MODUL PERKULIAHAN
Distinctive Strategic
Management
Porter’s Five Forces Model
Cost learning strategies
Focus strategies
Strategies for competing in turbulent, high-velocity market
Fakultas
Program Studi
Ekonomi & Bisnis
Magister
Manajemen
Tatap Muka
13
Kode MK
Disusun Oleh
35009
Dr. Baruna Hadibrata, SE., MM
Abstract
Kompetensi
This module illustrates Porter’s Five
Forces Model
Cost learning strategies
Focus strategies
Strategies for competing in turbulent,
high-velocity market
Understanding Porter’s Five Forces Model
Cost learning strategies
Focus strategies
Strategies for competing in turbulent,
high-velocity market
Pembahasan
Porter five forces analysis is a framework that attempts to analyze the level of competition
within an industry and business strategy development. It draws upon industrial organization
(IO) economics to derive five forces that determine the competitive intensity and therefore
attractiveness of an Industry. Attractiveness in this context refers to the overall industry
profitability. An "unattractive" industry is one in which the combination of these five forces
acts to drive down overall profitability. A very unattractive industry would be one
approaching "pure competition", in which available profits for all firms are driven to normal
profit. This analysis is associated with its principal innovator Michael E. Porter of Harvard
University.
Porter referred to these forces as the micro environment, to contrast it with the more
general term macro environment. They consist of those forces close to a company that
affect its ability to serve its customers and make a profit. A change in any of the forces
normally requires a business unit to re-assess the marketplace given the overall change in
industry information. The overall industry attractiveness does not imply that every firm in
the industry will return the same profitability. Firms are able to apply their core
competencies, business model or network to achieve a profit above the industry average. A
clear example of this is the airline industry. As an industry, profitability is low and yet
individual companies, by applying unique business models, have been able to make a return
in excess of the industry average.
Porter's five forces include - three forces from 'horizontal' competition: the threat of
substitute products or services, the threat of established rivals, and the threat of new
entrants; and two forces from 'vertical' competition: the bargaining power of suppliers and
the bargaining power of customers.
Porter developed his Five Forces analysis in reaction to the then-popular SWOT analysis,
which he found unrigorous and ad hoc. Porter's five forces is based on the StructureConduct-Performance paradigm in industrial organizational economics. It has been applied
2016
2
Distinctive Strategic Management
Dr. Baruna Hadibrata,SE.,MM
Pusat Bahan Ajar dan eLearning
http://www.mercubuana.ac.id
to a diverse range of problems, from helping businesses become more profitable to helping
governments stabilize industries. Other Porter strategic frameworks include the value chain
and the generic strategies.
Figure 1. A graphical representation of Porter's five forces
Five forces
Threat of new entrants
Profitable markets that yield high returns will attract new firms. This results in many new
entrants, which eventually will decrease profitability for all firms in the industry. Unless the
entry of new firms can be blocked by incumbents (which in business refers to the largest
company in a certain industry, for instance, in telecommunications, the traditional phone
company, typically called the "incumbent operator"), the abnormal profit rate will trend
towards zero (perfect competition).
The following factors can have an effect on how much of a threat new entrants may pose:

The existence of barriers to entry (patents, rights, etc.). The most attractive segment
is one in which entry barriers are high and exit barriers are low. Few new firms can
enter and non-performing firms can exit easily.
2016

Government policy

Capital requirements

Absolute cost

Cost disadvantages independent of size
3
Distinctive Strategic Management
Dr. Baruna Hadibrata,SE.,MM
Pusat Bahan Ajar dan eLearning
http://www.mercubuana.ac.id

Economies of scale

Economies of product differences

Product differentiation

Brand equity

Switching costs or sunk costs

Expected retaliation

Access to distribution

Customer loyalty to established brands
Industry profitability (the more profitable the industry the more attractive it will be to new
competitors).
Threat of substitute products or services
The existence of products outside of the realm of the common product boundaries
increases the propensity of customers to switch to alternatives. For example, tap water
might be considered a substitute for Coke, whereas Pepsi is a competitor's similar product.
Increased marketing for drinking tap water might "shrink the pie" for both Coke and Pepsi,
whereas increased Pepsi advertising would likely "grow the pie" (increase consumption of all
soft drinks), albeit while giving Pepsi a larger slice at Coke's expense. Another example is the
substitute of traditional phone with a smart phone.
Potential factors:
2016

Buyer propensity to substitute

Relative price performance of substitute

Buyer switching costs

Perceived level of product differentiation

Number of substitute products available in the market

Ease of substitution

Substandard product

Quality depreciation

Availability of close substitute
4
Distinctive Strategic Management
Dr. Baruna Hadibrata,SE.,MM
Pusat Bahan Ajar dan eLearning
http://www.mercubuana.ac.id
Bargaining power of customers (buyers)
The bargaining power of customers is also described as the market of outputs: the ability of
customers to put the firm under pressure, which also affects the customer's sensitivity to
price changes. Firms can take measures to reduce buyer power, such as implementing a
loyalty program. The buyer power is high if the buyer has many alternatives. The buyer
power is low if they act independently e.g. If a large number of customers will act with each
other and ask to make prices low the company will have no other choice because of large
number of customers pressure.
Potential factors:

