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European Journal of Business and Social Sciences, Vol. 2, No.11 , pp 70-87, February 2014. P.P. 70 - 87 URL: http://www.ejbss.com/recent.aspx ISSN: 2235 -767X

EUROPEAN JOURNAL OF BUSINESS AND SOCIAL SCIENCES

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EXPANSION PROCESSES AND THE IMPORTANCE OF DIMENSIONS RELATED TO SIZE

Mauricio Emboaba Moreira, PhD Civil Engineer, Master in Public Administration, Doctor in Business Administration

Senior Consultant for Associação Brasileira das Empresas Aéreas (ABEAR, www.abear.com.br); Senior Advisor for GOL

Linhas Aereas Inteligentes, Brazil (www.voegol.com.br); Member of the Environment Committee of the International Air Transport Association (IATA); international lecturer for Boeing, Embraer, University of Cranfield, Routes, among other

institutions, and consultant in business strategy. Former professor in Escola Superior de Propaganda e Marketing, Brazil (www.espm.br)

[email protected]; com (55 11) 2128-4148, cell (55 11) 99295-4857, fax (55 11) 5098-7888

ABSTRACT

his paper discusses the objectives and nature of entrepreneurial expansion, with the aim of providing an understanding why firms are frequently engaged in

expansion processes. The core issue discussed is: Is size an important dimension for the success of a firm? This issue is not new. However, a definitive answer to this question has not been given by the academy yet. By reviewing the importance given by the theorists to firms’ size under a historical perspective, the article indicates the guidelines to be considered in order to give a proper response to this critical issue. The paper concludes that the once over valued dimensions related to size gradually have lost their relative importance along the time, as quantitative approaches has been substituted by qualitative perspectives. Key words: strategy, expansion, size, market share, gains of scale.

T



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Introduction

The final objective of expansion processes is to obtain advantages from dimensions related to size, such as economies of scale and market power, which, in general, derive from a high relative market share. However, the importance given by theorists to these dimensions has changed a lot with the evolution the strategic management thought, as discussed in the next sections.

The deterministic view

The deterministic approach encompasses several theories establishing mechanistic relationships between the variables controlled by the strategist and the effectiveness of the strategy developed. It corresponds to the application of scientific principles based in general laws related to both organizations’ internal and external environment. Those theories have been very popular since the beginning of the business strategy thought, in the early 1960s, until the beginning of the 1980s. Its great appeal was the logical approach and clearness of the prescriptions devised. The most popular deterministic theories are commented upon below.

One of the most important formulations in strategic thought theory is the learning curve, which can be defined as being the reduction of production unit costs as cumulated production increases. This phenomenon was early observed in military aircraft industry in the 1930s and confirmed during the Second World War, when pioneer theorists of business strategy formulated a gold rule, which stated that production unit costs fall at a 20% rate as cumulated production doubles. As may be deduced, according to the learning curve approach, firm growth is seen as playing a key role in obtaining competitive advantage because it is a way to achieve lower industrial costs.

Afterwards, in the 1960s, the strategic debate was redirected by Andrew’s SWOT analysis. According to Andrew’s model, strategic formulation should be oriented by the assessment of the organization capabilities (strengths and weaknesses, respectively identified by S and W) vis-à-vis the environment evaluation (opportunities and threats, respectively referred to as O and T) (Ghemawat, 2002).

In the 1960s, Bruce Henderson observed that the cost reduction predicted in the learning curve theory was also present in the electronic business. Moreover, the cost reduction was not only related to direct work activities but was also verified in other related activities. So, the concept of the learning curve was generalized and the concept of the experience curve was created (Le Roy and Pellegrin-Boucher, 2005).

By combining the learning curve concept and the SWOT analysis, Henderson and his associates from the Boston Consulting Group formulated the BCG portfolio. Henderson, as were many theorists at the time was searching for general laws that would encompass the most important aspects of the business strategy approach. In that context, Henderson conceived that a firm’s most important competitive advantage was to have lower operating costs compared to the competition and that condition would be guaranteed by a bigger market share, as this would give the firm a better position in the experience curve.

On the market side, Henderson and his associates conceived that the most important dimension to define the attractiveness of a particular market was its growth rate. In other words, growing markets were associated with growing opportunities in the future. Under this perspective, in 1968 the Boston Consulting Group formulated its famous portfolio (Le Roy and Pellegrin-Boucher, 2005). Note: For a brief discussion on the BCG matrix, see the appendix.

In the beginning of the1970’s, the profit impact of market strategies study (PIMS) reinforced the BCG matrix conclusions. The study - that would be transformed to a project - tried to associate the return on



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investment (ROI), assumed as the best variable to measure a specific strategy, to independent variables in 57 corporations and 620 diverse businesses. The conclusions of the study were that market share and product (or service) superior quality were the most important independent variables to explain profits. Marketing expenditures, R&D expenditures, investment intensity (a ratio on total sales) and corporate diversity were also variables to explain the ROI ratio (Schoefler, Buzzell and Heany, 1974). Once again, the conclusions pointed out the need for growth because it is the only way to achieve or maintain high market share in a growing economy.

