0 Unraveling Firm Competitiveness, A Life Cycle Perspective

Competition Forum Vol. 7 (1), 2009

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Unraveling Firm Competitiveness: A Life Cycle Perspective G R Chandrashekhar, Indian Institute of Management – Indore

EXECUTIVE SUMMARY

Competition and hence being competitive is central to the domain of strategy research and practice. The issue is how and when does a firm become competitive in its evolution and for how long does it remain competitive. Several theories and measures have been postulated which provide divergent perspectives. A life cycle perspective which views a firm as a combination of resources and processes provides some insights into the development of competitiveness in a firm across various stages of its evolution. Keywords: Competitive advantage, Evolutionary perspective, Resources and processes based view

INTRODUCTION A measure of either competitiveness or competitive advantage at a firm level could lead us to consider several dimensions of competitiveness. Porter (1990) suggested that sustained above industry average operating profits could be an indicator of a firm possessing a certain competitive advantage in its industry. This is a relatively simple and effective measure to adapt for understanding competitiveness. However, firms may not always return above industry average profits while still retaining competitiveness, and certain industries or sectors of business activity maybe beset with obsolescence resulting in decline. Krugman (1994) does not quite agree that percentage of exports in the total output of an economy is an indicator of competitiveness of an economy. This indicator seems to suggest that acquiring a share of international markets is sign of competitiveness of a nation. The same argument could be transposed to a firm level and it could be argued that share of exports as percentage of total sales of firm indicates its competitiveness. Export motivation for a firm could be as a result of relatively small home market, or a very concentrated home market which is unattractive to penetrate or a highly regulated market where quotas and licenses are still in vogue. Hence exports of a firm alone would not be a complete indicator of its competitiveness. It would also be pertinent to consider where the exports of a certain firm are headed – competitive markets or relatively uncompetitive markets. Barney (1991) has argued that resources that are valuable, rare, and inimitable are likely to lead to a firm possessing a competitive advantage. Peteraf (1993) has argued that possession of heterogeneous and imperfectly mobile resources are likely to result in competitive advantage. These arguments shift the focus from the outputs delivered by a firm in terms of exports and profits to the inputs secured by a firm to conduct its business. However, not all firms may be able to possess the sort of resources Barney considers important to achieve competitive advantage and imperfectly mobile resources may not be available in every sector as suggested by Peteraf (1993). Priem and Butler (2001) have questioned the usefulness of the resource-based view for strategic management research. There do not seem to be many definitions of Competitive Advantage in literature. Ansoff (1965:79, c.f. Mooney, 2007) defined competitive advantage as the ‘properties of individual product / markets which will give the firm a strong competitive position’. The Industrial Organization (IO) School (Porter, 1980, 1985, etc.) echoes this line of reasoning and views competitive advantage as a position of superior performance


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that a firm achieves by choosing an appropriate response to a selective pressure imposed by the industry. This view of competitiveness does not seem to consider if a certain firm has the capability to respond to industry pressures. Hunt and Morgan (1996) develop the Resource Advantage (R A) theory of competition wherein they suggest positions of competitive advantage for firms with superior relative resource disposition and superior relative resource produced value. They acknowledge that these are not easily measurable and one could infer these from the superior financial performance a firm returns. The R A theory has also been criticized for not considering life cycle trends and not directly considering the organizational learning aspects. Porter (2000) and others have indicated the importance of location in being competitive and achieving competitive advantage. The stream of research on clusters and cluster competitiveness seems to suggest that a firm located in a certain industrial cluster is likely to benefit by being part of a network for its resources, revenues and trade related information. However, not all firms in an industrial cluster maybe competitive and some of them may become uncompetitive by changing technology trends. Porter (1994) argues that competitive advantage has advanced from seeking static efficiencies to seeking skill and technology and developing dynamic processes. Belohlav (1993) highlights the importance of quality in the long run success of firms by using the Motorola six sigma initiative as an example. He concludes that a firm practicing superior quality could have multiple generic strategies and can create markets not available to competitors and in this manner engender competitive advantage. If this were to be true then competitive advantage could be associated with creating new markets rather than competing successfully in existing ones. As can be gathered from above, past research raises a few questions on firm competitiveness. Should firm competitiveness be associated with securing important resources? Should it be associated with competing and securing above industry average profits in home and export markets? Should it be associated with being part of an industrial network to obtain both resources technology, and customers? Should it be associated with creating new markets? One could resolve this multiple viewpoints if one considered that firm competitiveness could be different at various stages of its evolution. A new venture may consider gaining resources and customers to be competitively significant in its initial years. Once it reaches a growth stage, it may consider competing for market share in home and export markets to be competitively significant. As the markets it operates in mature and become hyper-competitive, or technological obsolescence sets in, it may consider creating new markets to be competitively significant. Thus a primary research question emerges that how is the competitiveness of a firm influenced during various stages of its evolution? This paper addresses this issue and advances a framework to develop a life cycle understanding of firm competitiveness.

