In the early 1980s, Michael Porter made a major contribution to the analysis of innovation in corporate strategy, by explicitly linking technology to the five forces driving industry competition and to the choice amongst a number of generic strategies that must be made by the firm. His approach situates the firm’s technological activities in a wider context of industry competition, and he develops a systematic SWOT analysis, based on competitive forces and firms internal choices. His approach has been very influential and it illustrates both the strengths and the weaknesses of the rationalist approach to technology strategy which is why we shall discuss it now. Despite criticism by many academics it remains the most dominant approach to strategy in both the business schools and in practice.
The five forces driving Industry competition:
For porter the unit of analysis is the industry producing similar products. Profitable opportunities are fewer in mature industries. There are five forces driving industry competition each of which generates opportunities and threats:
1) Relations with suppliers
2) Relations with buyers
3) New entrants
4) Substitute products
5) Rivalry amongst established firms.
According to Porter, the goal of competitive strategy is find a position in an industry where a company can best defend itself against these competitive forces or can influence them in its favor. Technological change can influence all the five forces.
Generic Market Strategies for firms:
According to Porter there are also four generic market strategies from which firms must choose:
1) Overall cost leadership
2) Product differentiation
3) Cost focus
4) Differentiation focus.
As shown the choice of product strategy has direct and obvious implications for the choice of technology strategy in particular for priorities in product and process development. Thus, in consumer durable goods markets like automobiles, consumer electronics and white (kitchen) goods we can observe a range of products with different trade offs between performance and price, with each aiming at specific market segments and each requiring different choices in the balance between product and process innovation. Porter insists on the importance of these choices, he argues that firms that get stuck in the middle between cost and product quality will have low profits.
Innovation leadership versus Followership:
Finally, according to Porter, firms must also decide between two market strategies:
Innovation leadership – where firms aim at being first to market based on technological leadership. This requires strong corporate commitment to creativity and risk taking with close linkages both to major sources of relevant new knowledge and to the needs and responses of customers.
Innovation followership: Where firms aim at being late to market based on imitating (learning) from the experience of technological leaders. This requires a strong commitment to competitor analysis and intelligence to reverse engineering (i.e. testing, evaluating and taking to pieces competitors’ products in order to understand how they work, how they are made and why they appeal to customers) and to cost cutting and learning on manufacturing.
However, in practice the distinction between innovation and follower is much less clear. For example a study of the product strategies of 2273 firms found that market pioneers continue to have high expenditures on R&D but that this subsequent R&D is most likely to be aimed at minor, incremental innovations. A pattern emerges where pioneer firms do not maintain their historical strategy of innovation leadership but instead focus on leveraging their competencies in minor incremental innovations. Conversely, late entrant firms appear to pursue one of the two very different strategies. The first is based on competencies other than R&D and new product development — for example, superior distribution or greater promotion or support. The second, more interesting strategy is to focus on a major new product development project in an effort to compete with the pioneer firm.
Source: Managing Innovation