Buyer concentration to firm concentration ratio

Degree of dependency upon existing channels of distribution

Bargaining leverage, particularly in industries with high fixed costs

Buyer switching costs relative to firm switching costs

Buyer information availability

Force down prices

Availability of existing substitute products

Buyer price sensitivity

Differential advantage (uniqueness) of industry products

RFM (customer value) Analysis

The total amount of trading
Bargaining power of suppliers
The bargaining power of suppliers is also described as the market of inputs. Suppliers of raw
materials, components, labor, and services (such as expertise) to the firm can be a source of
power over the firm when there are few substitutes. If you are making biscuits and there is
only one person who sells flour, you have no alternative but to buy it from them. Suppliers
may refuse to work with the firm or charge excessively high prices for unique resources.
Potential factors are:
2016

Supplier switching costs relative to firm switching costs

Degree of differentiation of inputs

Impact of inputs on cost or differentiation
5
Distinctive Strategic Management
Dr. Baruna Hadibrata,SE.,MM
Pusat Bahan Ajar dan eLearning
http://www.mercubuana.ac.id

Presence of substitute inputs

Strength of distribution channel

Supplier concentration to firm concentration ratio

Employee solidarity (e.g. labor unions)

Supplier competition: the ability to forward vertically integrate and cut out the
buyer.
Intensity of competitive rivalry
For most industries the intensity of competitive rivalry is the major determinant of the
competitiveness of the industry.
Potential factors:

