BUSINESS STRATEGIES AND UNIVERSITY OF MANAGEMENT

TECHNOLOGY SCHOOL OF BUSINESS & ECONOMICS (MANAGEMENT)

COMPARATIVE ANALYSIS Shaping the Market preferences or Shaping the consumers mind !
STUDENT BSP COURSE TOOLS TO BE USED WITH IKEA CASE STUDY-STUCK IN THE MIDDLE

WHERE TO GO..TO COMPETE OR CREATE OWN CUSTOMERS SPACE ? THE NEW CHALLENGES IN STRATEGIC ENVIORNMENT

COURSE INSTRUCTOR: FAROOQ OMAR

[Summer -2011]

Prepared for BSP (MBA-Exe) UMT Fall: 2010 THE NEW CHALLENGES FOR STRATEGIC MANAGEMENT THEORY: GLOBALISATION AND NATIONAL CULTURES

Abstract. In the current era of globalization and in time of current economic crises it is harder
and harder to identify the sources of Sustained Competitive Advantage (SCA) for industrial organizations. Authors argue that national culture, cultural identities of locality and also cultures of other localities, combined with impact from global environment provide basis for SCA. Thus national culture as such potential source should not be neglected in contemporary strategic management theory and practice. This research paper is based on analysis of classical and modern strategic management theories and practice: beginning with Porters competitive positioning, Resource Based View, Blue Ocean Strategy, The Delta Model and finally Service-Dominant logic, which is recently developed mindset for understanding the purpose and nature of SCA of organization. It is found that all the frameworks logically evolve together with development of globalization trends and have much in common. These frameworks are analyzed and compared according to types and nature of units of SCA. Authors place the national culture within potential sources of SCA. The place of national culture among the proposed sources of CA can be identified within all the theories. Keywords: competitive advantage, strategy, national culture.

Without changing our pattern of thought, we will not be able to solve the problem created with our current pattern of thought. Albert Einstein

1. Introduction
The globalization as historical process has increased during last decades and word economy has gone through revolutionary changes, current economic crises included. The organizations are striving to operate efficiently and effectively avoiding globalization threats and utilizing opportunities and advantages available to them in different countries and regions. Their competitiveness directly depends on managers understanding about strategy development process and one can hardly speak of business strategy without invoking the idea of competitive advantage (Kim, Mauborgne 1997).

As globalization moves on and economic recession continues it becomes more and more difficult to identify new sources of sustainable competitive advantage (SCA). Financial and human resources are highly mobile; advantages of having wide choice of skilled and low-cost workforce are not more valid. For small countries, as Latvia, it is almost impossible to exploit scaleefficient plants. Some unique abilities, skills, designs or knowledge present in national cultural identities can help to organize production processes efficiently, apply unique marketing strategies and be competitive.

The aim of this research is twofold: To identify historical understanding and development of the most important contemporary strategy frameworks and the sustained competitive advantage (SCA) as necessary component for organizations survival and effectiveness. To find out whether national cultural identity can serve as a resource for SCA development according to the analyzed frameworks. This study is based on analysis of strategic management theories: beginning with Porters competitive positioning, Resource Based View, the Delta Model, Blue Ocean Strategy, and finally Service-Dominant logic, which is recently developed mindset, new pattern of strategic thoughts for understanding the purpose and nature of an organization. The object of this research thus is competitive advantage as understood and described by the authors of the above mentioned theories. This qualitative research is based on the logic of analytical induction using a Boolean approach applied to textual data. According to Ryan and Bernard (2000) Boolean approach involves two states (true and false, present and absent). All five strategy frameworks are analyzed using textual data from minimum two and maximum seven scientific articles per each and the following categories are explored and compared: focus of strategic attention, types, units, and potential sources of competitive advantage, relationship with customers and competition, how resources are understood and whether national culture can serve as basis for companies competitiveness and success. The literature review provide a critical assessment of the analyzed strategy frameworks, their comparison, relationships and mutual historical links taking into consideration globalization trends.

