TOWARDS A DYNAMIC THEORY OF STRATEGY

AUTHOR

Michael E. Porter is the C. Roland Christensen Professor of Business Administration at Harvard Business School and Director, Institute for Strategy and Competitiveness

He is the author of many seminal books on competition and strategy, including On Competition, The Competitive Advantage of Nations, Competitive Advantage: Creating and Sustaining Superior Performance, etc

REFERENCES

• On Competition (Michael Porter, 1998 edition)• The Competitive Advantage of Nations (Michael Porter, 1998 edi-

tion)• The origin of Strategy, Harvard Business Review (Henderson,B

1989)• Dynamic Strategic Resources (Michael A Hitt, et al .1999)• Corporate Strategy. A Resource-Based Approach (Collis & Mont-

gomery,1998)• Arriving at a Strategic Theory of the Firm. International Journal of

Management Review, 2000 (Phelan, Steven E and Peter Lewin)• Using Simulation for Theory Generation in Strategic Management

(Paper presented at 2nd Australian Conference by Phelan, Steven, 1995)

• Explicating Dynamic Capabilities: Asset Selection, Coordination, and Entrepreneurship in Strategic Management Theory (Draft pa-per: David J.Teece, 2003)

• Strategic Thinking and Strategy Analysis in Business- A Survey on the Major Lines of Thought and on the State of the Art (Working paper: Gert Bruche, 1999)

ABSTRACT

Review the progress of the strategy field towards developing a truly dynamic theory strategy

Review the progress of the strategy field towards developing a truly dynamic theory strategy

Theory of StrategyTheory of Strategy

Cross sectional problem

Longitudinal problem

Review 3 traditional theory Review 3 traditional theory Fall short

of exposing

true origin of

competitive success

A Dynamic TheoryA Dynamic Theory

Local environment

Challenges for future research

Why firm succeed or failTheory of the firm

Theory of strategy

EARLY LITERATURE ON STRATEGIES

TERM & DEFINITION

• SuccessAttaining a competitive position(s) that lead to superior and sustainable financial performance

• Sustainable Competitive AdvantageWhen a firm implements a value creating strat-egy of which other companies are unable to du-plicate the benefit or find it too costly to imitate (Hitt, Ireland & Hoskisson in Strategic Manage-ment, 1999)

• Dynamic CapabilitiesThe firm’s ability to integrate, build, and recon-figure internal and external competences to adress rapidly changing environments

EARLY ANSWERS: DETERMINANTS OF FIRM SUCCESS

FIRM’S SUCCESSFIRM’S SUCCESS

Develop internally consistent set of goals and policies

Align SWOT

Create/ exploite distinctive competencies

• Only broad principles !• Companies and environment in a state of constant

change!• No theory for examining firm and competitive

environment!

FUNDAMENTAL ISSUES IN CREAT-ING A THEORY OF STRATEGY

1. Approach to Theory Building

MODELSMODELS FRAMEWORKSFRAMEWORKS

2. Chain of Causality

3. Time Horizon

4. Empirical Testing

TOWARDS A THEORY OF STRATEGY

THE DETERMINANTS OF SUCCESSFirm

Success

FirmSuccess

Relative Position

Relative Position

Industry Structure

Industry Structure

S. CompetitiveAdvantage

S. CompetitiveAdvantage

Activities / ValueSystem

Activities / ValueSystem

DriversDrivers

InitialCondition

InitialConditionManagerial

Choices

ManagerialChoices

5 FORCES

5 FORCES

1. Lower cost2. Differentiate

1. Lower cost2. Differentiate

ORIGINS OF COMPETITIVE ADVAN-TAGE

POSITION

CROSS-SECTIONAL PROBLEM:• What makes some

industries, and some positions within them, more attractive than others?

☛ through underlying choices a firm

makes in term of its industry, positioning, and

activities

LONGITUDINAL PROBLEM:• Why firms able to get

into the advantaged positions, and why did they sustain or fail to sustain them?

☛ through initial condition and pure managerial choices

Weakness: Built on aggregate understanding of the industry, in term of cost leadership or broad differentiation, rather than on understanding consumer preferences (Jonathan Wilson in Dynamic Strategic Resources)

TOWARDS A DYNAMIC THEORY

DYNAMIC THEORY

• Dynamic requires longitudinal perspective, which allow examining the changes and the continuity in the pattern of organiza-tional behavior over time

• During the last decades, there has been an intensive request for the search of dy-namic theory of strategy

• “ …detailed longitudinal case studies, cov-ering long periods of time, are necessary to study these phenomena” (Porter, 1991)

TRADITIONAL THEORY

THREE PROMISING LINES OF INQUIRY HAVE BEEN EX-PLORED:

• GAME-THEORETIC MODEL• COMMITMENT AND UNCERTAINTY• RESOURCED BASED VIEW• HYPERCOMPETITION (Strategic Thinking and Strategy

Analysis in Business …., by Gert Bruche, 1999)

