futureproof your business strategy: sources of corporate

Futureproof your business strategy:

sources of corporate competitiveness in

business

With insights from strategic management, entrepreneurship and organisation theory:

1. Market positioning 2. Innovation & entrepreneurship 3. Transaction cost efficiency & margins 4. Human capital & resources 5. Agility & dynamic capabilities 6. Strategic networks 7. Purposefulness & wider impact

Straight-talking by Professor Birgitte Andersen

April 2021

Digital Transformation Series No 1

2 Political Expediency and Economic Incentive Rationales for IPRs

Foreword

Read this Booklet to gain an overview of the sources of corporate competitiveness in

businesses.

Your learning opportunity is to understand and acquire a toolkit to design, evaluate and

futureproof the strategy of any business. It includes commercial frameworks organisational

contexts, and the ecosystem:

Commercial frameworks:

• The ‘Market power’ approach (industry positioning in product markets focus)

• Innovation theory of creative destruction (innovation and entrepreneurship focus)

• ‘Transaction cost economics’ view of the firm (efficiency drivers focus)

Organisational contexts:

• ‘Resource based view of the firm’ of corporate competitiveness (strategic assets

focus)

• ‘Dynamic capabilities’ (business agility focus)

The Ecosystem:

• ‘Strategic networks’ (network enablers focus)

• Corporate purpose (wider impact on society focus)

This Booklet provides evidence from strategic management, entrepreneurship and

organisation theory, applicable for business leaders, entrepreneurs, research and technology

centres, investors, and policy makers.

“The sources of corporate competitiveness and value creation in business are

manifold, and no one prevailing theory is sufficient. We need to integrate a whole range

of different approaches focusing on different things.

In order to succeed in digital transformation, managers and business leaders must

therefore be aware of - and be able to manage - a variety of factors. There is no simple

strategy or solution to corporate success. Technological investment in digital

technology is certainly not enough to succeed in the 21st century.”

PROFESSOR BIRGITTE ANDERSEN


Table of Contents

Introduction ............................................................................................................ 4

COMMERCIAL FRAMEWORK ................................................................................ 5

1. Market Power and Industry Forces ................................................................. 6

2. Innovation and Creative Destruction ............................................................ 11

3. Transaction Costs and Efficiency ................................................................. 13

ORGANISATIONAL CONTEXT ............................................................................. 17

4. Human capital and resources ....................................................................... 18

5. Dynamic capabilities ..................................................................................... 20

THE ECOCYSTEM ................................................................................................ 23

6. Leveraging Strategic Networks & Relationships ........................................... 24

7. Impact of Society and the Economy ............................................................. 26

A HOLISTIC APPROACH ...................................................................................... 28

Roundup ............................................................................................................... 29

References ............................................................................................................ 31

Contact details ..................................................................................................... 32


Introduction

In this Booklet we will consider different approaches to the sources of corporate

competitiveness and discuss how and why they must be considered as part of your institutional

digital transformation strategy.

Digital transformation is the fully integrated digitalisation of business operations, redesigning

your business processes around information and communications technology (ICT), the

Internet, Artificial Intelligence, ML or robotic processes, Blockchain, and other emerging

digital enablers, completely reinventing its business model. Digital transformation usually

involves the redesign and innovation of all organisational aspects important to the value

creation process.

In this Booklet, I will explain multiple theories, as part of a firm’s wider strategic

ecosystem, and how a holistic approach is needed to survive in the 21st century. All

theories must be considered in light of digital transformation and when upgrading your

strategies. In particular, I will consider three strategic spheres which any company must master

– the commercial, organisation, and ecosystem spheres – and we will consider 7 different

theories from management.

The commercial enablers, with input from management theory are:

• The ‘Market power’ approach (industry and product market focus)

• Innovation theory of creative destruction (innovation and entrepreneurship focus)

• ‘Transaction cost economics’ view of the firm (efficiency focus)

Then we will consider organisational enablers, in relation to organisation theory:

• ‘Resource based view of the firm’ of corporate competitiveness (strategic assets focus)

• ‘Dynamic capabilities’ (agility focus)

Finally, we will consider ecosystem enablers:

• ‘Strategic networks’ (network enablers focus)

• Corporate purpose (wider impact and society and the economy focus)

At the end I will present a holistic typology of the sources of corporate competitiveness, which

you can apply to build your own future-facing strategy.


COMMERCIAL FRAMEWORK


1. Market Power and Industry Forces

First there is the ‘exploitation of market power’ approach by Michael Porter (1985; 2001).

Porter is an American academic known for his theories on business strategy. He is credited

with creating the “Five Forces” analysis, an instrumental theory in business strategy

development.

The five forces focus on the creation and exploitation of market power in relation to

industrial competitive forces. In his evidence-based theory, there are five industry level

forces which determine the inherent profit potential of any industry or company.

