Rivalry between established competitors: For most industries, the major determinant of the overall state of competition and the level of profitability is competition among the firms with the industry (Grant 2002:77). In order to sustain the position in industry, firms adopt various tactics such as price competition, new products and increased levels of customer service. In determining the nature and intensity of competition between established firms, six factors play an important role. They are concentration, diversity of competitors, product differentiation, excess capacity, exit barriers, and cost conditions (Porter 1980:19).
Powerful suppliers & buyers: The firms in an industry operates in two types of markets: market for buyer and market for supplier. Both buyer and supplier can influence the price of product, yet in the contrary ways. Powerful suppliers of complex, technically components are able to squeeze profitability out of an industry by raising prices of raw materials. Whereas facing intense competition, firms have limited freedom to raise their prices accordingly. E.g. Intel in microprocessors has been a powerful factor depressing the profitability of PC manufacturers. On the other hand, customers likewise can force down prices by “demanding higher quality or more service, and playing competitors off against each other” (Costin 1998:56). It’s important for an organization to enhance its strategic position by choosing buyers who have weak power to apply adverse influence.
Conduct—strategic choice of Industrial Organization
Competitive conduct has been defined by Caves (1980:14) as the "policies that participants adopt toward the market with regard to their price, the characteristics of their product, and other terms that influence market transactions". Having identified the forces influencing competition in an industry, the next step for a firm to do is to consider its own position in the industry and design effective strategy accordingly.
According to Porter (1980), effective strategies involve three approaches: positioning the company, influencing the balance and predicting profitability of the industry.
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To match the given industrial structure with firm’s strength and weaknesses, a firm needs to position itself for gaining the long-term competitive advantage and high rate of return. There are two basic types of competitive advantage a firm can possess: low cost or differentiation (Wit & Meyer 2002:350), which leads firm to three generic strategies: cost leadership, differentiation and focus (cost focus & differentiation focus). The analysis of the relationship between these four strategies is listed in Appendix 2 with the figure.
- Firms not only need to position themselves in the industry, but also are able to influence, change or create the structure by means of applying competitive strategies.
- Building entry barriers to prevent new entrants and substitutes
- Achieving economy of scale for firms to compete aggressively on price and thus force new firms facing the choice either to come in on a large scale or to accept a cost disadvantage. (Porter 1980)
- Broadening product line to close off possible product niches (Masoud 1990).
- Strengthening bargaining position versus buyers and suppliers.
Implementation of vertical integration strategy can: 1.Spare the uncertainty of being dependent on suppliers (Thompson & Strickland 2001). 2. Produce cost advantage and competitive price by direct sales or Internet retailing instead of regular wholesale-retail channels.
- Reducing the intensity of competition from rivalry.
- Enhance the firm’s capability by acquisition and merger of competitors, or establishing alliance to increase industry concentration.
- Take advantage of economy of scale and achieve constant technology development and product innovation.
- Improve promotion mix to maintain brand awareness and loyalty.
- Explore new market to enhance competences by increasing demands from customers.
- For long-term profitability, the strategies that firms decide to adopt should be based on anticipated returns at least five years in the future (Grant 2001). The strategy which can accurately forecast industry change and the likely profit potential will enable firms to obtain competitive advantage.
Performance—measurement
External environmental conditions and industry structure are largely assumed to shape the firm's performance (Mahoney and Pandian, 1992). The strategic choices that firms made are used to examine performance variance and their economic contribution to firm profitability, therefore, market power and industry structure are determinants of firm performance (Montgomery, 1994). On the other hand, performance is used as measurement to prove the degree of applicability and effectiveness of the strategies that firm choose to adopt, also, performance can test the result of prediction that organizations made for their strategies choices.
- Analysis of resource-based approach:
Definition and introduction of RBV
As a traditional strategy research, structure-conduct-performance approach suggests that firms need to seek a strategic fit between their internal characteristics (strengths and weaknesses) and their external environment (opportunities and threats). However, considerable emphasis has usually been given to a firm's competitive environment and its competitive position. Comparing with the external emphasis, the resource-based view embodies a different approach, which stresses the internal aspects of a firm. In other words, what a firm possesses would determine what it accomplishes. According to this principle, a firm should pay more attention to its resources than to its competitive environment. The contribution of the resource-based view is that it develops the idea that "a firm's competitive position is defined by a bundle of unique resources and relationships" (Rumelt, 1984: 557), and thus provides a balance vis-à-vis environmental models of strategy.
RBV process analysis
According to Grant (2002), the firm is essentially a pool of resources and capabilities, and that these resources and capabilities are the primary determinants of its strategy. The relationship among resource, capabilities, and competitive advantage is shown in figure 3 (Appendix 3).