RESOURCES, PROCESSES, AND FIRM EVOLUTION A firm can gain and sustain its competitiveness in international markets by its ability to leverage on organizational resources that are valuable and rare (Coyne, 1985); nonimitable (Lippmann & Rumelt, 1982; Barney, 1986); and non substitutable (Barney, 1991). Thus resources form one conceptual foundation for developing a framework to understand the evolution of firm competitiveness. In this paper organizational resources are classified along the four dimensions – Economic, Intellectual, Institutional and Information Architecture.


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Economic Resource – Economic resources include all tangible resources of a firm that could be valued such as cash, assets, brands, etc. Moldaschl and Fisher (2004) have classified this type of resource as finite assets that are usually scarce for any firm. Intellectual Resource – Intellectual resources include both tacit and explicit knowledge of a firm contained with its founders and employees, and codified sources within a firm (Nonaka, 1994; Kogut & Zander, 1992). There is a degree of intangibility to this type of resource. Zahra (1999) has argued that intellectual resources are likely to be the key for a firm to sustain its competitiveness and that firms are likely to invest more in human resource development. Moldaschl & Fisher (2004) have classified the output from such resources as generative assets that could lead to development of competencies. Institutional Resource – Institutional resources include the code of ethics and the governance policies of a firm, which are largely intangible but could be tangibly employed. Kristensen and Morgan (2007) examine multinational firms of different origin and study the effect of institutional competitiveness of these multinational firms in different contexts. The interplay between the institutional competitiveness and local contexts determines the success or failure of a multinational along a time frame. Information Architecture – The information networks of a firm drawn from all its stakeholders including suppliers, dealers, partners, and business probes etc which is largely intangible but could be tangibly employed in decision making. Knudsen and Madsen (2002) have emphasized the importance of information architecture of a firm in developing capabilities for growth. Zahra (1999) has argued that a firm’s intangible assets and resources shall become the key in developing dynamic capabilities in the twenty first century, while differentiating it from competition. The intellectual resources, institutional resources, and a firm’s information architecture are intangibles for a firm to use and deploy in developing a sustainable competitive advantage. The resource-based view (RBV – Wernerfelt, 1984) allows for evolutionary consideration of firm growth on a time dimension and scholars such as Dosi (1982) have pointed out the idiosyncratic paths followed by firms in their evolution. However, RBV does not seem to account for the development of competencies within a firm and its competitive impact in the market place. Here a life cycle perspective of firm evolution is considered to understand a firm’s competitiveness at various stages and also the use of its resources and processes. The life cycle perspective of a firm is considered along four broad stages of its growth and evolution – early firm growth, high growth phase, inflexion point, and maturity stage. Early firm growth – This early phase of firm growth would commence with the founding of the firm and would extend until a new venture has survived its early period in business and is poised for further growth. Founding Time (Chandrashekhar & Srinivasan, 2005) is a concept meant to describe this early phase of growth of a new venture. Founding Time measures that period of the early firm growth since the inception of a new venture to the stage wherein it has achieved stability and is poised for rapid growth. High growth phase – This phase of a new venture evolution would commence when a venture has gained a certain amount of legitimacy and has developed a set of client relationships and has instituted a business model for further growth. Inflexion Point – Firms in their high growth phase are likely to encounter changing demographic trends, changing customer preferences, new technology breakthroughs brought about by current and new competitors. At these junctures, firms would have to predict a future or a range of future possibilities and make strategic decisions. This stage is somewhat similar to the ‘inflection point’ of Burgelman and Groove (1996:11)