The unit of analysis regarding corporate competitiveness is the company’s positioning

within its industry. In Porter’s analysis, the firm’s competitive forces are viewed in relation to

their external environment. Firms are part of industries – and thus follow industry trends. The

key consideration is to be positioned in industries with favourable trends (e.g. in the software

industry now, in the motor car industry of the 20th century) and then to outperform your

competitors.

I will now give context to the five forces and discuss how they explain the effect of digitalisation

on business environments.

Entry barriers

First are “barriers to entry”. Entry barriers can be capital or finance-based, and can exist in the

form of knowledge, technology, patents, skills or competences. Entry barriers can also be

standards, regulations or source codes.

Barriers to entry can be related to high scale economies on the product market. For example,

if you are able to produce at a high scale, the fixed costs can be spread out, providing you a

competitive advantage as you can price out the competition. Others aiming to break into the

market must start at lower scale and higher costs. Consider this: to set up an automobile

factory to produce 100 cars is very expensive, and each car will need to be priced with these

set up costs factored in. However, if your factory produces 500,000 cars you can spread fixed

costs and price the cars more competitively. This approach is useful for large and experienced

firms that wish to keep new entrants out or acquire them outright.

The key consideration is to MAKE SURE YOUR ENTRY BARRIERS ARE HIGH!

But in the digital economy, barriers to entry have been coming down due to less need for

upstart and venture capital to invest in physical assets. Internet applications are standardised,

business processes are ‘automated’ in many ways, and there is less need for local

competencies.


Also, as information-based products and services rely mostly on fixed development as

opposed to variable costs of reproduction, the unit cost of production is almost zero.

As a result of entry barriers coming down, we observe a rise in price competitions.

Threat of Substitution

Next up there is the threat of substitution.

The threat of substitution force refers to product substitution. This can entail substituting your

products or services with better quality or with different types.

For example, if people eat out more, supermarket sales go down. Similarly, a local hotel in a

beach town may find competition from the hotel next door, if they sponsor a shuttle from the

airport.

In a similar vein and with the emergence of the digital economy, some grocery stores

transformed as well, adding to new competition. Some remained physical, others – such as

Tesco, Sainsbury and Argos – moved to a hybrid model (which offer online combined with

pick-up or delivery), and a few went fully digital – as observed with the Amazon model.

Ocado is a British online supermarket that describes itself as ‘the world’s largest dedicated

online grocery retailer’. In contrast to its main competitors, the company has no retail locations

and exclusively offers home deliveries from its warehouses. The company was floated on the

London Stock Exchange on 21 July 2010 as a member of the FTSE 100.

But what else happened in the digital economy?

Notoriously, Blockbuster movie and game rental shops were largely replaced fully by Internet

based providers in the early 2000s. Today, Blockbuster is a cautionary tale and a relic of the

past. Music stores were also replaced with internet retailers selling digital files of music. More

recently these were again replaced by streaming services, such as Spotify.

Camaras with mechanisms based upon chemical processes (such as Kodak) were first

substituted with digital ones, totally disrupting the camera industry. Today, mobile phones like

the iPhone are the most used “cameras”.

Long-distance high-cost telephone services were substituted by texts, voice messages, and

social media sites where personal updates were shared to friends and families. Postal services

were substituted by email.

High street travel agencies – where you would once have purchased your travel package with

rental car, hotel and insurance – were replaced with online businesses like LastMinute,com

or Opodo.


The competition between online and high street products have sparked sharp price

competition.

The key is to MAKE SURE THAT YOUR PRODUCTS CANNOT EASELY BE SUBSTITUTED.

However, the explosion of new Internet-based approaches to do business has been able

to substitute existing product and service markets, as I have just explained, and led to a

sharper price competition.

Bargaining power of buyers

Now we turn to the “bargaining power of buyers”. if you are supplying products or services to

firms or consumers, it is important that you are the price setter and that you control the market.

Remember to MAKE SURE YOU ELIMINIATE BARGAINING POWER OF BUYERS.

But the Internet has caused reduced switching costs for your consumers or business

clients, impacting brand loyalty and empowering comparison shoppers.

Consumers (or your buyers) can use price runners on the internet and decide which company

to buy from, comparing prices and reviews from other customers regarding their experiences.

Savvy consumers don’t need to invest effort in building relationships online or find relevant

information on the product or service they purchase, and the next store is only one click away.

As professional business services are becoming automated, buyers can easily be

outsourced from different agents. This includes consultancy, legal, accountancy and financial

services, which now face price competition due to the digital revolution and automation. They

were previously bespoke expensive services, but due to automation, they’ve become less

unique, and lost some bargaining power to the buyers.

