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Journal of Management Research Vol. 16, No. 1, Jan–March 2016, pp. 3–15
Mr. Porter and the New World of Increasing Returns to Scale Ajit Prasad and Lekha Warrier
Abstract
This paper endeavours to espouse a nonconformist stance to the classic economic assumptions of Constant and Decreasing Returns to Scale, and explores the world of Increasing Returns to Scale, within the realms of Strategic Management. It seeks to study Michael Porter’s Five Forces Model under the latter assumption which apparently embodies the contemporary internet age and global technological evolution, and juxtaposes it with traditional assumptions. Under refreshed circumstances, the paper attempts to establish how a technology supporting Increasing Returns favourably influences the five forces, providing fillip to a firm’s competitive positioning, thereby offering it a substantial strategic advantage over peers.
Keywords: 5 Forces model, Porter, IRS, Technology, Competitiveness
Taking a cue from the ever changing dynamics of economic forces, this paper endeavours to espouse a nonconformist stance to classic economic assumptions of Constant and Decreasing Returns to Scale (CRS, DRS) and seeks to explore the world of Increasing Returns to Scale (IRS), within the realms of Strategic Management. It attempts to study Michael Porter’s seminal work – the Five Forces Model (5FM), originally framed with the traditional assumptions, under the relatively more challenging assumption of IRS.
In the current global scenario, technological intervention in the way business is conducted (especially e-commerce) is triggering explosive growth of business revenues vis-à-vis the resources utilized to achieve them. IRS, hence, apparently
embodies the contemporary internet age and global technological evolution. Therefore, a scrutiny of the conventional five forces model and its implications, under a new set of assumptions is justified.
This paper contends that as 5FM is a static model, it becomes difficult to apply it to an industry stage where all the five forces have a propensity to keep changing. It is easily applicable in case of CRS (with no disruptive innovations, as any sudden up- gradation in technology may shift it to IRS), it being an inert industry phase with identical levels of input and output. Similarly, it smoothly applies under DRS where increasing business size triggers exhaustion of inputs and inefficiencies.
However, the scenario is different under IRS where the input-output ratios have a dynamic predisposition. The strength of the five forces has a tendency to actually decrease with consistently increasing output, thereby augmenting the profitability and attractiveness of the industry. Thus, under refreshed circumstances, this paper attempts to establish how by switching to a technology supporting IRS, a firm’s competitive positioning witnesses a boost, with low intensity of
Ajit Prasad Director Indian Institute of Management Prabandh Nagar, Lucknow 226013
Lekha Warrier S P Jain Institute of Management Mumbai 400058
4 Journal of Management Research
the forces offering it a substantial strategic advantage over its peers.
In a seminal article, Brian (1996) raked up an old issue that economists had for long brushed under the carpet. What would happen in a world where the traditional assumptions of Constant Returns to Scale (CRS) and Decreasing Returns to Scale (DRS) were replaced with the more challenging Increasing Returns to Scale (IRS)? It is universally acknowledged that traditional Marshallian economics (Marshall, 1890) was based purely on the CRS assumption that equilibrium in a perfectly competitive situation occurred in a perfect market with a perfectly elastic demand curve, when the U- shaped average cost curve became tangential to the average revenue curve at its lowest point. Only then was the classic assumption of marginal cost equating marginal revenue satisfied; along with the second order derivatives of the cost curve favouring that the marginal cost curve should cut the average cost curve from below. Hicks (1946), too was very apprehensive about departing from the Decreasing Returns to Scale (DRS) or CRS assumptions, as it would have undermined the very foundation of his ideally shaped convex-to-the- origin Indifference Curve.
This state of economic thought continued well into the later years of the 20th century, with desperate modifications made on the existing theoretical platform as was done by Douglas and Cobb (1928).2
With the modifications on the production function specification, Dixit and Barry (1993) with his game theoretic approach, and Intriligator’s (2002) indifference curve “point of bliss”. But none challenged the basic assumption of CRS that most economic models were based on. It was only in the 1990s, that severe limitations on existing theory were pointed out, including the inability to handle the new ‘demon’ of the internet and its basic foundation of Increasing Returns to Scale.
In this paper, our purpose is not to examine all the ramifications of IRS on economic theory but to scrutinize one of the most famous tools of strategy
– Michael Porter’s Five Forces Model (5FM), and examine its implications under the new set of assumptions.