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Maturity Stage – Firms that have evolved through all the previous stages and have achieved dominant market shares in a certain business or certain businesses are likely to encounter saturated market demand nationally and / or globally. Such firms are likely to contemplate entering new businesses or creating new markets. Table 1 depicts the type of resource that is likely to be more important at different stages of a firm evolution. During the early firm growth phase, a new venture would probably require economic and intellectual resources to execute its business idea(s) it has developed. However, as it obtains some amount of legitimacy from various stakeholders and is poised for high growth, it would also require Governance policies to be in place to retain the legitimacy it has obtained and build further on it. A profitably growing firm would also require its information architecture to be developed to predict future business scenarios either during inflexion points or during stages of maturity. The information architecture of a firm would be crucial for a firm during its later stages of development. This is not to argue that economic resources shall not be important during the later stages, however, a firm with a dominant market share would be expected to have sufficient reserves to invest in existing or new businesses. However, the strategic direction for further growth at this stage could only be arrived at by combining information architecture and intellectual resources of a firm.

TABLE I Stages of Firm Evolution

Dominance of Resource Type Degree of Competitiveness

Early firm growth Economic, Intellectual None High growth phase Economic, Intellectual, Institutional Nascent Inflexion Point Intellectual, Institutional, Information

Architecture Moderate / High

Maturity stage Intellectual, Institutional, Information Architecture

Moderate / High

Processes are important for efficiency and effectiveness of inter personal coordination (Dierickx & Cool, 1989) to achieve a firm’s objectives. They combine the various resources and facilitate the development of competencies of a firm to enable it to compete in the market place. Thus organizational processes form the other conceptual foundation for developing a framework to understand the evolution of firm competitiveness. Processes within an organization have been classified along the eight dimensions – Search, Sheltering, Founding, Release, Conservation, Learning, De-risking, and Self Organizing as shown in figure 1.

FIGURE I

Conservation

Self-Organizing

Sheltering

Search Founding Learning De-Risking

Release


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Search – The search process in a new venture or an established firm is the process that seeks a new business idea or a new product / service idea. This process is likely to combine both economic and intellectual resources as shown in Table 2 to achieve its objective. Cohen and Levinthal (1990) have argued that the firms with superior absorptive capacity are likely to improve their power position in a network and also become competitive. The search process and the learning process combined would be the key to a firm developing this absorptive capacity. Sheltering – The sheltering process is the act of providing initial legitimacy to a new venture for one of resources, customers, associations etc. Some of the ways of sheltering could be - a high tech start up is sheltered by a venture incubator, a large business group shelters a new division before spinning it off as a separate entity, and a new venture obtains a sizeable business contract from a well known firm which not only enables it to tide over its early firm growth phase but also develops legitimate customer associations (Chandrashekhar & Srinivasan, 2009). Founding – The founding process is the endogenous formation of an entity by entrepreneur(s) with a business objective and mission for the new venture (Chandrashekhar & Srinivasan, 2005). The founding process may either precede a search process or succeed a search process depending on the degree of preparedness of the founding entrepreneurs. However, a sheltering process is very likely to succeed the founding process. All the three processes – search, sheltering, and founding are likely to chiefly combine economic and intellectual resources as shown in Table 2. Learning – The learning process (es) for a firm would leverage on its information architecture and combine it with intellectual resources to develop superior decision making ability within a firm. The learning process may also include institutional resources to prevent any opportunistic behavior within a firm. Argyris and Schon (1978) had described single loop and double loop learning within organizations. Organizations could be considered as coupled systems, be it tightly coupled or loosely coupled (Weick, 1976). The type and degree of coupling adopted determines the centralized control or the decentralization found in different organizations. The following three processes, viz., Release, Conservation, and De-risking together are meant to couple an organization. Release – The release process could be considered as the resource allocation process in a firm, which would come into being when a new venture starts formalizing its internal systems and specifically creates budgeting and planning systems. The release process is also likely to combine institutional resource to economic, and intellectual to ensure that a firm’s objectives are met in accordance with the mission and the code of ethics of the firm. Conservation – The conservation process is likely to develop as the firm achieves stability in terms of profits, market share etc in its businesses. This process is likely to ensure appropriate resource rationalization and resource leverage across various units and functions of a firm. This process is more likely to combine information architecture with intellectual and institutional resources. Economic resources may not be important as conservation process is internally focused and is primarily seeking efficiency and productivity within a firm. De-risking – The de-risking process of a firm is likely to develop in conjunction with the release process of a firm. This process acts a counter to the release process and is likely to do a due diligence on the release process. Self-Organizing – Self Organizing process is the overall governance process of a firm that would normally start developing after the early firm growth stage and controls all the other processes. In the early firm growth stage founding, and search (sometimes sheltering) are likely to be the dominant processes. Once a new venture finds its moorings the self organizing process slowly assumes control of the venture. An