Again, all of these effects of increased bargaining power of buyers lead to price

competition.

Bargaining power of suppliers

Next we will consider the “bargaining power of suppliers”.

This force considers it important that you are the price setter of intermediate goods. You must

make sure you are not dependent on suppliers or supplier standards, but that you have

broader networks. Above all else, MAKE SURE YOU ELIMINATE POWER OF SUPPLIERS.

Consider this: what happened in the digital revolution? I will answer below in three contexts:

“Disintermediation” / cutting out intermediates: The Internet provided some devastating

challenges for many firms – especially intermediates. In fact, the Internet provides

opportunities for suppliers to reach end-users, fully reducing the influence of intermediate


companies. This includes off-line specialised travel agencies and record stores, where

suppliers of travel holidays or music, cut all ties with their intermediates and could reach

customers directly via the internet.

New intermediaries: new intermediaries dealt an extra blow to existing intermediates, by

offering direct peer to peer trading avenues, like eBay for auction markets, Gumtree for rental

markets, and Airbnb for hotel markets.

Loss of supplier relationship: as companies become digitalised and standardized, suppliers

can more seamlessly take on additional business partners, increasing their bargaining power.

All of these factors above have led to increased price competition due to the digitalisation of

businesses and of the economy.

Rivalry among industry incumbents

The last of the five forces is “rivalry among industry incumbents”. In the Porter framework,

companies compare themselves with their closest rivals in order to benchmark and relatively

enhance their position. Thus, MAKE SURE YOU ARE IN A GOOD POSITION. Companies

need to be uniquely positioned to execute all of above forces better than their industry

opponents.

But within the Internet economy everything has changed. Not only have barriers to entry fallen,

but products and services have become more homogenized online, and relations with

suppliers and buyers have lost some unique interpersonal aspects through digitalisation.

Due to a more standardised ways of running business online – either because firms use same

suppliers or because of they use same ICT applications – the differences among firms have

decreased, which in turn has intensified rivalry among competitors.

Overall it is difficult to stay unique in a digitalised economy, leading to intensified price

competition.

In Porter’s theory, rents or profits are shaped largely at the industry or sub-sector level

rather than at the firm level. That is, competitiveness is at the product market level.

Industries compete and at certain times, certain industries dominate. It follows that, while

there is some recognition given to firm specific assets, differences among firms relate

primarily to their size or scale. There are economies of scale in bigger market shares – “Big

is beautiful”.


Economic rent or profits in the competitive forces framework are created because firms

engage in strategic investment and find strategic positions to hold back the competitive

forces which tend to drive economic returns towards zero. Profit or rent is ‘Chandlerian’,

based upon ‘scale and scope’. Scale: you produce at large scale and spread fixed costs to

decrease the marginal costs of production, making your price competitive. Scope: you use

your specialised talents in a variety of specialised products and services.

What went wrong in the digital age?

The five forces approach can be used to help the firm find or identify its position in an industry,

as well as help the firm identify the competitive forces it can deploy to defend or augment its

position. Competitive strategies are aimed at altering the firm’s position in the industry vis-à-

vis competitors, buyers and suppliers.

But Porter (2001) argues that what many firms has done wrong in the Internet economy is

allow price competition to enter the picture, and forgotten to stay unique by developing

individual capabilities and ways of doing business.

From his approach we learn that the Internet it is not a competitive advantage in and of

itself. The principles of the five forces still apply regarding how competitiveness is created and

enforced for many businesses.

Theory Sources for corporate competitiveness


‘Exploitation of market power’

approach (Porter 1985, 2001)

Strategic positioning in industry structures

• Entry barriers | Threat of substitution | Bargaining power of

buyers / suppliers | Rivalry among industry incumbents


2. Innovation and Creative Destruction

Schumpeter (1934; 1939) pioneered the theory of economic development and new value

creation through the process of technological change and innovation. Here, the sources of

corporate competitiveness and the value drivers are innovation and profit accumulation

during lead-time.

Schumpeter considered individual entrepreneurs’ contributions to innovations as a

byproduct of their new combinations of old resources (i.e. technological change and

improvements) and by developing the “new“ new thing (radical new things). Technological

innovation is based on novel combinations of ideas as foundational for new products and

production methods.

He also viewed technological development as discontinuous change resulting from innovation.

In a sense, radical inventions lead to new technological trajectories, new technological

paradigms, and new technological regimes.

Radical inventions brought about ‘creative destruction of old practices’ with respect to

combining scarce resources with new efficiencies (e.g. improvements to machinery), or by

inventing totally new products and processes (e.g. the lithium-ion powered car or the mobile

phone). Basically, the source of corporate competitiveness and value creation is innovation

with respect to new and improved goods and services or production methods.