Sustainable competitive advantage through innovation

Competition between online and offline companies

Level of advertising expense

Powerful competitive strategy

Firm concentration ratio

Degree of transparency
Usage
Strategy consultants occasionally use Porter's five forces framework when making a
qualitative evaluation of a firm's strategic position. However, for most consultants, the
framework is only a starting point or "checklist." They might use value chain or another type
of analysis in conjunction. Like all general frameworks, an analysis that uses it to the
exclusion of specifics about a particular situation is considered naive.
According to Porter, the five forces model should be used at the line-of-business industry
level; it is not designed to be used at the industry group or industry sector level. An industry
is defined at a lower, more basic level: a market in which similar or closely related products
and/or services are sold to buyers. (See industry information.) A firm that competes in a
single industry should develop, at a minimum, one five forces analysis for its industry. Porter
makes clear that for diversified companies, the first fundamental issue in corporate strategy
2016
6
Distinctive Strategic Management
Dr. Baruna Hadibrata,SE.,MM
Pusat Bahan Ajar dan eLearning
http://www.mercubuana.ac.id
is the selection of industries (lines of business) in which the company should compete; and
each line of business should develop its own, industry-specific, five forces analysis. The
average Global 1,000 company competes in approximately 52 industries (lines of business)
Criticisms
Porter's framework has been challenged by other academics and strategists such as Stewart
Neill. Similarly, the likes of ABC, Kevin P. Coyne and Somu Subramaniam have stated that
three dubious assumptions underlie the five forces:
1) That buyers, competitors, and suppliers are unrelated and do not interact and
collude.
2) That the source of value is structural advantage (creating barriers to entry).
3) That uncertainty is low, allowing participants in a market to plan for and respond to
competitive behavior.
An important extension to Porter was found in the work of Adam Brandenburger and Barry
Nalebuff of Yale School of Management in the mid-1990s. Using game theory, they added
the concept of complementors (also called "the 6th force"), helping to explain the reasoning
behind strategic alliances. Complementors are known as the impact of related products and
services already in the market. The idea that complementors are the sixth force has often
been credited to Andrew Grove, former CEO of Intel Corporation. According to most
references, the sixth force is government or the public. Martyn Richard Jones, whilst
consulting at Groupe Bull, developed an augmented 5 forces model in Scotland in 1993. It is
based on Porter's model and includes Government (national and regional) as well as
Pressure Groups as the notional 6th force. This model was the result of work carried out as
part of Groupe Bull's Knowledge Asset Management Organisation initiative.
Porter indirectly rebutted the assertions of other forces, by referring to innovation,
government, and complementary products and services as "factors" that affect the five
forces.
It is also perhaps not feasible to evaluate the attractiveness of an industry independent of
the resources a firm brings to that industry. It is thus argued (Wernerfelt 1984) that this
theory be coupled with the Resource-Based View (RBV) in order for the firm to develop a
2016
7
Distinctive Strategic Management
Dr. Baruna Hadibrata,SE.,MM
Pusat Bahan Ajar dan eLearning
http://www.mercubuana.ac.id
much more sound strategy. It provides a simple perspective for accessing and analyzing the
competitive strength and position of a corporation, business or organization.
Cost Leadership Strategy
This strategy involves the firm winning market share by appealing to cost-conscious or pricesensitive customers. This is achieved by having the lowest prices in the target market
segment, or at least the lowest price to value ratio (price compared to what customers
receive). To succeed at offering the lowest price while still achieving profitability and a high
return on investment, the firm must be able to operate at a lower cost than its rivals. There
are three main ways to achieve this.
The first approach is achieving a high asset utilization. In service industries, this may mean
for example a restaurant that turns tables around very quickly, or an airline that turns
around flights very fast. In manufacturing, it will involve production of high volumes of
output. These approaches mean fixed costs are spread over a larger number of units of the
product or service, resulting in a lower unit cost, i.e. the firm hopes to take advantage of
economies of scale and experience curve effects. For industrial firms, mass production
becomes both a strategy and an end in itself. Higher levels of output both require and result
in high market share, and create an entry barrier to potential competitors, who may be
unable to achieve the scale necessary to match the firms low costs and prices.
The second dimension is achieving low direct and indirect operating costs. This is achieved
by offering high volumes of standardized products, offering basic no-frills products and
limiting customization and personalization of service. Production costs are kept low by using
fewer components, using standard components, and limiting the number of models
produced to ensure larger production runs. Overheads are kept low by paying low wages,
locating premises in low rent areas, establishing a cost-conscious culture, etc. Maintaining
this strategy requires a continuous search for cost reductions in all aspects of the business.
This will include outsourcing, controlling production costs, increasing asset capacity
utilization, and minimizing other costs including distribution, R&D and advertising. The
associated distribution strategy is to obtain the most extensive distribution possible.
Promotional strategy often involves trying to make a virtue out of low cost product features.
2016
8
Distinctive Strategic Management
Dr. Baruna Hadibrata,SE.,MM
Pusat Bahan Ajar dan eLearning
http://www.mercubuana.ac.id
The third dimension is control over the value chain encompassing all functional groups
(finance, supply/procurement, marketing, inventory, information technology etc..) to ensure
low costs. For supply/procurement chain this could be achieved by bulk buying to enjoy
quantity discounts, squeezing suppliers on price, instituting competitive bidding for
contracts, working with vendors to keep inventories low using methods such as Just-in-Time
purchasing or Vendor-Managed Inventory. Wal-Mart is famous for squeezing its suppliers to
ensure low prices for its goods. Other procurement advantages could come from
preferential access to raw materials, or backward integration. Keep in mind that if you are in
control of all functional groups this is suitable for cost leadership; if you are only in control
of one functional group this is differentiation. For example Dell Computer initially achieved
market share by keeping inventories low and only building computers to order via applying
Differentiation strategies in supply/procurement chain. This will be clarified in other
sections.
Cost leadership strategies are only viable for large firms with the opportunity to enjoy