The findings of the three approaches – Learning/Experience Curve, BCG portfolio and PIMS – were perfectly consistent with the expectations of many academics at the time: to identify general laws that determine profitability. Among the various drivers, market share was in a prominent position. As a corollary, businesses expansion should be emphasised, even though it implies some degree of cash outlay.

The BCG matrix approach was much criticised for being too much reductionist. Kenneth Davidson (1985) synthesized most of the criticism addressed to the BCG matrix: “The single most important message to executives of the BCG matrix was implicit: You can manage a diversified corporation by numbers. If believed, that message freed managers from any restraints in acquisition policy. Any firm could become a target (for investment). No resulting firm would be too large, too diverse, or too complex if the numbers –product market growth and market share- provided all the information necessary for good management”.7

The PIMS study also received much criticism. One of the most compelling was the one formulated by Anderson and Paine (1978), who made several observations on the study, as follows:

“Observation 1: PIMS achieves its primary usefulness in the analysis and diagnostic appraisal phase of the policy formation process. Problem finding and solution generating phases are deemphasized.

Observation 2: The complexity of the PIMS model may lead to problems of interpretation and understanding and to a tendency for the user to rely on the “exactness” of the technique.

Observation 3: Current analysis of the PIMS data is largely a retrospective approach to strategy formulation.

Observation 4: Positive (or negative) effects of synergy are deemphasized in PIMS approach.

Observation 5: The ROI criterion employed in the PIMS program may not be a suitable global criterion for the measurement of strategic performance.

Observation 6: The cross-sectional data base employed by PIMS has certain identifiable, weaknesses which can lead to erroneous conclusions.

Observations 7: PIMS analysis has not identified intended goals-strategies for which performance was measured. In the future goal structures should be added to the database.

Observation 8: Analysis of independent variables in the absence of remaining model variables may lead to erroneous conclusions primarily due to problems of multicolinearity.

Observation 9: Omission of key strategic variables from the model may lead to erroneous conclusions.

Observation 10: The standard error of the estimate for the regression model should be specified.

7 Kenneth Davidson, Strategic Investment Theories, in The Journal of Business Strategy (1985), pp. 16-28.



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Observation 11: The PIMS database represents the most reliable and accurate data relevant to strategy formulation currently available.

Observation 12: Criteria for selection of “similar” business appear arbitrary. In addition, relevant ranges which determine the degree of “similarity” are not specified.

Observation 13: Differences in management controllability exist among the 37 independent variables. These differences suggest a causal sequence.

Observation 14: Theoretical frameworks from strategic management and organization theory suggest causal relationships among the independent variable set.

Observation 15: Some variables include in the PIMS model may have an impact due to their construction rather than a “true” causal impact”

Observation 16: Conclusions derived from the PIMS analysis may be misleading due the omission of certain contingency factors including inconsistencies across industries and neglect of relevant ranges of variables.”8

As a response to the BCG matrix, McKinsey Consulting produced an analytical tool that would be known as the GE/McKinsey matrix, which is a generalization of the BCG approach. In the place of the dimension market growth, assumed by BCG as a proxy variable to quantify the attractiveness of a specific market, McKinsey created the multifactor dimension named “Industry Attractiveness”. Similarly, the BCG dimension “Relative Market Share” was replaced by the multifactor dimension “Business Position”, on the assumption that relative market is only one aspect of a firm’s competitive position.

To quantify “Industry Attractiveness” the firm has to select a group of variables that best reflect how attractive a specific industry is for the organization. These variables may include aspects such as market size, market growth, existing competition, financial margins performed by current players, scale economies, entrance barriers, technology required and government attitude, among others.

After the variables are chosen, it is necessary to attribute marks to each one of them, which should be correlated to the evaluation made (e.g., high = 1; medium = 0.5; low = 0). Afterwards, weights must be attributed to each specific factor in order to reflect their relative importance. Finally, the weighted marks are summed to calculate the score of the specific industry being assessed.

The “Business Position” score is calculated in an analogous way. The respective factors must include aspects, such as market share, bargaining power of clients and suppliers, scale, distribution, reputation, etc. Attributing marks and weights to each factor and summing will reproduce the business position score.

Each product or business is than placed in a matrix. In order to help decision makers, each cell receives a generic recommendation.

In spite of the McKinsey / GE matrix not being as emphatic as the BCG matrix with relation to the importance of market share, it is clear the existence of an underlying trend in favour of overvaluing the variable market share. When weighting the factors related to the business strength, generally market share comes in first place, receiving the highest weights.

8 Carl R. Anderson and Frank T. Paine, PIMS: A Reexamination, in The Academy of Management Review, Jul 1978, page 602.



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Nevertheless, undoubtedly the McKinsey matrix offers a broadened approach when compared with the BCG matrix. Obviously, the McKinsey methodology is more difficult to implement than the BCG one.

Apart from that, it is notorious that the McKinsey matrix incorporates the common belief in vogue at the time of its development, which emphasises the relevance of dimensions such as market share, economies of scale, size, etc., implying the need for business growth in order to obtain a healthy survival.