Novelty and first mover advantages are central issues here: due to the principles of head

start profit, rents are available to entrepreneurs until the innovations become the ‘established

new practice’ (i.e. until imitation has occurred).

Schumpeterian rents or profit therefore stem from risky initiatives in uncertain

environments.

The effectiveness of protective intellectual property rights can function as complementary

assets to value creation from innovation. The IPR system essentially functions as an

appropriation regime.

High focus on creative destruction

Digital transformation, integration of e-business environments and the emerging of

virtual markets – and even new business methods – can be viewed in terms of

Schumpeter’s model of creative destruction.

In this context, entrepreneurs create new goods and services OR organizational forms OR

new markets through the destruction of old ones. First mover advantages become key;


especially when patenting new business methods combined with network-effects. For

example, Ford Motor Company is credited with inventing the assembly line, and digital music

markets creatively destroyed the resource heavy and inflexible LP and CD markets.

In the digital economy, there are many other radical inventions contributing to the creative

destruction of existing markets. For example:

• eBay (first to offer customer-to-customer auctions)

• Facebook (hang out with friends and extended family)

• Linked-In (job markets and professional profiles)

• Amazon (shopping mall, substitute catalogue firms)

• Spotify (your music hub)

• Google (search – “finding the needle in the haystack”)

• Twitter (influencing – the only “Speakers Corner”)

• TikTok (your personalized short videos)

• Instagram (your scrapbook or photo sharing)

• Wikipedia (encyclopedia)

• WhatsApp (your chat room)

‘High emphasis on novelty’ in corporate competitiveness

In this competition-centric model, there is a strong emphasis on combining novelty with

substantial first mover advantages. The theory builds upon the notion that catching up from

these deficiencies is difficult due to competitors needing the right competencies, capabilities,

resources, and time to develop. First mover advantages makes it easier to establish

market positioning, especially in situations where there are network externalities.

However, first mover advantages do not always prevail; sometimes the first mover takes risk

which other capitalize on. It has also been argued that the close follower tends to

outperform the first mover, as products and markets are tested, more mature,

somewhat standardised and accepted by customers (Teece).

Theory Source


Schumpeter’s theory of

creative destruction (1942)

Innovation and profit accumulation during lead-time.

• High focus on creative destruction

• High emphasis on novelty in corporate competitiveness:


3. Transaction Costs and Efficiency

Transaction cost theory is concerned with explaining the choice of the most efficient

governance form, a key value driver for the firm. The firm is basically concerned with

economising on transaction costs, by strategically choosing when to internalise

activities related to the operations and production, and when to buy (or outsource) via the

market.

In the transaction cost economics theory, the sources of corporate competitiveness is most

efficient organisation of the transactions undertaken by the firm. The theory was put

forward by Coase (1937) and Williamson (1975).

The rationale for establishing firms is that there are many costs associated with making

transactions in the market, so companies internalise them instead. Consider how we make

permanent or long-term contracts to set up a labour force, instead of hiring new workers each

day. However, we may choose to outsource certain functions like accounting or development,

because they are not a specialised part of our business operations. Let’s now consider the

approach.

Characteristics of the transaction cost and efficiency approach

On average, transaction costs are too high to repeatedly buy via the market, compared with

long term employer contracts or partnerships. This is because of several factors:

• ‘Asset specificity’: your assets – whether people, process, or data – are very specific

and cannot easily be sourced via the market.

• Uncertainty: the more uncertainly there is associated with the markets, the more

activities will be internalised.

• Complexity: adds to uncertainty – that is, relations are so complex that all effects

cannot be known, and you reduce risk by internalizing processes.

• Information asymmetry: opportunistic behaviour can occur as some transaction

participants hold key knowledge – and the person that know the most will take

advantage. The classic argument is that a second-hand car detailer will trade

opportunistically without disclosing every aspect of an old car. The buyer lacks all

relevant information and will correct the imbalance through securities or choose not to

participate at all. Therefore, sometimes, no market transaction will occur.

• Small number bargaining conditions: Often it is difficult to source the safest option or

supplier via the market, so you instead leverage personal networks. In this case, your

market options have narrowed dramatically, if there is a market at all.

The transaction cost approach to choosing which activities to keep within the unit called ‘the

firm’ is also called ‘The Theory of the Firm’.


Basically, transaction cost theory economics is about identifying transaction cost efficiency (in

terms of economising on transaction costs) as a major value creator. Enhanced transaction

cost efficiency clearly reduces costs, so how is this applicable in the digital economy or from

digital transformation?

Investment in information technology has reduced coordination costs and transaction

risk. Through internet business services, companies have experienced both direct and

indirect transaction cost reductions, and increased overall transaction cost efficiency.

Where have internet businesses succeeded in cutting costs? They include areas such as:

• Real time spend for managers and employees searching for customers and suppliers.

