TABLE OF CONTENTS
List of Figures and Tables
CHAPTER 1: INTRODUCTION
1.1 Research Obj ective and Aims
1.3 Outline of the Thesis
CHAPTER 2: A STRATEGY FRAMEWORK
2.2 The Business and Competitive Strategy Contextpage
2.3 Investigation of Business Strategies and Choice of a Competitive Strategy Frameworkpage
2.4 Porter’s (1985) Value Chain Frameworkpage
2.5 Porter’s (1980, 1985) Generic Strategiespage
2.5.1 Generic Strategies and Value Chain Frameworkpage
2.6 Proposed New Theoretical Framework for Formulating Competitive Strategiespage
2.6.1 The Role of Environmentpage
2.6.2 Key Success Factors (KSFs)page
2.6.3 The Role of the Combined Value Chainpage
2.6.4 The Role of Combined Competitive Strategiespage
2.6.5 Firm Performancepage
CHAPTER 3: METHODOLOGY AND RESEARCH DESIGN
3.2 Measures of Study
3.3 Research Hypotheses
3.4 UK Manufacturing SMEs
3.6 Research Design
3.6. 1 Quantitative Approach: UK Data Archive Datasets
188.8.131.52 Cambridge Centre for Business Research SME Dataset (Second Panel), 1997 (Project Code: 4431)page
184.108.40.206 Cambridge Centre for Business Research Manufacturing Strategy & Competitiveness Dataset 1994-1999 (Project Code 4434)page
3.6.2 Questionnaire Surveypage
220.127.116.11 Maintaining Reliability of the Survey Instrumentpage
18.104.22.168 Data Entrypage
3.6.3 Qualitative Analysis: Semi-Structured Interviewspage
22.214.171.124 Semi-Structured Interviews: Dealing with Data Quality Issuespage
126.96.36.199 Data Entrypage
CHAPTER 4: DATA ANALYSIS - QUESTIONNAIRE SURVEY & DATASETS
4.2 Methodology of Data Analysis
4.3 Data Analysis for Project: 4431(Cambridge Centre for Business Research SME Dataset,(Second Panel),1997)
4.3.1 Project 4431: Operational Facets
4.3.2 Project 4431: Factor Analysis
4.3.3 Project 4431: Cluster Analysis ,
4.3.4 Project 4431: Performance Analysis & Competitive Strategy Fit
4.4.4 Project 4434: Performance Analysis & Competitive Strategy Fit _
4.5 Questionnaire Survey
4.5.1 Operational Facets
CHAPTER 5: DATA ANALYSIS - INTERVIEWS
5.2 Operational Facets of the Samplepage
5.3 Theoretical Framework & Importance of External Environment & KSFs when Formulating Competitive Strategiespage
5.4 Analysis of Firms’ Competitive Strategy Directionpage
5.5 An Overall Examination of Firms’ Competitive Strategy Direction & Firm Performancepage
CHAPTER 6: EVALUATION & CONCLUSION
6.2 Study Overview
6.3 Summary of Findings & Results
6.4 Discussion of Results & Contributions
6.5 Further Recommendations & Limitations of the Study
6.6 Recommendations for Further Research
Script: Semi-Structure Interviewpage
3a UK Data Archive: Project 4431 Factor Output - Resultspage
3b UK Data Archive: Project 4431 Hierarchical Cluster & K-Means Output Resultspage
4a UK Data Archive: Project 4434 Factor Output - Resultspage
4b UK Data Archive: Project 4434 Hierarchical Cluster & K-Means Output Resultspage
5a. Questionnaire Survey Factor Output - Resultspage
5b. Questionnaire Survey:
Hierarchical Cluster & K-Means Output Resultspage
Interview Data - Respondents’ Views - Categorised By Value Chain Activities (Both Primary & Secondary)page 304
In this study an in depth investigation of successful competitive strategies for small to medium-sized enterprises (SMEs) is undertaken. The overall aim of this study is to analyse the strategic orientation of UK Manufacturing SMEs. In the process, it will test Porter’s (1980, 1985) theoretical framework of generic strategies and thus evaluate firms’ preferred strategic synthesis. It will, therefore, test the efficacy of the value chain and develop any specific pattern that relates to a combination strategy.
The investigation of the above objectives is undertaken utilising a mixed research methodology with the purpose of examining the applicability of existing competitive strategy frameworks (phase 1) and testing a new theoretical framework that incorporates additional dimensions of strategy (phase 2). During phase 1, Porter’s framework is employed to investigate SMEs’ strategic orientation as a means to achieve sustainable competitive advantage. A semi-structured questionnaire is employed and the analysis is carried out by means of factor and cluster analysis to identify strategic variables currently employed by SMEs. During phase 2, the theoretical framework is operationalised to bridge the gap within the literature and existing empirical research. Its purpose is to identify forms of successful competitive strategies of UK MSMEs as they are formulated and implemented in firms’ value chain activities. The data was collected through a number of semi-structured interviews and the analysis was based on data categorisation.
The findings indicate that Porter’s (1980) single generic strategies are not the best option for UK MSMEs for gaining competitive advantage and that the competitive strategy of successful MSMEs differs from that of the less successful ones. Successful UK MSMEs develop competitive strategies that are characterised by a combination of strategies as they are formulated within firms’ value chain activities. Although, during the evaluation of strategic synthesis at value chain level, the data analysis demonstrated that not all forms of combination strategies can deliver a high performance. One of the significant findings to emerge from this study is that the value chain framework is essential when analysing forms of successful competitive strategies of UK MSMEs. The results of this investigation also show that generalisations and previous recommendations regarding successful MSMEs competitive strategy should be interpreted with caution.
Some important implications for managers and researchers follow from these conclusions. The findings suggest that, although Porter's model is an excellent initial classification scheme, in reality there are modifications of strategy in practice. UK MSMEs managers need to recognise that the formulation of successful competitive strategies can be developed within the value chain, and that competitive advantage frequently involves the simultaneous pursuit of differentiation and low-cost strategies. In addition, top managers must work closely with lower-level managers to implement strategic practices consistent with, and supportive of the chosen competitive strategy.
To conclude, this study predominantly contributes to knowledge in the field of formulating successful competitive strategies, although it also contributes in the field of strategic management. One of the major contributions of this thesis is the investigation of the applicability of Porter’s (1980) generic strategy typology by UK MSMEs. Another major contribution is the examination of the usability of the new competitive strategy framework to UK MSMEs by filling the gaps identified in the literature, and by utilising the value chain framework in the process of analysing successful competitive strategies.
The completion of this thesis leaves me in debt with a number of people and institutions. I can only acknowledge my gratitude to them. I would like to thank everyone who have helped and inspired me during my doctoral study.
I especially want to thank both of my supervisors Phil Baugh and Professor Phil Whyman for their guidance during my research and study at the University of Central Lancashire. Indeed there are no words that would fully express my gratitude to both of them for their constant support and friendship. Phil Baugh for his constant guidance, understanding and patience in carrying out this research project. Professor Phil Whyman for his perpetual energy and enthusiasm in research that had motivated not only myself but a number of other fellow Ph.D. researchers. As a result, research life became smooth and rewarding for me. I only wish that other researchers will be as fortune as I to have the chance to associate with such esteemed and excellent researchers and advisors.