Another popular theory in the 1970s was the Product Life Cycle (PLC). According to that theory, products, similar to living beings, have a life cycle. This life cycle can be described by a two dimensional graphic where the abscissa axis represents time and the ordinate axis represents sales.

To each stage corresponds generic descriptions and hypotheses and for each stage in the Product Life Cycle model there are generic propositions about the best strategy to be followed.

In spite of the fact of the PLC model’s propositions go much further than those of relative market share or the experience curve, many authors recommended that in the decline stage high relative market share is quite desirable. Hofer (1975), for instance, stated: “In the decline stage of life cycle, major determinants of business strategy are buyer loyalty, the degree of product differentiation, the price elasticity of demand, the company’s share of market, product quality, and marginal plant size" 9 … “When the degree of product differentiation is low, the nature of buyer needs primarily noneconomic, the degree of specialization within the industry low, the marketing intensity high, the manufacturing economies of scale medium, and the ratio of distribution costs to manufacturing value added high, businesses should: … (d) Withdraw from the industry if their market share falls to less than 20 percent of that held by the industry leader within their geographic service area (PIMS data indicate that for nonsegmented markets, ROI falls off sharply for firms whose market share is less that 30-40 percent of that of the industry leader)”10.

PLC theory was much more popular for being easy to understand rather for its accuracy or capacity to explain reality. Several arguments were raised against the PLC theory. The main ones were: no clear distinction if its application is for product class, product form or brand; no precise definition of the length of each stage in the life cycle; immutable and irreversible sequence of stages, not in accordance with experience; and the non-existence of empirical evidence (Dhalla and Yuspeh, 1976).

One important deterministic approach that had a significant popularity in the academic world is Game Theory, which can be defined as the mathematical study of interactions between players, whose payoffs depend on each other’s choices, having its fundamentals in the famous book entitled “The Theory of Games and Economic Behaviour” (Neumann and Morgenstern, 1944). Game Theory’s strength is its formalism but this aspect is also accompanied by important limitations, such as the basic assumption of total rationality of economic players. Besides, it relies much on the sensitivity of the predictions of mathematical models. The limited number of variables considered in one model and the unconditional assumption of rationality as being the main driver in any industry are also significant (Ghemawat, 2002).

In spite of the appeal of deterministic theories, they contain important limitations. First, they are reductionist, implying the non consideration of a range of relevant aspects. Second, they ignore reciprocal

9 Charles W. Hofer, Toward a Contingency Theory of Business Strategy, in The Academy of Management Journal, Dec 1975, page 799. 10 Charles W. Hofer, opus citatum, page 804.



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cause-effect between the strategy adopted by the organization and the environment and vice-versa. Third, they reduce a managers’ approach to the application of quantitative methods. Fourth, they induce managers to passive attitudes, not exploring other alternatives different from the traditional ones (Burgeois, 1984).

The non-deterministic approaches: the Industrial Organization (IO) view

Once the limitations of the deterministic theories became clearer a new approach came up in the 1980s. The industry attractiveness and competition approach replaced the statistics models used by the deterministic theorists with frameworks, whose objectives are not to quantify relationships among variables but to organize the analytical process.

According to this new approach the strategic analysis should be divided into two parts, one addressed to the industry environment and other dealing with internal resources and capabilities held by a firm.

Two basic schools were formed, one advocating that the best process of strategic management should start by analysing a firm’s external environment and the other stating that the analytical process should start by analysing the organization internally. The first school, called “industrial organization” (or IO, for short), recommended the identification of external opportunities first and the promotion of a firm’s adjustment to better exploit the opportunities identified in a second stage. The second school, called “resources based”, recommended an inverse process, starting by identifying a firm’s resources and capabilities and, afterwards, analysing the external environment in order to find out industries in which these resources and capabilities could be better used.

One of the most popular frameworks for industry analysis is the Porter’s Five Competitive Forces (Porter, 1980). According to this author, there are five fundamental determinants of industry competition: bargaining power of suppliers, bargaining power of buyers, threat of new entrants, threat of substitute products or services, and rivalry among existing firms. The model assumes that the interaction of the five forces determines how attractive an industry may be. Besides, it assumes that those forces may change with time and the firm may create defensive attitudes against environmental threats or the firm may explore external opportunities. According to Porter, “Most importantly, though, the firm, through strategy, can influence every one of the five competitive forces in its favour. A central axiom of the competitive strategy framework is that, although the industry structure is to some extent defined by exogenous economic and technical factors, strategy can unlock the constraints of industry structure”11.

As may be noticed, Porter’s model is totally distinct from the deterministic approaches. Apart from this, the dimension market share influences just indirectly the strategic evaluation, by being related to buyer concentration and supplier concentration versus firm concentration because high concentration supposes few competitors having high market share.

In the 1990s Nalebuff and Brandenburguer introduced improvements on Porter’s five forces model. Arguing that competition is not necessarily the only dynamic in a specific industry, the authors introduced the concept of “co-opetition” (Nalebuff and Brandenburguer, 1996). The key component of this approach is based on the assumption that more frequently than is supposed firms cooperate among themselves. According to this conception, the interaction of two players in an industry is not a zero sum game, as Porter’s model assumes.

