TOWARDS A DYNAMIC THEORY OF STRAT EGY

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 edition) 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 & Montgomery,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) J.Teece, 2003)

Explicating Dynamic Capabilities: Asset Selection, Coordination, and Entrepreneurship in Strategic Management Theory (Draft paper: David

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
Theory of the firm Why firm succeed or fail Theory of strategy

Review the progress of the strategy field towards developing a truly dynamic theory strategy Cross sectional problem Longitudinal problem

Theory of Strategy

Local environment

Review 3 traditional theory A Dynamic Theory

Fall short of exposing true origin of competitive success

Challenges for future research

EARLY LITERATURE ON STRAT EGIES

TERM & DEFINITION

Success Attaining a competitive position(s) that lead to superio r and sustainable financial performance Sustainable Competitive Advantage When a firm implements a value creating strategy of w hich other companies are unable to duplicate the bene fit or find it too costly to imitate (Hitt, Ireland & Hoski sson in Strategic Management, 1999) Dynamic Capabilities The firms ability to integrate, build, and reconfigure int ernal and external competences to adress rapidly chan ging environments

EARLY ANSWERS: DETERMINANTS OF FIRM SUCCESS

Develop internally consistent set of goals and policies

Create/ exploite distinctive competencies

FIRMS SUCCESS

Align SWOT

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

No theory for examining firm and competitive environment!

FUNDAMENTAL ISSUES IN CREATING A T HEORY OF STRATEGY

1. Approach to Theory Building
MODELS FRAMEWORKS

2. Chain of Causality 3. Time Horizon

4. Empirical Testing

TOWARDS A THEORY OF STRA TEGY

THE DETERMINANTS OF SUCCESS

Firm Success Relative Position 1. Lower cost 2. Differentiate S. Competitive Advantage Industry Structure

Activities / Value System

Drivers Managerial Choices Initial Condition

ORIGINS OF COMPETITIVE ADVANTAG E

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

P O S I T I O N

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, whi ch allow examining the changes and the conti nuity in the pattern of organizational behavior over time During the last decades, there has been an int ensive request for the search of dynamic theor y of strategy detailed longitudinal case studies, covering long periods of time, are necessary to study th ese phenomena (Porter, 1991)

TRADITIONAL THEORY
THREE PROMISING LINES OF INQUIRY HAVE BEEN EXPLORED:
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 UNCERTAINTY

STRATEGY IS MANIFESTED IN A RELATIVELY FEW INVESTMENT DECISIONS, HARD TO REVERSE AND TEND TO DEFINE CHOICES IN OTHER AREAS OF THE FIRM (COMMITMENT UNDER UNCERTAINTY) Ghemawats book in 1991 CONSIDERS THE ENVIRONMENT AS RELATIVELY STABLE (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 environment, respond to environmental changes, or define entirely new positions

RESOURCE-BASED VIEW
Firm differ in fundamental ways because each firm pos sesses a unique bundle of resources The origin of competitive advantage are valuable resou rces that firm possess i.e. assets( such as skill, reputatio n, etc) and organizational capabilities RBV will have the greatest significance in environments where change is incremental, number of strategic varia bles 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 deter minants 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 ENVIRONMENT 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 theory of strategy

FIRM AS THE ORIGIN OF ADVANTAGE

SINCE THE NUMBER OF VARIABLES IS SUBSTANSIAL AND ENVIRONMENTAL CHANGE IS CONTINUOUS, THEN THE PROBLEM IS NOT SELECTING GOOD STRATEGIES BUT CREATING A FLEXIBLE ORGANIZATION THAT LEARN AND ABLE TO CONTINUALLY REDEFINE ITS STRATEGY IT LIES IN THE ABILITY TO MAKE GOOD STRATEGY CHOICES AND IMPLEMENT THEM

ENVIRONMENT AS ORIGIN OF ADVANT AGE

True origin of competitive advantage may be found in firms 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 concentrated within nations Firm create and sustain competitive advantage because of their capacity to continuously improve, innovate and upgrade their competitive advantage overtime Successful firms are those that improve and innovate in ways that are valued not only at home but elsewhere

