Dynamic Firm the Role of Technology - Assignment Example

Chelladurai. P., VLBJCAS, 3rd November 2006 Question Porter's essentially a historical approach cannot provide a full account of either a nation's competitive advantage and corporate strategies or the growth and development of industrial clusters.' Discuss, with reference to other theories and evidence that might assist such an account. Porter's ideas became more and more subject of critique under the impression of the developing Internet economy during the last decade. Critics point out that economic conditions have changed fundamentally since that time. The rise of the Internet and of various e-business applications has strongly influenced nearly all industries. In fact, Porters theories base on the economic situation in the eighties. This period was characterized by strong competition, cyclical developments and relatively stable market structures. Porter's models focus on the analysis of the actual situation (customers, suppliers, competitors etc) and on predictable developments (new entrants, substitutes etc). Competitive advantages develop from strengthening the own position within this Five-Forces-Framework. Hence, these models cannot explain or analyze today's dynamic changes that have the power to transform whole industries. In fact, digitalization, globalization and deregulation have become powerful forces during the last years, but Porter's models rarely take them into consideration. Today's markets are highly influenced by technological progress, especially in information technology. Therefore, it is not advisable - if not to say impossible - to develop a strategy solely on the basis of Porters models. Shapiro and Varian explain in their book "Information Rules"that the economical laws that apply to products and services cannot be simply transferred to the new category information good. Production, marketing etc are different for products and services and, hence, are different for information too ". Moreover, the latest shift from dot-com-hype to dot-com-crashes has given evidence that the basic laws of economics are viable for the new economy or information economy too. Even in the eighties, it was not advisable to build a strategy on nothing but Porters models. Every strategy should base on a careful analysis of all internal and external factors and on their potential future development. This is no new insight. Michael E. Porter is an economist. His Five Forces model is based on microeconomics. It just describes them in a more understandable way. Porter talks about the attractiveness of an Industry that is influenced by the shape of five forces. In economics, the constellation of factors determines issues like profit maximization or supernormal profits. Porter's Model and Micro economics Porters Five Forces Areas of Microeconomics Bargaining Power of Suppliers Supply and demand theory, cost and production theory, price elasticity Bargaining Power of Customers Supply and demand theory, customer behavior, price elasticity Rivalry between Existing Players Market structures, number of players, market size and growth rates Threat of Substitutes Substitution effects Threat of New Entrants Market entry barriers Source: Primary Michael Porters models do not have the influence they used to have any more as the economic model has changed to Internet economy in the past decade. Now with the emergence of Global companies and Dot Com companies, considering only the economic perspective for a nation's advantage or corporate strategies or the growth and development of industrial clusters is not sufficient. New economic laws came up and other drivers started to transform markets. Drivers transforming Markets beyond Porter's Model: Digitalization: As power of information technology grows, all players in a market will have access to far more information. Thus, totally new business models will emerge in which even players from outside the industry are able to vastly change the basis of competition in a market. The rise of electronic shopping malls, operated for instance by telecom operators or credit card organizations is an example of this. Those who use the Five Forces Model and who base their thinking on today's industry structure would never see these changes coming in time. Globalization: Improvements in distribution logistics and communications have allowed nearly all businesses to buy, sell and cooperate on a global level. Customers, meanwhile, have the chance to shop around and compare prices globally. In the result, even locally orientated mid-sized companies find themselves in a global market, even if they do not export or import themselves. One can add here, that global and networked markets impose new requirements on organizations' strategies. It is not enough any more to position oneself as a price-leader or quality-leader (like Porter suggests in his Generic Strategies model). Rather competitive advantages emerge now from the ability to develop lasting relationships to more mobile costumers and to manage far-reaching networks of partners for mutual advantage. Deregulation: The past decade has seen a dramatic shrinking of government influence in many industries like airline, communications, utilities and banking in the U.S. and in Europe. Fuelled by the new opportunities of information technology, organizations in these industries were able and forced to completely restructure their businesses and to look out for alternatives. Evidence for 'Porter's essentially a historical approach cannot provide a full account of either a nation's competitive advantage and corporate strategies or the growth and development of industrial clusters.' Industry: Dot com Corporate: Google Inc. Evidence for Industry Irrelevance The Dot com Industry as a whole has no relevance with Porter's