I was posed with a simple yet very poignant question today on Linked-In, is Michael Porter's Competitive Advantage Model incomplete?
First off, here is the boiled down version of Michael Porter's concept. There are two types of competitive advantages a business can obtain: low-cost and differentiation. These two advantages in relationship to the business' target market scope (niche or broad) and product mix (limited or wide) yields the following four business strategies:
Cost-Leadership: The advantage is based on being the industry's low-cost producer in a mix of products/services; think big box stores private label brands. This is a pure value play that works best with a well-understood and accepted service.
Product Differentiation: When a business has an actual or perceived uniqueness it is said to have an advantage by means of differentiation.
Cost Focus: This is when one's position allows it to offer to niche market at prices lower than the competition.
Focused Differentiation: Leverages a better understanding of a narrow segment of the market to develop unique products that can be sold at premium prices because they solve a niche's pressing issue.
It is my belief that the Competitive Advantage Model is too simplistic for today's complex global environment. The 'Flagship Model', which was developed by Alan Rugman and Joseph D'Cruz, is an alternative framework, which comes at the situation from a network perspective. If you have studied keiretsus or chaebols then you'll quickly grasp the concept. The framework includes government(s) and other loosely associated influences. Quite simply the Flagship Model states that success will come easier to those who adopt strategies that are mutually reinforced within a business system that incentives long-term goal among the partners in the system.
Here is how it breaks down:
- The firm is at the center of a five (5) partner and one (1) influencer structure.
- The Flagship firm provides the vision, leadership, and resources.
- Key Suppliers perform value-creating actions and have an alliance with the Flagship firm. This alliance horizontally shares strategies, resources, and responsibility. Think Intel and Microsoft or better yet the recently announced Hewlett-Packard and Microsoft strategic alliance in the data center market.
- Other Suppliers who have a traditional provider-customer relationship.
- Key Customers who provide direct feedback on functionality within their business process; logistical fit, suitability, changing needs. Think of it as a race car driver providing feedback to the crew chief during the race.
- Key Consumers provides traditional feedback on the product or service provided via sales and focus groups.
- Selected Competitors are firms with which the Flagship firm has alliances with in selected produce areas or markets. Both concerns understand that the alliance is developed for a specific reason and that in other areas they are fierce competitors.
In the model the influencer structure is called a Non-business Infrastructure, which is composed of government(s), universities, unions, and others who can or do supply intangible inputs. As way of an example these inputs could be intellectual property.
I will be the first to admit that each model is valid, with its validity dictated by the business' situation. One should also take into consideration that Porter's better-known Five Forces Model is often used in conjunction with the Competitive Advantage, Value Chain, and National Competitive Advantage models. I however feel that as the world converges, thanks to enhanced communication and the rapid emergence of businesses from around the globe, it becomes harder and far less appropriate for many businesses to take a limited perspective. The Flagship model help identify the best areas in which an organization should negotiate a strategic partnership.
What are your thoughts?
I'll take a look at some of the frameworks used to identify and exploit international business development opportunities in Part 2.