2. Strategy theories historical perspective

The strategy concept has long history in the military field and is rooted in the Greek word strategos, what means The art of the general. Many of the ideas developed in business strategy were first formulated as military strategy. The concept Business strategy theories as an academic field can be traced back to sixties. Probably the most influential paradigms that have emerged in the last three decades are Porter (1980) Competitive Positioning and Resource Based View (RBV). It was initially proposed by Penrose and later developed by Werhefelt, Hamel and Prahalad (1990); still the most important contribution was made by Barney (1991) who is considered a father of the RBV on the firm. Not all strategy theory can be universal or timeless (Mahoney, Sanches 2004), they are eventually reappraised by the market and history. Environmental changes and development trends in society forces the researchers to develop or change the theories and new ones emerge. Wilde and Hax (1999) introduced the Delta Model, which, according to its authors, complement the first two frameworks by adding the missing component the customer. This new approach was forced by the development of technologies, internet in particular. With further development of globalization trends and competition becoming more severe Kim and Mauborgne (1997) suggested that a focus on beating the competition is counterproductive and the term Competitive Advantage is obsolete. They proposed value innovation instead. Their theory was formulated in 2004 and named Blue Ocean Strategy and places the buyer in the centre. As the word economy becomes more and more interconnected, globalised and turbulent, and with increased impact of ethics and social responsibility of business, a new mindset focused on the interaction of the producer and the consumer and co-creation of value through collaborative process emerged. This new way of thinking is proposed by Robert Lusch and Stephen Vargo (2004) and is called Service-Dominant logic (S-D logic). It introduces a new understanding of purpose and nature of an organization, market and society; the knowledge and skills should be applied for the benefit of other parties and value is determined only by the beneficiary (customer). Table 1 presents the historical perspective of Strategy theories and their attitude towards the

strategy.

Table 1. Strategy frameworks

Since the above mentioned strategy frameworks are amply documented, in this paper only a brief description of S-D logic will be provided.

3. Service-Dominant logic
Service-Dominant logic is a new mindset or management philosophy which proposes the even tighter connections with the customer co-creation of value. Customers create value through service experiences. According to Vargo and Lush (2004) goods are only providers of service, mechanisms for service provision and the exchange is fundamentally and primarily about the intangible rather then the tangible. Customer is buying a service flow and so the companies should focus on selling a flow of service instead of products. In S-D logic, knowledge as intangible resource is the primary source of wealth and the only sustainable source of competitive advantage (Vargo et al. 2007). Two meta-competences are important for the organization:

 Collaborative capability the ability to work with other parties in an open truthful and

symmetric manner.
Absorptive capability ability to absorb new information from the environment

including the partners. For successful organizations these competences should be part of the organizations culture. In general S-D logic as new management philosophy is grounded in ten foundational premises (Vargo, Lush 2009): 1: Service is the fundamental basis for exchange. 2: Indirect exchange masks the fundamental basis for exchange. 3: Goods are distribution mechanisms for service provision. 4: Operant resources are the fundamental source of competitive advantage. 5: All economies are service economies. 6: The customer is always co creator of value. 7: The enterprise can not deliver value, but only offer value propositions. 8: A service-centered view is inherently customer orientated and relational. 9: All economic and social actors are resource integrators. 10: Value is always uniquely and phenomenological determined by the beneficiary. S-D logic is philosophically grounded in a commitment to a collaborative process with customers, partners, and employees; it changes the management thinking towards service provision to all the stakeholders (Vargo et al. 2006).

4. Analysis and comparison

During last three decades the focus of strategic analysis has sifted from the external to the internal environment and finally both have been combined. 4.1. Focus of strategic attention In search of competitive advantage the above mentioned strategy frameworks encourage managers to choose the most attractive industry (Porter 1985), to create core competences based on organizational resources (Barney 1991), combine both, and focus on the customer (Wilde and Hax, 1999) and finally to co-create value (Vargo, Lusch 2004). Table 2 describes the analyzed strategy frameworks focus of strategic attention.

From todays point of view it seems clear that looking only at external environment or only within the company managers can not make sound strategic decisions. Still the examples provided by the authors of the frameworks seem to prove the opposite. One of such examples is Southwest Airlines. Still this company is provided as an example practically in all frameworks. Hence the question rises the managers of this company have based their decisions on the principles of one particular framework, all of them or none? One may conclude that all the frameworks are not mutually exclusive and only describe the same situation from different point of view; they are similar.

Table 2. Focus of Strategic attention

4.2. Customers and competition The analyzed strategy theories differ significantly in their attitude towards customers and competition. Porter (1998) views customers as element of rivalry and consequently as one of the five forces to overcome. For company it is better to have buyers with lower bargaining power; in such situation the firm is acting against its customers and eventually such situation will not be productive for the society in the long run. On the contrary, according to the Delta Model and Blue Ocean, strategy design process begins with the customer. S-D logic goes even further the overall aim of the business is value creation and customer is co-creator, thus the achievement of companys goals is measured by customer satisfaction, they both co-create the environment. Table 3 summarizes attitudes towards customers and competition as described by all the theories. Views on competition have changed historically from war towards cooperation and from between the products to between the services. Attitudes towards both, customers

and competition, in general during last decades has changed basically from against to together with. It proves that according to the latest trends in society the cooperation is more productive than the contrast. Still there are lot of similarities in the analyzed theories as well. For example, The Delta Model proposes to lock out the competitors, Porter suggests creating an entry barriers and RBV advocates using inimitable resources. Customer lock-in can be compared with bargaining power of buyers and high switching costs. System lockin in the example with Yellow Pages is similar to what is called first mover advantage and/or Blue Ocean creation.