I would also like to thank the Business School of the University of Central Lancashire regarding the collection of data and use of academic resources. Thanks to many who helped me is many different ways and for their warm friendship that made my studying so pleasant.
Special thanks goes to my very good friend and mentor in my early studies Professor Christopher Cottis for giving advice, and always supporting me to seek and explore new frontiers in life. Although he is no longer with us, he is forever remembered. I am sure he shares our joy and happiness at this moment.
I also thank my friends in Greece, Great Britain, South Africa and elsewhere for their support and encouragement throughout.
My deepest gratitude goes to my family for their unflagging love and support throughout my life; the completion of this thesis would be simply impossible without them. I am forever indebted to them for their understanding, endless patience and encouragement when it was most required.
My wife Sophia has been, always, my pillar, my joy and my guiding light, and I thank her. Words fail me to express my appreciation to her whose dedication, love and persistent confidence in me, has taken the load off my shoulder. I owe her for being unselfishly let her intelligence, passions, and ambitions collide with mine.
Finally, I would like to thank everybody who was important to the successful realisation of this thesis, as well as expressing my apology that I could not mention personally one by one.
University of Central Lancashire, Business School January 2011
LIST OF FIGURES AND TABLES
CHAPTER 2: A STRATEGY FRAMEWORK FIGURES:
Figure 2.1: Porter’s (1985) Value Chain Frameworkpage
Figure 2.2: Porter’s (1980) Model of Generic Strategiespage
Figure 2.3: Proposed Theoretical Framework for Diagnosing and
Formulating Integrated Competitive Strategiespage
Figure 2.4: An Integrated Framework of Combined Value Activities
Leading to Forms of Combined Competitive Strategiespage
Table 2.1: Costs Savings & Differentiating Opportunities within the
Primary Value Chain Activitiespage
Table 2.2: Costs Savings & Differentiating Opportunities within the
Secondary Value Chain Activitiespage
Table 2.3: Strategic Elements of Primary Value Chain Activitiespage
Table 2.4: Strategic Elements of Secondary Value Chain Activities page
CHAPTER3: METHODOLOGY AND RESEARCH DESIGN TABLES:
Table 3.1: Variation in Strategic Variables used to Test Porter’s Theorypage
Table 3.2: Measures of Strategy and Variable Definition in relation to
Competitive Strategy Direction (Project Code: 4431)page
Table 3.3: Measures of Strategy and Variable Definition in relation to
Competitive Strategy Direction (Project Code: 4434)page
CHAPTER4: DATA ANALYSIS: QUESTIONNAIRE SURVEY & DATASETS FIGURES:
Figure 4.1: Project 4431 -Respondents Firm Sizepage
Figure 4.2: Scree Diagram - Project 4431 page
Figure 4.3: Project 4434 - Respondents Firm Sizepage
Figure 4.4: Scree Diagram - Project 4434page 135 Figure 4.5: Respondents’ Firm Sizepage
Figure 4.6: Scree Plot - Questionnaire Surveypage
Table 4.1: Empirical Studies Investigating Porter &
Methodology of Data Analysispage
Table 4.2: Factor Analysis and Rotated Component
Matrix (Project Code: 4431)page
Table 4.3: Final Cluster Centres (Produced by SPPS) -
Table 4.4: Means, Standard Variations & Coefficient of Variation -
Project: 4431 page
Table 4.5: Factor Analysis and Rotated Component Matrix
(Project Code: 4434)page
Table 4.6: Final Cluster Centres (Produced by SPPS)
Table 4.7: Means, Standard Variations & Coefficient of Variation
Table 4.8: Factor Analysis and Rotated Component Matrix
Table 4.9: Final Cluster Centres (Produced by SPPS)
Table 4.10: Means, Standard Variations & Coefficient of Variation
CHAPTER 5 DATA ANALYSIS - INTERVIEW
Figure 5.1 Inbound Logistics - Activities & strategic Directions Based on Interviewee Responsespage 179
Figure 5.2: Operations - Activities & Strategic Directions Based on Interviewee Responsespage 182
Figure 5.3: Outbound Logistics - Activities & Strategic Directions Based on Interviewee Responsespage 185
Figure 5.4: Marketing& Sales - Activities & Strategic Directions Based on Interviewee Responsespage 190
Figure 5.5: Services - Activities & Strategic Directions Based on Interviewee Responsespage 192
Figure 5.6: Human Resources - Activities & Strategic Directions Based on Interviewee Responsespage 195
Figure 5.7: Technology Development - Activities & Strategic Directions Based on Interviewee Responsespage 198
Figure 5.8: Firm Infrastructure - Activities & Strategic Directions Based on Interviewee Responsespage 200
Figure 5.9: Procurement - Activities & Strategic Directions Based on Interviewee Responsespage 203
Figure 5.10: Combined Value Chain for ID:5500 (high performance firm)
Figure 5.11: Competitive Strategy Framework of ID:5500
Figure 5.12: Combined Value Chain for ID:1000 (high performance firm)
Figure 5.13: Competitive Strategy Framework of ID:1000
Figure 5.14: Combined Value Chain for ID:3000 (high performance firm)
Figure 5.15: Competitive Strategy Framework of ID:3000
Table 5.1: Respondents’ KSFs
Table 5.2: Overall Strategic Direction ofFirms within Value Chain
Table 5.3: Total No of Responses & Percentage Analysis ofUK MSMEs
Table 5.4: Inbound Logistics - Activities & Strategic Directions Based on Interviewees Responses
Table 5.5: Operations - Activities & Strategic Directions Based on Interviewees Responses
Table 5.6: Outbound Logistics - Activities & Strategic Directions Based on Interviewee Responses
Table 5.7: Marketing & Sales - Activities & Strategic Directions Based on Interviewees Responses
Table 5.8: Services - Activities & Strategic Directions Based on Interviewees Responses
Table 5.9: Human Resource Management - Activities & Strategic Directions Based on Interviewees Responses
Table 5.10: Technology Development - Activities & Strategic Directions Based on Interviewees Responses
Table 5.11: Firm Infrastructure - Activities & Strategic Directions Based on Interviewees Responses
Table 5.12: Procurement - Activities & Strategic Directions Based on Interviewees Responses
Table 5.13: Firm Performance & Strategic Direction within Value Chain
Over the last few decades, a significant restructuring of business and industry has occurred through globalisation, a consequential movement toward government deregulation and privatisation, as well as an immense wave of technological innovation. Grimm (2005) states that those movements resulted in an increasingly competitive environment and have had an enormous impact and are likely to continue to affect the way business is conducted into the twenty-first century. According to Takala (2002), those globalisation shifts and changes have forced manufacturers to reconsider themselves in terms of quality, cost, and ability to deliver.
Simultaneously, the technological revolution and increasing globalisation present major challenges to firms' ability to maintain their competitiveness (Hitt et al., 1998). Some of the recent important strategic discontinuities encountered include the elimination of industry boundaries, fewer distinctions between the industrial and service sectors, major advances in logistics, computer aided design and communication, and opening of global markets. It has been suggested that the ability to adapt and transform these challenges from problems into opportunities will separate the successful companies from those following (Leveson, 1991; D’Aveni, 1994; Hitt et al., 1998; Hamel, 2000).