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organization could be considered as autopoietic requiring an overall self-organizing process (Varela, Maturana, & Uribe, 1974).

TABLE II

Stages of Firm Evolution

Dominance of Process Types Combination of Resource Types

Early firm growth Search, Sheltering, Founding Economic, Intellectual High growth phase Release, De-risking, Self Organizing Economic, Intellectual, Institutional Inflexion Point Learning, Conservation, De-risking, Self

Organizing Intellectual, Institutional, Information Architecture

Maturity Learning, De-risking, Self Organizing Intellectual, Institutional, Information Architecture

The four types of resources and the eight types of processes outlined above allow us to go inside a firm in its various life cycle stages and examine the degree of competitiveness a firm is likely to achieve along its evolution.

RESOURCES, PROCESSES, AND FIRM COMPETITIVENESS If we were to consider Tables 1 and 2 above we are likely to find some interesting influences of resources and processes on the evolving competitiveness of a firm. The interaction between the resources and processes at various stages of firm evolution could be observed thus. A new venture in its early growth stage is likely to be largely uncompetitive as indicated in Table 1. In this stage the founders of a new venture are very likely to be occupied with developing a business idea, testing it in the market place, and developing customer relationships. Unless the idea is totally new in the market place there are likely to be incumbent firms already delivering either the same or a similar product or service to a set of customers. These incumbents would have the advantage of being early movers and would have gained from the experience of delivering a certain product / service. If however, a firm has a breakthrough idea, then its ability to generate resources both – economic and intellectual and scale up quickly would decide its competitiveness. A new venture is likely to be deploying its search process and strengthening its founding process in the early growth stage. Some ventures may have the benefit of being sheltered in some form, which would result in the sheltering process being in action. The search process would probably take a backseat as a new venture finds its moorings in terms of executing its business idea and generating revenues. By the end of the early growth stage the founding process would be almost complete and the self-organizing process would be at different stages of development within a firm. The self-organizing process, being the main governing process of a firm, would then spawn other processes for further growth. In the high growth phase, a firm through its release process would invest for growth of its business. A de-risking process is likely to be spawned by the self-organizing process to keep a check on the release process. A firm in this stage is probably focused on its original objectives of achieving a certain market share and other objectives, and may not have developed its information architecture across its value chain or from other complementary businesses, and thus a firm may not have evolved its learning process by this stage. Hence even if a firm in a high growth stage is generating cash profits it is still vulnerable to technological changes, shifts in consumer demand, and other competitive influences. Thus a firm in this stage is grappling with being competitive in its business and any sudden shifts in its business would make it very vulnerable.