Usually, when a company wants to analyse the environment it operates in, the 5FM is an important weapon in its arsenal, as it gives a snapshot of the different forces impacting the company and shaping its profits. The model helps identify where a company has an inherent advantage, and where it needs to take action – develop flanks, like how HUL introduced its brand ‘Wheel’ in 1987 to compete against the then popular brand ‘Nirma’ or launch of Kindle (e-book reader and the Fire Tablet) by the e-commerce titan Amazon; or go in for a vertical/horizontal integration strategy to fend off its competitors, like Google’s acquisition of Motorola Mobility or the recent merger of Indian e-retailing pioneer Flipkart’s with fashion portal, Myntra.
It was in 1979, that Porter unleashed the Five Forces model which changed the fundamental way that business looked at strategy and competition. According to Porter (1979), the five forces prevailing in an industry determine the profitability of a firm, and hence are of the greatest importance in strategy formulation. These competitive forces constitute Five Forces Model and comprise - i) threat of potential entrants, ii) threat of substitutes, iii) bargaining power of buyers, iv) bargaining power of suppliers and v) inter-firm rivalry3.
While Porter’s contribution was to assess the competitive environment on the basis of five forces, it was based on certain assumption, explicit and implicit. In the base case of perfect competition, where all the forces are “high” and thus unfavourable [from a market attractiveness point of view], Porter opines that strategies must be developed to convert the 5 forces from a “high” to a “low”, and that becomes the basis of competitive strategy. The base case assumptions of: no market barriers, the existence of perfect substitutes, price being set by the market so that neither one single buyer or supplier has the ability to influence prices etc, all point out to the classical U-shaped cost curve, being tangential at the lowest
Volume 16, Number 1 • January–March 2016 5
point to the perfectly elastic demand curve: the perfect paradigm of constant returns to scale.
The 5FM serves very well for analyzing ‘traditional’ industries ranging from steel, automobile to even shampoo. It is therefore not surprising that it has been a subject of study by intellectuals around the world in pursuit of maverick solutions to unceasing issues of strategic management. And it would be really worthwhile to assess the implications of its application to an industry specifically exhibiting traits of IRS, for instance, telecom or internet portals, which is something that we will examine in this paper.
Apparently, the synthesis of 5FM with the popular microeconomic theory of Returns to Scale, paves way for some compelling set of findings. The theory contends that as the inputs employed within a firm are increased, its output would initially increase with increasing returns to scale, then witness constant returns to scale and eventually face decreasing returns to scale. Whereas during increasing returns to scale, the output would increase more than proportionately with respect to the increase in inputs, it would increase proportionately in case of constant returns to scale and less than proportionately during decreasing returns to scale. Exhibit 1 throws light on this theory using the Cobb-Douglas Production Function (1928)4.
At best the 5FM is an essentially comparative- statics model, and it may not be applicable to an industry stage where all the five forces have a dynamic propensity to keep changing. It is interesting to note that while the five forces of Porter’s model is thus easily applicable in case of an industry facing constant or decreasing returns to scale and becomes less applicable in case of increasing returns to scale. This is also why the former assumptions seem to be popular amongst economists compared to the IRS which throws up significant challenges in attaining well defined and permanent conclusions in economic theories.
Constant returns to scale depict a stable industry situation, with no disruptive innovations or
technological changes that may reduce costs for the company. In such cases, strategy formulation at a company level is required to induce flexibility and dynamism into the system. Porter’s model is applicable here, as there are no changes in input and consequently in output, and hence nothing disrupts and disturbs the equation of buyer-seller and inter-competitor relationship. If there was a disruptive innovation, for example, the inclusion of internet in a company’s service or product, this would entirely change the buyer-seller relationship, the bargaining powers of the companies in question as well as the inter-competitor relationship.
For instance, a kiosk of Bengali handicraft items in ‘Dilli Haat’ (a Delhi based open air piazza for aficionados of food and traditional merchandise) would end up with almost identical output if it replicates its items for sale and people employed in another stall, thereby reinforcing the theory of constant returns to scale and heading towards the perfect market. An analysis of the five forces would be relatively more applicable in such a scenario as there is nothing, so to say, that can agitate this apparent balance, unless it chooses to sell products through some online portal, which would entirely change the dynamics of his business.