To adapt in a continually changing environment firms need to create differences between their firm positions and those of their rivals (Porter, 1985). Competitive strategies have been developed and formulated with the purpose of assisting firms in performing various activities differently than their rivals (Zott, 2003). As a result since the late 1970s a number of competitive strategy frameworks have been proposed and empirically tested (Hayes & Schmenner, 1978; Miles & Snow, 1978; Wheelwright, 1978; Porter, 1980; Richardson et al., 1985; Roth & Morrison, 1992; Miller & Dess, 1993; Chandler & Hanks, 1994; Day and Nedungadi, 1994; Katsikeas, 1994; Wright et al., 1995; Krajewski & Ritzman, 1996; Hooley et al., 1998; Spanos & Lioukas, 2001; White, 2004).
Despite the widespread application of competitive strategy frameworks, Porter’s (1980) generic strategy typology is the most commonly used framework in a variety of industries, firm size, and countries and has been widely accepted by both academics and business strategy practitioners. However, Porter’s generic strategy framework has been extensively criticised in relation to flexibility, usability in various industries, and success in delivering a competitive advantage (Miller & Friesen, 1986a, 1986b; Kim & Lim, 1988; Wright et al., 1991; Miller & Dess, 1993; Helms et al., 1997; Yamin et al., 1999; Beal & Yasai-Ardekani, 2000; Marques et al., 2000; Shah et al., 2000; Jacome et al., 2002; Lau, 2002; Spanos et al., 2004).
Extensive research into the competitive strategy literature has resulted in the identification of a number of issues in relation to Porter’s generic strategies and other frameworks’ applicability and usability. First, the majority of the research either supporting or criticising Porter’s framework, has been conducted in relation to US businesses (Wright et al, 1991;Yasmin et al., 1995; Lau, 2002), using the PIMS database (Miller & Friesen, 1986a,b; White, 1986; Miller & Dess, 1993), investigating services sector (hospitals, retailers, banking, airlines) companies (Kling & Smith, 1995; Kean et al., 1998; Parnell, 2000; Marlin et al., 2004), and only a limited number of studies have focused on European countries (Booth & Philip, 1998; Silva et al., 2000; Hlavačka et al., 2001; Spanos et al., 2004).
Despite the importance of the manufacturing small and medium-sized enterprises (MSMEs) in the UK economy little of the literature has focused on their specific situation (O’Donnell et al., 2002). Specifically, there are a limited number of studies investigating SMEs’ competitive strategy (Helms et al., 1997; Beal & Yasai-Ardekani, 2000; Upton et al., 2001). In addition, only a small number test Porter’s strategic typology in relation SMEs’ competitive strategy (Dess & Davis; 1984; Miller & Toulouse, 1986; Helms et al., 1997; Beal & Yasai-Ardekani, 2000; Upton et al., 2001). Moreover, it is evident from various studies (for instance, Jennings & Beaver, 1997; Mintzberg et al., 1998; McGowan et al., 2001) that investigating the formulation of competitive strategies within SMEs has a mixture of implications. Mainly because of the lack of homogeneity, limited resources, owners’ expectations, and usually strategymaking is emergent, adaptive, accidental and based on personal relationships.
The above discussion indicates that there is a gap in the literature in relation to the employability and usability of Porter’s typology by UK’s MSMEs. Hence, this study will contribute to knowledge by investigating whether UK MSMEs utilise Porter’s typology with the purpose of gaining competitive advantage over their rivals.
Second, another gap in the literature concerns the employability of Porter’s framework by UK Manufacturing SMEs. While much has been written on the nature of business strategy, there is a lack of understanding of the strategy typology and the relation between internal factors and the environment for this group of companies (Pelham, 2000). So far, various studies focus on SMEs’ quality and innovative elements of performance but not necessarily the strategic direction and performance of those actions (Smallbone et al, 1995; McAdam & Armstrong, 2001; Salavou et al, 2004; Oke et al, 2007). In addition, Porter’s generic strategies have been examined mainly in connection to US manufacturing SMEs (Chandler & Hanks, 1994; Beal, 2000; Pelham, 2000). This study will investigate and test the applicability of competitive strategies in UK manufacturing SMEs.
Third, an additional gap in the literature is that the majority of studies test generic strategies based on the form of differentiation and cost leadership alone. They exclude the possibility of a combined strategic synthesis as a typology (Hall, 1980; Hambrick, 1983b; Dess & Davis, 1984; Green et al., 1993; Marques et al., 2000). Even if their results support the fact that there is a positive relationship between combined strategy and performance, all their investigation is based upon variables relating to pure generic strategies and not upon other forms of strategic synthesis. A combination strategy could have different characteristics than those proposed by previous studies (Miller & Friesen, 1986a/b; Kim & Lim, 1988; Wright et al, 1991; Parnell, 1997; Yamin et al, 1999; Lau, 2002; Allen et al., 2007) and Porter’s initial conceptualisation of generic strategies. The aim of this study therefore is to seek to bridge this gap by investigating MSMEs’ successful competitive strategies and examining the strategy-performance relationship.
Fourth, another gap in the literature identified is the missing link between the value chain framework and the generic strategies typology. According to Porter (1985), a company can gain competitive advantage by performing value chain activities more cheaply or differently than its competitors and by managing linkages among its value chain activities. Hence, if a company wishes to achieve a competitive strategy, it must encompass every aspect of the business so that every manager and employee knows what the objectives of this strategy are and as a result every decision and action is consistent with it and serves to put it into practice (Pearson, 1999). The value chain framework can be considered as the main tool for formulating, diagnosing and implementing a generic strategy. This thesis will contribute to knowledge by investigating competitive strategies based on the value chain framework rather than just asking questions about the overall firm competitive strategy (that is, either cost leadership or differentiation).
1.1 Research Objective and Aims
With the above arguments in mind, this thesis will seek to make an original contribution to the literature through the identification of successful competitive strategies for UK manufacturing SMEs. The main objective of this study is to evaluate strategic typologies and, in the process, it will test Porter’s (1980) theoretical framework of generic strategies and thus discover firms’ preferred strategic syntheses. In detail the following are the aims of this thesis:
- To analyse the types of business-level strategies that UK manufacturing SMEs adopt with the purpose of developing and gaining competitive advantage over rivals. An evaluation of various strategic alternatives in relation to firm performance will identify competitive strategies that deliver higher performance than others.
- Porter (1980) described his generic strategies as alternatives and mutually exclusive. This study aims to analyse in what form generic strategies can be employed (combined or single types), and evaluate preferred syntheses of successful strategic frameworks. As a result, a new framework of combined strategic types will be presented and tested. This thesis will evaluate whether single and/or a combination of competitive strategies lead to higher firm performance.
- To evaluate whether firms use both primary and secondary activities of the value chain and to analyse specific patterns that relate to a combination strategy. This investigation will identify forms of strategic patterns that are associated to higher firm performance over rivals.
1.2 Research Design
This thesis will investigate the objectives discussed in the previous section by initially testing Porter’s generic strategies for their applicability and usability by UK MSMEs. Despite the wide application of Porter’s strategic typology in various industries and settings there is not a study investigating his framework in this sector. This thesis therefore contributes to knowledge by examining whether UK MSMEs employ Porter’s generic strategies.
