Competition and Business Strategy in Historical Perspective - Ghemawat

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Competition and Business Strategy in Historical
Perspective - Ghemawat
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Strategy History

• Account of several eras
• Invisible hand
• 2nd half of 19th century ?? 2nd half of 20th
  century
• Based on development of new competitive models

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• Prior to 19th Century, no real opportunity or
  ability for single organizations to affect an
  industry
• Legal protections were limited
• Ability to generate capital for large projects
  was limited

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Alfred Chandler

• Visible Hand tames Invisible Hand
• Development of Infrastructure ?? Development of
  Markets
• Railroads
• Reaction to Adam Smith theory of invisible hand
• Both ? Development of Managerial Class

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M-form (Multidivisional form)

• 2nd half of 19th century
• Increasing numbers of diversified,
  equity-capital-financed organizations
• These organizations made large investments in
• Manufacturing
• Marketing
• Professional Mangers to coordinate
• First strategic plans from these managers
• Alfred Sloan ? GM over Ford
• Chester Barnard ? ATT

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Effect of Second Great War

• Development of Operations Research ??Operations
  Management to manage military logistics
• Linear Programming Learning Curves Game
  theory
• Rise of interest in formal strategic thinking
• Attempts to shape the environment of the
  organization
• Inter-service Competition in US Military
• Development of notion of distinctive competence
• After War Rapid Increase in Globalization
• Need to rebuild ?
• Differential Advantage of US Firms due to
  disruption
• Reduction of competitiveness so no focus on
  strategy

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Learning Curve
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Growth of Academic Influences 1950s

• Development of Business Policy ?
• 1. Integration of functional thinking at all
  levels
• 2. Examination of external environment
• 3. Matching of efforts 1 and 2
• Function of manager ?
• Continuous process of determining the nature of
  the enterprise and setting, revising and
  attempting to achieve goals

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Growth of Academic Influences (cont.)

• Organization, Subunit and Individual should have
  clearly defined purposes or goals defining
  direction and preventing drift
• 1960s - SWOT (TOWS)
• Popular in firms into the 1990s

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SWOT MATRIX
STRENGTHS WEAKNESSES
OPPORTUNITIES SO STRATEGIES WO STRATEGIES
THREATS ST STRATEGIES WT STRATEGIES
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Andrews Model
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Growth of Academic Influences (cont.)

• Willingness to risk investment leads to debate
  about long-range versus short-range advantages
• Related to distinctive competence
• Levitt Marketing Myopia ? Worry about marketing
  (pushing) goods based on distinctive competence
  and not delivering value
• Ansoff Worry about risk of action based on
  speculating about customer versus efficiently
  delivering goods and services to known demand
  based on competence
• Ford versus GM

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Ansoff Summary of Strategy Alternatives
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Strategy Formula

• Profitability Optimization Model (PROM)
• Based on Multivariate Statistical Analysis
• Explains differences in Return on Investment
• Idea to generalize and quantify the strategy
  decision making process
• Interest in Formula Dove Firms to Private Sector

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Growth of Influence of Strategy Consultants

• Move to assumption of strategic approach based on
  common patterns across all industries
• Boston Consulting Group (BCG)
• Selling oversimplifications
• Experience Curve Model
• Economies of Scale
• Learning
• Technological innovation
• Growth Share Matrix
• Portfolio Concept
• Better way of allocating capital

Cash Flow Matrix 1965-66
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Basis for BCG Cash Flow Model
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Growth of Influence of Strategy Consultants
(cont.)

• McKenzie
• Developed alternative version of Portfolio
  Analysis for GE - 1968
• Development of Strategic Business Unit (SBU)
  concept
• Developed Alternative Matrix
• Profit Impact Market Strategies (PIMS) Program
  (from PROM)

Nine Block Matrix
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Criticisms of Consultant Theories

• Experience curve
• External shocks disrupted process
• Need to consider/enable radical innovations
• Creates competition that damages all competitors
• Portfolio models
• Differences in recommendation across different
  models
• Too mechanical in allocation of resources
• Vulnerability to the initiatives of outside firms
• Focus on risk minimization, not innovation
• Hayes and Abernathy
• Preference for analytic detachment instead of
  insight based on experience
• Stress short-term cost reduction, not long-run,
  technological innovation

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Industry Attractiveness Approach

• Unbundled and focused on industry attractiveness
  as a basis for investment choice
• As an alternative to reliance on models of
  perfect competition
• Considered inverse relation between profitability
  and price elasticity
• Bain Industry Structure and performance (IO)
• Concentration ? Profitability
• Barriers to entry as a source of concentration ?
• Absolute cost advantage (Like a strong patent)
• Economies of scale
• Significant degree of product differentiation

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Industry Attractiveness Approach

• Porter Five Forces Model

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Industry Attractiveness Approach

• Brandenburger and Nalebuff model

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Criticisms of Attractiveness Models

• Coyne and Subramanyam
• Assumptions behind models are not always the case
• That buyers, sellers, competitiors and
  substitutes do not collaborate
• Wealth goes to those that can create barriers
  value is in structural advantage
• Uncertainty is low enough to predict the behavior
  of others in the industry

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Competitive Positioning Approach

• Addresses profitability within an industry
• Profitibility for a successful player in an
  unattractive industry may be better than the
  worst firms in an attractive industry
• Important to consider competitive positions
• Considered relative position of firms within
  industries
• Competitive cost analysis
• Customer analysis

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Competitive Positioning Approach

• Derived from an attempt to fix the experience
  curve
• Disaggregated costs into specific components that
  added costs
• Disaggegrated costs into raw materials costs and
  added costs
• Sorts out scale effects from different components
  of costs added
• Adds consideration of economies of scope

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Cost Analysis

• McKenzie model of cost drivers
• Porter model

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Value Chain Analysis

• Hall concept of differentiation
• Part of changing the focus from experience
• Porter elaboration of McKenzie model
• More cost drivers
• Attention to the concept of value
• Activities can be source of cost or value
  competition
• Optimal tradeoff between cost and value postions

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Competitive Dynamics

• Focus on time-based competition
• Choices are linked across time
• Focused
• The length of time for competitive advantage of
  an investment
• The availability and attractiveness of other uses
  of capital
• Erosion of profitability through time
• Stalk ? Fast response variety

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Competitive Dynamics
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Game Theory

• Focuses on the role of commitment, or
  irreversibility of action
• Changes what can be done by a firm
• Thus changes strategic options
• Assumptions of game theory are problematic
• Sensitive to details
• Limited number of variables
• Rationality of participants

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Resource Based View of Firm

• Wernerfeldt ? ownership of unique and critical
  resources in generating value
• Role of inimitability (resistance to copying) of
  Advantageous Resources
• Source of inimitability
• Unique, historical conditions
• Causal ambiguity
• Social complexity

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Core Competency

• Prahalad and Hamel
• Enduring inimitability based on knowledge
• Knowledge creates competencies
• Difficult to copy
• Creates value
• Applies to many end markets
• Is expressed in core products

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Dynamic Capabilities

• Avoiding core rigidities
• Avoiding path dependence in development of
  capabilities

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