economies of scale and large production volumes and big market share. Small businesses
can be cost focus not cost leaders if they enjoy any advantages conducive to low costs. For
example, a local restaurant in a low rent location can attract price-sensitive customers if it
offers a limited menu, rapid table turnover and employs staff on minimum wage. Innovation
of products or processes may also enable a startup or small company to offer a cheaper
product or service where incumbents' costs and prices have become too high. An example is
the success of low-cost budget airlines who despite having fewer planes than the major
airlines, were able to achieve market share growth by offering cheap, no-frills services at
prices much cheaper than those of the larger incumbents. At the beginning for low-cost
budget airlines choose acting in cost focus strategies but later when the market grow, big
airlines started to offer same low-cost attributes, cost focus became cost leadership!
A cost leadership strategy may have the disadvantage of lower customer loyalty, as pricesensitive customers will switch once a lower-priced substitute is available. A reputation as a
cost leader may also result in a reputation for low quality, which may make it difficult for a
2016
9
Distinctive Strategic Management
Dr. Baruna Hadibrata,SE.,MM
Pusat Bahan Ajar dan eLearning
http://www.mercubuana.ac.id
firm to rebrand itself or its products if it chooses to shift to a differentiation strategy in
future.
Differentiation Strategy
Differentiate the products/services in some way in order to compete successfully. Examples
of the successful use of a differentiation strategy are Hero, Honda, Asian Paints, HUL, Nike
athletic shoes (image and brand mark), BMW Group Automobiles, Perstorp BioProducts,
Apple Computer (product's design), Mercedes-Benz automobiles, and Renault-Nissan
Alliance.
A differentiation strategy is appropriate where the target customer segment is not pricesensitive, the market is competitive or saturated, customers have very specific needs which
are possibly under-served, and the firm has unique resources and capabilities which enable
it to satisfy these needs in ways that are difficult to copy. These could include patents or
other Intellectual Property (IP), unique technical expertise (e.g. Apple's design skills or
Pixar's animation prowess), talented personnel (e.g. a sports team's star players or a
brokerage firm's star traders), or innovative processes. Successful differentiation is
displayed when a company accomplishes either a premium price for the product or service,
increased revenue per unit, or the consumers' loyalty to purchase the company's product or
service (brand loyalty). Differentiation drives profitability when the added price of the
product outweighs the added expense to acquire the product or service but is ineffective
when its uniqueness is easily replicated by its competitors. Successful brand management
also results in perceived uniqueness even when the physical product is the same as
competitors. This way, Chiquita was able to brand bananas, Starbucks could brand coffee,
and Nike could brand sneakers. Fashion brands rely heavily on this form of image
differentiation.
Differentiation strategy is not suitable for small companies. It is more appropriate for big
companies. To apply differentiation with attributes throughout predominant intensity in any
one or several of the functional groups (finance, purchase, marketing, inventory etc..). This
point is critical. For example GE uses finance function to make a difference. You may do so
in isolation of other strategies or in conjunction with focus strategies (requires more initial
2016
10
Distinctive Strategic Management
Dr. Baruna Hadibrata,SE.,MM
Pusat Bahan Ajar dan eLearning
http://www.mercubuana.ac.id
investment). It provides great advantage to use differentiation strategy (for big companies)
in conjunction with focus cost strategies or focus differentiation strategies. Case for Coca
Cola and Royal Crown beverages is good sample for this.
Variants on the Differentiation Strategy
The shareholder value model holds that the timing of the use of specialized knowledge can
create a differentiation advantage as long as the knowledge remains unique. This model
suggests that customers buy products or services from an organisation to have access to its
unique knowledge. The advantage is static, rather than dynamic, because the purchase is a
one-time event.
The unlimited resources model utilizes a large base of resources that allows an organisation
to outlast competitors by practicing a differentiation strategy. An organisation with greater
resources can manage risk and sustain profits more easily than one with fewer resources.
This provides a short-term advantage only. If a firm lacks the capacity for continual
innovation, it will not sustain its competitive position over time.
Focus strategies
This dimension is not a separate strategy for big companies due to small market conditions.
Big companies which chose applying differentiation strategies may also choose to apply in
conjunction with focus strategies (either cost or differentiation). On the other hand, this is
definitely an appropriate strategy for small companies especially for those wanting to avoid
competition with big ones.
In adopting a narrow focus, the company ideally focuses on a few target markets (also called
a segmentation strategy or niche strategy). These should be distinct groups with specialised
needs. The choice of offering low prices or differentiated products/services should depend
on the needs of the selected segment and the resources and capabilities of the firm. It is
hoped that by focusing your marketing efforts on one or two narrow market segments and
tailoring your marketing mix to these specialized markets, you can better meet the needs of
that target market. The firm typically looks to gain a competitive advantage through product
innovation and/or brand marketing rather than efficiency. A focused strategy should target
2016
11
Distinctive Strategic Management
Dr. Baruna Hadibrata,SE.,MM
Pusat Bahan Ajar dan eLearning
http://www.mercubuana.ac.id
market segments that are less vulnerable to substitutes or where a competition is weakest
to earn above-average return on investment.
Examples of firm using a focus strategy include Southwest Airlines, which provides shorthaul point-to-point flights in contrast to the hub-and-spoke model of mainstream carriers,
United, and American Airlines.
Recent developments
Michael Treacy and Fred Wiersema (1993) in their book The Discipline of Market Leaders
have modified Porter's three strategies to describe three basic "value disciplines" that can
create customer value and provide a competitive advantage. They are operational
excellence, product leadership, and customer intimacy.
A popular post-Porter model was presented by W. Chan Kim and Renée Mauborgne in their
1999 Harvard Business Review article "Creating New Market Space". In this article they
described a "value innovation" model in which companies must look outside their present
paradigms to find new value propositions. Their approach complements most of Porter's
thinking, especially the concept of differentiation. They later went on to publish their ideas
in the book Blue Ocean Strategy. Thus it is difficult, but not impossible, to topple a firm that