On the other hand, Porter’s typology has a number of under-developed areas and thus there is no consensus as to whether a pure or combination strategy is the most appropriate strategic synthesis for MSMEs to achieve competitive advantage over their rivals. Similarly, there are few studies employing the value chain framework to test the formulation of competitive strategies, which mainly focus on examining a single dimension of the value chain (for instance, marketing, human resource management, IT, etc.) and not its totality. Hence, this thesis contributes to knowledge by proposing a theoretical framework which integrates the employability of competitive strategies (as they are utilised by firms within their value chain) while taking into consideration the dynamism of the external environment.
To investigate the above gaps in the competitive strategy literature, this thesis will employ a mixed research methodology, which combines both elements of positivism and phenomenology. The positivist methodology (deductive approach) tests Porter’s theory in two ways: first a number of datasets available from UK Data Archive (online data sources) were used to investigate the competitive strategies of UK MSMEs based on a number of variables; second, to cover the gaps in the number of variables employed in those datasets this study carried out an additional questionnaire survey. The analysis of the data is based on a number of statistical methods widely used by the competitive strategy literature to test the competitive strategy and firm performance variables (for instance: Hambrick, 1983; Kim & Lim, 1988; Parker & Helms, 1992; Yamin et al, 1999; Silva et al., 2000; Jacome et al., 2002).
Quantitative analysis is completed by a phenomenology stage (inductive approach), utilising a qualitative approach with the purpose of testing and tuning the proposed competitive strategy framework to MSMEs. The analysis of the data is based on data categorisation that resulted from the semi-structured interviewees that were carried out (Saunders et al., 2000).
1.3 Outline of the Thesis
Chapter One provides an overview of this thesis by evaluating a number of gaps in the competitive strategy and points in which this study will contribute to knowledge. Following the previous analysis, the aims of this thesis are outlined and demonstrate the content of each chapter.
Chapter Two reviews various competitive strategy frameworks and discusses reasons why this study is focused on Porter’s (1980) generic strategy typology. It demonstrates in detail Porter’s framework in relation to competitive strategy, and its various dimensions. In addition, this chapter describes ways of achieving competitive advantage in relation to Porter’s typology. The value chain framework is described and its relationship with each generic strategy is presented with the purpose of identifying the importance of the link between the two different frameworks. Chapter Two further examines a number of gaps identified within the strategic management literature. All these gaps are critically evaluated in relation to competitive strategy theory and in accordance to Porter’s generic strategies. In the process of evaluating the literature, a number of studies supporting or criticising Porter’s competitive strategy typology are presented. This comparison took place with the purpose of investigating the strengths and weaknesses of the generic strategy framework. To fill those gaps in the literature and contribute to knowledge a theoretical framework for formulating competitive strategies is presented. Its various dimensions are explained in detail highlighting the relationship between value chain, combination strategies, Key Success Factors, and the external environment.
Chapter Three addresses the research methodology and examines the issues and arguments behind the choice of research approach and method. For the purposes of this study a mixed methodology was employed to address the issues identified during the literature review. A quantitative approach was employed to test Porter’s typology of UK Manufacturing SMEs by employing available datasets from UK Data Archive. To further analyse the competitive strategy direction of firms, this thesis utilised a survey questionnaire which employed a greater number of variables compared to the previous datasets. On the other hand, to test the proposed framework of combined competitive strategies a number of semi-structured interviews (qualitative approach) were carried out with UK MSMEs. This method was chosen with the purpose of evaluating in depth the formulation of competitive strategies within firms' value chain activities.
Chapter Four starts the discussion with the methods chosen to analyse the quantitative data. A variety of statistical techniques are employed and the reasons for choosing them in the context of this study are discussed. A detailed analysis is undertaken with the purpose of presenting the results of the various datasets and evaluates the applicability of Porter's generic strategy framework by UK MSMEs.
Chapter Five addresses the approach to qualitative data employed. It analyses the proposed framework and its various dimensions by evaluating the formulation of competitive strategies within firms’ value chain activities. It investigates the importance and influence of the external environment and the consideration of key success factors in strategy formulation. Finally, this chapter evaluates forms of successful combined competitive strategies based on firms industry setting (mature, growing, declining). The analysis of the data contributes to knowledge by indicating forms of combined strategies which UK MSMEs can employ in order to gain competitive advantage over their rivals.
Finally, Chapter Six concludes the thesis: (i) Porter’s typology is evaluated for its applicability to UK MSMEs sector; (ii) it analyses variations of combination strategies which are linked to superior performance of firms; and (iii) it contributes to knowledge by demonstrating forms of successful combination strategies that lead to superior performance based on firms' industry setting. The remainder of the chapter appraises the work and addresses the issues of major limitations of the study and discusses the implications for the development of theory and future studies.
A STRATEGY FRAMEWORK
Strategy frameworks have been developed with the purpose of providing a simplified version of the real business world so that practitioners are able to develop and take effective strategic decisions (Pearson, 1999). These frameworks offer a variety of strategic synthesis, simplification of the real world, and analysis of complexity in various ways. As discussed in Chapter 1, the overall aim of this research project is to investigate strategic typologies and in the process, it will test Porter’s (1980, 1985) theoretical framework of generic strategies and thus discover firms’ preferred strategic syntheses.
In order to provide a clear understanding of the generic business strategies, the researcher reviews the competitive and business strategy literature. An extensive assessment takes place of articles and papers within various academic journals and major academic textbooks with the purpose of identifying, examining, and describing significant characteristics of strategic syntheses. Hence, this study aims to establish a theoretical context for the competitive and business strategy literature.
2.2 The Business and Competitive Strategy Context
Within the following sections the thesis elaborates various competitive strategies, provides the main frameworks developed, and illustrates their characteristics. This is considered essential, as this research project will investigate competitive strategies of companies with the purpose of investigating those elements providing competitive advantage.
Porter (1985) states that the purpose of a business-level strategy is to create differences between the company’s position and those of its competitors. Hence, when a company chooses to perform its activities differently or to perform different activities than its competitors is the essence of business-level strategy (Porter, 1985, 1996). According to Zott (2003), a chosen business level strategy assists a company to establish and exploit a particular competitive advantage within a particular competitive scope.
This strategic advantage should be of a kind that can be utilised as soon as possible and last as long as possible. Its function is to generate profits above the industry average and to gain market share and create differences between a company’s position and those of its rivals (Porter, 1996). Beard and Dess (1981) state that a firm should have a separate business-level strategy for each industry in which it competes, and the relevant characteristics of the firm's business-level strategy would be measured relative to the range and norms on each characteristic in each of its industries. Hofer and Schendel (1978:27-28) outline this view, thus: “At the business level, strategy focuses on how to compete in a particular industry or product-market segment. Thus, distinctive competences and competitive advantage are usually the most important components of strategy at this level”.
Competitive strategy is therefore defined as the dimensions in which a company has chosen to compete in their industry with the purpose of sustaining itself and successfully grow (Hayes and Weelwright, 1984). Competitive strategies can have various dimensions and characteristics. For instance, companies can achieve competitive advantage by reducing their prices (Wheelwright, 1978; Hill, 1993; Krajewski & Ritzman, 1996); by achieving higher quality (Wheelwright, 1978; Hill, 1993; Krajewski & Ritzman, 1996); fast delivery times (Krajewski & Ritzman, 1996); achieving high levels of differentiation (Porter, 1980; 1985).