• Real time spend in communication with counterparts.

• The costs of travel, physical space for meetings.

• The costs of paper documents.

• The cost of inventory management and relation with suppliers.

Digitalisation has reduced many costs due to e-conferencing, ICT systems and the emergence

of blockchain. Prior to the pandemic, global business travel spending alone reached $1.3

trillion in 2017.

We have also experienced a reduction to information asymmetries, due to cheap

interconnectivity of virtual markets, which enhance transaction efficiency. The speed and

faculty with which information can be transmitted and sorted via the internet makes

information sharing easy. Examples here include everything from email to chat-bots to virtual

assistants.

Improvements to the information gathering process equate to reduced search and

bargaining costs for both suppliers and customers or clients. It also improves transparency

in job markets; for example, LinkedIn supports job-screening for job seekers and those hiring.

Marketing and sales costs as well as transaction process and communication costs are

also reduced, which has sparked the globalisation of local businesses (and indeed local

influencers via social media platforms) as well as the growth of global giants.

Trading costs are also reduced through digitalisation – online costs are a fraction of the off-

line costs. Consider this: imagine the eBay peer-to-peer auction site in a physical format, or

a WhatsApp group via pen pal posts, or a display of your YouTube clips in your local store.

How about Instagram in the form of a laminated scrapbook? Indeed, e-business has been

enabled by transaction cost efficiency, and what is possible.

Furthermore, e-business environments have enhanced a reduction of asset specificity –

meaning personal investments made to support a particular transaction. When visiting a travel

agency previously, the consumer built a relationship with the salesperson, and familiarity with

the system and options the particular travel agency offers. Online, the consumer does not


need to invest in building such short-term ‘personal relations’ and procedures are more

standardised and transparent, as the next site is only a click away. This last point in

particular has driven a huge reduction in asset specificity within consumer markets.

Efficiency enhancements from economising on transaction costs can be realised in many

ways, and we need to consider and compare the online reduced costs relative to offline

businesses. There are also the indirect cost reductions through digitalization, which include

transaction cost issues related to adverse selection and moral hazards:

• Adverse selection: asymmetric information between salesperson and buyer exists in

insurance cases where the clients know more than the firm. Therefore, firms have

selection mechanism such as house surveys for home insurance.

• Moral hazard: after the contract is signed, the client may not be careful unless the

contact provides incentives to do so. Hence, insurance contracts contain an ‘own risk’

component.

In the digital economy asymmetric information can be corrected through behavioural

data which can be collected and analysed easily via information technology systems and

database sharing. Indeed, businesses or government may know more than individuals

know about themselves. This sparks the growing need for compliance through new

standards of information and accountability in data use.

In the UK, this new asymmetric information gap has resulted in the GDPR (General Data

Protection Act). Persistently under review, GDPR assesses whether it got the balance right in

terms of protecting individuals privacy and allowing the opportunities for digital platforms to

produce both private and social value to society.

In a similar vein, job contracts are based upon asymmetric information. The contract may be

to work 37.5 hours per week, but the firm will not know how long the person has worked

efficiently – as effort is out of control of the employer. Accountability is enforced via

standardization, codes of behaviour and performance related pay.

However, the tides have turned. Digitalisation and increased transaction cost efficiency from

information processing has changed the power relationship away from employees and allowed

jobs to be divided into tasks, resulting in the growth of ‘gig-workers’ to do bits of work

when required, as opposed to contract based long term work. It is not uncommonly

argued that the gig-economy may growth to 40% of all working people in just a few years. The

extent to which this is good business model remains a question for corporate governance

departments and regulators, which now need to protect workers in new ways.


Theory Source


Transaction cost economics

(Coase,1937; Williamson,

1975)

Transaction cost efficiency.

• High emphasis on the reduction in transaction costs in business

• High emphasis on efficiency


ORGANISATIONAL CONTEXT


4. Human capital and resources

The Resource Based View to corporate competitiveness is a radical shift from viewing firms’

competitive sources in terms of their external industry structures and traditional product

markets (as in Porter’s approach).

The resource based view to corporate competitiveness is about a company’s internal

resources or the resources possessed by the firms. We are talking about the human,

organisational, cultural and intellectual resources possessed by the firm. Instead of

looking to external environments, the firm shall look for its competitive sources internally.

This approach to corporate value creation is built by Penrose (1959). Wernerfelt (1984) and

Barney (1991), among other important contributors.

The resources can be defined as ‘anything that can be thought of as a strength or

weakness of a given firm’. For example, we can consider strengths in the form of tangible

resources (buildings, machinery, labour), but the intangible resources (market assets,

Intellectual property assets, Human centred assets, Infrastructure assets) are even

more important, as they give the company a unique and difficult to imitate competitive edge.