11 Michael E. Porter, Industrial Organization and the Evolution of Concepts for Strategic Planning: The New Learning, in Managerial and Decision Economics, vol. 4, no 3, 1983, page 177.



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Relying on their observations on the digital industry, Nalebuff and Brandenburguer argued that the relationship of Microsoft and Intel are predominantly symbiotic. For instance, Intel’s powerful micro processors have no utility if there was not the Microsoft’s MSOffice, which demands a huge processing capacity. On the other hand, it would be impossible to run the MSOffice package if there was not Intel’s super micro processors. Clearly, Microsoft and Intel’s relationship is a cooperative one and not competitive. Other examples of cooperative relationships are easily found: the automobile industry and motorway builders, physicians and medical products, and so on.

The different players listed above, in each case, are neither suppliers nor customers, they are “complementors”. The interaction “complementors” do would be called the “sixth force” and added to Porter’s analytical model. Government also should be included in the “sixth force” because its policies could interfere decisively on a specific industry, improving or reducing its attractiveness.

Based on the above, Nalebuff and Brandenburguer proposed the “Value Net” model. The purpose of identifying the “complementors” in the Value Net is to develop a strategy for each one of them. That can help to determine how to make your business more profitable and that implies the firm should lower the “complementors’” added value. Several initiatives may be addressed to this. For instance, you can offer long term guaranties for new suppliers, increasing their number; form coalitions to become a larger buyer; educate customers, once more people know about your products and services, the more uses they may find for them, and so on.12

A very interesting response to Nalebuff and Brandenburguer was given by Porter (2008) arguing that neither complements nor government are a sixth force, but factors influencing the other five forces. According to Porter, “Government is not best understood as a sixth force because government involvement is neither inherently good nor bad for industry profitability. The best way to understand the influence of government on competition is to analyze how specific government policies affect the five competitive forces”. … “However, like government policy, complements are not a sixth force determining industry profitability since the presence of strong complements is not necessarily bad (or good) for industry profitability. Complements affect profitability through the way they influence the five forces”.13

In spite of size measures, as market share, growth rate, and others are not explicit in the IO approach, one may assume that the bigger is the size of a firm compared with its suppliers, customers and “complementors”, the bigger will be its bargaining power or capacity to retain the value added in its net. In other words, size implies indirectly profitability.

12 Barry J. Nalebuff and Adam M. Brandenburguer, Co-opetition: Competitive and Cooperative Business Strategies for the Digital Economy, in Strategy & Leadership, Nov/Dec 1997, page 28. 13 Michael E. Porter, The Five Competitive Forces that Shape Strategy, Harvard Business Review, January 2008, page 86.



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The non-deterministic approaches: the Resources Based View (RBV) In spite of the fact that RBV had been developed earlier, it gained significance in the 1990s after Prahalad and Hamel’s influential article “The Core Competence of the Corporation” was published, in 1990. The essence of Prahalad and Hamel’s theory is that within any industry there is a great profitability discrepancy among the existing players. That discrepancy is even bigger than the profitability discrepancy existing among different industries. According to the authors, the IO view can only give convenient answers to explain the variation of economic performance existing between industries, making clear the limitation of IO’s explanation capability. On the other hand, there is evidence that in the long run all players within a specific industry tend to have similar profitability due the fact that it is very difficult to all players to retain their products or processes differentials. That happens because, contrary the IO view, industries are dynamic and not static. And, in that context, if a firm is unable to develop new products over the time, it will be producing and selling current commodities and, as a consequence, experiencing low profitability. Once again, according to Prahalad and Hamel, in the long run, “competitiveness derives from an ability to build, at lower cost and more speedily than competitors, the core competencies that spawn unanticipated products”. 14 As a consequence, new markets and diversification initiatives must be assessed not in accordance to business attractiveness, because this is temporarily, but on a core competence basis. The identification of a firm’s core competencies may be made by the application of three tests. “First, a core competence provides potential access to a wide variety of markets … Second, a core competence should make a significant contribution of the perceived customer benefits of the end product … Finally, a core competence should be difficult for competitors to imitate”. 15 As a consequence, firms should be managed considering the competence portfolio instead of the product portfolio. The relationship between competencies, end products and the organization itself is analogous to the relationship between the roots, fruits and the tree.

The contrast between Prahalad and Hamel’s approach with traditional firms organized on a product basis (called by the authors SBU-Strategic Business Unit organizations) becomes clear in the following figure.

Figure 1 – Two Concepts of Corporation: SBU or Core Competence. Source: 1 C. K. Prahalad and Gary Hamel, The Core Competence of the Corporation, Harvard Business Review, May-June 1990

14 C. K. Prahalad and Gary Hamel, The Core Competence of the Corporation, Harvard Business Review, May-June 1990, page 81. 15 C. K. Prahalad and Gary Hamel, opus citatum, pages 83 - 84.

