Overview
Now we focus on technology, rapid innovations within technology, its
effects and different insights on how companies should act and react to the
changing environment that is brought about by technological innovation.
Porter-type IO, PV (Porter, 1979) and the Resource Based View, RBV (Barney,
1995) -albeit different views on strategy- focus on how to achieve competitive
advantage in a more or less static state of the industry. Both the PV and RBV
talk about a world where once a market position is acquired (or resources are
built), it becomes more a question of operations, control and optimization. They
do not discount the idea of industrial evolution, but don’t explain the
differences in performance or how to achieve competitive advantage during the
tumultuous time of evolution. The Entrepreneurial View realizes the
entrepreneur as the source of competitive advantage and someone who breaks the
equilibrium that a certain industry achieves (Jacobson, 1992). The EV also
acknowledges that equilibrium builds and breaks in cycles. This week’s readings
build more on the EV, but approach it from a novel perspective.
Differences in Performance
The commonly
known product life-cycle hypothesizes that any industry passes
through 4 basic stages; introduction, growth, maturity and decline, and
represents these stages by an S-curve. The RBV does not present an objection to
this, but Porter (1980) presents a strong criticism of this traditional view by
saying that initial industry structure depends on the skills and resources of
early entrants and the potential structure depends on innovations in R&D,
marketing, manufacturing etc (processes). There is a mesh of deeply
interrelated evolutionary processes which affect the five forces and as a
result cause every industry to follow a unique life-cycle. The product
life-cycle curve is made on the pretense of diminishing returns; it considers
eventual demise as inevitable. Porter says that firms can influence industry
innovations to benefit the firm’s position and that industry demise
(diminishing returns) is not obvious at all.
The strategies
based on industrial innovation build on this view by saying that process and
knowledge based industries have become significantly distinct and are thus,
governed by different rules (Arthur, 1996). Diminishing and increasing returns
relate to the traditional industrial based process industries and the novel
knowledge based industries respectively.
Anderson and
Tushman (1991) bring forth the idea of technology cycles and discontinuities.
Technology cycles consist of three eras: substitution, design competition and
incremental change (the era of substitution and design combined together make
up the era of ferment). Each new cycle is initiated by a major breakthrough
which they term as a discontinuity. Discontinuities can be
competence-destroying; where old knowledge becomes completely obsolete and
ineffectual, or competence-enhancing; where the innovation builds on old
knowledge. These can be product or process innovations. Competitive advantage
is gained by inciting a discontinuity, and then controlling the evolution
during the era of ferment to introduce the dominant design. Anderson concludes
with a rudimentary framework in the shape of 4 lessons for managers: expect
discontinuities, expect an era of ferment leading up to a dominant design,
monitor potential competitors and direct process and product innovation for the
profitability and viability of the firm. If we compare this to the RBV,
dominant designs brought forth by these discontinuities can also be viewed as
heterogeneous resources, and hence are a source of competitive advantage for
the firm (Barney, 1995).
The PV and the
RBV consider that each industry keeps moving towards equilibrium. The PV and
the RBV explain process industries, where process innovations affect only a few
links in the value chain (Anderson and Tushman, 1991). Process innovations are
usually competence enhancing, and all the players in an industry can keep up-
depending on the position they choose to take up within that industry. As a
result, no firm can corner the market and a standard price (equilibrium) is
maintained. The converse is the increasing-returns world- the
knowledge based industries- where products or firms that are ahead get further
ahead, and the ones that lag keep lagging further behind(Arthur, 1996).
The PV considers
diminishing-returns if firms are not constantly repositioned depending on the
variance of the 5-forces. The RBV considers diminishing returns if resources
are not strong enough and therefore focuses on building core-competencies to
avoid diminishing returns. The PV and the RBV try to explain worlds which favor
hierarchy, planning and control; superior optimization is then the difference
in performance. In the increasing-returns world, hierarchies flatten because
the entrepreneurs need to report directly to the CEO or the board. Time is an
important factor here, and delays from ideas to implementation as a result of
the red-tape of hierarchies should be avoided. In the process based industries
(of the PV and RBV) reinvention just means optimization, but the
knowledge-based world is one of adaptation.
Strategy in the
processing world is based on core competencies, pricing, costs and quality. In
addition to these, Arthur talks about the importance of the economics of
positive feedbacks. He talks about the importance of hitting the markets first
and to have superb technology. If a market has already been hit first,
advantage can be gained by pricing competitively and then exploiting the
installed network base (web) for profits. Psychological positioning and exit
strategies are also important. Arthur concludes with some thoughts for
managers, which reflect ideas from the PV and RBV arbitrarily: understanding
feedbacks, ecology recognition, having the resources to compete and identifying
the games that are coming.
Stoelhorst
(2005) explains that value appropriation is related to
increasing-returns and the scarcity and value of resources (RBV). Value
creation is driven by ubiquity, and it can be achieved through scale,
experience and information economies. He uses the Microsoft example to show
that even under increasing-returns, identification of scarce, inimitable
resources were the basis of profitability. Christensen, Raynor and Verlinden
(2001) present the concept of disruptive technologies; customers cannot keep up
with technological progress and that is the purpose, because if a customer is
satisfied, the industry will shift towards that of decreasing-returns.
Competitive outcomes in the PC and VCR
industries
The four phase
model below provides us a unique tool which helps firms anticipate possible
sources of the competitive advantage for each phase. By looking to regularities
in historical evidence, we could be able to understand and predict the change
of the value of resources during the product’s lifecycle (Stoelhorst 2004).