has established a dominant standard.
Criticisms of generic strategies
Several commentators have questioned the use of generic strategies claiming they lack
specificity, lack flexibility, and are limiting.
Porter stressed the idea that only one strategy should be adopted by a firm and failure to do
so will result in “stuck in the middle” scenario. He discussed the idea that practising more
than one strategy will lose the entire focus of the organization hence clear direction of the
future trajectory could not be established. The argument is based on the fundamental that
differentiation will incur costs to the firm which clearly contradicts with the basis of low cost
strategy and on the other hand relatively standardised products with features acceptable to
many customers will not carry any differentiation hence, cost leadership and differentiation
2016
12
Distinctive Strategic Management
Dr. Baruna Hadibrata,SE.,MM
Pusat Bahan Ajar dan eLearning
http://www.mercubuana.ac.id
strategy will be mutually exclusive. Two focal objectives of low cost leadership and
differentiation clash with each other resulting in no proper direction for a firm. In particular,
Miller questions the notion of being "caught in the middle". He claims that there is a viable
middle ground between strategies. Many companies, for example, have entered a market as
a niche player and gradually expanded. According to Baden-Fuller and Stopford (1992) the
most successful companies are the ones that can resolve what they call "the dilemma of
opposites". Furthermore, Reeves and Routledge's (2013) study of entrepreneurial spirit
demonstrated this is a key factor in organisation success, differentiation and cost leadership
were the least important factors.
However, contrarily to the rationalisation of Porter, contemporary research has shown
evidence of successful firms practising such a “hybrid strategy”. Research writings of Davis
(1984 cited by Prajogo 2007, p. 74) state that firms employing the hybrid business strategy
(Low cost and differentiation strategy) outperform the ones adopting one generic strategy.
Sharing the same view point, Hill (1988 cited by Akan et al. 2006, p. 49) challenged Porter’s
concept regarding mutual exclusivity of low cost and differentiation strategy and further
argued that successful combination of those two strategies will result in sustainable
competitive advantage. As to Wright and other (1990 cited by Akan et al. 2006, p. 50)
multiple business strategies are required to respond effectively to any environment
condition. In the mid to late 1980s where the environments were relatively stable there was
no requirement for flexibility in business strategies but survival in the rapidly changing,
highly unpredictable present market contexts will require flexibility to face any contingency
(Anderson 1997, Goldman et al. 1995, Pine 1993 cited by Radas 2005, p. 197). After eleven
years Porter revised his thinking and accepted the fact that hybrid business strategy could
exist (Porter cited by Prajogo 2007, p. 70) and writes in the following manner.
Though Porter had a fundamental rationalisation in his concept about the invalidity of
hybrid business strategy, the highly volatile and turbulent market conditions will not permit
survival of rigid business strategies since long-term establishment will depend on the agility
and the quick responsiveness towards market and environmental conditions. Market and
environmental turbulence will make drastic implications on the root establishment of a firm.
If a firm’s business strategy could not cope with the environmental and market
2016
13
Distinctive Strategic Management
Dr. Baruna Hadibrata,SE.,MM
Pusat Bahan Ajar dan eLearning
http://www.mercubuana.ac.id
contingencies, long-term survival becomes unrealistic. Diverging the strategy into different
avenues with the view to exploit opportunities and avoid threats created by market
conditions will be a pragmatic approach for a firm. Critical analysis done separately for cost
leadership strategy and differentiation strategy identifies elementary value in both
strategies in creating and sustaining a competitive advantage. Consistent and superior
performance than competition could be reached with stronger foundations in the event
“hybrid strategy” is adopted. Depending on the market and competitive conditions hybrid
strategy should be adjusted regarding the extent which each generic strategy (cost
leadership or differentiation) should be given priority in practice.
Strategies For Competing in Turbulent High-Velocity Market
The rapid diffusion and unprecedented commercial use of information and communications
technologies (ICT) have caused significant structural economic changes during the last few
years. Some industries are particularly affected by the increasing convergence of
information technology, telecommunication and media. In these environments, boundaries
and industry structures are blurred, successful business models have not yet been
established and the roles of the market players change continuously. The term high-velocity
environments embraces all those characteristics and emphasises the brisk and
discontinuous changes in demand, competition, regulation and technology. Within this
context, many start-ups, as well as projects of established companies in the internet sector,
came into being. After an initially positive assessment by the stock market, a lot of those
start-ups faced considerable financial distress. Many newly-founded companies experienced
dramatic declines in market capitalisation and some became insolvent. Likewise, several
internet efforts of established companies failed to achieve the desired results. Consequently
investments in internet activities were substantially reduced. Several authors blame the
multitude of business failures on the absence of a sound strategy. For example, Porter
argues that failed companies in high-velocity environments have not embarked on a
coherent long-term strategy: ‘‘Many of the pioneers of internet business, both dotcoms and
established companies, have competed in ways that violate nearly every precept of good
strategy.
2016
14
Distinctive Strategic Management
Dr. Baruna Hadibrata,SE.,MM
Pusat Bahan Ajar dan eLearning
http://www.mercubuana.ac.id
The developments described above have led to a vibrant discussion on the design and
performance implications of strategy in high-velocity environments. While authors such as
Porter suggest a modification and supplementation of these concepts, others negate the
applicability of traditional strategy concepts for the turbulent environmental conditions.
According to Porter, and following the concepts of industrial economics, strategy in the
context of the internet must be based on the structural analysis of an industry using the five
forces concept. Based on this analysis, a company chooses its unique positioning and aligns
all value-added activities to reach this position. Directly referring to this line of discussion,
Eisenhardt and Sull base their argument on the resource-based view, as well as complexity
and evolutionary theory: ‘‘Rather than picking a position or leveraging a competence,
managers should select a few key strategic processes. Rather than responding to a
complicated world with elaborate strategies, they should craft a handful of simple rules.’’