Table 3. Strategy frameworks and customers , and competition

4.3. Knowledge and skills as a source of sustained competitive advantage The notion of competitive advantage has slightly changed during last decades from strictly defined as low cost or differentiation (Porter 1985) to value proposition determined by the customer value and co-creation (Vargo, Lusch 2004). Generally understood as product, proposition or benefit that puts a company ahead of its competitors, it can be characterized by type, unit and source of such advantage. Competitive advantage as described in all the analyzed theories is summarized in Table 4. Companys competitiveness is evaluated and measured differently within analyzed strategic

frameworks. Porter and BRV measure it as product market share, while the Delta Model measures it as customer share. Porter (1985) demonstrates that a firm can develop a competitive advantage in any of the areas within the value chain, and he distinguishes primary and support activities as potential sources of competitive advantage. Porter emphasizes the role of human resources and education (knowledge) for successful, competitive companies. According to RBV the most direct route to a sustained competitive advantage is through intangible knowledge-based resources and capabilities (Pringle, Krol 1997), as well as organizations unique heritage.

Table 4. Competitive Advantage

The authors of Blue Ocean Strategy claim to make the competition irrelevant by expanding the boundaries of the industry or creating a completely new industry. Still the value innovation proposed by Kim and Mauborgne (2004) looks very similar to competitive advantage through differentiation and low cost combined, as cost reduction is one of the steps in strategic canvas design. Though Porter (1985) argued that following both strategies will result in stuck in the middle and no advantage, from Blue Ocean point of view we see that it can be very productive. SD logic emphasize the value creation is interactional process and the customer is always co creator of value. The RBV; the Delta Model, Blue Ocean strategy and finally SD logic all emphasize the importance

of intangible resources and knowledge for achieving superior performance, thus sustained competitive advantage. If we consider the main sources of sustained competitive advantages are intangible resources and capabilities now the question arise here: do intangible resources like stories, ideas, designs, attitude and capabilities like abilities, rituals, skills and knowledge widely presented in cultural environment of every locality can serve as a source of sustained competitive advantages in era of globalization and in time of economic crisis for industrial organization?

5. National culture as a source of competitive advantage

Hence the importance of gaining and sustaining the competitive advantage at least over number of years still remains high. Creation of SCA becomes more and more complicated and it is more and more difficult to identify sources of such SCA as information flows increase and resources become transferable. One of such potential sources could be national culture and identity, hence further culture as a source of SCA within the strategy frameworks is analyzed. 5.1. National identity Keillor and Hult (1999) have developed a measure of national identity, NATID scale, based on five country sample thus similarities and differences can be identified and compared. One of the benefits of their framework is minimization of the relevant distinction between culture and nation. The conceptualization of national identity is partially formulated on the premise that the elements which characterize nations identity are also the components which serve to tie sub-cultures together within national boundaries. This makes Keillors framework applicable for use in business, particularly in Latvia, as there is no need to distinguish between identities of different people living in the country. All sub-cultures together make this composite national identity which is defined by Keillor and Hult as sense of culture. Constructs of National Identity (Keillor, Hult 1999) are the following: Belief structure mainly shows the role of religion and whether it affects the moral reasoning process in a marketing ethics context.

Cultural homogeneity deals with the cultural uniqueness of a given society and whether the number of subcultures has inverse relationship to the strength of national identity. Ethnocentrism accounts for the importance placed on maintaining culturally-centered values and behaviors. It affects product choices in consumer behavior and its effect on a particular business can be positive if the product is culturally bound and consumer supports this culture. National heritage reflect the given cultures sense of their own unique history. It is measured by importance of historical figures and events. 5.2. National identity within the strategy frameworks National culture should be considered from both sides the customer and the company. In cross cultural strategy literature there are plenty of studies carried out by Hofstede and others about how to enter different cultural environments and how to adapt, still this study focuses more on company side as what we have and what we can offer, as this part has been neglected. Within Porters competitive positioning cultural identity can be a basis for differentiation and customers with specific cultural preferences (belief structure) can be a targeted as specific market niche, thus focus strategies can be applied successfully. Culturally based competences and skills (cultural homogeneity) can be the value creators and help to implement low cost strategies. Low cost culture within the organization can be embedded in national cultural identity in case such competences exist in the definite national culture. According to Resource Based View (Barney 1991), firm resources must have four attributes to have the potential of generating SCA (VRIO characteristics): a) It must be valuable. Resources are valuable when they enable a firm to conceive or implement strategies that improve its efficiency or effectiveness. The empirical evidences show that culturally based resources allow companies to implement such strategies. These resources add value in the eyes of customers or enable to produce at lower costs. b) It must be rare among a firms current and potential competitors. From the first sight it seems that culturally based resources are not rare, but it is not true in case with global or international competition. The resource may be common in one relatively small locality, but rare globally as in case with The Body Shop and resources based on Mexican, Brazilian and African

