industry. The corporations are finding it increasingly difficult to develop unique strategies. Strategy, in this context, is not about which industry or business to operate in but is about how to achieve competitive advantage in any chosen business or industry.

For good measure, we do have a few strategic templates from management gurus; the principal ones being the theory of generic competitive strategy by Michael Porter and the theory of core competence by C K Prahalad. There are also several theories for firms and organizations to become effective and competitive, for example, the model of balanced scorecard by Robert Kaplan and David Norton, the theory of constraints by Eliyahu Goldratt and the theory of reengineering by Michael Hammer. All these theories, developed in the 1980s and 1990s, do not take into account the perfect spread of information and options that is now available for strategists and firms. Every leader, for example, is aware of the generic strategies of cost leadership and differentiation, and even the sub-strategies to achieve them. What strategy officers must now focus is on developing an elegant balance amongst multiple strategic options. This blog post proposes a paradigm of strategically balanced corporation.

Strategic balance

An optimal strategy is one that is open to environmental opportunities but also one that hedges against environmental uncertainties. It also plans execution based on available resources or resources that can be acquired to execute the strategy. This requires that the strategy must always balance rewards and risks on one hand and aspiration and attainability on the other. Seeking this balance is a delicate and complex process; with strategists requiring to be both conservative and aggressive as the situation demands. The concept of strategic balance is relevant for mono-product firms as well as for multi-product and multi-business firms. The concept is also not necessarily limited to only products or services but covers all the essential parts of a firm’s value chain such as products and services that are delivered, the manufacturing or delivery process used, the customer outreach methods, the human resources deployed, and so on.   

Research has focused on firms adopting certain extreme strategies. For example, it has been well researched if market share and profitability are correlated. It has also been researched if specialized and conglomerated businesses have unique sustainability characteristics. There is, however, practically negligible research on what constitutes a strategic balance and whether strategic balance leads to superior performance. In this context, this blog post creates a fundamental platform to understand and analyze strategic balance. We may define strategic balance as a firm-specific balance that exists by design amongst various key components of a firm’s value chain and between strategic options that exist in respect of each component of the value chain. Strategic balance must not be misconstrued as striking a middle ground; rather it should be seen as a quest for optimality of a firm. The concept of strategic balance is amplified below.

Value balance

There is a concept, in some schools, that it is not important for a firm to operate across all segments of the value chain. This school of thought argues that a firm could just develop and stick to a core competence and stick to it. An analogy could be that a firm could be a design house but could manufacture and market products with external alliances as successfully as a fully integrated firm. Such outsourcing hypothesis could be true to an extent but not to a sustainable extent. Corporate history has enough chapters of firms which mimicked a full value chain operation on certain basic internal strengths and a large extent of external support but withered away when the alliance partners denied support or failed to respond to growth opportunity because of lack of internal capabilities. As a matter of fundamental principle, a firm which does not ensure value chain balance with appropriate attention to key components such as R&D, manufacturing, supply chain, marketing, human resources and information technology would be suboptimal and sub-sustainable in a competitive world. By no means, this is an all-inclusive listing of value chain components.    

Portfolio balance

Every firm exists and grows based on products and services in a particular business, be it hospitals or healthcare business and automobiles or transportation business. The notion that portfolio concepts are valid for only diversified businesses is archaic. Even a business of coffee chains can apply and benefit from portfolio balance concepts. Once a business is defined, and however narrowly the business is defined, there would be creative ways to in-build a portfolio into the products or services. A portfolio approach is based on the strategic truism that a service or a product offers more than the product or service functionality to the customer. A restaurant may serve only food but it can provide umpteen choices in terms of culinary streams to its customers. Even Starbucks, known for its pioneering coffee line of business, has multiple beverages, hot and cold, besides several eats and food accessories as its portfolio. The strategic challenge lies in developing the right balance between specialization and diversification. Any business provides the opportunity of strategic portfolio balance;  a company manufacturing only heavy trucks can offer a wide portfolio from bare chassis to fully built custom application vehicles on one hand and from civilian to defence vehicles. Strategic portfolio balance ensures an optimal exploitation of environmental opportunity and appropriate hedging against volatility.

