Reexamining Porter’s Models — the example of innovation
The Five Forces Model proposed by Prof. Michael Porter in the 1980s to the1990’s defined the modern Western business environment. Within the initial phase of the model, firms must differentiate to remain competitive. Inclusive, the differentiation is based on vertical integration. To compete in Western business, the more a firm controls and owns its supply chain, the greater it’s chance of eliminating its competition. The concept of vertical integration will be examined in the third part of the series. As a primer, vertical integration is the process where a firm seeks to control or own its entire supply chain (Harrigan, 1986). The concept has the benefit of standardization of quality, ease of logistics, and control of costs. One of the main disadvantages of vertical integration is the effect of consolidating supply chains, leading to an overall smaller market. Competitive elimination is the basis of profit maximization.
Factors influencing innovation
Innovation enables a firm to remain competitive. An intersection of three factors defines innovation in the high technology market. The first is market uncertainty, where consumers’ demands and needs are highly volatile and where the inability to forecast these factors accurately creates risk. Competitive volatility is where uncertainty about the competition, their products, and marketing tactics are unknown. Technological uncertainty encompasses the risk involved in developing the new product with factors such as timing from design to market, functionality, and how to develop a sustainable supply and marketing chain (Mohr, 2011).
Innovation can be broken into two broad categories, incremental and radical breakthrough. Incremental innovation occurs where the firm continuously updates an existing product for an existing stable market (Mohr, 2011). In this type of innovation, the firm is responding to general customer and competitive needs. Examples include the slow design change of refrigerators and bicycle tires. The radical breakthrough path is where the firm develops a new product and a new market for it. In this case, the firm is undertaking risk to create a new technology for a new market (Mohr, 2011). The method depends on creating an environment of creative destruction or disruptive innovation in highly innovative firms, where old processes are completely removed to accommodate the innovation (Kopp, 2019). Examples include the replacement of cable TV for broadband streaming and the record stores replaced by music streaming.
Innovation as a competitive strategy
Innovation, by itself, is a competitive strategy that a firm can use. Whether through incremental innovation to maintain a market and brand or through the radical breakthrough model to create a new product or market, innovation allows a firm to remain competitive. A firm can still use standard competitive advantage tactics such as product differentiation, price leadership, and price disruption to gain and maintain their market in both broad categories. Within the radical breakthrough model category, the most useful strategy to gain a competitive advantage and foster innovation that a firm can use are developing and working with an open-knowledge business ecosystem (Meihami & Meihami, 2014).
The model depends on a firm’s ability to work across similar industries to create new products and processes that will help the ecosystem secure and enhance its market. The model also depends on consumers as early adaptors as well as their input into the design process. The concept known as the diffusion of innovations (Rogers, 2010) is central to defeating the lag time inherent in technological adaptation. In the model’s classic version, new technology enters an early market with few clients being the early adaptors and lead users where revenue is still low compared to investment. Through a lag time of adaption, the return on investment increases as more consumers adopt the product, and it declines as the late adaptors engage the product.
The modified model for the open-knowledge business ecosystem lowers the lag time and increases investment return early in the product lifecycle. As the product’s market share increases, the return on investment increases due to a widespread early adaption (Rogers, 2010). It is of note that in the end, a mature product produced through creative destruction can still enter a classic mode of incremental innovation to maintain its market.
Specific strategies
Specific open-knowledge business ecosystem strategies to build innovation and competitive advantage include co-creation in the development of differentiated products for national and global markets (Bowonder, Dambal, Kumar, & Shirodkar, 2010). The strategy involves engaging the local supply chain and consumers to develop the product, including differentiated automobiles for markets in Asia and the USA.
The use of open knowledge can reduce the time to market for a new product. By offering clients early access to the product at all levels, the firm is locking in its market before the product reaches it. The early adaptors become beta-testers, providing the firm with valuable input on the product’s final design. The strategy also has the advantage of creating a buzz for the product for the next wave of adaptors (Bowonder et al., 2010). Examples include the iPhone and iPad, and game releases.
Development enhancements include shifting product development from an exclusive internal process towards engaging everyone in the business cluster. In this case, the firm will collaborate with its supply chain and ecosystem to develop a product that will create value for all the stakeholders (Bowonder et al., 2010; Meihami & Meihami, 2014). Commercial passenger airplanes’ development follows this design philosophy as they are part of a symbiotic business ecosystem.
The innovation of the overall business model also is an innovative and strategic competitive advantage. A firm’s business model can be modified to include the prior strategies and encourage an internal culture of open thought that spurs innovation. The strategy works with firms with a strong ability to absorb and deliver on risk with a solid but general mission statement. For example, SpaceX’s mission statement is, “You want to wake up in the morning and think the future is going to be great — and that’s what being a spacefaring civilization is all about. It’s about believing in the future and thinking that the future will be better than the past. And I can’t think of anything more exciting than going out there and being among the stars.” (SpaceX, 2020). The generality but solidity of the mission statement allowed the firm and its engineers to develop an open innovation environment focused on the core values established by the founder. Combining a strong vision with a management style that allows engineers to work without traditional restraint allowed the firm the surpass all its global competitors to become the leader in spacecraft design and innovation.
Consider this
Innovation, by itself, is a competitive strategy. Creating an environment that fosters innovation can be achieved by adopting an open-knowledge business ecosystem. The model allows a firm to develop products that bring value to all its stakeholders by allowing collaborative and cooperative co-creation. Perhaps the most significant advantage a firm can achieve in innovation and competitiveness is to adapt an open-knowledge culture with a firm mission statement. Allowing innovators to create within the firm’s boundaries freely can enable it to become a market and innovative leader.
References
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Dodgson, M., Gann, D., & Salter, A. (2006). The role of technology in the shift towards open innovation: the case of Procter & Gamble. R&D Management, 36(3), 333–346.
Harrigan, K. R. (1986). Matching vertical integration strategies to competitive conditions. Strategic Management Journal, 7(6), 535–555.
Kopp, C.M. (2019). Creative destruction. Retrieved from https://www.investopedia.com/terms/c/creativedestruction.asp#:~:text=Creative%20destruction%20was%20first%20coined%20by%20Austrian%20economist,been%20adopted%20for%20use%20in%20many%20other%20contexts.
Meihami, B., & Meihami, H. (2014). Knowledge Management a way to gain a competitive advantage in firms (evidence of manufacturing companies). International letters of social and humanistic sciences, 3(14), 80–91.
Mohr, J. (2011). Marketing of high-technology products and innovations. Pearson Education India.
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SpaceX. (2020). Mission. Retrieved from https://www.spacex.com/mission/
Van der Borgh, M., Cloodt, M., & Romme, A. G. L. (2012). Value creation by knowledge‐based ecosystems: evidence from a field study. R&D Management, 42(2), 150–169.