Diamond Model as it has very little relationship with the economic model and this industry breaks the barrier of both Economic model and Business model going together. In the Dot com Industry, The economic and Business models are independent of each other. Evidence for Corporate strategy Irrelevance Consider the business model of Google, it has no relevance to the porters model. Google Business Model User Google Advertiser Google Inc generates its revenue from users when they use google website to search for information and click on Google Advertisements displayed on various sites thrpugh Google's feature Google Adsense. Each click the user makes generates revenue for Google. Similarly, Advertisers pay Google to place their Ads in Google Advertisements and to list their company in the search pages of Google. This is the basic business model of Google. Google Inc's Business model has a little relationship with the Economy of the nation. So Porter's Diamond and Porter's Value chain has no relevance in this business model of Google and say any other dot com company in this sense. The Government restrictions are low and the factor conditions are minimal. This example shows the evidence that Porter's Diamond or Porter's Value chain cannot be applied to all industries or Corporate. More Limitations of porter's model Porter asserted that firms could achieve competitive advantage through either cost leadership or differentiation, and he advised firms to avoid being 'stuck in the middle'. These formulae have been widely discredited. For example, Knights (1992) reported on research in a financial services firm. He found the model difficult to follow in practice because costs of a firm's own operations, let alone competitors, are not calculable, and products are easily imitated. Porter discusses only two types of achieving competitive advantage - cost leadership or differentiation without defining competitive advantage. To define competitive advantage, first different types of competition must be put together. It is possible to discern at least five distinct modalities: Different forms of Competition Modality Examples Possible Mechanisms Market competition (Competition in tradeable assets) Factor inputs Products Channels Finance Location Price Priority competition (Competition to be first) Innovation Creativity Patents Competence building Hegemonic competition (Competition for influence) Brand recognition Standards Politics Performative competition (Competition in organizational performance) Productivity Quality Management Competition in foresight (Competition to understand and predict) Technology choices Leadership While this is not intended as a complete list, or even a well founded one, it illustrates the diversity of the ways in which competition occurs. Furthermore, competition takes place in multiple domains, of which the domains of most interest are production (in which firms compete against firms) and consumption (in which products compete against products). Given this diversity, the theoretical resources being brought to bear on these types of competition are surprisingly modest and poorly integrated with each other. Furthermore, the way in which different types of competition - in different domains - interact is largely unclear. The feedback loops between competition in production and consumption frustrate analysis. Michael Porter's Model does not consider all the above said competitions to arrive at the competitive advantage. Competition is not a straightforward process. Whereas the most developed theoretical treatment of competition is concerned with the role of markets in matching supply and demand in traded assets, most of the processes of competition concern nontradeable assets and are therefore enacted outside markets. Such competition follows a number of different modalities, but in the main these modalities are poorly served by theory. In particular, there is a need to better theorize the interaction between organizational theory and competition. Market competition would be expected to be historically invariant. However, the relative emphasis of the other competitive modalities and the processes within them may be historically specific. If so, the fads of strategy might reflect not the undue influence of fashions but a genuine shift in the underlying nature of competitive processes. Comparison with other Models and Theories In the recent years, Porter's model has lost its relevance and more it has been used as one of the tools to arrive at a decision regarding devising a corporate strategy. The generic Strategies proposed by Porter are being replaced by many other new models and strategies. A research states that there are nearly 50000 alternative strategies. Some of the other popular models and tools to devise a strategy are as follows. Value Disciplines: An alternative approach to Generic strategy proposed by Michael Treacy and Fred Wiersma is Value Discipline. They believed the strategies must center on delivering superior customer value through on of the three value disciplines: Operational excellence, customer Intimacy, or product leadership. Grand Strategies: The most popular alternative approach to Generic strategy is the Grand Strategy. The Grand strategies include 15 most important strategies and a company must analyse all the 15 principal strategies and select an optimal grand strategy from the given alternatives. The 15 principal grand strategies are: Concentrated Growth, market development, product development, innovation, horizontal integration, Vertical integration, Concentric diversification, Conglomerate diversification, Turnaround, divestiture, liquidation, bankruptcy, joint ventures, strategic alliances, and consortia. Nowadays, a lot of importance is given to SWOT Analysis or TOWS Matrix for devising a corporate