From the figure, we can find the process of resource-based approach consists four consequent steps which are listed as follows, and then we will attempt to analyze them from each step:
Identifying resources
Identifying the resources of a firm is the essential step for resource-based approach. As listed in the figure, resources of the firm are divided into tangible, intangible and human resources. Tangible resources are those financial resources and physical assets that can be measured by the firm’s financial statements. While in most case, intangible resources contribute much more than tangible resources. E.g. the brand equity of global brands, like Ford, can be times higher than it’s book value. Comparing to the former two, the human resources are more dynamic and complex to identify, and are therefore much more likely to “give rise to advantages that are rare and difficult for competitor to copy” (Haberberg & Rieple 2001:225).
Identifying capabilities
As Grant (2002) said: ”Resources are not very productive on their own.” To measure the firm’s capacity for productive activity in the value chain, a firm needs to identify capabilities, or competence that it has by making use of the resources, which enables a firm to establish competitive advantage and perform better than its competitors.
Evaluating resources and capabilities for establishing and sustaining competitive advantage
The purpose of identifying resources and capability of firm is to evaluate competence that a firm possess, thus find out its strength and weakness compared with competitors and identify the important resources and capability that the firm can use to build up competitive advantage, which is the key factor to compete with rivals and obtain high rate of return in the industry.
Developing strategy implications
In order to make superior profit by making use of firm’s competitive advantages through firm’s resources and capabilities, a firm needs to exploit its key strengths and manage weakness, which is to formulate strategy to enable the strengths to the greatest effect—to maintain resources and capability durable, difficult to identify, imperfectly transferable and not easily replicated (Grant 2002).
Developing resources and capabilities
To sustain and extend firm’s competitive advantage, a firm should not only exploit existing resources, but also need to constantly develop them to enable firm eliminate existing weakness and build new adaptable competence. E.g. by setting the mission statement, a firm can determine how it will go to achieve the desired relative position to “fill the resulting resource and capability gaps” (Grant 2002:165).
- Critical analysis of relationship between two approaches:
- Similarity and difference:
The similarities of the two approaches are that:
- The purpose of both approaches is to build competitive advantage for firms to obtain market share and thus superior profit.
- Both approaches encourage implementation of affective strategies to compete with rivals in the industry or outside.
- Under both models, firms need to identify their strength and weakness for strategy making.
However, the two approaches talked about the strategic position of company from different perspectives. In the following paragraphs, we will try to identify the difference one by one from 8 points (Wit & Meyer 2002).
The principle of structure-conduct-performance is that the firm should firstly identify the main competitive forces of industry structure. And then in order to find a competitive position in the industry, a firm needs to make strategy choice accordingly. To this extent, the S-C-P approach focuses on market environment analysis, and firm’s resources are used to help forming strategy based on firm’s position in the industry.
Resource-based view tends to emphasize the importance of a firm’s strengths, because they think “internal resources and capabilities provide the basic direction for a firm’s strategy, thus they are the primary source of profit for the firm” (Costin 1998:292). Maintaining and developing unique and difficult to imitate resources are dominant factors for firm to apply strategies to various environmental opportunities.
S-C-P has been regarded as a market/industry-driven approach (Wit & Meyer 2002). In this paradigm, an industry’s performance depends on the conduct of sellers and buyers, which depends on the structure of the market. Strategists analyze the external environment to identify industry attractiveness and market opportunities. Firms selecting superior position in industry can then implement strategy and improve performance to gain competitive advantage.
The R-B-V, on the other hand, is viewed as resource-driven approach. In this approach, the level of analysis is the firm environment. Strategist taking this view thought that the way to make superior profit is to establish sustainable competitive advantage over rivals by its valuable and imperfectly imitable resources. The strategy applied by firm is to keep the strength to ensure the firm possesses leading position among competitors.
S-C-P approach starts with structural environment analysis, which is Porter’s five forces analysis. By identifying competitive sources, firms can highlight their opportunities and threats in the industry in face of competitors.
The starting point of R-B-V is to identify the resources and capabilities that a firm possesses, because firm resources are the basis of superior performance, and “the key to competitive success lies in identifying and developing the hard-to-imitate organizational capabilities that distinguish a company from its competitors in the eyes of the customers” (Wit & Meyer 2002:342).
From the perspective of S-C-P approach, a firm needs to create competitive advantage by first selecting a superior environmental position in the industry, e.g. an industry with low buyer and supplier power, a low threat of substitution and high barriers to entry, and then choose strategy to deal with the opportunities and threats in the position. In this paradigm, a firm should adapt itself to the industrial environment.
Whereas R-B-V emphasize that firm’s unique competences, e.g. knowledge and skill, are the key strength to ensure the company stay ahead. To exert the competitive advantages of resources, the firm needs to find a more suitable market. In other words, the market position selected is adapted to fit the organization’s resource base (Wit & Meyer 2002).
According to Porter (1980), the key point that determines whether a firm can get high rate of return from the industry is the position that the firm stay in the industry, because the position indicates the intensity of competition, and thus decides the opportunities and threats for firm to cope with.
Attaining distinctive resources, from perspective of R-B-V, should be the strategic focus for firms. Establishing competitive advantage through the deployment of resources and capabilities has become the primary goal for strategy (Grant 2002). The R-B-V emphasizes the uniqueness of each company and suggests that the key to profitability is through exploiting distinctive resources.
