Positioning views of competitive strategy Assignment for part-time MBA Competitive Strategies, week 2By Gulcin Askin, Michelle Donovan, Kivanc Ozuolmez and Peter Tempelman 9/9/2012 1
The sources of performance of a company have been subject to research for more than fiftyyears. Various schools of thought have tried to determine what these sources are. From theviewpoint of determining the strategy of a company, knowing what these sources are veryimportant, because if the source of performance is identified, the strategy of a firm can beformulated accordingly.Conner (1991) discusses five schools of thought within industrial organization economicsthrough a historical perspective to provide a comprehensive understanding of the elementsforming the resource based approach. Starting with the neoclassical model, the mainassumption of which is the existence of a perfectly competitive market, firms are producingidentical products at the point where marginal cost equals to marginal revenue. Accordingly,performance differences among firms are attributed to technological, managerial and scalefactors. Secondly, Bain-Type IO theory is analyzed, which links performance differenceswith market dominance based on monopolistic power by using the examples of GreatDepression of 1929-1941. Additionally, Mann (1966) argues that firm size, in other wordsproducing large portion of total supply in the market, also matters in terms of gainingpersistent above-normal returns that can also be interpreted as a strengthening factor formonopoly control. On the other hand, distinguished from neoclassical and Bain Type IOtheories, Schumpeter deals with competition as a dynamic concept rather than a static one.According to him, improvement in the market position is highly depending on innovativeinvestments which support monopoly power and consequently enhance the size and scale ofthe firm. While Bain Type IO and Schumpeter theories emphasize monopolistic power as oneof the main drivers of higher performance of a firm, on the contrary, the Chicago Responsedisagrees with the sustainable formation of collusion due to high costs to maintain andmonitor it. Instead, the Chicago Response attempts to explain the performance differencesbetween firms by bringing the terms of efficiency in production and distribution onto the 2
Avanade as a joint venture between Microsoft andtable. In order to improve, firms should be able to reach inputs Accenture widely practicesand distribution channels which enable them to reduce costs the Resource-Based approachthus vertical integration is attached significant importance by to be a high performer in thethe Chicago School. Additionally, the Chicago School deems competitive IT consultancyefficiency as an initial circumstance for the expansion of size market. Avanade values itsand scope of a firm. After this, the theory of Coase and people and knowhow, andWilliamson is examined by Conner which expresses the builds an asset base ofimportance of decreasing costs arising from transactions resalable / reusable toolsexecuted in the market. By applying vertical integration and from every project it realizes.coordination within the firm, assembling different operations This approach leads Avanadeunder one umbrella until the marginal cost of an in house to be distinctive in itstransaction equals the cost of executing it in the market, the services and a strongperformance of the firm improves. Williamson (1975) discusses competitor in the market.that in case of having asset specificity, small numbers of Additionally, by being apotential transactors and imperfect information, a firm has an venture by Microsoft andopportunistic potential which implies that a firm would keep Accenture, Avanade hastransactions which create additional costs in house to support access to the wide salesits market position. channels of the parents’,After elaborative discussion of above mentioned theories, internal or external servicesConner argues Resource Based Theory (RBT) which puts of the parents’ and mostuniqueness of the product value in the center of its argument. In importantly the knowhoworder to come up with a unique product, RBT combines the databases. From this angle,innovative approach of Schumpeter and Chicago School’s Avanade is a very effectiveproposal of having efficient production and results with the cost avoider (Coase/Willamson). Case by 3 KivancOzuolmez.
An example of a firm operating in an extremelydistinctiveness of inputs. RBT defends that high profit competitive market, wheregeneration would be possible not by limiting the supply as there is rapid innovation, andBain Type IO argues but by having uncopyable assets customers and suppliers(Rumelt, 1987). (especially panel suppliers)Rather than focusing and building up only onto one strategy have considerable bargainingtheory, Porter extends the theories and explains performance power, is TPV. One in threeas determined by the collective strength of the five monitors manufactured in thecompetitive forces. Large scale production, vertical integration world is made by TPV. Inand dominance as the barriers to new entrants discussed by order to attempt to gain marketPorter are also focal points in Bain-type monopolization. share and increaseEspecially in the markets where large initial investments are profitability, their recentrequired for R&D, and the start-up losses are high, the power strategy has been to becomeof monopoly plays important role for the firm to keep up more efficient by takingrevolutionary innovations and higher the barriers of potential advantage of synergies (e.g.,new entrants, as discussed in Schumpeter theory and later merging the European salesaddressed by Porter. and back office of the Philips and AOC brands to onePorter discusses the importance of supply costs, especially in location, Amsterdam, andthe case of powerful suppliers and says they can be through combining, getting aresponsible for a firm’s potential profit decreases. Similarly better deal from suppliers forCoase and Williamson focus on internal cost avoidance, and warehouse, forwarding, officethe Resource-Based theory, seeing a firm as an input- rent). It is expected in thecombiner, seeks efficiency and low prices in the supplies. coming years more synergiesPowerful buyers; be it due to price sensitiveness, bargaining will be found because of thepower, etc.. may force the firm to lower prices, therefore profit joint venture with Philips in 4 the TV business, TPV Vision. Case by Michelle Donovan.