According to their point of view, the traditional concept of intended strategy as a mid-term
orientated positioning based on the configuration of the value chain activities is not useful
in a dynamic and complex environment where it is difficult to plan ahead. Hence, the two
positions concerning strategy in high-velocity markets are diametric: while Porter mainly
argues in the tradition of the market-based, outside-in perspective that clear differentiation
is a prerequisite to gain above-average rents, Eisenhardt and Sull emphasise the resourceand capabilities-based, inside-out perspective, arguing that an entrepreneurial attitude and
the mastering of key capabilities will provide the necessary agility and flexibility to succeed
in dynamic and complex environments. Thus it becomes obvious that the understanding of
strategy in high-velocity environments differs considerably among different theory schools.
Different terms have been coined and used simultaneously to describe the competitive
changes caused by information and communication technologies e for instance,
‘‘hypercompetition’’, ‘‘turbulent markets’’ or ‘‘high-velocity environments’’. Following
Eisenhardt and Martin, we use the term high-velocity environments. The central feature of a
high-velocity environment is the rapid, 296 Strategy in High-Velocity Author's personal copy
discontinuous and simultaneous change in demand, competitors, technology and
regulation. These characteristics indicate that information is time-sensitive and imprecise, or
even unavailable. As a result, market boundaries are blurred, successful business models
2016
15
Distinctive Strategic Management
Dr. Baruna Hadibrata,SE.,MM
Pusat Bahan Ajar dan eLearning
http://www.mercubuana.ac.id
have not yet manifested and the roles of market players continuously change. Complex and
unpredictable changes are frequent and come in the form of market jolts.
Increased complexity entails that management has to account for a huge number of
variables regarding the competitive environment when formulating strategy. Moreover,
management needs to be highly flexible due to environmental dynamics and the resulting
limited forecastability.
Product differentiation
The strategy dimension ‘‘product differentiation’’ refers to the degree to which a firm
differentiates itself in a competitive market by distinguishing its products and services from
those of competitors through unique features. According to industrial economics, strategic
positioning based on product characteristics can result in a competitive advantage by
creating buyer value and allowing a company to command a premium price. Correspondent
to Porter, product differentiation and strategic positioning are of great importance in highvelocity environments. This is because of the magnitude of opportunities for achieving or
enhancing a unique positioning provided by information and communication technologies.
The improved ability to customise product offerings and co-ordinate quality controls as well
as R&D activities illustrates this point. At the same time, strategic positioning is more
important in high-velocity environments as it is harder to sustain an operational advantage.
The openness of the internet along with progress in software architecture, development
tools and modularity let barriers to imitation disappear. Consequently, product
differentiation is a key factor for distinguishing a company from competitors. A prominent
example for product differentiation in a high-velocity environment can be found within the
mobile phone service market. Cingular Wireless, the largest mobile phone service provider
in the US in terms of subscribers, has gained a position as a high-quality provider offering
the most reliable network. As media convergence accelerates, the company increasingly
adds internet-related features. Cingular was one of the first mobile phone service providers
to add location-based services, such as navigation system capabilities and multimedia
services, to some of its plans.
Image differentiation
2016
16
Distinctive Strategic Management
Dr. Baruna Hadibrata,SE.,MM
Pusat Bahan Ajar dan eLearning
http://www.mercubuana.ac.id
Image differentiation indicates the degree to which a company differentiates itself through
psychological, attitudinal positioning. Similar to product differentiation, it enables the
company to set a price premium. Referring to new institutional economics, image
differentiation is capable of reducing information asymmetries and uncertainty on the part
of the customer. Products in high-velocity environments are particularly informationintensive. They can be regarded as experience goods and their value cannot be evaluated
until used. Thus a firm’s image plays an important role in the customer’s purchase decision
and can be regarded as a central part of strategy in high-velocity environments. Apple, for
instance, has developed an outstanding brand image in the computing and entertainment
sectors. Apple stands for cool products that are stylish without being ostentatious, and
fashionable yet sophisticated. In contrast to most of the competition, its advertising
campaigns have little to do with technology standards, but stress design and usability.
Following this approach, Apple has garnered numerous awards for brand excellence and has
some of the highest margins in its sectors.
Focus
The dimension of ‘‘focus’’ can also be derived from industrial economics as a way of
strategic positioning. It refers to the degree of concentration on niche markets e e.g. a
customer group, a part of the product line or a geographically-confined market. Aboveaverage profitability results from a more efficient and effective satisfaction of the needs of
the market segment compared with non-focused companies. In the context of high-velocity
environments, the focus dimension is of great importance. In these markets, there are
typically a high number of young and small enterprises focusing on one particular product
segment. Additionally, several larger companies are forced to concentrate on discrete
products because of tight liquidity positions and a downturn of stock markets. Siemens is an
example of a company that refused to follow this aspect of strategy for a long time. While
retaining its structure as a highly-diversified corporation operating in many different
product markets, the company was not able to keep pace with changing trends in the
mobile phone industry. It was neither able to recognise and match the increasing demand
for flip phones and built-in digital cameras, nor was it able to equip its devices with state-ofthe-art software. The Siemens mobile division increasingly lost market share in the growing
market, slipping to fifth place in 2005 (in terms of phones sold), and was finally divested to
2016
17
Distinctive Strategic Management
Dr. Baruna Hadibrata,SE.,MM
Pusat Bahan Ajar dan eLearning
http://www.mercubuana.ac.id
the Taiwanese company BenQ, which subsequently shut down the Siemens facilities in
2006. Proactiveness The originally evolutionary economical concept of search routines
provides a theoretical basis for the strategic dimension of ‘‘proactiveness’’. Proactiveness
describes the extent of continuous search for productive opportunities and innovative kinds
of business activity as well as the early pursuit of those opportunities. Proactive companies
explore trends in technology, competition and customer behaviour. The concept of