 Manufacturing balance

Manufacturing represents a part of value chain which converts a proven design into a saleable product or service. Manufacturing can vary between complete integration and complete outsourcing. The former is highly resource intensive with high fixed overheads that could be highly catastrophic in the event of a precipitous demand downturn. The latter is certainly resource-lean with low overheads but could be highly vulnerable in the event of a sharp and sudden demand uptick. Each industry offers a paradigm of optimal manufacturing balance. A highly evolved industry where each component or material has also evolved into its own industrial structure provides several solutions for manufacturing optimality. On the other hand, a newly developing industry has fewer degrees of freedom to offer. The former implies an established quality and cost base that could afford higher outsourcing. The latter could have doubtful engineering and quality fundamentals that could demand greater control over manufacture through integration. An automobile manufacturer outsourcing differing components based on differentiated internal capabilities is an example of the former. On the other hand, a coffee chain seeking control over coffee plantations, roasting technologies and coffee making is an example of the latter. Strategic manufacturing balance ensures optimal quality, cost and delivery capabilities for a firm.

Marketing balance

The best of design and manufacturing optimality could come to naught with strategic marketing imbalance. Marketing balance is not about regional marketing effort allocations or domestic-export balance. It is about striking the right balance between the product and the sales channel, between different marketing channels and between sales and service.  Some of the technical marvels, Tata Nano car to quote an example, have failed to fulfill the potential of design and manufacturing brilliance due to marketing sub-optimality. Had Tata Nano been marketed through an exclusive car dealer network, with appropriate emphasis between different marketing approaches and a special after-sales package, potentially Nano would have caught the imagination of the target market segments. By way of another example, the best of marketing cannot make up for strategic imbalances in either design or manufacturing. Godrej Interio comes across as a prime example of lack of strategic portfolio balance (dependence on all-steel design and manufacture, as is Godrej wont) adversely influencing the final low-business outcome, despite some great strategic market balance. These examples also illustrate how a strategic balance amongst the various components of a value chain is also extremely important for a firm to achieve sustainable successful performance. 

Talent balance

Firms are a complex cascading network of leaders, managers and executives on one hand, and another equally complex network of organization, teams and individuals. Adding further complexity is the network of businesses, functions and processes. Across all this complexity, two components stand out:  individuals and teams. Organizations are often unable to comprehend and convey whether it is the individual performance or the team performance that determines performance. Talent management thought keeps swinging between the typical Western practice of individual superstar performance and the equally typical Oriental practice of consensual team performance. This leads to somewhat strange positions taken by leadership experts wholly deprecating either ‘we’ or ‘I’ in performance management. The concept of strategic talent balance requires that individual performance be treated as important as team performance. For organizations to be successful, meritocracy based on individual performance (and individual recognition) and organizational harmony based on team performance (and team recognition) must co-exist. Without overwhelming each other, ‘I’ as well as ‘We’ are equally important for strategic talent balance.

Strategically balanced corporation

The aspects discussed above are illustrative and not comprehensive. The value chain of a firm varies significantly, multi-functionally, depending on the industry. It is important for a firm to understand and map out its value chain in its entirety and then select the components that are critical for performance. The next step would be option mapping for each function and establishing the optimum strategic balance in each case. Exercises of long range planning which seek certain goals and develops strategies to execute towards the goals would not be effective unless they are set in the perspective of strategic balance. Strategists (whether they are chief executive officers, chief functional officers or chief strategic officers) must also be balanced professionals without any biases as to what constitutes the appropriate strategies; for example, some tend to seek diversification and some seek specialization preferentially as a pre-experienced panacea for success. Such biases limit the openness and effectiveness in developing true strategic balances.

A strategically balanced corporation is able to move through the economic and business cycles successfully while exploiting opportunities with agility. The journey of a small-cap startup through the phase of mid-cap company to the goal of a blue-chip company is based on strategic balance adding strength and resilience to exploit opportunities and withstand uncertainties. A strategically balanced mid-cap or blue chip firm leads to the evolution of a conglomerate. While a conglomerate provides much flexibility to define varied businesses under its fold (for example, salt to software and chips to ships), it is essential that each business or firm under the conglomerate umbrella is a strategically balanced corporation. The seeding, screening and weeding of individual businesses adopted by big conglomerates, from time to time, is proof enough of the need for the individual firms to be strategically balanced and sustainably effective. If research were to be undertaken on the performance of strategically balanced corporations, the results would surely support superior performance by, and superior competitive advantage for, such firms.

Posted by Dr CB Rao on November 24, 2013   

 

Education and Experience - Specialization and Diversification: Matrix of Multiple Possibilities

Many young people as they embark upon their educational and experience journeys are often intrigued and stymied in their analysis of what kind of focus and/or versatility in their journeys would provide them with appropriate career growth and satisfaction. There cannot be easy answers to this query as the variables that influence one’s career development go beyond education and experience. That said, education and experience are two of the most profound variables that influence a person and his or her contributions to any system. Education and experience not only add knowledge on a continuous basis but also influence personality development. Any template that helps the aspirants to understand themselves and their career ecosystem better should be a welcome addition to management and organizational literature.  