The strategic choice of S-C-P focus on positioning the company so that it’s capability can defense against the competitive force. According to Porter (1980), firm gets alternative choice in seeking strategy: cost leadership or differentiation to achieve the competitive advantage, stuck in the middle may cause disastrous failure in competing.
From perspective of R-B-V, strategists conclude that the firm’s most important resources and capabilities are those durable, imperfectly transferable, not easy replicated and imitated ones (Costin 1998). The firm need to constantly explore and develop it’s distinctive resources as strategy formulation to prevent competitors taking over the strength and maintain competitive advantage.
For long run profitability, S-C-P approach needs to realize the importance of attaining necessary resource to help building and keeping sustainable competitive advantages among competitors. E.g. a monopoly or oligopoly position in an industry is based on the possession of reputation, know-how, manufacturing capacity, or distribution facilities that other firms in the industry cannot match (Grant 2002:137).
Strategists in R-B-V suggest that the flexibility of moving in and out of business brought by organizational capabilities is more important than market share. But from long-term perspective, economies of scale and experience advantages caused by large market share, along with a strong market position, can powerfully improve a firm’s competitiveness and thus enhance profitability.
The competitive weapons of market-driven organizations are bargaining power against suppliers and buyers. A company can find least powerful suppliers or buyers by staying in a low cost position or producing a unique product (Porter 1980). On the other hand, firm existing in the industry can possess competitive weapons to new entrants by increasing the economics of scale and raising capital cost barriers.
The weapons that resource-driven companies use to compete with rivals are superior resources that other firms do not have. Possessing resources that are valuable, rare among competition, imperfectly imitable and difficult to be substituted can help firms increasing the probability of survival and generating superior profit above competitors (Wit & Meyer 2002).
- Limitation of two approaches:
Porter’s five forces of competition is the foundation of the S-C-P model. From his point of view, industry structure is stable and externally determined, and it in turn determines the level of industry profitability (Grant 2002). But in real business, the industry structure does not remain unchanged. Moreover the speed of structural change is vital for firm’s strategy setting if entry quickly destroys the market power of dominant company, and if innovation rapidly changes the industry structure, it’s not wise for company to use industry structure as criteria for competition and profit analysis. Competition is a dynamic process; thus structure is unstable. Firms can change the industry structure and its own position by acquisition, new technologies etc, but competitive advantage is transitory according to the rapidly changed industry structure (Grant 2002). Also, there are no sufficient evidences showing that external environment is the only factor to determine firm’s profitability.
R-B-V, on the other hand, also has some limitations for strategic management. First, it identifies generic characteristics of profit-generating resources without much attention to differ situations or resource comparisons in the firm. E.g. there is no basis for telling managers with superior or inferior management skills, other than waiting for the performance results. Second, the processes through which particular resources provide competitive advantage remain in a black box (Wit & Meyer 2002). We do not know how the resources generate sustainable profits. Why is it that some heterogeneous resources generate value, whereas other heterogeneous resources do not? Third, the R-B-V model is based on the assumption that (1): resources are distributed heterogeneously across firms, (2): these productive resources cannot be transferred from firm to firm (Barney 1991). But in real business, firms within an industry can be homogeneous. And the second possibility is that some of firm’s resources are mobile in the industry. Fourth, it doesn’t explain how firm can manage and manipulate some intangible resources, such as tacit knowledge.
- Relationship between two approaches:
Although the two models have different dimension of analysis and different emphasis, the relationship between S-C-P approach and R-B-V is interactive, market-driven strategy and resource-driven strategy both play important role in influencing firm profitability.
According to Grant (2002), superior profitability might derive from two sources: location within an attractive industry, and achieving a competitive advantage over rivals. Industry structural analysis emphasizes the importance of favorable position to firms for profit above average. As to achieve competitive advantage, firms needs to exert its strength, which is superior resources that are unique and difficult for competitors to imitate. Therefore, firms in competitive environment should give equivalent attention to firm strengths and weakness (resources and capabilities) versus the opportunities and threats (competitive forces and industry position) in order to achieve long-term development and high rate of return. Figure 4 (Appendix 4) illustrates the process of the business strategic-planning.
Conclusion
In this essay, we briefly introduced the two model of strategic management — structure-conduct-performance approach and resource-based view model. Each of them studies the industrial organizations from different perspective. Structure-conduct-performance emphasizes the importance of analysis about external industrial environment and competitive forces. In this approach, the industrial structure analysis is used as the only criterion of all the relevant strategies and performance that firms would adopt and implement. Whereas from the standpoint of resource-based view, the dominant factor that can influence firm’s strategic management is it’s own strengths and weaknesses, in other words, resources and capabilities.
In the latter part of this essay, we identified the different roles that each approach plays in industrial organizations. The purpose that both models have in common is that organizations attempt to use either approach to seek and build up competitive advantages through research from inside or outside organizations. Therefore, in order to achieve the long-term need of survival and development in the competitive and volatile environment, organizations need to cautiously choose strategic management style according to their own situation in the industry.
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