proactiveness has received considerable attention in research on entrepreneurship and has
been included in more recent, dynamic streams of the resource-based view. The literature
emphasises the increased significance of proactive behaviour in high-velocity environments.
It is argued that competitive advantage in dynamic and complex markets is only temporary.
Product lifecycles and thus innovation lifecycles are extremely short, while customer needs
are fluid. Hence proactive behaviour is of great importance to maintain leadership and gain
firstmover advantages in high-velocity environments. Samsung is a prominent example of a
particularly proactive company. High investments in R&D have transformed the company’s
position in the mobile phone market from a me-too producer into a first-mover. For
instance, Samsung brought the clamshell design into the mass market and at an early stage
invested in the development of integrated megapixel camera-phones, as well as in display
innovations. Today, Samsung has the third-largest mobile phone market share in the world.
Following the dimension of proactivity, Google lets its employees dedicate 20 per cent of
their time to the development of their own innovative ideas and the transformation of
these ideas into productive opportunities and sustainable business concepts. The early
pursuit of these ideas is demonstrated in the philosophy of Google to release Beta-versions
of all services instead of following pre-defined release cycles. By leveraging the productive
capabilities of its employees and pursuing these productive opportunities early, Google
diversified its business in a very short timeframe and launched a multitude of innovative
services around its core business, e.g. Google Earth, Google Maps and Google Alerts.
Replication
Replication derived from the resource-based concept of co-ordination/integration e denotes
the extent of efficient redeployment of knowledge and competencies from one economic
setting to another. Codification and transfer of knowledge are the fundamentals of
replication. Knowledge codification refers to the representation of knowledge so that it can
2016
18
Distinctive Strategic Management
Dr. Baruna Hadibrata,SE.,MM
Pusat Bahan Ajar dan eLearning
http://www.mercubuana.ac.id
be accessed by each member of an organisation. Through codification, implicit knowledge is
externalised e i. e. transformed into explicit knowledge. Knowledge transfer can be defined
as the company-initiated relocation of knowledge from one type of use to another. One
employee’s knowledge can be made available to other members of the organisation. Thus,
codification is an imperative prerequisite for the transfer of knowledge. The capability to
replicate knowledge and competencies can create economic value in two ways. First, it
enables fast and efficient growth through geographic and product line expansion. Second, it
can be a part of organisational learning and process improvement. Accordingly, replication is
especially suitable for explaining competitive advantage in industries of rapid change. Fast
replication of organisational skills can be crucial in outperforming competitors in such
environments. Hence, replication is an essential dimension of strategy in high-velocity
environments. The relevance of the replication strategy dimension can be illustrated by the
example of the semiconductor industry. Short product lifecycles persistently force firms in
this industry to shift their manufacturing processes. In the past, Intel has been particularly
effective in performing the required internal changes, making existing capabilities available
for new product lines. Intel has successfully relied on fast development and ‘‘ramping’’ of
new manufacturing processes to speed its introduction of improved versions of the Pentium
microprocessors.
Reconfiguration
Reconfiguration refers to the extent of the creation of new knowledge and competencies in
a company. Based on the resource-based view, reconfiguration capability can be described
as the ability to react on the need to reconfigure the firm’s asset structure and accomplish
necessary internal and external transformation by learning or acquiring necessary
knowledge.
The two central mechanisms for knowledge creation e and therefore for reconfiguration e
are knowledge abstraction and absorption. Boisot defines knowledge abstraction as
‘‘generalising the application of newly codified insights into a wider range of situations.
Abstraction then works by teasing out the underlying structure of phenomena relevant to
our purpose.’ The enlargement of the knowledge’s field of application also expands the
company’s options. In addition, knowledge generation requires the absorption of new
knowledge, i.e. its assimilation and integration with existing knowledge. Teece et al.
2016
19
Distinctive Strategic Management
Dr. Baruna Hadibrata,SE.,MM
Pusat Bahan Ajar dan eLearning
http://www.mercubuana.ac.id
underline the importance of reconfiguration in high-velocity environments. They state that
in rapidly-changing environments, it is pivotal to quickly accomplish strategic
reconfiguration and transformation before competitors and narcissistic organisations are
likely to be impaired. Important preconditions for reconfiguration are an open corporate
culture and a flexible organisational structure. For instance, Gore & Associates, a producer
of fabric for the textile, telecommunications and electronics industries, has an
organisational culture characterised by a high degree of empowerment and an
entrepreneurial mindset. This environment motivates employees to bring in ideas for
innovations and to transfer knowledge and competences to new projects. Furthermore, a
flat organisation without pre-determined channels of communication allows for quick
reactions to employee proposals. These features were important in Gore’s continuous
knowledge abstraction, such as transferring know-how in the manufacturing of wire and
cable or developing the Gore-Tex fibre for the textile market.
Co-operation
Co-operation Referring to the resource-based view of the firm, the strategic dimension of
‘‘co-operation’’, or the extent to which a company maintains co-operative arrangements, is
essential to gain access to external resources and competencies. Forms of co-operation may
include bilateral arrangements (e.g. joint ventures and strategic alliances) as well as
multilateral agreements (e.g. strategic networks). Co-operation plays a particularly
important role when resources can only be acquired through organisational learning
processes because of imperfect factor markets. These organisational learning processes can
take place within the company or through collaboration (‘‘inter-partner-learning’’). As a
result of ‘‘time compression diseconomies’’ only the latter is often appropriate in highvelocity environments. Because of rapid environmental change, an internal accumulation of
resources often turns out to be inefficient and time-consuming. Consequently, co-operation
is of utmost significance in high-velocity environments. The importance of interorganisational co-operation is especially high for web portals, such as internet sites like
Yahoo! that (directly or indirectly) provide a broad array of services and linkages to users.
Co-operation can be beneficial for portals in two ways. First, the portals receive direct