GAME THEORY

• RESTRICTED TO ONE OR A FEW VARIABLES☛ Many variables that characterize most industries

• ENVIRONMENT (TECHNOLOGY, PRODUCTS, ETC) ASSUMED TO BE FIX☛ Environment keep changing

• HOMOGENEITY OF STRATEGIES ☛ Trade-off/interaction in configuring the entire set of activities in value chains

• MANY FIXED VARIABLES ☛ Changing variables

COMMITMENT AND UNCER-TAINTY

• STRATEGY IS MANIFESTED IN A RELATIVELY FEW IN-VESTMENT DECISIONS, HARD TO REVERSE AND TEND TO DEFINE CHOICES IN OTHER AREAS OF THE FIRM (COMMITMENT UNDER UNCERTAINTY) – Ghe-mawat’s book in 1991

• CONSIDERS THE ENVIRONMENT AS RELATIVELY STA-BLE (THOUGH UNCERTAIN)☛ Commitments have long lived consequences and

possibilities for reconfiguring the value chain are limited

• FOCUSING ON DISCRETE CHOICES☛ Limit the discretion a firm has to shape its envi-ronment, respond to environmental changes, or define entirely new positions

RESOURCE-BASED VIEW

• Firm differ in fundamental ways because each firm possesses a unique bundle of resources

• The origin of competitive advantage are valuable resources that firm possess i.e. assets( such as skill, reputation, etc) and organizational capabili-ties

• RBV will have the greatest significance in envi-ronments where change is incremental, number of strategic variables and combination is limited and the time period is short to intermediate term☛RBV cannot be an alternative theory of strategy, it cannot be separated from cross sectional

determinants of competitive advantage

HYPERCOMPETITION

• Hypercompetition takes place in fast cycle environments where any single competitive advantage is eroded very quickly

TRADITIONAL THEORY

THREE + ONE PROMISING LINES OF INQUIRY HAVE BEEN EXPLORED:

•GAME-THEORETIC MODEL•COMMITMENT AND UNCERTAINTY•RESOURCED BASED VIEW•HYPERCOMPETITION

STILL LACK OF A DYNAMIC THEORY OF STRATEGY !!

IMPORTANT ISSUES TO BE ADRESSED

• A THEORY MUST DEAL WITH FIRM/INDUSTRY AND ENVIRON-MENT☛ Environment both constrains and influences outcome

• A THEORY MUST ALLOW FOR EXOGENOUS CHANGE IN AREAS SUCH AS BUYER NEED, TECHNOLOGY AND INPUT MARKET☛ In a world where exogenous change is rapid, analytical

problem more complicated

• A THEORY MUST GIVE LATITUDE NOT ONLY TO CHOOSE AMONG WELL DEFINED OPTIONS BUT TO CREATE NEW ONES☛ Ability to shift the constraints through creative strategy

choices, innovative activities, skills, capabilities

• A THEORY MUST TAKE INTO ACCOUNT ROLE OF HISTORICAL ACCIDENT OR CHANGES☛ Luck has an important influence on how one develops a the-ory of strategy

FIRM AS THE ORIGIN OF AD-VANTAGE

• SINCE THE NUMBER OF VARIABLES IS SUBSTANSIAL AND ENVIRONMENTAL CHANGE IS CONTINUOUS, THEN THE PROBLEM IS NOT SELECTING GOOD STRATEGIES BUT CREATING A FLEXI-BLE ORGANIZATION THAT LEARN AND ABLE TO CONTINUALLY REDEFINE ITS STRATEGY

• IT LIES IN THE ABILITY TO MAKE GOOD STRATEGY CHOICES AND IM-PLEMENT THEM

ENVIRONMENT AS ORIGIN OF ADVANTAGE

• True origin of competitive advantage may be found in firm’s proximity or local environment

• Competitive advantage in particular industries tended to be strongly concentrated in one or two countries, often with several/many successful home-based competitors

• Successful firms were also geographically concen-trated within nations

• Firm create and sustain competitive advantage be-cause of their capacity to continuously improve, in-novate and upgrade their competitive advantage overtime

• Successful firms are those that improve and inno-vate in ways that are valued not only at home but elsewhere

PERSPECTIVES ON FIRM COM-PETITIVENESS

TRADITIONAL

• Competitive advantage resides solely inside a company/industry

• Competitive success depends primarily

on company choices

EMERGING

• C.A. resides partly in the locations at which company’s business units are based

• Cluster participation is an important contributor to competitiveness

Michael Porter “ On Competition” , 1998 edition

THE DIAMOND AS A DYNAMIC SYSTEM

DETERMINANTS OF NATIONAL COMPETITIVE ADVANTAGE

Firm Strategy,Structure and

rivalry

Firm Strategy,Structure and

rivalry

DemandCondition

DemandCondition

FactorCondition

FactorCondition

Related and SupportingIndustries

Related and SupportingIndustries

• Presence of high quality, specialized inputs:

Human/capital/natural resources

Physical/administrative/info

rmation/technological infrastructure

• Access to capable, locally based suppliers and firms in related fields

• Presence of clusters instead of isolated industries

• A local context and rules that encourage investment and sustained upgrading e.g. intellectual property protection

• Open and vigorous competition among locally based rivals

• Sophisticated and demanding local customers

• Local customer needs that anticipate those elsewhere

• Unusual local demand in specialized segments

Chance

Government

ORIGIN OF COMPETITIVE AD-VANTAGE

• Competitive advantage origi-nates in the local environment in which the firm is based

• The four attributes (“diamond”) in a firm’s home market promote or impede a firm’s ability to achieve competitive advantage

DIAMOND AS DYNAMIC SYS-TEM

• Aspects of the local environment con-stitute a dynamic system. The effect of one determinant depends on the others Mutual reinforcement of all determi-nants

• Sustained success requires the inter-action of favorable conditioned of de-terminants

• Firms lose competitive advantage due to weakness in their local environment or other internal problem

ENVIRONMENTAL INFLUENCES ON DYNAMIC OF STRATEGY

• The environment, via diamond, af-fects firm’s initial condition and its managerial choices

• The diamond address a dynamic the-ory of strategy early in the chain of causality

• Firms must understand and exploit their local environment to achieve competitive advantage

ISSUE FOR FURTHER RE-SEARCH

• Need to better understand the balance be-tween environmental determinism and com-pany choice in shaping competitive outcome

• Need to better understand the degree of stickiness or inertia in competitive positions once a firm stop progressing

• Need to know how necessary or helpful it is to push even further back in the chain of causality

• Challenge of crafting empirical research to make further progress in understanding this dynamic of strategy

EMERGING THEORY

Challenge of crafting empirical research to make further progres

in understanding this dynamic of strategy

DYNAMIC CAPABILITY THEORY

A DYNAMIC THEORY

Resourced Based Theory

• Emphasizing on internal analysis/specific asset of the firm where resources/capabilities /uniqueness, etc, as source of sustainable competitive advantage

• Static due to not anticipating environmental change

Dynamic Capability Theory

• Extension of Resourced Based Theory

• Seeks to explain how firm achieve and sustain competitive advantage despite an ever-changing environment

• Appropriately adapting, integrating, and re-configuring internal and external organizational skills, resources, and functional competencies toward a changing environment

• Competitive advantage from managerial/organization processes, positio, path

DYNAMIC THEORY OF STRATEGY

Adapting effectively to changingenvironment

Longitudinal view(answering WHY)

COMPLEMENTARY OR COM-PETITOR?

Factor Condition

Relatedand supporting

Industries

Firm Strategy,Structure,

Rivalry

Demand Condition

Dynamic CapabilityTheory

Industrial BasedResourced Based

DISCUSSION + CONCLUSION

DISCUSSION

• An analogy from other field to answer why firm success

• Limitation to Porter’s theory- Theory of strategy should provide the predictive function (Phelan,1995)- Lack of experimental method condition i.e.

observation, manipulation and replica-tion

• To establish a theory of strategy need a reconciliation of the different perspective between economist and strategist (Phelan, 2000)

CONCLUSIONS

• Success of the firm depends on initial con-dition and managerial choice, and ex-plained through chain of casualty

• There is no theory of strategy that can be applied for all situation over time. Envi-ronmental and technological changes re-quire a dynamic theory of strategy

• Strategy implemented in one firm, might not success if adopted by other firm

• Dinamic Capability theory is one of the al-ternatives developed to answer the need for a dynamic theory of strategy

ORIGINS OF COMPETITVE AD-VANTAGE

• THE FRAMEWORK BUILD LINK BETWEEN MARKET OUTCOMES AND UNDERLYING CHOICES A FIRM MAKES (IN TERM OF IN-DUSTRIES, POSITIONING AND ACTIVITIES)

• SUCCESS REQUIRES THE CHOICE OF A RELATIVELY ATTRACTIVE POSITION, FIRM’S CIRCUMSTANCES, AND POSITIONS OF COMPETITORS

• ALL FIRM’S ACTIVITIES MUST CONSISTENT WITH THE CHOSEN POSITION

TERM & DEFINITION

• SuccessAttaining a competitive position(s) that lead to superior and sustainable financial performance

• Competitive AdvantageWhen a firm earns a higher rate of eco-nomic profit than the average rate of eco-nomic profit of other firm competing within the same market, the firm has a competi-tive advantage in that market

• Sustainable Competitive Advantage • Dynamic Capabilities

DYNAMIC CAPABILITY THEORY

• The dynamic capability theory seeks to explain how firm achieve and sustain competitive advan-tage despite an ever-changing environment

• Dynamic capabilities emphasized the key role of strategic management in appropriately adapting, integrating, and re-configuring internal and ex-ternal organizational skills, resources, and func-tional competencies toward a changing environ-ment☛ Dynamic Capabilities are those competencies that allow the firm to respond to and exploit changing market environment