These specialised competencies and capabilities may lead to value creation since they are

limited, durable, not easily traded, and difficult to imitate.

Characteristics of the resource-based approach

The resource based approach considers some firms as superior, not because they engage in

strategic investments or prevent market entry or price against long-run costs (as in Porter’s

five forces), but because they have markedly lower costs, or offer markedly higher quality

or performance.

In the digital economy, a particularly scarce resource is the combination of ‘hard’ and ‘soft’

skills. Hard human resource skills include coding, or STEM skills. Soft skills are a set of skills

or traits that include behaviour, communicational skills, teamwork ability, management skills,

and appropriate attitude.

Such soft skills are critically important when professional sectors like law, consultancy and

accountancy face digital transformation. They also play a part in the testing of automated cars,

digitalisation of the health sector, AI adoption, or when using face recognition in policing.

Consider this: why are corporate competencies so difficult to imitate? Because a company

plays like a team. You can have many great football teams, but those with the right

competencies and strategy will win the game. Thy must train each day to know how to win.


Company teams are no different. At work each day the team must learn in order to stay

competitive.

Keith Pavitt (1937-2002) was an English scholar, world-renowned patent statistician, and

professor of science and technology policy at the University of Sussex from 1984 until his

death. In a guest lecture I attended as a student, he explained firm competencies with the

following analogy, “I will never fly in an airplane that has been built from a manual, as it will

fail. It must be built from a company with collective competencies through practice and

corporate culture”. He went on to amusingly complain about British hairdressers and how the

staff at Oddbins cannot advise on wine pairings, without picking up a manual.

In summary: the competitive advantages of firms lie in their idiosyncratic and difficult-to-

imitate resources. What a firm can do is not just a function of the opportunities and structures

it confronts in industry or product markets (as in Porter’s approach) – it also depends on what

resources the organization can muster.

In this context, economic profits are not from market positioning, but from exploiting internal

capabilities through (i) consulting firm-specific resources, which determine the relative

advantage, and (ii) from which the firm chooses to specialise and trade.

Theory Source


The resource-based view of

the firm (Penrose, 1959;

Wernerfelt, 1984; Barney,

1991)

Specialized competencies

• High focus on firms’ resources and capabilities

• High focus on mobility of capabilities


5. Dynamic capabilities

We have just established the “Resource Based View” of corporate competitiveness, where the

firm views its internal resources as value drivers.

However, let’s face it – today the global competitive battles in fast changing high-tech

industries demonstrate a need for understanding competitive advantages beyond the

resource-based view. It is not enough to sustain competitive advantage; many firms have

accumulated a large stock of valuable technology, IPR, specialised competencies, databases,

and software, but have no dynamic capabilities.

Management and organisation theory has begun to focus specifically on how organizations

develop firm specific capabilities and how they renew competences to respond to shifts

in the external and internal business environment.

The dynamic capability approach on corporate competitive forces is championed by its

spiritual leader David Teece (1988; et al., 1994; 1997), with the units of analysis captured as

‘dynamic capabilities’.

The ability to develop new forms of competitive advantage is defined as ‘dynamic

capabilities’:

• Dynamic refers to the capacity to re-evaluate competences and innovative responses.

• Capabilities refer to the key role of strategic management in appropriately adapting,

integrating, and reconfiguring organizational skills, resources, and functional

competences to match the new requirements of a changing environment.

Winners of the competitive race are often those that can respond quickly and flexibly to

changing conditions and effectively re-deploy internal and external capabilities. Those that

can’t respond become the losers.

Characteristics of the ‘dynamic capabilities’ approach

How can we characterise the dynamic capabilities approach?

We must recognise the constraints of firm behaviour. Firms are informally locked into

certain paths and do not change easily – they have competence domains which are

influenced by technological, organisational or managerial past choices. They can change

competencies only incrementally, as this requires investment, resources, and adjustments and

against a learning curve. Your firm cannot skill-wise or financial-wise change overnight.


At any given point in time, firms follow a certain trajectory of competence-development. This

path not only (i) defines what choices are available now, but (ii) it also constrains what

choices the firm will be able to take in the future.

Thus, at various points in time, firms make long-term, quasi-irreversible commitments in

certain domains of competencies.

We can consider this theory in relation to digital transformation, which has certainly added

a challenge to firms’ resources and dynamic capabilities.

Toys-R-Us, HMV and a range of bricks and mortar companies struggled to compete against

more agile online competition. However, many more businesses adapted and continue to

change with the digital economy.

Today we think of Netflix as a tech giant

alongside Facebook, Amazon and Google.