compensation in exchange for advertisements, promotions and other services. Second, the
agreements may increase the appeal of the portal’s site by deepening its content and
2016
20
Distinctive Strategic Management
Dr. Baruna Hadibrata,SE.,MM
Pusat Bahan Ajar dan eLearning
http://www.mercubuana.ac.id
extending its features. Yahoo! operates hundreds of partnerships with content, service and
access providers from around the world. Even the most successful companies in the internet
sector may have to rely on interfirm co-operation. Because of the tremendous importance
of network externalities and lock-in effects in a dynamic and complex environment e leading
to increasing returns and ‘‘winner-takes-it-all-markets’’ e Google’s social networking
platforms Orkut and Google Groups were not able to achieve the critical mass to compete
against the leading platform, MySpace. In order to secure its revenue streams from contextbased advertising, Google had to enter a $900m cooperation deal with NewsCorp to
become the exclusive search engine for MySpace. Having illustrated each of the seven
strategy dimensions and their specific relevance in highvelocity environments, it is
important to note that strategy is to be perceived as a holistic concept that integrates the
different perspectives. It is not sufficient for a firm to be a great differentiator without being
capable of replication or co-operation. Firms need to balance their strategic orientation and
put efforts into pursuing all of the dimensions previously discussed, following the example
of Cisco Systems.
Exhibit 1
Cisco’s success story in a high-velocity environment*
Founded in 1984 by a small group of computer scientists from Stanford University, today
Cisco Systems is the worldwide leader in networking for the internet. The company focuses
on products in the field of routing and switching as well as on advanced technologies in
areas such as home networking, IP telephony, network security and others.
The seven dimensions of the high-velocity strategy construct are an integral part of Cisco’s
success story, especially the dimensions of product differentiation and co-operation. The
Cisco Dynamic Configuration Tool allows for product customisation according to the
individual
customer needs. Product innovations are achieved through high investments in R&D as
well as by relying extensively on strategic partnerships. An example is the strategic alliance
with Intel. Together these companies are able to develop more reliable wireless local area
networks (WLANs) and achieve higher quality services.
Another important strategy dimension for Cisco is replication. For example, the knowledge
database Cisco Connection Online provides customers and employees with information on
2016
21
Distinctive Strategic Management
Dr. Baruna Hadibrata,SE.,MM
Pusat Bahan Ajar dan eLearning
http://www.mercubuana.ac.id
network problems and corresponding solutions. In this database, network problems are
collected
not only in order to ensure the quality of Cisco’s recent products, but also to derive
ideas for new solutions.
As reconfiguration is also a key factor of the strategy, Cisco created a modular partner
business
model, the so-called ecosystem. The goal of the ecosystem is to ensure the transfer of
existing knowledge and competences into new areas. An example is the transfer of
approved
software standards to new projects (e.g. Cisco IOS, an open software standard). The target
groups are internal systems engineers, strategic partners and channel system engineers.
The dimension of image differentiation is guaranteed by a strong brand philosophy with
clear branding guidelines for partner companies using the brand name. Cisco has
established
a distinct corporate identity for all communication channels. The brand identity system is
made up of several proprietary copyrighted elements which can only be used in association
with communications that are created and distributed by Cisco.
Since the early days of the company, focus has been a major success factor. Cisco’s business
always focused on networking. The firm strengthened this core business activity over the
years and outsourced other areas to its strategic partners.
Finally, proactiveness has always been part of the business strategy. Cisco’s reputation as
a first-mover is well known. For instance, Cisco was the first company to create a complete
solution for the integration of data, voice and video in one single network infrastructure.
This
innovation can be regarded as the starting point of multimedia applications such as video
conferencing and unified messaging.
*Based on interviews with the marketing director at Cisco Systems Germany, in March
2002, supplemented by publicly available information.
2016
22
Distinctive Strategic Management
Dr. Baruna Hadibrata,SE.,MM
Pusat Bahan Ajar dan eLearning
http://www.mercubuana.ac.id
Daftar Pustaka
Michael Porter, Nicholas Argyres, Anita M. McGahan, "An Interview with Michael Porter", The
Academy of Management Executive 16:2:44 at JSTOR
Michael Simkovic, Competition and Crisis in Mortgage Securitization
Tang, David (21 October 2014). "Introduction to Strategy Development and Strategy Execution".
Flevy. Retrieved 2 November 2014.
Kevin P. Coyne and Somu Subramaniam, "Bringing discipline to strategy", The McKinsey Quarterly,
1996, Number 4, pp. 14-25
http://www.investopedia.com/terms/s/six-forces-model.asp
Michael E. Porter. "The Five Competitive Forces that Shape Strategy", Harvard Business Review,
January 2008, p.86-104. PDF
2016
23
Distinctive Strategic Management
Dr. Baruna Hadibrata,SE.,MM
Pusat Bahan Ajar dan eLearning
http://www.mercubuana.ac.id
Wernerfelt, B. (1984), A resource-based view of the firm, Strategic Management Journal, Vol. 5,
(April–June): pp. 171-180.
Porter, Michael E. (1980). Competitive Strategy. Free Press. ISBN 0-684-84148-7.
Michael E. (1985). Competitive Advantage. Free Press. ISBN 0-684-84146-0.
Kiechel, Walter (2010). The Lords of Strategy. Harvard Business Press. ISBN 978-1-59139-782-3.
Wright, Peter, Kroll, Mark, Kedia, Ben, and Pringle, Charles. 1990. Strategic Profiles, Market Share,
and Business Performance. Industrial Management, May 1, pp23-28.
Wright, P, "A refinement of Porter's strategies."
Jump up ^ Gamble, Arthur A. Thompson, Jr., A.J. Strickland III, John E. (2010). Crafting and executing
strategy : the quest for competitive advantage : concepts and cases (17th ed.). Boston:
McGraw-Hill/Irwin. p. 149. ISBN 9780073530420.
William E. Fruhan, Jr., "The NPV Model of Strategy—The Shareholder Value Model," in Financial
Strategy: Studies in the Creation, Transfer, and Destruction of Shareholder Value
(Homewood, IL: Richard D. Irwin, 1979)
Porter, M.E., "Competitive Strategy: Techniques for analyzing industries and competitors" New York:
The Free Press (1980)
Panayides, "Unknown" (2003)
Miller, D., "The generic strategy trap" in The Journal of Business Strategy 13(1):37-41 1992)
Hambrick, D, "An empirical typology of mature industrial product environments" Academy of
Management Journal, 26: 213-230. (1983)
Murray, A.I. "A contingency view of Porter's "generic strategies." Academy of Management Review,
13: 390-400. (1988)
Wright, P, "A refinement of Porter's strategies." Strategic Management Journal, 8: 93-101.(1987)
2016
24
Distinctive Strategic Management
Dr. Baruna Hadibrata,SE.,MM
Pusat Bahan Ajar dan eLearning
http://www.mercubuana.ac.id