The template cannot be about which educational course or industry domain is better or worse from a career point of view. The template has to be more generic and independent of such choices. The oriental model advocates specialization in education and experience; it almost frowns upon darting across streams. The western model is open to, and even welcomes, versatility in education and experience. Alternatives are possible when a matrix approach is taken. The author, in one of the earlier blog posts, brought out how a 2X2 matrix provides insightful conceptual and analytical clarity to understand any issue. Interested readers may refer to the blog post, “The 2 Dimensional Matrix: A Universal Analytical Tool”, Strategy Musings, July 3, 2011 (http://cbrao2008.blogspot.in/search?q=the+two+dimensional+matrix).

Four categories

Fundamentally, there are four options for an individual with respect to education or experience. He or she can pursue specialization or diversification in the course of education. He can also pursue specialization or diversification in industry of employment. Individuals can, therefore, be slotted in one of the four quadrants of the education-experience matrix. These are (i) Education Specialization – Experience Specialization (ESES), (ii) Education Diversification – Experience Specialization (EDES), (iii) Education Specialization – Experience Diversification (ESED), and (iv) Education Diversification – Experience Diversification (EDED). For ease of reference and even for representative reflection, these four categories of individuals may be referred to as Mountaineers, Miners, Seafarers, and Explorers, respectively. The nomenclature is supported logically as further discussed below.

The individual who specializes in a particular education stream and sticks to a particular related industry domain is very much like a mountaineer who masters mountaineering and is clear about the singular mountain he needs to climb; hence ESES individuals are best named as Mountaineers. The individual who diversifies into many educational streams but sticks to a particular industry domain is quite like a miner who masters multiple mining technologies to get that best metal or mineral; hence EDES individuals are appropriately named as Miners. The individual who specializes in one educational stream but diversifies into many industry domains is like a sailor who trusts his ship to navigate through the varied seas; hence ESED individuals are logically named as Seafarers. The individual who diversifies into many educational streams and also diversifies into multiple industry settings is like an explorer who constantly learns and embraces the new to achieve the prize catch; hence EDED individuals are reasoned to be Explorers.

The Successful Mountaineer (ESES Executive)

To be a successful Mountaineer in the professional or corporate world, one must have a strong aptitude for the subject or domain and a commitment to contribute through a synergy of academic knowledge and practical experience in the industry. A good example would be a basic degree in mechanical engineering, followed by a post graduate degree in automobile engineering or other specializations such as thermal engineering, metal forming, robotics or mechatronics and a career in an automobile firm. Typically, he or she would commence the career in one of the three core areas of product development, manufacture or marketing and move on to become a functional head and eventually a business head. The linkage of education and experience with the subject and domain aptitude is the hallmark of the successful Mountaineer.

To be a successful career Mountaineer, the professional executive would need to have all the technique and patience of the real mountaineer. The career path for a person specialized in and dedicated to a particular domain, industry, and even a company is likely to be challenging with slow growth and slippery terrain. It requires a perfection of subject knowledge and conversion of knowledge into results to become differentiated. As one would be aware, automotive, aerospace and metals majors recruit each year scores of graduate engineers suited to different functions, and only a handful can reach to the top. It is, however, a feasible target illustrated by the likes of Alan Mulally of Boeing and Ford and AM Naik of L&T, and several other graduate engineers who reached to the top in the respective industries. It pays to be a Mountaineer if education and experience are aligned with aptitude serving as the glue.

The Successful Miner (EDES Executive)

The successful Miner in the professional or corporate world is like a miner in search of precious metals and minerals. He is likely to be highly career focused, motivated to reach to the top by being as broad spectrum as possible in terms of functional capabilities. An individual who pursues a graduate degree in any engineering discipline, followed by post graduate degree in business management or a professional who does chartered accountancy, company secretary and cost accounting courses are driven by an ambition to mine wider and grow faster, picking prize assignments and seeking functional adjacencies in growth. As opposed to the Mountaineer who has committed aptitude, the Miner tends to have flexibility and adaptability as the key drivers.

