In the early stages of development, strategic management concepts revolved around microeconomics. As the theory of firm addresses the question of why firms exist and what determines their scale and scope, other theories also revolved around this basic theme .
Several approaches to study strategy can be deliberated under two comprehensive streams of theories: competence-based theories and game-based theories. The competence-based theories take the organization theory perspective and focus on the process, whereas, game-based theories take the economic perspective and give importance to the governance viewpoint. Centred on these theories, two broad perspectives are followed:
Industry/organization perspective (called I/O model) and
Resource-based perspective (called RBV model).
Resource-Based View (RBV)
According to Barney , sustained competitive advantage largely depends on the resources (assets, capabilities, organizational processes, firm attributes, information, and knowledge) a firm possesses. Although a firm’s external environment is important, firm resources are far more important than the environment in which the company operates.
RBV is based on two key assumptions…
1. Resources are heterogeneously distributed across all the firms, and
2. The firm’s resources are largely immobile.
Taking into account these assumptions, a firm upholds competitive advantage if the resources possess the qualities of rarity, value, imperfect limitability, non-substitutability, and non-transferability. The supporters of RBV reason that competing firms will not be able to imitate strategies based on resources because there is fundamental ambiguity and social complexity associated with the relationship between these resource configurations and sustained competitive advantage. RBV has gained wide acceptance because its competence logic is quite convincing in explaining why some firms achieve success despite the fact that they fall under the industry that is not performing well. The core logic behind the RBV is the “capability logic” that states that a firm can outperform rivals only if it has a superior ability to acquire, develop, configure, and use the resources to sustain its competitive advantage. The basic argument of the RBV is that a firm’s competitiveness is a positive function of the resource mobilization and capability building so that strategies are designed to capitalize on the opportunities and mitigate threats stemming from the environment. The way in which firms exploit and leverage internal abilities and resources is the key. Having superior resources is a necessary, but not sufficient, condition. What is important is that the resources and competencies need to be protected from exploitation by competitors through imitation and substitution.
Industrial Organization (IO) Theory
According to IO theory, industry forces in which a firm operates are very important for the firm to maintain profitability. The industry attractiveness depends on the strength of the five forces : competition of firms within the industry, bargaining power of buyers, bargaining power of suppliers, threat of new entrants, and availability of substitute products. The stronger the forces, the more unattractive the industry becomes. Analysis of these five forces is the key for a firm to see whether it can have an edge over its competitors. IO theory places a premium on the environment and is explicitly concerned with the opportunities and threats stemming from the environment.
Researchers who subscribe to the IO theory argue that a firm should scan the external environment and focus on identifying and exploiting opportunities and neutralizing threats. However, it is necessary to match the firm’s internal capabilities to exploit opportunities and strengths, in order to mitigate the threats from environment. Strategic management researchers attempt to address the performance differences across firms in terms of two basic approaches: IO and resources. As Montgomery contends, a portion of these differences may be “due to unique firm characteristics and actions; and another portion is due to the conditions in their respective industries in which firms operate.” Scholars argue that industry effects explain far more variance than firm effects. The debate is ongoing.
The dynamic nature of external environment is captured by John Sculley. He mentioned James E. Cook in his book, Odyssey: From Pepsi to Apple, as inspiring in formulation of contrasting Second Wave versus Third Wave management paradigms. Scully observes the characteristics of second wave and third wave are contrasting. For instance, output during the second wave was market share where as in third wave it is market creation. The mission in second wave was goals/strategic plans in third wave they are identify/directions/Values. If the quality was affordable best during the second wave it is no compromise in the third wave.
Thus in today’s context every organization has to look at its own resources as well as the industry the organization operates in.
As noted earlier the strategic management as a discipline evolved during 1950s, organizations, particularly the American business community was engaged in intense merger activity. Like flocks of birds or of packs of wolves, mergers came in waves .
1. The first wave peaked between 1898 and 1902 to create monopolies
2. Second wave peaked between 1925 to late 1920s acquisition of related firms but did not create monopolies
3. Third wave 1966 to 1968 produced large conglomerate firms composed of unrelated business
4. Since 1974 the incidence of megamergers between large firms has dramatically increased and allowed these firms to diversify their holdings.
The strategic management was evolving and so were the marketing philosophies.