One of the major works in the competitive strategy field is that of Miles & Snow (1978) that identifies four strategic types: (i) Prospectors are companies which maintain a level of flexibility and utilise innovation practices to deal with uncertainty and environmental changes; (ii) Defenders seek stability and control in their operations with the purpose of achieving maximum efficiency; (iii) Analysers are companies which combine elements of the above two types and stress both stability and flexibility; and (iv) Reactors perform poorly and lack strategy.
Another popular competitive strategy framework was proposed by Porter (1980, 1985) that suggests a two-dimensional framework: strategic advantage and strategic target. The strategic advantage refers to the competitive advantage and scope which companies can choose, and strategic target relates to market choices that could be either broad or narrow. Therefore, he identifies four competitive strategies that could be pursued by businesses: cost leadership; cost focus; differentiation; and differentiation focus. Companies employing a cost leadership or cost focus strategy attempt to be the low cost producer in an industry. On the other hand, companies utilising a differentiation or focus differentiation strategy endeavour, in differentiating their product lines, with the purpose of appearing unique in a given industry, and thus allowing them to charge a premium price.
Further to the above popular frameworks of competitive strategy, are a number of other frameworks that have been suggested. Based on the empirical study of 15 Canadian electronics firms, Richardson et al. (1985) identified two categories of competitive priorities with three distinct corporate missions within each one: Competitive advantage depending on: (i) innovations skills (technology frontiersman; technology exploiter; and technological serviceman), and (ii) low cost production (customiser; cost-minimising customiser; and cost minimise).
Mintzberg (1988) proposes a typology of generic competitive strategies using the dimensions of differentiation strategies (for instance, price differentiation strategy; image differentiation strategy; support differentiation strategy; quality differentiation strategy; design differentiation strategy; and undifferentiation strategy), and scope strategies (for instance, unsegmentation strategy; segmentation strategy; niche strategy; and customising strategy). According to Mintzberg (1988), differentiation is a supply- driven concept, whilst scope is a demand-driven concept. Day (1990) extended the two-dimensional framework to a three-dimensional framework (customer value, costs, and scope of market coverage). They argue that businesses fall somewhere along a continuum of all three dimensions - relative cost, relative differentiation, and relative focus - regardless of whether or not researchers choose to measure all of them.
Alternatively, Wright et al. (1995) develop three competitive attribute dimensions: high costs and high innovation/differentiation; low costs and low innovation/differentiation; and low costs and high innovation/differentiation. Hooley et al. (1998) propose that there are six basic positioning strategies, each differentially rooted in the resource profiles of firms: low price; superior quality; rapid innovation; superior service; differentiated benefits; and tailored offering. Thus, while there may be some overlap regarding the nature of competitive attributes, the particular means by which firms can compete appear to differ markedly (Hooley et al., 2004). Krajewski & Ritzman (1996) propose a competitive strategy framework based on the dimensions of cost, quality, time, and flexibility elements of competitive strategy to low-cost operations, highperformance design, consistent quality, fast delivery time, on-time delivery, development speed, customisation, and volume flexibility.
Recently a new paradigm was introduced regarding the field of competitive strategy: the resource-based theory (RBV). The RBV is one of the most widely accepted theoretical perspectives in the strategic management field (Powell, 2001; Priem and Butler, 2001; Rouse & Daellenbach, 2002). RBV is based on the work of Wernerfelt (1984) and has been extended by various other studies (Barney, 1991; Grant, 1991, 1996; Wernerfelt, 1995; Henderson & Mitchell, 1997; Combs & Ketchen, 1999; Cockburn et al., 2000; Priem & Butler, 2001a). RBV stresses the importance of a company’s unique competencies and resources (tangible and intangible assets, skills, and organisational capabilities) in strategy formulation, implementation and performance (Spanos & Lioukas, 2001; Parnell, 2002).
According to the RBV framework, competitive advantage arises when a company is employing a value creating strategy in their markets (Parnell, 2000; Hooley & Greenley, 2005). To be successful, companies must possess and deploy distinct resources that are scarce, valuable, insubstitutable, appropriable, which create value for customers and on the other hand cannot be imitated by their competitors (Barney, 1991, 1995; Mahoney & Pandian, 1992; Peteraf, 1993; Teece et a;., 1997; Foss, 1997; Parnell, 2000; Hooley & Greenley, 2005). Thus, if the resources are valuable and rare, but the competitors have the ability to imitate or replace the resource by using substitutes, the firm will lose the competitive advantage (Barney, 1991).
Most companies have many resources (both tangible and intangible) but few that are strategic in nature. Most strategic assets tend to be knowledge-based and are intangible. Although tangible resources enable a company to execute business processes, it is the intangible ones that are more likely to serve as sources for competitive advantage (Brush, 2001; and Ray et al., 2005). Strategic assets involve a mix of explicit and tacit knowledge embedded in a company’s unique internal skills, knowledge, and resources (Rumelt et al., 1994; and Foss, 1997). Such strengths are difficult to purchase, let alone copy; as a result, these can contribute to a firm’s ability to move beyond competitive convergence toward a competitive advantage. Examples of strategic assets include quality, reputation, managerial skills, brand recognition, patents, culture, technological capability, customer focus, and superior managerial skills (Castanias, 1991; Kogut & Zander, 1993; Barney & Zajac, 1994; Chakraborty, 1997; and Hawawini et al., 2002).
RBV has gained considerable support from numerous studies (Coyne, 1986; Ghemawat, 1986; Grant, 1991; Hall, 1989; Stalk et al., 1992; Williams, 1992) that highlighted examples and cases of where companies with particular skills and capabilities were able to out-perform their competition. Empirical studies from Hitt & Ireland (1985); Markides & Williamson (1994); and Robins & Wiersema (1995) have tested companies from a variety of industries. For example, the study of Robins & Wiersema (1995), which was conducted among 88 firms listed in the Fortune magazine and acting in a variety of industries, indicated that the resource-based view has accounted for variance in financial performance. Hitt and Ireland (1985) examined the relationships of seven distinctive functional competencies, consisting of 55 activities, to market returns of 185 Fortune 1000 firms in a variety of industries.
2.3 Investigation of Business Strategies and Choice of a Competitive Strategy Framework
One of the most critical steps in investigating business strategies is to select a framework, which incorporates critical dimensions and strong theoretical underpinning and empirical support (Tan, 1995). For the purposes of this research project, the researcher will employ Porter’s generic strategy framework to study strategic synthesis of Small to Medium-Sized Enterprises (SMEs) within the Manufacturing sector in UK for the reasons described below. In the following paragraphs, the researcher will discuss and compare the two different approaches to competitive strategy: outside-in perspective and firm-specific effects on performance. In addition, it will provide reasons for choosing Porter’s framework for the investigation of competitive strategies within the UK’s MSMEs sector.
The field of strategic management has undergone, in the 90s, a major shift in focus regarding the sources of sustainable competitive advantage: from industry to firm specific effects. Within the classical industrial organization (IO) literature scholars have typically assumed that firm management can influence neither industry conditions nor its own performance (Mason, 1939; Bain, 1956) because firm conduct (i.e., strategy) is constrained by industry structural forces and it does not represent independent managerial action.