SBU Core competence

Basis for competition Competitiveness of today’s products Inter-firm competition to build competencies

Corporate structure Portfolio of businesses related in product-market terms

Portfolio competencies, core products and businesses

Status of the business unit Autonomy is sacrosanct, the SBU “owns” all resources other than cash

SBU is a potential reservoir of core competencies

Resource allocation Discrete businesses are the unit of analysis, capital is allocated business by business

Businesses and competencies are the unit of analysis: top management allocates capital and talent

Value added of top management Optimizing corporate returns through capital allocation trade-offs among businesses

Enunciating strategic architecture and building competencies to secure future



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As should be noticed, for the first time competitiveness is not associated directly or indirectly with size measures, such as market share, growth rate, and others. On the contrary, qualitative concepts, such as expertise, talent, creativeness, replace the quantitative dimension. The following years would witness the growth of the importance of these qualitative approaches.

A variation on the Resources Based View (RBV) is the Dynamic Capabilities Approach, proposed by Teece, Pisano and Shuen (1997). According to the authors, the most difficult challenge for firms is not to build but to sustain competitive advantage, which is more critical in environments of rapid change. The emphasis should be placed on the development of management capabilities and difficult-to-imitate combinations of organizational, functional and technological skills.

However, the term “dynamic” is employed in a different sense than in other strategy perspectives. “The term dynamic refers to the capacity to renew competences so as to achieve congruence with changing business environment” … “The term “capabilities” emphasizes the key hole of strategic management in appropriately adapting, integrating, and reconfiguring internal and external organizational skills, resources, and functional competences to match the requirements of changing environment”.16

On the other hand, the authors state that many commitments taken by firms are quasi-irreversible to certain domains of competence. It is important to emphasise this point because the IO approach states the opposite; that is, all resources and competences can be bought in the market if they don’t exist in the firm. Besides, different from the financial approach, the Dynamic Capabilities Approach considers that the main assets of a firm are not presented in the balance sheet. Moreover, the real assets of a firm should be understood in three dimensions: processes, positions, and paths.

According to this view, organizational processes have three roles: coordination/integration (a static concept), learning (a dynamic concept) and reconfiguration (a transformational concept). Positions include technological, financial, market, structural, and reputation assets, just to mention some. Paths are understood to be where a firm can go, and that is related to the current positions, technological opportunities and so on.

As may be noticed, dimensions related with size, such as market share, economies of scale and others play only a marginal or an indirect role in the Dynamic Capabilities Approach, confirming the prevailing trend existing in the 1990s and afterwards.

Nevertheless, the static characteristic attributed to IO models in general and the five forces model, in particular, is also a matter of controversy. Porter (2008) argued that “Industry structure proves to be relatively stable, and industry profitability differences are remarkably persistent over the time in practice. However, industry structure is constantly undergoing modes adjustment – and occasionally it can change abruptly.”17 Moreover, changes in industry structure may emanate from outside or from inside the firm. Changes coming from outside the firm include the shifting threat of new entry, changing supplier or buyer power, the shifting threat of substitution, and changes in rivalry. Again according to Porter (2008), an industry can be reshaped in two ways, by altering the division of profitability in favour of the current incumbents or by expanding the overall profit pool. In both cases the author suggested initiatives in order to accomplish those objectives.18

16 David J. Teece, Gary Pisano and Amy Shuen, Dynamic Capabilities and Strategic Management, Strategic Management Journal, Vol. 18:7, 509-533, 1997. 17 Michael E. Porter, The Five Competitive Forces that Shape Strategy, Harvard Business Review, January 2008, page 87. 18 Michael E. Porter, opus citatum, pages 87 – 92.



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Contemporary Approaches in Strategic Management

By the end of the 1990s, Pascale (1995) had identified a profusion of new approaches in the strategic management field, a trend which has intensified in the most recent years. As one may expect, following the profusion of contributions the same has happened to their diversity. Some of these contributions are highlighted below due to their originality or due to their impact on the contemporary strategic thought.

The Balanced Scorecard methodology was introduced by Kaplan and Norton in 1992 but its popularity achieved the summit by the middle of the following decade. Differently from the large majority of the previous approaches, Kaplan and Norton’s contribution was focused on an organization’s internal processes. The authors’ basic purpose was to activate the firm’s strategy to action. To accomplish that task and according to Kaplan and Norton, the first step in the strategic implementation is to create an organization’s strategic map. The strategic map is a diagram that identifies the causal relationships among its objectives, as shown in the following figure.

Figure 2: Generic Strategic Map. Source: Robert S Kaplan and David P. Norton, The Balanced Score Card: Translating Strategy into Action, Harvard Business School, 1996



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On the other hand, objectives should be set under four perspectives, avoiding the prevalence of one single perspective as commonly happens to firms, which gives too much influence to the financial perspective.

Figure 3: The Balanced Scorecard: Four Perspectives. Source: Robert S Kaplan and David P. Norton, The Balanced Score Card: Translating Strategy into Action, Harvard Business School, 1996

As can be noticed, Kaplan and Norton’s approach is perfectly compatible with all strategic schools such as IO or RBV, for instance. Besides, it is very easy to understand and be used by consulting firms, being these, probably, the main reasons for the popularity of this methodology. Finally, size dimensions related to size, such as market share, economies of scale or economies of scope, aren’t even touched in the Balanced Scorecard approach.