PERSPECTIVES ON FIRM COMPETITIVE NESS

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 companys 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 COMPE TITIVE ADVANTAGE

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

Firm Strategy, Structure and rivalry

Chance

Open and vigorous competition among locally based rivals

Factor Condition Presence of high quality,

specialized inputs: Human/capital/natural resources

Demand Condition Government

Sophisticated and demanding local customers Local customer needs that anticipate those elsewhere

Unusual local demand in Physical/administrative/info specialized segments rmation/technological infrastructure Access to capable, locally based suppliers and firms in related fields

Related and Supporting Industries

Presence of clusters instead of isolated industries

ORIGIN OF COMPETITIVE ADVANTAGE

Competitive advantage originates in the local environment in which the firm is based The four attributes (diamond) in a firms home market promote or impede a firms ability to achieve competitive advantage

DIAMOND AS DYNAMIC SYSTEM

Aspects of the local environment constitute a dynamic system. The effect of one determinant depends on the others Mutual reinforcement of all determinants

Sustained success requires the interaction of favorable conditioned of determinants

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

ENVIRONMENTAL INFLUENCES ON DY NAMIC OF STRATEGY

The environment, via diamond, affects fir ms initial condition and its managerial c hoices The diamond address a dynamic theory of strategy early in the chain of causality Firms must understand and exploit their l ocal environment to achieve competitive advantage

ISSUE FOR FURTHER RESEARCH

Need to better understand the balance betwee n environmental determinism and company ch oice in shaping competitive outcome Need to better understand the degree of sticki ness 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 causalit y Challenge of crafting empirical research to mak e further progress in understanding this dyna mic 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 reconfiguring 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 changing environment Longitudinal view (answering WHY)

COMPLEMENTARY OR COMPETITOR?
Resourced Based
Dynamic Capability Theory

Industrial Based
Firm Strategy, Structure, Rivalry

Factor Condition

Demand Condition

Related and supporting Industries

DISCUSSION + CONCLUSION

DISCUSSION
An analogy from other field to answer why firm suc cess Limitation to Porters theory - Theory of strategy should provide the predictive function (Phelan,1995) - Lack of experimental method condition i.e. obse rvation, manipulation and replication To establish a theory of strategy need a reconciliati on of the different perspective between economist and strategist (Phelan, 2000)

CONCLUSIONS
Success of the firm depends on initial condition and managerial choice, and explained through chain of casualty There is no theory of strategy that can be applied for all situation over time. Environmental and technological changes require 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 alternatives developed to answer the need for a dynamic theory of strategy

ORIGINS OF COMPETITVE ADVANTAGE

THE FRAMEWORK BUILD LINK BETWEEN MAR KET OUTCOMES AND UNDERLYING CHOICES A FIRM MAKES (IN TERM OF INDUSTRIES, POSITI ONING AND ACTIVITIES) SUCCESS REQUIRES THE CHOICE OF A RELATI VELY ATTRACTIVE POSITION, FIRMS CIRCUMST ANCES, AND POSITIONS OF COMPETITORS ALL FIRMS ACTIVITIES MUST CONSISTENT WIT H THE CHOSEN POSITION

TERM & DEFINITION

Success Attaining a competitive position(s) that lead to superior and sustainable financial performance Competitive Advantage When a firm earns a higher rate of economic profit than the average rate of economic profit of other firm competing within the same market, the firm has a competitive advantage in that market Sustainable Competitive Advantage Dynamic Capabilities

DYNAMIC CAPABILITY THEORY

The dynamic capability theory seeks to explain how fir m achieve and sustain competitive advantage despite an ever-changing environment Dynamic capabilities emphasized the key role of strate gic management in appropriately adapting, integrating , and re-configuring internal and external organization al skills, resources, and functional competencies toward a changing environment Dynamic Capabilities are those competencies that allow the firm to respond to and exploit changing market environment