1st phase:
Embryonic technology
During the first
phase of technological development R&D is important for firms to provide
technological innovations. In the development phase of a product, the market is
dominated by firms that are able to design and make end-use products. On this
stage, the most profit goes to the companies making highly-differentiated
products with a strong cost advantage (Christensen, 2001). The early years of the
computer industry illustrate how the leading position changes over the time of
technological discovery. In 1975, a small company called MITS introduced the
first microcomputer, outperforming Intel, the world's largest semiconductor
company. Even the fact that Intel introduced the first microprocessor during
1970’s and the third generation 8080 processor (considered as the world's first
PC by some experts) in 1977 didn't help Intel keep its leading position in
commercializing the personal computer. The other example of firm's performance
in dynamic view of competition is the VCR (videocassette recorder) industry. The
first VCR was invented by Amptex as the Ampex VTR. Due to its high price and
small scale of production it was only available for TV networks. However, three
Japanese firms- Sony, JVC and Matsushita- brought the VCR to the consumer
market. So we see that it was not the innovator, but the manager of positive
feedbacks which reaped the rewards of the technology.
2nd phase:
Design competition
This phase of
the technology lifecycle is lead by competition between designs. MITS was
overtaken by the first imitator IMSAI who played on MITS's inability to meet
demand. The IMSAI machine also included CP/M –the only operating system that
was then available for microcomputers based on the Intel 8080. The other main
competitors for the leading industry position were three companies who
introduced incompatible systems with a higher market potential: Commodore PET,
Tandy TRS-80 and Apple II (Stoelhorst 2004). The inability of customers to keep
up with the technical progress by main player (innovation leader) gives competitors
the chance to enter the market to create a better version of a product or a
service with a lower cost- a more market friendly version (Christensen et. al.
2001).
3rd phase:
Standardization
Emerging
consensus of standards becomes crucial for business success during this 3rd
phase. Setting industry standards that meet the needs of the market was an
ultimate goal of SONY and JVC. JVC worked on building a web (Arthur, 1996 pp.
106) that was the key factor for VHS format to become the industry standard. To
become a market leader, a strategy based on alliances could be crucially
important. IBM's PC branch was set as the standard in the market. Setting
partnership with Microsoft provided IBM with software developers and producers
of add-ons. Strategic maneuvering, build coalitions and establishing dominant
designs are the 3rd phase model components by Stoelhorst (2004).
4th phase:
Normal competition
The phase of
normal competition is dominated by innovation in component manufacturers,
processes and by incremental improvements on the standard. In the late 1970s
and early 1980s, the leaders in the VCR for home use production were
Matsushita, JVC and Sony. Between 1978 and 1981 Matsushita outperformed Sony by
doubling the number of models manufactured. Offering VHS components to other
manufacturers was the main reason for market success, together with a broad VHS
product line of its own. When the boom in pre-recorded home video tapes came, this
market was dominated by VHS and this was the end of Sony’s Betamax line. Sony
had to finally opt for an exit and restructured itself to conform to the VHS
standard while being on the prowl for the next innovation (which came in the
shape of Sony’s Walkman).
With 'clones'
appearing in the market, IBM’s monopoly was broken in the PC industry. IBM was
losing control and was going through a major restructuring while the start-up
Compaq introduced and sold the first fully IBM compatible machine during its
first years.
Manufacturers of
components and software like Intel and Microsoft profited the most from this
development. A new layer of competitive advantages appeared by the early 1990s
– low cost producers like Packard-Bell, Gateway and Dell would become the
largest PC sellers by introducing low cost manufacturing, excellent logistic
capabilities and an innovative internet-based distribution strategy (Stoelhorst
2004, p. 18). These were examples of playing the high tech tables to gain
competitive advantage (Arthur 1996, p. 108).
References
Porter, Michael E. (1980), ‘Industry Evolution’, From: Bob
de Wit and Ron Meyer (1998), Strategy: Process, Content, Context, 2nd
edition, London: Thomson Learning.
Anderson, Philip and Tushman, M.L. (1991). Managing through
cycles of technological change, Research
Technology Management; 34 (3): 26-31.
Arthur, W. Brian (1996), Increasing Returns and the New
World of Business, Harvard Business
Review, (July-August): 100-109.
Stoelhorst, J.W. (2005), Competitive Dynamics and the
Paradox of Increasing Returns:
Why Winning Markets May Not Lead to Fat Profits, Working
paper, Amsterdam Business School, Universiteit van Amsterdam.
Christensen, Clayton M., Michael Raynor and Matt Verlinden
(2001), Skate to Where the Money Will Be, Harvard
Business Review, (November): 73-81.
Stoelhorst, J.W. (2004), Balancing Resource-Based
Competitive Advantage over a Technology Lifecycle, Paper presented at the
Strategic Management Society Annual International Conference, Puerto Rico.
Foster, Richard (1986), Innovation: The Attacker’s
Advantage. New York: Summit Books
Barney,
Jay B. (1991), Firm Resources and Sustained Competitive Advantage, Journal
of
Management, 17, p. 99-120.
Peteraf,
Margaret A. (1993), The Cornerstones of Competitive Advantage: A Resource-Based
View, Strategic Management Journal, 14, p. 179-191.
Porter,
Michael E. (1991), Towards a Dynamic Theory of Strategy, Strategic Management Journal, 12, p. 95-117.
Porter, Michael
E. (1979), How Competitive Forces Shape Strategy, Harvard Business Review, (March-April): 137-145.
Jacobson, Robert (1992), The “Austrian” School of Strategy,
Academy of Management Review, 17(4): 782-807