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The high growth phase of a firm could develop into a few business scenarios. An unsuccessful firm may exit during this phase, something that could also happen during the early growth phase. Firms growing successfully in this phase may face a consolidation trend post a high growth phase, or competitive action in terms of new businesses being formed through technological innovation or business model innovation. This would be the phase of evolution wherein the conservation and the learning processes of a firm are likely to evolve and mature. A firm facing either a consolidation trend or a relatively lower demand for its products would use its conservation process to drive up internal efficiency and generate internal resources for future. A firm facing competitive innovation trends has to combine its information architecture and intellectual resources with its learning process to develop future strategy for growth. Thus the degree of maturity of the learning, conservation, and de-risking processes along with the availability of intellectual resources and well-developed information architecture would determine the competitiveness of a firm facing an inflexion point in its growth. Economic resources though important at every stage of firm evolution, are not quite sufficient for a firm facing an inflexion point. A firm facing terminal decline in demand of its products / services may have to combine all its processes and resources either to revive demand or generate new businesses. Hence the maturity of its processes would be critical for it to remain competitive. Thus maturing of firm processes is probably a sign of firm competitiveness in its evolution across different phases. In addition to maturing of processes, appropriate combining of different resource types by the various processes is important for a firm to be competitive. SOME POINTERS FOR DEVELOPING A COMPETITIVENESS FRAM EWORK The processes outlined in figure 1 have some inter process interactions to be considered. The solid arrows indicate persistent influence while the dotted ones indicate possible influences which may or my not be constant. In the initial stages of venture growth the three processes of Search, Sheltering, and Founding are likely to be the key processes of firm evolution. The transition of control from a founding process based system to a self – organizing process-based system is the first stage of significant development for a new venture in its evolution that could determine if a new venture will ever become competitive. Observing that stage when a venture decides to have formal budgeting and planning processes in place could identify the formation of a self – organizing process. Once the budgeting and planning cycles are in use, the founding entrepreneurs allow other managers to participate in the future visioning of the venture and have more accountability for achieving the same. This also means that the entrepreneurs step back from day-to-day operations of the venture. The spawning of Release, Conservation, Learning, and De-Risking processes by the Self-Organizing process is the second crucial stage of development for a firm which has transited to a self – organizing process based system. This could be identified by observing the formation of distinct business units (for release and conservation processes), by observing the establishing of knowledge management systems (for learning process), and by observing launch of new initiatives (for de-risking process) by a firm. All of these when combined with financial data, indicate that a firm has a stable business model and is growing to establish leadership in certain markets. The formation of feedback loops from Learning, De-Risking, and Search processes which are all shown in dotted lines is the third important stage of development of a firm. A static and not current knowledge management system may not have any feedback to offer to the self-organizing, de-risking, and search processes. It is this feedback that motivates the self-organizing process to either launch the search process to seek new technologies, markets, sets of customers, or launch the de-risking process to take action on current portfolio of businesses, or engender new ones. In the absence of such a feedback, a firm may not notice changing trends and may lose direction in its business (es) and hence become uncompetitive. The appointment of Chief Operating Officer (COO), Chief Knowledge Officer (CKO), and Chief Strategy


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Officer (CSO) by a firm could be one indication that it is serious about these feedback loops being used in its business decisions to remain competitive.

CONCLUSIONS

Understanding firm competitiveness is necessarily an interdisciplinary effort. This paper combines literature from economics, marketing, technology management, resource based view, knowledge based view, and organization theory to arrive at a resources and processes perspective, which provides a different insight into evolving firm competitiveness. This paper focuses on the internal aspects of evolution of firms and the possible actions and decisions that may lead a firm to be competitive. Maturing of the different processes and combination of different resource types seems warranted for a firm to be competitive. The three inter-process interactions provide pointers towards the degree of competitiveness a firm has achieved or is likely to achieve. Future research could be directed to examine specific combination of resources that lead to firm competitiveness and the degree of maturity of processes required for a firm to be competitive at various stages of its evolution. Combining of internal measures and external measures would very likely lead to a greater unraveling of firm competitiveness across the various stages of evolution of a firm.

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0 Unraveling Firm Competitiveness, A Life Cycle Perspective