falls. As a strategic action, Porter suggests finding the buyers who possess the least power toinfluence the prices - generally by distinctiveness of the product or the industry. Schumpeterand later the Resource-Based theories also see a firm as in a continuous evaluation processseeking and producing unique, high quality and competitive products.Porter, in his view on the Substitute Products as another competitive force, extendsSchumpeter’s and Resource-Based theories’ approach to product uniqueness, and points outthat a product may be unique, however, if it’s replaceable by an alternative, then the marketfor the firm might be more fragile than it looks.Between all the threats of new entrants and substitute products, bargaining power of suppliersand customers, a firm willjockey for position Porter adds, and to reduce the impact ofindustry rivalry, Porter builds on Schumpeter theory and advices on focusing on sellingefforts in the fastest-growing industries or market areas with the lowest fixed costs.Porter builds on all five of the theories compared by Conner to a greater or lesser extent. Inexplaining the five forces which affect profitability, many elements had previously appearedin earlier theories. Economies of scale are highly important in neoclassical theory and theseare mentioned by Porter as being a barrier to new entrants into an industry. Other barriers toentry Porter describes are important points of Schumpeterian theory, namely differentiationof product and investment in innovation, both of which larger firms are likely to be in a betterposition to carry out according to Schumpeter, however Porter does not necessarily agree: hebelieves newcomers can overcome this under certain circumstances. There are still morebarriers which Porter mentions, efficiency of a firm and knowledge, (both specialistknowledge within the industry but also information customers have e.g. through advertising),and the Chicago school had already observed that these are crucial; again Porter also seesthem as important barriers, but not as impossible to break down under certain conditions or in 5
some industries. The Coase/Williamson view also emphasizes the savings which can beincreased due to increasing size and scope of a firm and also the impact of information andspecialism.The other forces at work, according to Porter, the power of customers and suppliers as well asthe availability, quality and price of substitute products and the rivalry between competingfirms, are also discussed by Schumpeter, who emphasizes the importance of pushing rivalsout of the market by innovating. Bain-type IO also sees the size of a firm and the positionadopted by a firm relative to its competitors as the most important factors in a firm’sperformance. In building on some elements from each school of thought, Porter combinesthem and adds to them to create a more detailed theory to explain differences in performanceamong firms and how these differences can be used to create competitive advantage. 6
Case: Instead of fightingTo summarize, Porter’s position on what influences the competition in the arena of post-performance of a firm can be derived from the initial education, e.g. by starting acharacteristics Porter deems critical to the strength of five price war, the Amsterdam Schoolcompetitive forces: threat of entry, changing conditions, of Real Estate (ASRE), more andpowerful suppliers & buyers, substitute products and more tries to join forces withjockeying for position (Porter, 1979). Brandenburger organisations that (may) offerbuilt upon these five forces and drafted the ‘Value Net’ similar studies. By joining forces a(Brandenburger and Nalebuff, 1995). Both Porter’s five win-win situation is achieved.forces and Brandenburger’s ‘Value Net’ describe the way These organisations, whose corevarious actors interact with each other in a competitive business typically is not education,industry. By analyzing the position of a company relative are able to offer high quality studiesto the surrounding forces or actors (e.g. suppliers, to their customer base. The ASREchanging preferences of customers) strategists can in return can tap into a new groupdetermine the most beneficial position of their company of potential students that may havein the industries’ ‘competition arena’. Porter’s five forces otherwise not considered the ASREseem to reflect his view on competition as something that and new knowledge flows into theshould always be battled, i.e. a negative. In Porter’s view, ASRE. Also, the otherwinning implies that a competitor loses, somewhere organisations do not feel the needwithin the five forces framework (Porter, 1979, p. 141). to offer a study themselves whichA company either wins, or loses. Brandenburger and could, from a commercialNalebuff on the other hand introduce the term perspective, result in two barely‘coopetition’ (Brandenburger and Nalebuff, 1995, p. 59). sustainable studies (which wouldCoopetition refers to a situation in which a company not constitute a ‘lose-lose’). Case byonly looks for ‘win-lose’ situations, but also considers Peter Tempelman.‘win-win’ situations. It is not a given that improving 7
one’s performance automatically comes at the expense of others. By looking for ‘win-win’situations, companies may find opportunities that would have otherwise been missed.This paper aims to provide an overview of sources of performance, as suggested by variousauthors. We have also tried to link (parts of) these theories to our own experiences at thecompanies we work at. 8