strategy. The Strategies are devised to each and every strategic business unit within the corporate separately. The growing popularity of Balanced Scorecard by Kaplan and Nortan as both a tool for devising the strategy and monitoring the performance of the strategy is replacing all models. Balanced Scorecard The balanced scorecard is famous as it translates an organization's mission and strategy into a comprehensive set of performance measures that provides the framework for implementing its strategy. The balanced scorecard does not focus solely on achieving financial objectives. It also highlights the non financial objectives that an organization must achieve in order to meet its financial objectives. The balanced scorecard measures an organization's performance from four key perspectives: 1. Financial 2. Customer 3. Internal business process 4. learning and growth Reference: 1) M E Porter, 'The Competitive Advantage of Nations' (1990) [338.6048 POR] Shapiro, C. & Varian, H.: 'Information Rules'. 2) A D Chandler (ed.), 'The Dynamic Firm: the Role of Technology, Strategy, Organization and Regions' (1998) [338.7 DYN] 3) Auerbach, P. 1988. 'Competition: The economics of industrial change', Oxford: Basil Blackwell. 4) Johnson, G. and K. Scholes. 1999. 'Exploring Corporate Strategy', fifth edition, Hemel 5) Hempstead: Prentice Hall Europe. 6) Fred R. david, 'Strategic Management - Concepts and cases', Ninth edition, Pearson Education 7) Pearce and Robinson, 'Strategic Management', Ninth edition, Mcgraw hill. 8) www.themanager.org/Strategy/BeyondPorter.htm 9) www.valuebasedmanagement.net 10) http://www.brs-inc.com/business_strategy.asp 11) http://www.anu.edu.au/people/Roger.Clarke/ Annexure 'Competitive advantage is at the heart of a firm's performance in competitive markets. After several decades of vigorous expansion and prosperity, however, many firms lost sight of competitive advantage in their scramble for growth and pursuit of diversification. Today the importance of competitive advantage could hardly be greater. Firms throughout the world face slower growth as well as domestic and global competitors that are no longer acting as if the expanding pie were big enough for all.' - Michael Porter's book 'Competitive Advantage' (Porter, 1985: xv), Competitive Advantage of Nations The Diamond model of Michael Porter for the Competitive Advantage of Nations offers a model that can help understand the competitive position of a nation in global competition. This model can also be used for other major geographic regions. Traditionally, economic theory mentions the following factors for comparative advantage for regions or countries: A. Land B. Location C. Natural resources (minerals, energy) D. Labor, and E. Local population size. Because these factor endowments can hardly be influenced, this fits in a rather passive (inherited) view towards national economic opportunity. Porter says sustained industrial growth has hardly ever been built on above mentioned basic inherited factors. Abundance of such factors may actually undermine competitive advantage! He introduced a concept of "clusters," or groups of interconnected firms, suppliers, related industries, and institutions that arise in particular locations. As a rule Competitive Advantage of nations has been the outcome of 4 interlinked advanced factors and activities in and between companies in these clusters. These can be influenced in a pro-active way by government. These interlinked advanced factors for Competitive Advantage for countries or regions in Porters Diamond framework are: 1. Firm Strategy, Structure and Rivalry (The world is dominated by dynamic conditions, and it is direct competition that impels firms to work for increases in productivity and innovation) 2. Demand Conditions (The more demanding the customers in an economy, the greater the pressure facing firms to constantly improve their competitiveness via innovative products, through high quality, etc) 3. Related Supporting Industries (Spatial proximity of upstream or downstream industries facilitates the exchange of information and promotes a continuous exchange of ideas and innovations) 4. Factor Conditions (Contrary to conventional wisdom, Porter argues that the "key" factors of production (or specialized factors) are created, not inherited. Specialized factors of production are skilled labor, capital and infrastructure. "Non-key" factors or general use factors, such as unskilled labor and raw materials, can be obtained by any company and, hence, do not generate sustained competitive advantage. However, specialized factors involve heavy, sustained investment. They are more difficult to duplicate. This leads to a competitive advantage, because if other firms cannot easily duplicate these factors, they are valuable). The role of government in Porter's Diamond Model is "acting as a catalyst and challenger; it is to encourage - or even push - companies to raise their aspirations and move to higher levels of competitive performance " . They must encourage companies to raise their performance, stimulate early demand for advanced products, focus on specialized factor creation and to stimulate local rivalry by limiting direct cooperation and enforcing anti-trust regulations. Porter introduced this model in his book: The Competitive Advantage of Nations, after having done research in ten leading trading nations. The book was the first theory of competitiveness based on the causes of the productivity with which companies compete instead of traditional comparative advantages such as natural resources and pools of labor. This book is considered required reading for government economic strategists and is also highly recommended for corporate strategist taking an interest in the macro-economic environment of corporations. Read More