Another innovative approach that came up in recent years is the blue ocean strategy (Kim and Mauborgne, 2005). The blue ocean concept is related to markets where competition is minimum or non-existent, evocating very calm waters, where it is very easy to sail. In opposition, the red ocean is related to very competitive markets, by analogy the bloody waters populated by voracious sharks. Apart from poetic views, the blue ocean strategy brings up the basic idea of avoiding competition, making it irrelevant, contrary to traditional strategic thought, in which most of the conceptual developments are addressed to defeat competitors.

One of the basic blue ocean strategy tools is the value curve. The value curve consists in displaying the main attributes offered by the different players to clients in a specific industry. To each attribute is associated a mark on a scale indicating how much value each player offers to clients in each attribute. When value curves of the different players are superposed this indicates that several offers are very close in terms of values, and the competition will be restricted to price. In other words, the profitability will be very low (red ocean). Though, the correct strategy in searching profitability is to avoid having a value curve similar to the competitor. When that happens, the competition is not centred on price, but in the value offered. In this case profits tend to be high (blue ocean).



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Because it is impossible to the firm to offer the highest value in each attribute and be price competitive at the same time, it has to decide in which attributes it should reduce the value offered and in which attributes it should increase the value offered. The blue ocean strategy approach develops a series of techniques addressing how to create unique value curves and how to implement them. The following figure illustrates the Southwest strategy according to the blue ocean strategy approach.

Figure 4: The Strategy Canvas of the Short Haul Airline Industry. Source: W. Chan Kim and Renée Maugborne, Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition

Irrelevant, Harvard Business School, 2005

As should be noted, once again, dimensions related to size are not mentioned in the blue ocean strategy approach.

Another outstanding contribution was made in the best seller “The World is Flat” (Friedman, 2005), alluding to the new and very integrated world of current days. The author identified ten “flatteners”, that is, forces that “flattened” the world.

The first flattener is “11/09/89”, referring to the fall of the Berlin Wall, a political happening that allowed the integration of East and West Europe, with enormous impact in the world economy. The flattener number 2 is “8/9/95”, the day when Netscape went public (or, when that company launched its shares in the stock market) allowing millions of computers to be integrated on the Web. The flattener number 3 is “Work Flow Software”, which introduced the software capability to intercommunicate using the Web. The flattener number 4 is “Open-Sourcing”, a capability introduced by a shareware program for Web server technology, which created conditions for the formation of worldwide self-organizing collaborative communities. The flattener number 5 is “Outsourcing”, which was widely practiced after the advent of the optic fibre, integrating huge quantities of skilled labours from developing countries like India. The flattener number 6 is

High

Offerings

Low

Price Meals Lounges Seatingchoices

Hubconnectivity

Friendlyservice

Speed Frequentdepartures

Car

Southwest

Other airlines



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“Off-shoring”, that is, the capability of a plant to be totally transferred to a foreign country. A great amount of off-shoring operations has happened after China joined the World Trade Organisation, introducing a new factor in worldwide competition due to the very low production costs possible in that country. The flattener number 7 is “Supply chaining”, corresponding to the integration and standardisation of huge supply chains as a requirement of worldwide competition pushing firms to gain efficiency. The flattener number 8 is “In-sourcing”, which corresponds to the trend of transportation firms to reposition themselves into logistic firms that is, assuming part of their client’s operating tasks, i.e., in-sourcing some activities. The ninth flattener is “In-forming”, corresponding to intense use of information sites like Google and Yahoo!, which has allowed people to have the ability to find so much information about so many things and people. The flattener number ten is “The Steroids”, so called communication and computing portable devices, like “black-berries”, that amplify the other nine flatteners effect.

In summary, according to Friedman’s view, the world reached unthinkable levels of integration, becoming, in his words “flat”, and that is due to very specific and identifiable facts and the respective trend that they triggered.

Counter to Friedman (2005), Ghemawat (2007) was emphatic: “Globalization has bound people, countries and markets closer than ever, rendering national borders relics of a bygone era – or so we’re told. But a close look at the data reveals a world that’s just a fraction as integrated as we thought we knew. In fact, more than 90 percent of all phone calls, Web traffic, and investment is local. What’s more, even this small level of globalization could still slip away”.19 Ghemawat (2007) estimates that, on average, industries present levels of internalization of around 10% as Figure 12 below illustrates. He calls that “10% presumption”.

