Strategic Management of Firms Operating in High-Velocity Markets
by Dr Dorel Iosif
LAVAUX
Note:
this is a long paper written for academic purposes. It may take some time to read it in its entirety
1.Idea in Brief
The paper is intended to address the strategic management of firms operating in high velocity markets and in particular the inter-dependencies and trade-offs between ordinary (static) capabilities, causal ambiguity and dynamic capabilities.
Throughout the paper we adopt the resource-based view (RBV) with regard to the link between inimitability and the creation of competitive advantage and Schumpeter’s view of competition as a destructive process in which effort, assets, and fortunes are continuously destroyed by innovation (creative destruction); this view comes in conflict with the neoclassical model of competitive markets which is more suitable to static and monopoly-based markets, hence not the object of this work.
Our work combines some practical perspectives with the theoretical work and should be viewed as an extension of RBV (Penrose, Andrew, Rumelt) and dynamic capabilities (Teece, Pisano) frameworks widely published and taught in academia.
2.Definitions
High-velocity markets
We define high-velocity markets as the locus for a number of sectors that show common similarities, market and capability-wise, in which the cost of information is relatively low while the flow (speed) of information relatively high. This covers all major industries from manufacturing, energy and resources to biotechnology, engineering and pharmaceuticals. An important distinction between static and hi-velocity industries is also the fact that innovations that take place in the far ecosystem arena (“far away” from the firm) can be brought into the firm and its industry with relative ease.
In this sense, the firm operates usually in its “habitable zone” but often the disruption takes place from the periphery inwardly.
Causal ambiguity (CAA)
Throughout the paper, we discuss causal ambiguity (Lippman and Rumelt) as one of the protection mechanisms against imitability. In doing so, we choose to define causal ambiguity as follows:
Causal ambiguity is a firm-level integrated nexus of competencies that result in higher performance and is also difficult to deduce or comprehend externally, even if the Firm is subject to intentional isomorphic pressures from its competitors.
In this definition we postulate that:
CAA is integrated at the firm’s level (ie. it is a firm level construct) acting as an isolating protective mechanism,
Isomorphic pressure (if it exists) is mimetic
Inductive-creative reasoning (ICR).
Firms may use ICR (Iosif) as a mechanism for generating strategic scenarios based on “scanning the periphery” of the ecosystem (Teece, Schoemaker, Rowley). ICR combines the specificity of the observation set from the inductive arena and the creativity (and intuition) element from the abductive arena, therefore providing a "cogent" view of the future. This methodology will result in grounded creative thinking and can be used in strategy planning to generate future as-yet unobserved phenomena. While ICR cannot yield an absolutely certain conclusion, similar to inductive reasoning, it is ampliative and can extend human knowledge.
3.Hypotheses
For firms operating in high-velocity markets, we hypothesize the following:
Firms’ economic rents are in fact the sum of rents acquired through a series of successive Schumpeterian advantages as a result of innovation. Innovation can occur at product or corporate/business unit level (processes, tangibles, intangibles).
Schumpeterian advantages are increasingly becoming “time- thin”, ie the Schumpeterian cycle today is at best 2-3 years and so firms need to innovate more frequently.
Once Schumpeterian advantages diffuse they may continue to produce long-lived rents. However, the accumulation of long-lived rents does not ensure firms’ success in terms of competitive advantage (though they may contribute to it indirectly and in the virtue of inertia). Accordingly, firms need to continuously re-innovate to remain relevant.
The successive and continuous emergence of Schumpeterian advantages can only exist if firms possess strong dynamic capabilities (Teece) in addition to ordinary capabilities. Creative destruction (Schumpeter) is also necessary. However, possessing strong dynamic capabilities may detract or impair firms’ ability to carry out their current set of activities fully efficiently.
Though somewhat static, the Resource-Based View framework (Penrose, Andrew, Collis, Montgomery) does align well with the hypotheses above. Competitive Forces (Porter) and Strategic conflict (Shapiro, Shelling) frameworks do not.
Overall dynamic capabilities should be systematically cheaper to build than static (ordinary) capabilities.
Causal ambiguity can have various effects on competitive advantage.
Strategy is just another form of innovation.
We live in a world of innovation.
Throughout the paper, the acceptance of the word innovation is strictly linked to value creation. This is a given.
Today innovation is seen and felt not only at the product level but in the firm’s supply chain, processes and ability to promote learning and transfer of knowledge. The increasingly global nature of business forces ultimately facilitates innovation providing that firms have the ability to reconfigure and transform in a timely manner. In their work, Teece and Pisano refer to this capability as “dynamic” and disaggregate the nature of such ability into “sensing, seizing and shifting” elements.
In our view, the firms’ capacity to “sense” involves two elements: motivation and infrastructure. By motivation we mean the firm’s concomitant “ability” and “desire”. In order to possess sensing capacity, firms needs to rely on an infrastructure conducive to sensing. This infrastructure resides with:
the level of entrepreneurship that the leaders possess
their ability to express and act upon such qualities
an organizational culture of courageous conversations and
an organizational setup (org design and processes) that facilitates innovative pursuits
Most firms today reside in high velocity markets. If the firm does not possess sufficient capabilities to protect innovation and create isolation mechanisms, the diffusion of such products, mechanisms, know-how is almost instantaneous.
4.Innovation adopted from outside the firm diffuses at a higher rate
The innovation could be generated not only in the habitable zone but beyond in the ecosystem (see Google driverless car vs GM/Ford). In such cases the firm needs not only to “sense” the opportunity but also to be able to pivot and reconfigure its business or parts of it in order to take full advantage of the opportunity.
Take for instance the biotechnology industry. Even though more than 200 million prescriptions are written annually for cholesterol-lowering drugs, there are some people who still don’t get enough reduction in their LDL.
The discovery of PCSK-9, a protein which inhibited lowers the bad cholesterol by a further 70%, was made outside biotech firms by researchers working not only apart from the prevailing scientific strategy of genome research, but with an almost entirely different approach. This was followed by a flurry of PCSK9 inhibitor based medication, a new class of cholesterol-lowering drugs that are self-injected once or twice a month.
The market potential is enormous. Such are the benefits.
The diffusion of such a discovery was almost instantaneous; Sanofi, Regeneron Novartis and Amgen to name just a few, have all successfully completed medical trials and the drugs are on the market already competing for market share.
Another example is the invention in the late 80’s of numerical-modelling based software. Software companies such as HKS (now part of Dassault Systèmes) and MSC produced suites of such modelling software which were then sold to hi-tech companies worldwide. No attempt was made by HKS or MSC to enter the consulting business; they rather concentrated on adding increasingly sophisticated routines to the software to increase its applicability. A typical “supply-push” type of innovation. Today, virtually every car you drive, plane you fly, bridge you cross or hotel you rest in are designed using numerical modelling based software.