Competing in the New Economy
created opportunities to earn monopoly rents (profits). The concept of strategy thus evolved into finding ways by which firms could leverage imperfections in industry structures, so as to gain monopoly power. Exploiting learning curves and striving for market share represented some of the means by which firms could create imperfections in the structure of the industry and leverage monopoly power (Amit, 1986).
Companies competed with physical assets as their key resources, because they were primary means to create imperfections within the industry. Physical assets included fixed costs which raised barriers to entry and investments in physical capacities were means to signal the potential for protracted price wars and hence deterred rivalry (Dixit, 1980). Morever, by increasing the intensity of physical assets firms could further take advantage of their economies of scale. The specific means by which a firm leveraged market imperfections were captured in its positioning. A strong market positioning implied that the firm was leveraging on its market imperfections very well. Business units were found to cluster around specific positions in an industry to form strategic groups (Cool and Dierickx, 1993) and these positions determined their competitiveness (Porter 1980). Positioning thus became the dominant view of strategy.
Era 2: Strategy as a Portfolio of Capabilities
How are multiple businesses managed? Clearly some synergies across businesses had to be leveraged for effectively managing a multi-business corporation (Prahalad and Bettis, 1986). The concept of strategy based on “positioning” did not adequately address cross-business synergies, and hence the value added of a corporation.
The Portfolio of Capabilities framework rationalises that if organisational processes and routines were valuable and difficult for rivals to imitate, firms could create and sustain competitive advantage (Barney 1991; Conner 1991; Peteraf, 1993). This framework underscores the inimitability of processes and routines as a necessary condition for competitive advantage. The significance of this framework was that it allowed a strategist to systematically analyse and understand the internal processes and routines by which an organisation competed in the market place. For embedded within these processes and routines were an organisation’s distinctive capabilities that determined how effectively they could compete either within or across businesses and industries (Nelson 1991).
Prahalad and Hamel’s (1990) influential work on core competencies underscored the key differences between these two perspectives of strategy (portfolio of businesses and portfolio of capabilities). They argued that firms that restricted their strategic analysis to single industries, and limited their attention to how they were positioned in their focal industry alone, often failed to anticipate the potential for new competitors to transform the structure of their industry and to seriously undermine prevailing product-market positions. Their case maybe made clear from an example of how Canon penetrated and dominated the photocopier business from Xerox.
Honda, Canon and Sharp came into the US markets with strengths absorbed from initial different industries.
§ Canon, for example, entered the photocopier business to challenge Xerox by [next page]