According to Ghemawat, (2007) the globalization process is still far from being completed preferring to call the current stage of the process as semi-globalization. He states, “If markets were either completely isolated by or integrated across borders, there would be little room for international business strategy to have content distinctive from ‘mainstream strategy’. But a review of the economic evidence about the international integration of Globalization and its implications has been one of the favourite themes in the academic world, in which Ghemawat has played a prominent role in the last decade. Among other contributions, the author proposed a framework to evaluate international strategies markets indicates that we fall in between these extremes, into a state of incomplete cross- border integration that I refer to as semi globalization" 20 (Ghemawat, 2007), which he called the AAA triangle. “The three A’s stand for the three distinct types of global strategy. Adaptation seeks to boost revenues and market share by maximizing a firm’s local relevance … Aggregation attempts to deliver economic scale by creating regional or sometimes global operations … Arbitrage is the exploitation of differences between national and regional markets, often by locating separate parts of the supply chain in different places”21. The AAA triangle approach describes the strategic options a firm has to develop a global strategy. Although the adoption of each A of the AAA triangle is not mutually exclusive it is recommended that a firm avoid the adoption of two or more A strategies simultaneously. Figure5 below summarizes the recommendations for each strategy.

19 Pankaj Ghemawat, Why the World isn’t Flat, in Foreign Policy, Mar/Apr 2007, vol. 159, page 54. 20 Pankaj Ghemawat, Semiglobalization and International Business Strategy, in Journal of International Business Studies, Mar / 2003, page 138. 21 Pankaj Ghemawat, Managing Differences: The Central Challenge of Global Strategy, in Harvard Business Review Mar / 2007, page 59.



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Figure 5: Globalization Options. Source: Pankaj Ghemawat, Managing Differences: The Central Challenge of Global Strategy, in Harvard Business Review Mar / 2007, page 61

The AAA triangle works as map for managers. The percentages on sales expended in advertising, labour and R&D indicates the relative importance for the firm of the dimensions adaptation, arbitrage and aggregation, respectively, as shown by the following figure.



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Figure 6: Globalization Options. Source: Pankaj Ghemawat, Managing Differences: The Central Challenge of Global Strategy, in Harvard Business Review Mar / 2007, page 62

Completed or not, the benefits of globalization are estimated as reaching just one third of the world’s population, represented by the top of economic pyramid, with purchasing parity power superior to U$1,500/capita/year (Prahalad, 2005). According to this estimation a population of about 4 billion is excluded from the consumer market. Prahalad calls that population tier the “Bottom of the Pyramid” (BOP) market. As said by the author, this latent market is not focused on by firms because they have a dominant logic that assumes that: the poor cannot afford products and services; they do not have use for products sold in the developed countries; technological innovations are just appreciated and purchased in the developed countries; that market is not critical for multinational corporations; and it is very hard to recruit managers for BOP markets. Prahalad also states that the BOP markets should be approached differently, creating the capacity to consume. This can be made by managing the “3 As “: Affordability (referring to novel



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commercialization schemes such as single-serve package, for instance), Access (including distribution patterns and focal commercialization locals) and Availability (or distribution efficiency, because BOP consumers buy just when they have cash in hands). Finally, principles for developing products and services for the BOP markets have to focus, among other features, in price-performance, technological innovation, gains of scale, functionality adjustments and deskilling.

As can be seen, contemporary approaches in strategic management do not include, necessarily, concepts related to size, like market-share, economies of scale, etc. Besides it should be noticed the great prevalence of qualitative and non-deterministic approaches.

Conclusions

The importance given by the academia for the dimensions related to size, such as market share, gains of scale, etc, have changed much along the strategic thought history. Before the 1980s, when the deterministic approach was predominant, dimensions related to size were considered as being key drivers for strategic success. This is very clear in the BCG portfolio, in the GE/McKinsey matrix and in the PIMS studies.

In the 1980s the deterministic approach lost ground for the emerging non-deterministic school. One of the most prominent branches in the non-deterministic school was the Industrial Organization (IO) approach in which dimensions related to size got indirect importance, through bargaining power of buyers and suppliers, for instance. However, in almost all strategic formulations size was assumed implicitly as being crucial for entrepreneurial success.

In the 1990s, another branch of the non-deterministic school became prevalent: the Resources Based View (RBV). In RBV approach, dimensions related to size are not even mentioned. The focus shifted radically to qualitative concepts as core competencies, flexibility, organizational, functional and technological skills, etc. In some cases, size is indirectly perceived as an organizational potential weakness because it may work against the firm flexibility.

More recently, from the end of the 1990s to current times, the diffusion of information technology applications and the globalization process has pushed the importance of the dimension size to very specific industries according to the academy perspective. Besides, strategic formulation has started to share attention with implementation, in scholars’ concern.

As it was demonstrated, the profusion of approaches that has emerged nowadays has diminished the dimensions related to size, the once believed paradigm, to almost irrelevance.



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References

1. Barry J. Nalebuff and Adam M. Brandenburger, Co-opetition: Competitive and Cooperative Business Strategies for the Digital Economy, in Strategy & Leadership, Nov/Dec 1997, 1996

2. Carl R. Anderson and Frank T. Paine, PIMS: A Reexamination, in The Academy of Management Review, Jul/1978.

3. Charles W. Hofer, Toward a Contingency Theory of Business Strategy, in The Academy of Management Journal, Dec/1975.

4. Coimbatore Krishnarao Prahalad and Gary Hamel, The Core Competence of the Corporation, Harvard Business Review, May/Jun/1990.