To be a successful Miner, the professional or corporate executive needs to have, like the real life miner, a fine discriminating and refining power. Knowing more subjects or dabbling in multiple disciplines is not necessarily a sure passport to the top. Successful move to the top is often based on some solid achievements in certain core functional or business areas. The uniqueness of knowing multiple domains must be reflected in an ability to define, plan and execute for strategic goals, with greater end to end connectivity. A large number of senior executives at the top in an industry appear to conform to the pattern of learning more and contributing singularly to a specialized industry. Indian industry and Indian executives, in particular, appear to prefer the Miner model.

The Successful Seafarer (ESED Executive)

The successful Seafarer has aptitude for, and belief in, his core subjects just as the successful real life sailor has control on, and confidence in, his ship. He is also not easily laid off by the vastness of practical applications which his core specialization can explore. Examples of this type of career planning relate to educational specializations that are not industry specific, and instead are industry neutral. Specializations like finance, information technology, legal, electronics and instrumentation which can find scope and need in any industry are the typical Seafarer’s preferences. However, certain gritty Seafarers are wont to use their educational specializations in uncharted seas of radically different industries. Unlike the Mountaineer who has a certain natural alignment of education and experience and the Miner who has a vast functional spread for a unitary industry, the Seafarer has the challenge of his or her knowledge specialization leading to such notable contributions that could help him or her get positioned for growth in competition with Mountaineers and Miners that are bound to exist in an organization.  

To be a successful Seafarer, the individual has to have the innovative ability to apply his specialization to achieve competitive advantage for any industry. He or she also should have the competitive and tenacious spirit to push the envelope and create new areas of contribution to the industry. An instrumentation engineer would, for example, be able to secure new levels of automation for any industry. A finance professional can bring his vast core and collateral functional knowledge to lead the company in any industry to newer levels of financial solidity, costing sharpness, overseas listing and so on. In addition, a Seafarer would need to have an extra set of behavioral competencies to be seen as a strategic manager despite strong functional specialization. If the Seafarer does not possess or acquire such soft skills, it is quite possible that a Seafarer would remain a knowledge worker or a subject expert even in the long term, which, however, need not necessarily be a bad outcome either for the individual or the organization.

The Successful Explorer (EDED Executive)

There could be a view that an Explorer would end up a rolling stone, gathering no mass in the sober, steady corporate and organizational worlds. On the other hand, the Explorer represents the quintessential Gen-Next executive, eager to absorb multiple subjects and dabble in several domains. He is also eager and motivated to constantly search for an organizational home that not merely meets his expectations but challenges him to explore higher trajectories. The new age young CEOs and the young entrepreneurs coming up with new ideas are the representatives of the Explorer category. Some Explorers tend to become turnaround specialists and growth drivers. Most Explorers also become highly successful as consultants with diversified competencies and organizational deliveries.

To be successful, the Explorer needs to be an intensely absorbing person; linking subject mastery and organizational delivery to each moment’s challenge rather than to the nature of degrees or longevity in organizations. The Explorer tends to have a bit of the Mountaineer, Miner and Seafarer characteristics in him but in his own ‘mix and match’ capability. The Explorer is characterized essentially by lateral thinking and an ability to generate new thinking from current situations and adapt past experiences to new situations. Explorers eventually make excellent heads of diversified business conglomerates, and not surprisingly highly successful bureaucrats and public servants. Business stalwarts like JRD Tata and Ratan Tata are legendary examples.  

Talent-Organization Matrix

An ideal organizational format of a growing organization would offer adequate space for all the four classes of performers, the Mountaineers, the Miners, the Seafarers and the Explorers. Needless to say, diversified companies organized in terms of business units offer much greater space for all the four classes of aspirants. That said, their existence or requirement is also contextual. If an organization chooses to be specialized and narrowly focused, it will need, and also tend to have, more Mountaineers. If an organization is narrowly focused but needs new ideas to propel turnaround or growth, it will need and also tend to have more Miners. If an organization is in search of a core competence, it will need, and tend to have, Seafarers. If an organization needs diversification, or is already a business conglomerate, it will have, and need to have Explorers.

The above has important implications for strategy formulation and talent management. There has been a debate whether structure or strategy precedes the other, and the debate has been settled with the validated hypothesis that structure follows strategy. The discussion in this blog post also leads to a debate whether strategy sets the talent needs or talent helps create a sustainable strategy. Potentially, a broad vision for the organization should lead to induction of an appropriate mix of Mountaineers, Miners, Seafarers and Explorers that can develop and execute a required strategy. Young aspirants need to understand that when they choose their unique educational paths and experience pathways, they are not only categorizing themselves into one of the four classes but are also developing into human dynamos that can power organizations in potentially unique ways.

Posted by Dr CB Rao on October 14, 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