Competition and Business Strategy in Historical Perspective - Ghemawat

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

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

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

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

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

Learning Curve

Price Drop withIncreasing Volume

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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

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

SWOT MATRIX

STRENGTHS WEAKNESSES

OPPORTUNITIES SO STRATEGIES

WO STRATEGIES

THREATS ST STRATEGIES

WT STRATEGIES

Andrews Model

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

Ansoff Summary of Strategy Alternatives

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

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

Basis for BCG Cash Flow Model

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Product Life Cycle Curve

First Mover Advantage

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Experience Curve

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

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”

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

Industry Attractiveness Approach

Porter Five Forces Model

Industry Attractiveness Approach

Brandenburger and Nalebuff model

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

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

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

Cost Analysis

McKenzie model of cost drivers

Porter model

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

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

Competitive Dynamics

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

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

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

Dynamic Capabilities

Avoiding core rigidities Avoiding path dependence in

development of capabilities

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