5. Coimbatore Krishnarao Prahalad, The Fortune at the Bottom of the Pyramid, Wharton - University of Pennsylvania, 2005.

6. David J. Teece, Gary Pisano and Amy Shuen, Dynamic Capabilities and Strategic Management, Strategic Management Journal, Vol. 18:7, 509-533, 1997.

7. Frédéric Le Roy and Estelle Pellegrin-Boucher, Bruce Henderson come Fondateur de la Pensée Stratégique, in Revue Française de la Géstion, Jan/Fev, 2005.

8. Keneth Davidson, Strategic Investment Theories, in The Journal of Business Strategy, 1985. 9. L. Jay Burgeois III, Strategic Management and Determinism, in The Academy Management Review,

Oct/1984. 10. Michael E. Porter, Industrial Organization and the Evolution of Concepts for Strategic Planning:

The New Learning, in Managerial and Decision Economics, 1983. 11. Michael E. Porter, The Five Competitive Forces that Shape Strategy, Harvard Business Review,

Jan/2008. 12. Nariman K. Dhalla and Sonia Yuspeh, Forget the Product Life Cycle Concept!, in Harvard Business

Review, Jan/Feb/1976. 13. Pankaj Ghemawat, Competition and Business strategy in Historical Perspective, Harvard University,

2002.

14. Pankaj Ghemawat, Managing Differences: The Central Challenge of Global Strategy, in Harvard Business Review Mar/2007.

15. Pankaj Ghemawat, Semiglobalization and International Business Strategy, in Journal of International Business Studies, Mar/2003.

16. Pankaj Ghemawat, Why the World isn’t Flat, in Foreign Policy, Mar/Apr 2007, vol. 159. 17. Robert S Kaplan and David P. Norton, The Balanced Score Card: Translating Strategy into Action,

Harvard Business School, 1996. 18. Sidney Schoefler, Robert D. Buzzell and Donald F. Heany, Impact of Strategic Planning on Profit

Performance, Harvard Business Review, Mar/Apr/1974. 19. Thomas L Friedman, The World is Flat: A Brief History of the Twenty-first Century, 2005. 20. W. Chan Kim and Renée Maugborne, Blue Ocean Strategy: How to Create Uncontested Market

Space and Make the Competition Irrelevant, Harvard Business School, 2005.



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Appendix – The BCG portfolio

The BCG portfolio classified products and businesses of a corporation according to the dimensions market share (as a proxy variable associated to the firm’s competitive superiority) and market growth (as a proxy variable associated to market attractiveness).

Products and businesses with a high relative market share in a low growth rate market are named “cash cows”. Products and businesses with a high relative market share in a high growth rate market are named “stars”. Products and businesses with a low relative market share in a low growth rate market are named “dogs”. Products and businesses with a low relative market share in a high growth rate market are named “question marks”. Each one of the categories of products of the BCG matrix is supposed to play a specific role to maintain a balanced cash flow and to perpetuate the organization

The “cash cow” is the most positive cash flow product or business in a firm or corporation. By having high relative market share, the “cash cow” has small unit cost, which, under perfect competition assumptions, corresponds to a very strong cash generator. As, by definition, the “cash cow” industry growth rate is small, there is no need to reinvest much in that specific product or business. Thus, “cash cows” represent the most positive net cash flow result and the survival of a firm or corporation depends much on its capability to maintain healthy its “cash cows”, which implies it having high market share in some of its products or business.

“Stars” are products and businesses with high market share in markets with a high growth rate. Due to their high market share, “stars” are great cash generators. However, as a consequence of the correspondent high market growth, and in order to maintain market share, most of the cash generation is absorbed by the “stars” themselves. The net result of this process is that “stars” are moderate cash generators or cash absorbers. In other words, “stars” are mandatory to guarantee the firm or corporate continuity, but they don’t provide much cash contribution.

Products and businesses sales growth rates tend to reduce in the long term, which implies that, in the future, the current “stars” will be tomorrow “cash cows”. This being so, “stars” also must be replaced and that is the role of the products and businesses named “question marks”.

“Question marks” are products or services with small relative market share in high growth rate markets. They don’t generate cash because they have small market shares and they absorb cash because their markets experience high growth rates. Due to resource limitations, firms and corporations must choose which “question marks” will receive investments in order to become tomorrow’s “stars”.

Finally, “dogs” are products or businesses with small relative market share in low growth rate markets. Because they are in low growth rate markets, “dogs” don’t offer attractive prospective for the future; neither, they do represent gains in the present. This being so, “dogs” are the natural candidates for divesting in order to generate cash for firm’s or corporate’s other products or businesses.

Healthy financing is made by “cash cows”, which should generate funds for selected “question marks” and not selected “question marks” and “dogs” should be divested to generate funds, while “stars” should, at least, maintain a balanced cash flow.

As demonstrated, the BCG portfolio offered an integrated approach, both qualitative and quantitative, combining marketing and financial points of view. Second, according to the BCG matrix method, business or products sales growth is mandatory because the product or business virtual cycle (“question marks” – “stars” – “cash cows”) will guarantee an organisation’s survival in the long run.

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