The modified framework advanced by Porter (1980; 1985; 1990; 1991) is fundamentally different from traditional IO theory in various ways. First, Porter focuses on firm rather than industry performance, a characteristic of research in the strategic management tradition. Second, for Porter, industry structure is neither wholly exogenous nor stable, as commonly viewed in traditional 10 theory (Bain, 1968; Caves, 1972). Finally, in Porter’s framework, the role of firm’s conduct in influencing performance, together with industry structure, is explicitly recognised. While industry structure still occupies a central role in explaining firm performance, undoubtedly reflecting a heritage from traditional 10, Porter chooses to focus on the role of firm activities and positioning as a way to the development of a dynamic theory of strategy (Porter, 1991). Then for Porter, holding industry structure constant, a successful firm is one with an attractive relative position. This position can either arise from the selection of a cost base lower than the competition or from the firm’s ability to differentiate its offerings and command a premium price that exceeds the accumulation of the extra costs.
Porter (1985) considered that in the long-term the extent to which the firm is able to create a defensible position in an industry is a major determinant of the success with which it will out-perform its competitors. He proposed generic strategies by which a firm can develop a competitive advantage and create a defensible position. Porter argued that by adeptly pursuing the cost leadership, or differentiation strategies, businesses can attain significant and enduring competitive advantage over their rivals (Porter, 1985). Two schools of thought have emerged regarding the conceptualisation and adoption of competitive strategies. The first school of thought supports Porter in his assertion that an organisation has to choose one of the generic strategies and devote total commitment of resources to it (Dess & Davis, 1984). On the other hand, several other authors have argued against Porter’s assertion, and suggest that organisations should focus on a combination of strategies that best suit their circumstances (Wright et al., 1990).
The first school of thought maintains that viable companies can seek either efficiency or differentiation. According to Yamin et al. (1999), the more efficiency is sought by management, the less differentiated the company would be, while greater differentiation would be associated with a less efficient company. This school of thought reasons that the value chain required for a low-cost strategy is qualitatively different from the value chain required for a differentiation strategy (Yamin et al., 1999). The emphasis of a differentiation strategy is on achieving (even at considerable cost) superior quality and image throughout the value chain, while the emphasis of a low-cost strategy is on lowering cost wherever possible (Porter, 1980, 1985). Because of difficulties in reconciling apparently opposed strategic thrusts, profitable companies tend to compete with one strategy only.
An opposing prospective proposes that both low-cost and differentiation strategies may be simultaneously and profitably adopted by an enterprise. According to this notion, the adoption of a differentiation strategy would entail promoting higher product quality and involve bearing higher costs across a number of functional areas in order to support the differentiation strategy (Yamin et al., 1999). However, higher quality products would possibly lead to greater market demand, allowing the company to adopt a low cost strategy through the attainment of higher market shares and cumulative volumes of production (Yamin et al., 1999). Miller & Friesen (1986) found that the cluster of business units that show distinct competencies in the areas of differentiation, cost leadership and focus dramatically outperform all the others. In fact, they found that success associated with the possession of strategic advantages—the more the better— rather than strict adherence to Porter’s types. They argued that this issue certainly warrants further study as failure and success appeared to be systematic with poor performers exhibiting many weaknesses and virtually no strengths, while good performers show the opposite. Similar results were drawn by Wright et al. (1990) and Miller (1992). Based on their findings, strategic specialisation may leave serious gaps or weaknesses in product offerings, ignore important customer needs, be easy for rivals to counter, and in the long run cause inflexibility and narrow the vision of the organisation.
As a result of the inability of 10 strategy researchers to agree on a common typology or resolve the combination strategy debate, emphasis in the field began to shift towards the RBV paradigm (Parnell, 2000). Central to Porter’s view of strategy is the notion of activities. For Porter then, strategy is a consistent array or configuration of activities (Porter, 1991: 102), aiming at creating a specific form of competitive advantage. These in turn, together with the scope of operations define the notion of generic strategies.
A firm according to Porter is viewed as a bundle of activities whereas for the RBV is viewed as a bundle of unique resources. As Barney (1991) states, much of the empirical literature informed by Porter’s framework, chose to focus analysis on the environmentperformance relationship, placing little emphasis on the impact of idiosyncratic firm attributes on performance (Porter, 1990). This was implicitly due to two main assumptions. First, it was assumed that firms are identical in terms of strategically relevant resources. Second, any attempt to develop resource heterogeneity has no long term viability due to the high mobility of strategic resources amongst firms.
In contrast, the Resource Based View of the firm (RBV) focuses upon the relationships between firm internal characteristics and performance, and accordingly it advances two alternative assumptions: (i) firms may be heterogeneous in relation to the resources and capabilities on which they base their strategies; and (ii) these resources and capabilities may not be perfectly mobile across firms, resulting in heterogeneity among industry participants.
Rooted in evolutionary economics and the work of Penrose (1959), the resource-based approach has re-established the importance of individual firm, as opposed to industry (or particular strategic groups), as the critical unit of analysis. Resources are defined as those tangible (or intangible) assets that are tied semi-permanently to the firm (Maijoor & Witteloostuijn, 1996). Examples of such resources are: brand names, in-house knowledge of technology, skilled personnel, trade contracts, efficient procedures, and similar (Wernerfelt, 1984). In the early contributions, there was no explicit distinction between resources and capabilities. According to Amit & Schoemaker (1993) however, recourses are assets that are either owned or controlled by a firm, whereas capabilities refer to its ability to exploit and combine resources through organisational routines in order to accomplish its targets.
While both perspectives have made significant and complementary contributions in the field of strategic management (Foss, 1996, 1997a; Amit & Schoemaker, 1993; Peteraf, 1993; Mahoney & Pandian, 1992; Conner, 1991) they have been at odds with each other regarding the origin of sustainable competitive advantage. Hence, Porter’s framework of generic strategies and the RBV draw from two different and antagonistic theoretical traditions.
In Porter’s framework firm performance is a function of industry and firm effects (for example, market positioning) (Grant, 1991; Porter, 1991). Because industry structure is also, at least partly, susceptible to firm activities, these two determinants of firm performance are ultimately interrelated. According to Porter, industry structure affects the sustainability of firm performance, whereas positioning reflects the firm’s ability to establish competitive advantage over its rivals. Having gained such an attractive position, a firm can exercise market power (Teece, 1984; Teece et al., 1997) and thus, acquire higher performance than its rivals. According to Porter (1980, 1985, 1991), higher performance stems from the firm’s ability either to defend itself against competitive forces (“defensive” effects), or to influence them in its favour (“offensive” effects).
Porter (1991) views resources occupying an inherently intermediate position in the chain of causality with respect to firm performance. For Porter, business assets are built from either performing activities (that is, strategy) over time, or acquiring them from environment, or both. In either case, the available stock of resources reflects prior managerial choices, the latter related to the choice of strategy. Thus, the argument goes, activities are logically prior, since their successful implementation requires different resources and skills, organisational arrangements, control procedures and inventive systems (Porter, 1980). Thus, resources are not valuable because they are attached to strategic activities. Maintaining or enhancing these assets demands reinvestment through continuously performing these activities. Moreover, their significance critically depends on how well they support the strategy pursued, and by extension, how well they fit industry structure.