But it was not always so. Netflix has

changed the way we consume

entertainment. It launched in 1997 as the

world's first online DVD-rental store and

traditional membership model, but at the emergence of the digital revolution, Netflix

experimented and trained customers on the idea of

streaming rather than using physical DVDs. They were

among the first companies to adopt artificial intelligence

to match users with content, based upon previous

choices. Now with over 100 million subscribers

worldwide, it’s hard to imagine not watching video on

demand.

All UK households used to have a copy of the Yellow

Pages phone book. The telephone directory provided

names, numbers and addresses of businesses to its

customers for over 50 years. But in 2017 the entire

busines digitised to Yell.com, given the rapid growth of digital and social media. The business

model completely transformed but the vision remained. We may have lost the look and feel of

the iconic Yellow Pages in our homes, but the company now delivers the same services more

efficiently.

Dani Lego was founded by a Danish carpenter in 1932.

It began with small wooden toys for children before

moving to simple plastic building bricks. Even though

the original idea was good, it almost hit bankruptcy

in 2003 as a result of over-innovating and

exhausting too many options. By revitalising and

reigniting its original products, Lego streamlined its


offerings – they have since rolled out digital Lego construction games, launched a successful

series of movies and franchised its theme parks. Lego’s brand today is compared to Disney

and the like.

Finally, Kodak who dominated the photography industry, failed to respond fast enough to the

advent of digital photography. The company file for bankruptcy in 2013, as camera film was

rendered obsolete. But Kodak may now be rising from the dead after launching its own

cryptocurrency called KodakCoin.

Aimed at photographers, KodakCoin forms

part of a wider blockchain platform

committed to protecting photographers and

helping them control their image rights. In

January 2018, Kodak’s share price on the

NYSE more than doubled.

Lessons learned: we must not be too sentimental about the past – adapt fast! In this context,

economic profits are Schumpeterian (1939) in the sense that the first mover to adjust or

adapt to new technology or business conditions will generate new markets and profit.

Theory Source


Dynamic capability approach

on corporate competitive

forces (Teece, 1988) and

(Teece et al. 1994; 1997)

Dynamic capabilities

• High focus on the Challenge to firms’ dynamic capabilities


• Emphasis on ‘complementarities


THE ECOCYSTEM


6. Leveraging Strategic Networks & Relationships

What if the sources of corporate competitiveness are embedded in the networks with which

they engage? Can they be the catalyst for success? The “Strategic Network Theory” of Dyer

and Singh (1998) consider the networks of firms as their key sources of corporate

competitiveness.

Strategic networks are stable inter-organizational ties or bonds – whether formal or informal.

They can be in the form of joint ventures, long-term buyer-supplier partnerships, strategic

alliances, and other inter-organisational or inter-personal ties. Pay close attention to the

implications of the network on value creation: what are the network advantages?

Characteristics of the ‘strategic networks’ approach

• Strategic networks can enable access to shared information, technology, and research

labs, or facilitate learning.

• They can also be formed around a mission of controlling markets and sometimes result

in price agreements.

• They offer the potential to reach economies of scale and scope. Scale in this context

means that companies grow bigger together, while scope means that they form more

competencies together.

• Strategic networks also offer the potential to share risk where several organisations are

involved in the same projects.

• Last but not least, some key advantages for strategic networks include reducing time to

market through improved coordination between firms. Distribution and production

between all parts in the value chain can be networked. This results in enhanced

efficiency.

A network perspective is clearly relevant to understanding value creation in the digital

economy.

The competitiveness and value creating potential of a networked business is not only

enhanced by the extent to which customers are motivated to engage in repeat

transactions, but also by the extent to which strategic partners have incentives to

maintain and improve their strategic associations.

These value creating attributes and competitive forces of e-business can be achieved through

(1) emphasis on ‘complementarities’ and (2) ‘lock-in’. I will now explain.

High emphasis on ‘complementarities’

An effect of ‘complementarities’ is when a consumer values your product more when they


have products from others at the same time.

Digital businesses have become networked businesses and they tend to offer a bundle of

complementary goods and services to their customers. Vertical complementarities are after

sale services, while horizontal complementarities are the likes of cameras and films, one-stop

shopping, or travel sites offering weather forecasts and currency exchange rate information.

Strategic business partners create value from product complementarities by using the

opportunities provided by e-business interconnectivity in virtual markets.

Examples include Amazon which is a hub and spoke model – supply chains are linked,

companies are onboarded to sell, and customers provide peer-to-peer reviews. In Amazon’s

case, there is not significant lock-it; it is a purely strategic, value-driven network for all parties.

One similar organisation is online travel agency Opodo, which combines airlines, trainlines,

car rental services and hotels, allowing for the bespoke creation of your own package holiday.

High emphasis on lock-in

But networks are also manifested by creating high switching costs for consumers through

network externalities. This creates the lock-in situation:

• Building increasing returns to adoption when customers interact with products or services.