cultures. Or in other cases company can make traditional thing rare adding a specific story or organizational capability, as in case with Stendera Ziepju Fabrika. c) It must be imperfectly imitable. Resources embedded in local culture, viewed globally, have all the attributes of imperfectly imitable resources, as explained by Barney: the ability of a firm to obtain such resource depends on unique historical condition of the particular locality. The link between the resources possessed by a firms SCA is casually ambiguous it is hard to determine why and how it adds value. In general it is impossible to imitate culture as it is complex social phenomena. d) There can not be equivalent substitutes for this resource that are valuable but neither rare nor imperfectly imitable. Strategic substitutability of firm resources is a matter of degree. Firm can substitute one cultural story by another, but this will be completely different story, it can substitute culturally based process by modern one, but the difference lies not in modernity but in the cultural feeling and story. Companies who build there internal resources based on national cultures can have the resources with all the VRIO characteristics and use them as basis for SCA. Developing strategy according to the Delta Model SCA can be achieved by the best product, total customer solution or system lock-in. In the best product case culture as a source for differentiation or low cost remains. In developing total customer solution understanding local culture will definitely help and customization to a specific customer needs can be culturally based. In the bounding process national heritage can serve as proof for companys unsurpassed history of long term superior performance (Hax, Wilde 2003). Consumer ethnocentrism can help to achieve system lock-in for local companies, even SME. Generally system lock-in is almost impossible for small companies, still if high value is assigned to locally produced goods in the nation (high consumer ethnocentrism); system lock-in is achievable. In creation of Blue Oceans customers with specific cultural preferences (belief structure and cultural homogeneity) can be considered as specific target group. Their values should be considered within strategic canvas. According to S-D logic, people have two basic operant resources: physical and mental skills (Vargo, Lusch 2004) and these resources as part of organizations culture make unique organizational capabilities (meta competences). Knowledge is the only true source of competitive advantage and it includes both: companys employees and customers as co-creators of value.

National cultures are rich in specific skills and knowledge, designs, stories, and competences; hence all this can be used in value creation and provide, unique customer experience.

6. Conclusions
Globalization, changes in competitive landscape, including the presence of foreign competitors in domestic markets and current economic crisis, are raising the adrenaline level of the business community and driving businesses to rethink their strategies. Search for more or less sustainable sources of competitive advantage becomes more and more important and organizations should view the competition internationally and globally even if their activities are still mainly domestic. All the strategic frameworks provide way of thinking about companies competitiveness and efficiency. Analizing a company according to all the frameworks can help managers to understand their situation better and find innovative and valuable ideas for raising competitiveness. In spite of some minor differences (attitude towards customers and focus switched from competition to cooperation), knowledge and intangible resources as major source of superior performance and above average rents is present in all analyzed theories. Many companies successfully exploit competitive advantages based on cultural identities of localities There are also some successful examples in Latvia. In most cases it is difficult to separate whether their advantages are based on Latvian cultural identities, or those of our neighbours, but the importance is in the fact that cultural attributes are strongly present in their designs and processes:
STENDERA ZIEPJU FABRIKA, who is, to some extent similar to The Body Shop, yet their

packaging and retail environment is different and deeply embedded in Latvian culture. The company, although founded in 2001, at present STENDERS sells productions through wide international distribution network combine 195 retail shops in 14 countries over the world including China, Japan, Sweden, Poland, Russia (franchising). The most wide STENDERS represents in Russian market where work 75 retail outlets. Nevertheless of time of economic crisis in 2008 STENDERS Revenue was 3.6 M LVL, Gross Profit 1.3 M LVL, Net Profit 0.56M LVL; Gross Profit Margin = 36 % R.O.S = 15.5 %. STENDERS is a good example of Blue Ocean Strategy and successful internationalization in time of economic crisis.

 LIDO, whose catering objects are extremely popular and have became almost as

symbols of our country and cuisine and are widely visited by tourists. Their products, service style and organization are deeply embedded in Latvian culture and traditions with some aspects of German culture. This is one more example of successful Blue Ocean Strategy in Latvia. Nevertheless of economic crisis and fierce competition LIDO successfully promoted the business model to Minsk (Belorussia) and is going to open the restaurant in 20102011 in Moscow (Russia) Using SD logic LIDO is grounding in a commitment to a collaborative process with foreign customers adopting Baltic style, kitchen and design to Slavic cultural tradition. LIDO integrated two different cultures and created sustained competitive advantages. Since globalization trends provoke interest towards different cultures (Chirjevskis, Ludviga 2009), national cultures are historically rich in specific knowledge and skills and consequently could be used as pool of intangible recourses for SCA development.

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