The resource-based perspective, by contrast, views the issue of strategy-resources and the resources- performance relationships from exactly the opposite angle. Within the traditional mainstream strategy research literature (see for example Andrews, 1971; Ansoff, 1965; Child, 1972), of which RBV incorporates important concepts (Mahoney and Pandian, 1992), strategy selection is based on careful evaluation of available resources (strengths and weaknesses). Over time, firms continue to follow strategies because of both the opportunities imposed by the market environment and the constraints that result from their own accumulated asset base, organisational structure, ownership and other firm specific factors (Barney, 1991; McGee & Thomas, 1986). Current or future strategic decisions are constrained by past resource deployments and result in further reinforcement of strategic profile. Because of constant environmental changes, managers do have choices to make about strategic alternatives but their options might be limited within the established framework of available resources (Spanos & Lioukas, 2001).
Accordingly, then, and in sharp contrast to Porter’s contention, resources are valuable in and of themselves, driving the choice of strategy. Whereas Porter views strategy as being primarily industry driven, the resource-based perspective posits that the essence of strategy is or should be defined by the firm’s unique resources and capabilities (Rumelt, 1984). Furthermore, the value-creating potential of strategy - that is the firm’s ability to establish and most importantly sustain a profitable market position - critically depends on the rent generating capacity of its underlying resources (Conner, 1991).
This perspective’s contention is that persistent differences in firm profitability require that either the firm’s product be distinctive (for instance, differentiated), or attain a low cost position relative to its rivals (Conner, 1991). This of course is similar to Porter’s view. However, for the resource-based perspective, returns stemming from such a position in the market place, result, unlike Porter’s, from acquiring and deploying valuable idiosyncratic assets rather than from industry structure.
The underlying logic holds that the sustainability of effects of a competitive position rests primarily on the cost of resources utilised for implementing the strategy pursued. This cost can be analysed with reference to strategic factor markets (Barney, 1986a), that is markets where necessary resources are acquired. It is argued that strategic factor markets are imperfectly competitive, because of different expectations, information asymmetries and even luck, regarding the future value of a strategic resource. Should factor markets be perfectly competitive, then the cost of acquiring strategic resources would equal their going economic value in use for implementing this strategy, and hence no firm could sustain its competitive advantage (Barney, 1986a).
The important point here is that a given strategy will generate sustainable performance differential if and only if the resources used to conceive and implement it are valuable, rare, non-imitable and non-substitutable (Barney, 1991).
To summarise, both of the paradigms approach firm performance in different perspectives and arguments. This thesis will employ Porter’s typology to investigate competitive strategies within the UK’s MSMEs sector and not the RBV. This decision was made because various studies indicate that RBV fails to explain performance differences between companies that have the same levels of uniqueness, rareness, non- limitability and isolation of their internal resources (for instance: Cool & Schendel, 1988). Fahy (2000) and Priem & Butler (2001) have argued that the RBV does not appear to be capable of supporting a theoretical framework as it fails to meet the empirical criterion. For instance, in questioning the potential of the RBV as a paradigm in the field, Peteraf (1993) asks whether it ‘provides much additional insight over traditional understandings’. Although Peteraf (1993) and others (Barney, 2001) have advocated it, the debate has not yet been resolved (Carmeli & Tishler, 2004). Another criticism is that RBV does not adequately consider how organisations establish the resources to create competitive advantage (Mathews, 2002).
One critical work, for example, has argued that RBV is paradoxical, processing contradictions and ambiguities, which have produced incompatible implications for managerial scholarship and practice (Priem & Butler, 2001). For instance, RBV suggests that the ability to measure a resource means that this resource will be less likely to be a source of sustained competitive advantage, yet it can be used to generate the means to achieve strategic advantage through their resource deployments (Lado et al., 2006). Moreover, Barney’s (1991) argument that causal ambiguity sustains competitive advantage, by restricting rivals’ ability to isolate and hence replicate rentgenerating resources, itself suggests limited potential for empirical work (Lockett et al., 2009). RBV has been criticised in relation to the definition of competitive advantage because empirical tests normally involve seeking to explain inter-firm differences in performance with respect to observable differences in the firms’ identifiable resources (Lockett et al., 2009). Investigating performance and competitive advantage in this way strictly tests the joint hypothesis that resources and not other factors could generate a competitive advantage (Lockett et al., 2009).
One area of criticism is the need for more empirical studies testing the basic insights and definitions of the theoretical framework (Farjoun, 1994; Yeoh and Roth, 1999). According to Carmeli & Tishler (2004) the design of most empirical RBV studies suffers from a number of limitations including: (1) the use of a single major factor to explain variation in firm performance; (2) the use of a sample of firms from a single industry (without providing strong support that the investigated resources are industry specific); and, (3) the examination of each performance measure separately. Most quantitative studies have used a single resource such as human capital (for instance, Hitt et al., 2001) or leadership (i.e. Waldman et al., 2001). Although such studies yield some useful knowledge, it must be recognised that competitive position is derived from a combination of several resources and capabilities (Carmeli & Tishler, 2004).
Based on Godfey & Hill (1995), Fahy (2000), Hitt et al. (2001), Lopez (2001), Riahi- Belkaoui (2003), and Arend (2006) a major problem in using a set of resources and capabilities is that strategic resources and capabilities are, by nature, intangible and difficult to measure. Given the definition of valuable resources (rare, create value, inimitable, durable, transferable), the logical conclusion is that the very best resources will be the hardest to identify (Fahy, 2000), and also difficult to obtain in the first place (Miller, 2003).
In addition, RBV does not predict a universal relationship between firm performance and any particular resource (Lockett et al., 2009). On the contrary, the value of a resource to the firm will depend upon the specifics of its use. Therefore, even at the industry level, there may be no discernible relationship between firm performance and the possession of a specific resource (Lockett et al., 2009).
Compared to a number of other competitive strategy frameworks that fit into the IO paradigm, this thesis utilises Porter’s typology because his framework of generic strategies is inherently tied to firm performance (Powell, 1995). Other typologies (for instance, Miles & Snow, 1986) predate the more theoretically sophisticated strategic notions of Porter (Miller, 1988; Marlin et al., 1994). In addition, there is evidence that Porter's framework relates to other typologies (Marlin et al., 1994; Kumar & Subramanian, 1997/98). For example, Miles & Snow's (1978) ‘prospector’ and Miller & Friesen’s ‘innovators’ are similar to Porter's strategy of ‘differentiation’ (Kumar & Subramanian, 1997/98; Parnell, 2002). Moreover, Miles & Snow's ‘defender’ and Dess & Davis' (1984) ‘cost leadership’ strategies, and Hambrick’s (1985) “efficient misers” are similar to Porter's strategy of ‘cost leadership’ (Kumar & Subramanian, 1997/98; Parnell, 2002). Miles & Snow’s (1978, 1986) typology is quite similar to Porter’s in terms of consistency and proactiveness (Parnell, 2002). For instance, Porter’s ‘differentiation’ and Miles & Snow’s ‘Prospectors’ tend to emphasise proactivity, while ‘cost leadership’ and ‘defenders’ strategies are more reactive (Parnell, 2002). In addition, ‘stuck in the middle’ and ‘reactors’ lack of consistency (Segev, 1989).