• Consumption in one part of the network will have positive effect on another part of the

network and becomes a self-reinforcing process.

• Establishing critical mass, dominant design standards, learning effects, and technological

webs.

• Even brand names and loyalty programmes can create lock-in.

Today, social media (from TikTok to eBay to Facebook) and mobile network businesses build

models around such peer-to-peer network benefits.

Theory Source

ECOSYSTEM

Strategic network theory (Dyer

and Singh, 1998)

Strategic aspects of networks

• High emphasis on ‘complementarities’

• High emphasis on lock-in


7. Impact of Society and the Economy

Finally, there is the view that companies must take corporate social responsibility (CSR), a

stance that has grown significantly over time.

We live in an era of Intense creative disruption and intense social movement. Businesses

and management need to dynamic and savvy, as do politicians and policy makers.

Over the past 3 years, and especially during the global Covid-19 lockdown, social movements

have exploded in every region of the world.

Covid-19 is dramatically framing the context in which social movements flourish. They include

Extinction Rebellion, the Happiness movement, Black Lives Matter, #metoo movements,

live virtual movement, the Opioid crisis (use of anti-depression drugs), the Anthropocene, and

more.

These social movements are changing the workplace and the marketplace alike. After Covid

they will be even more present in whatever new normal emerges.

This is not just about human resource and corporate social responsibility departments – it is

about how they compete and design new products and services. In essence, it is about who

they are and what they represent – their corporate purpose.

Technology is the enabler and amplifier of social movements on a global scale. If companies

are not alive to them or do not understand them, they will cease to exist.


Theory Source

ECOSYSTEM

Corporate purpose

The wider impact on society and the economy

• High emphasis on purpose and corporate social

responsibility


A HOLISTIC APPROACH


Roundup

Each theoretical concept makes valuable suggestions about sources of value creation and of

corporate competitiveness. However, each theory explains only a limited part of the solution.

The variety of value drivers considered in this Booklet demonstrate how no single value driver

can be identified in the context of corporate competitiveness. A holistic approach is therefore

needed. Below you will find the typology of corporate competitiveness in business.

Typology

Theory Source


‘Exploitation of market power’

approach (Porter, 1985; 2001)

Strategic positioning in industry structures

• Entry barriers | Threat of substitution | Bargaining power of

buyers / suppliers | Rivalry among industry incumbents

Schumpeter’s innovation

theory of creative destruction

(Schumpeter, 1942)

Innovation and profit accumulation during lead-time

• High focus on creative destruction

• High emphasis on novelty in corporate competitiveness:

Transaction cost economics

(Coase, 1937; Williamson,

1975)

Transaction cost efficiency.

• High emphasis on the reduction in transaction costs in business

• High emphasis on efficiency


The resource-based view of

the firm (Penrose, 1959;

Wernerfelt, 1984; Barney,

1991)

Specialized competencies

• High focus on firms’ resources and capabilities


Dynamic capability approach

on corporate competitive

forces (Teece, 1988) (Teece et

al. 1994; 1997)

Dynamic capabilities

• High focus on the Challenge to firms’ dynamic capabilities


• Emphasis on ‘complementarities

ECOSYSTEM

Strategic network theory (Dyer

and Singh, 1998)

Strategic aspects of networks

• High emphasis on ‘complementarities’

• High emphasis on lock-in

Corporate purpose

The wider impact on society and the economy

• High emphasis on purpose and corporate social

responsibility

*****


We are now at the end of this Booklet.

I hope you have enjoyed this overview of Strategic Management, Entrepreneurship and

Organisation Theory, and that you will find the typology useful when designing your own

strategy for business success. You now know how sources of corporate competitiveness and

value creation in business manifest, with no sufficient single prevailing theory.

You will need to integrate a whole range of approaches focusing on different things – industry

positioning, product and process innovations, transaction cost efficiency, human resources,

agility and adaptability, and proficiency in leveraging value from strategic networks.

Finally, you will need to consider purposeful corporate governance which is attuned to social

movements, if you want to survive.

In order to succeed in digital transformation, you must be aware of that there is no simple

strategy or solution to corporate success. Investment in digital technology is certainly not

enough to succeed in the 21st century.


References

Amit, R. and Zott, C (2001): Value Creation in E-business. Strategic Management Journal,

Volume 22: 493-520.

Andersen, B. and Striukova, L. (2010) Where Value Resides in the Modern Enterprise.

Strategic Change: Briefings in Entrepreneurial Finance, Vol 19, No 3-4, Pp 103-123.

Andersen and Wong (2013), The New Normal: Competitive Advantage in the Digital Economy,

Big Innovation Centre report

Wong, David (2014). What Good Looks Like. The seven criteria of a good innovator, Big

Innovation Centre report.


Contact details

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United Kingdom

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