Philip Kotler listed Company Orientations to the Market place. The Five Concepts Described are
1. The Production Concept
2. The Product Concept
3. The Selling Concept
4. The Marketing Concept
5. The Societal Marketing Concept
The Production Concept is one the oldest concepts in business. The production concept holds that consumers will prefer products that are widely available and inexpensive. Managers of production-orientation business concentrate on achieving high production efficiency, low costs, and mass-distribution. They assume that consumers are primarily interested in product availability and low prices. The concept holds true even today where demand is more than supply and the organizations are looking forward to reducing the cost the expand the target market by achieving economies of scale.
The Product Concept orientation holds that consumers will favour those products that offer the most quality, performance, or innovative features. Managers focusing on this concept concentrate on making superior products and improving them over time. They assume that buyers admire well-made products and can appraise quality and performance. However, these managers are sometimes caught up in a love affair with their product and do not realize what the market needs. Management might commit the “better-mousetrap” fallacy, believing that a better mousetrap will lead people to beat a path to its door.
The Selling Concept holds that consumers and businesses, if left alone, will ordinarily not buy enough of the selling company’s products. The organization must, therefore, undertake an aggressive selling and promotion effort. This concept assumes that consumers typically show buying inertia or resistance and must be coaxed into buying. It also assumes that the company has a whole battery of effective selling and promotional tools to stimulate more buying. Most firms practice the selling concept when they have overcapacity. Their aim is to sell what they make rather than make what the market wants.
The Marketing Concept is a business philosophy that challenges the above three business orientations. Its central tenets crystallized in the 1950s. It holds that the key to achieving its organizational goals (goals of the selling company) consists of the company being more effective than competitors in creating, delivering, and communicating customer value to its selected target customers. The marketing concept rests on four pillars: target market, customer needs, integrated marketing and profitability.
The Societal Marketing Concept holds that the organization’s task is to determine the needs, wants, and interests of target markets and to deliver the desired satisfactions more effectively and efficiently than competitors (this is the original Marketing Concept). Additionally, it holds that this all must be done in a way that preserves or enhances the consumer’s and the society’s well-being.
The Holistic Marketing Concept is based on the development, design, and implementation of marketing programs, processes, and activities that recognize their breadth and interdependencies. Holistic marketing recognizes that “everything matters” in marketing and that a broad, integrated perspective is often necessary.
Considering the advances in the discipline of strategic management and marketing philosophies over the years, organizations need to focus on…
Quality of the product they offer in order to ensure acceptance by the target market
Quantity that the organization manufactures in order to make the accepted product affordable
Quick, organizations need to be quick in responding to the target market’s needs, wants, demands and transactions. Time targets and elimination of unnecessary activities.
Resources to make quality products, with economies of scale in quick time.
Relationships with the stake holders to understand and meet their needs, wants, demands and expectations better than the competitors.
In addition to resources and relationships organizations need to have suitable processes to achieve goals/objectives. To achieve these goals/objectives organization needs to have
Strategies to improve quality, quantity and quickness
Structure to improve quality, quantity and quickness
Systems to improve quality, quantity and quickness
For organizational growth the 3Q with its five elements are of critical importance.
The five Elements
Five elements of organizational growth
First we look at the formulation of the organization’s vision in the next chapter.
References:
Coase, R. H., Stigler G. J., & Boulding K. E. (Eds.) (1952). The nature of the firm. Readings in Price Theory, Chicago: Irwin, pp. 331-351
Barney, J. B. (1991). Firm resources and sustained competitive advantage, Journal of Management, 17, pp. 99-120
Porter, M. E. (1980). Competitive Strategy. New York: Free Press
Montgomery, C. A. (1988). Guest editor’s introduction to the special issue on research in the content on strategy, Strategic Management Journal, 9, pp. 3-8.
Davidson, Kenneth M. (1985) Mega-Mergers: Corporate America’s billion-dollar takeovers, Ballinger Publishing Company Cambridge, Massachusetts
Kotler, Philip. (2000) Marketing Management. Upper Saddle River, New Jersey: Prentice Hall.
Kotler, Philip; Keller, Kevin Lane; Koshy, Abraham; Jha, Mithileshwar; (2009), Marketing Management. A South Asia Perspective, 13th edition.