Porter’s typology has received more empirical support from previous research than have the other typologies (Kim & Lim, 1988; Marlin et al., 1994). Jones & Butler (1988) state that Porter’s framework of generic strategies is the starting point for any discussion of the term ‘competitive advantage’; and has dominated the strategic management literature (Hill, 1988; Kim & Lim, 1988; Miller & Dess, 1993; Kling & Smith, 1995; Ghingold & Johnson, 1998; Miller, 1998; Thompson & Stickland, 1998; Kumar & Subramanian, 1997/98; Silva et al., 2000; David, 2000; Brandenburge, 2002; Thompson & Stickland, 2003; David, 2002; Dess et al, 2004; Wheelen & Hunger, 2004; Allen et al., 2006).
Porter’s generic strategies have been studied extensively and considerable support for their existence and effectiveness has emerged (Hall, 1980; Dess & Davis, 1984; Kim & Lim, 1988; Miller, 1988; Calingo, 1989; Grant, 2002; Dess et al., 2004; Hooley et al., 2004; Dobson et al., 2004; Karloef, 2005; McGee et al., 2005; Hitt et al., 2007). Porter’s framework of generic strategies has been well received (Miller, 1986) and it has become the dominant paradigm in business policy and strategy research (Hill, 1988; Murray, 1988). It is considered to be a classic text (Miller & Friesen, 1986a/b), characterised to be as most “notable” (Parnell, 2006), and can yield competitive advantage (Allen & Helms, 2006). In addition, the generic strategy framework is academically widely accepted and has been shown to be internally consistent (Dess & Davis, 1984). According to Reitsperger et al. (1993) Porter’s framework has the primary virtue ofbeing easy to understand.
There are a number of empirical studies that have evaluated the usefulness of Porter’s framework in relation to performance and competitive strategy context (for instance, Dess & Davis, 1984; Miller & Friesen, 1986a/b; Green et al., 1993; Helms et al., 1997; Yamin et al., 1999; Marques et al., 2000; Silva et al., 2000; Spanos & Lioukas, 2001; Jacome et al., 2002; Lau, 2002; Spanos et al., 2004; Allen & Helms, 2006; Allen et al., 2007). Furthermore, Porter’s generic strategies have been empirically tested in a variety of manufacturing industries (such as, the electronics (Kim & Lim, 1988); textile (Parker & Helms, 1992); crystal glass (Marques et al., 2000); and mixed industries (Green et al., 1993; Yamin et al., 1999; Spanos et al., 2004). His framework has been further tested within the service industry (i.e. hospitals, retailers, banking, airlines, hotels, ship management) and within general industries, which combined both manufacturing and services. Porter’s framework has also been widely examined in a country setting. For instance, Australia (Prajogo, 2007), Greece (Spanos et al., 2004), Japan (Allen et al., 2007), Portugal (Silva et al., 2000; Jacome et al., 2002), UK (Parnell, 1997; Cousins, 2005; Оке et al., 2007), and USA (Miller & Dess, 1993; Kling & Smith, 1995; Kean et al., 1998; Helms et al., 1997; Ebben & Johnson, 2005).
The next sections discuss Porter’s generic strategy and value chain frameworks. This will allow a better understanding of the various dimensions and characteristics of the competitive strategy as was initially presented by Porter (1980, 1985).
2.4 Porter’s (1985) Value Chain Framework
Prior to examining the generic strategy framework, the researcher will demonstrate how Porter’s value chain activities can be used for investigating in depth the applicability of competitive strategies within the different functions of a company.
Porter’s framework of the value chain is one of the best known and widely applied frameworks of a company’s value-creation processes (Sanchez & Heene, 2004). According to Porter: “Competitive advantage cannot be understood by looking at a firm as a whole. It stems from the many discrete activities a firm performs in designing, producing, marketing, delivering and supporting its product. Each of these activities can contribute to a firm’s relative cost position and create a basis for differentiation” (Porter, 1985:33)
Porter (1985), Besanko et al. (2004), and McGuffog & Wadsley (1999) identify that a company’s profitability is a function not only of industry conditions, but also of the amount of value it creates relative to its competitors. A firm can achieve competitive advantage if it posses ‘capabilities’ that allow it to create not only positive value but as well additional total value compared to its competitors (Porter, 1985; Hooley et al, 2004). By understanding why a company can create value and whether it can continue doing so in the future is a necessary first step in diagnosing a firm’s potential for achieving a competitive advantage in the marketplace (Hitt et al, 2007; Spanos and Lioukas, 2001). Therefore, a firm must understand how its products serve customer needs better than potential substitutes; the technology of production, distribution and sales; and the business’s costs (Porter, 1985).
Porter (1985) introduced the concept of value chain as the basic tool for examining the activities a company performs and their interactions with a view to identifying the sources of sustainable competitive advantage. It separates the activities of a firm into a sequential stream of activities and is used to analyse and establish the importance of the different activities in delivering the final product/service, thereby facilitating the identification of core (primary) and non-core (secondary or support) activities.
Figure 2.1 exhibits Porter’s framework of value chain activities. According to Porter (1985), in the value chain there are two categories of activities: (i) Primary activities: are involved with a product’s physical creation; its sale and distribution to buyers, and its service after the sale (comprise inbound logistics, operations, outbound logistics, marketing and sales, and service). These activities are termed ‘primary’ because are the most important ones as they add value to the product or those involved in either producing or selling the product (White, 2004); (ii) Support activities provide the assistance required (Porter, 1980; White, 2004) for the primary activities to take place (consist of procurement, technology development, HRM, and infrastructure)
Figure 2.1: Porter’s (1985) Value Chain Framework
illustration not visible in this excerpt
Source: Porter, M. E. (1985). “Competitive Advantage: Creating and Sustaining Superior Performance”. The Free Press, pg. 37.
According to Porter (1980, 1985) the primary activities of an organisation consists of: (i) Inbound Logistics: it involves supplier relationships and refers to all the processes/activities involved in receiving, storing and distributing the raw materials, inputs, components, and parts used in the production process; (ii) Operations: are the processes/activities of manufacturing, assembly, packaging, maintenance of the equipment, and testing of inputs to produce the final product; (iii) Outbound Logistics: relates to storage, processing orders, transport, and distributions of the product to the final consumer; (iv) Marketing and Sales: Marketing must make sure that the product is targeted towards the correct customer group. The marketing mix is used to establish an effective strategy; any competitive advantage is clearly communicated to the target group by the use of the promotional mix. It involves activities like advertising, promotions, sales force organisation, segmentations, selecting distribution channels, pricing, and managing customer relationships (for either current or potential ones); and (v) Service: All those activities associated with maintaining product performance after the product has been sold. It involves processes/activities that enhance the value of the product in terms of installation, training, maintenance, repair, warranty, and after sales services.
On the other hand, Porter (1980, 1985) defines the support activities as: (i) Procurement: This concerns how resources are acquired for a business (e.g. sourcing and negotiating with materials suppliers). It occurs in many parts of the organisation with the purpose of supporting the main functions to carry out their activities (John et al., 1997); (ii) Technology Development: Activities concerned with managing information processing and the development and protection of "knowledge" in a business. In addition, it involves technology development to support R&D, process automation, and product design; (iii) Human Resource Management (HRM): involves activities in relation to recruitment, training, development, promotion, incentives, and payment of people working for an organisation; and (iv) Firm Infrastructure: involves the structures and routines of the organisation and its management, planning, accounting, finance, and quality control mechanisms.
Having explained the value chain framework and its relationship to a company’s activities that add value, the researcher will now demonstrate its relationship and importance in relation to competitive strategy.