Similarly, 5FM seems to be applicable in case of decreasing returns to scale as well. This stage occurs with passage of time, when the increasing size of business triggers exhaustion of factors of production and waning of efficiencies, leading to slower rate of growth. To cite an example, when the scale of operations of an organization increases, it paves way for multiple levels of leadership thus creating a tall hierarchy, innumerable regulations embroiled in red-tape. This may end up slowing down the very outcome that the aforesaid growth was intended to facilitate, hence reflecting a decreasing returns to scale. The following explains how each of the five forces in 5FM may behave under the classic condition of decreasing returns to scale:
6 Journal of Management Research
THE FIVE FORCES MODEL UNDER THE CLASSIC CRS CONDITIONS
Bargaining Power of Buyers A firm facing decreasing returns to scale would have an escalating average cost curve. At best, it may have three alternatives to deal with this situation - transfer the costs to the buyer, increase its working capital to meet its needs or utilize its reserves and surplus account for the same. Also, no matter how much inputs it utilizes, it would invariably end up with less than proportional increase in output. Having said that, a firm facing such diseconomies would in any case roll out less output into the market to avoid further overuse of inputs and cost escalation. Hence, the bargaining power of buyers does not change: albeit, there is a remote possibility that with less volume of production in the market, buyers may either shift to substitutes or accept slight increases in price if they find it hard to switch to alternatives. However, this too is subject to a few factors as one may witness under the Threat of Substitutes.
Bargaining Power of Suppliers Under decreasing returns to scale, if the company continues to increase its input in a similar way, the output increases less than proportionately. Hence the sourcing trends remain the same as earlier, keeping vendor relationship the same too. If the firm were to cut down on its quantity of input, then it may not actually remain in a decreasing returns to scale category, it may just have jumped ship to a constant returns to scale category.
Threat of Potential Entrants An increasing input usage leading to less than proportionate increase in output ensures that entry barriers have not reduced but remain the same, or at best, in a few cases, increase. In some cases the entry barrier may become high, but if the firm is a monopolist in its industry, it can transfer its costs to its consumers in the form of increased prices.
Threat of Substitutes It usually makes business sense for a firm to transfer rising average costs (during decreasing returns to scale) to the consumers in the form of increased prices. Though it may be contended that this may facilitate preference to cheaper substitutes, it may not always be necessary. Other factors such as brand loyalty and inelasticity of demand (or lack of price sensitivity) should also be given their fair credit. For example, a consumer who is loyal to Fendi will continue to remain loyal to the brand even if the prices increase, devoid of any willingness to switch to Prada or Dolce and Gabbana.
Inter–firm Rivalry In most cases, decreasing returns to scale does not impact inter firm rivalry. However, sometimes the rising costs may encourage the competitors to collaborate as a cartel and cut their costs, wherever they can.
THE FIVE FORCES MODEL UNDER IRS
Undertaking a 5FM analysis for an industry under increasing returns to scale may prove to be an arduously repetitive exercise, thus questioning its applicability under such circumstances. According to Pindyck (2013), increasing returns to scale occurs when the output more than doubles as the inputs are doubled. This may generally occur in large factories with huge scale of operation, which results in specialization of functions by managers and workers, leading to internal economies of scale. For instance, in an automobile assembly line, the average per unit cost is expected to fall with gradual increase in scale of production. This can be attributed to the organisation’s learning curve, improving managerial efficiencies and also because same cost outlay is spread over a larger level of output. Also, indivisibility and lumpy nature of the costs associated with assembly line, equipment and ancillaries ushers the firm to work towards a larger output target. Consequently, as one employs more
Volume 16, Number 1 • January–March 2016 7
inputs to the production, the resulting output is proportionately larger.
The implications of Porter’s five forces model applied to a firm with increasing returns to scale are discussed below.
Bargaining Power of Buyers will: Decrease As discussed earlier, under the conditions of increasing returns to scale, a small change in inputs (labour and capital) will lead to a far greater change in the output. Consequently, the company in question will have an incentive to manufacture excessive (more than what it was producing previously) volumes in the market, in order to get the benefit of lower cost per unit. The increasing spread between the revenue and the costs will imply an increasing margin. In a competitive scenario, the firm may decide to part with the increased margin in the form of lower prices for the customer. This naturally decreases the bargaining power of the buyer who obviously has a preference for the lower price.
Consider the case of NUCOR. In the steel industry, NUCOR was a miniscule player in front of US Steel (now USX). Its competitive strength was based purely on the innovative technology of thin slab casting (continuous casting) which would knock off 40%of the energy costs in the traditional ingot heating-cooling-re-heating route. This technology introduced IRS into the system, giving a cheaper option to steel making, and making it so attractive that very few buyers would have the economic gumption to say no. The bargaining power of buyers thus went down substantially.
Bargaining Power of Suppliers Will: DECREASE When there are increasing returns to scale in a company, a firm can leverage this advantage by manufacturing in volumes and achieve economies of scale. In such a case, the demand for raw materials will increase substantially5. As the firm
represents a huge sales opportunity for the supplier, the stakes here are quite high for it. On the other hand, for the buying company, the stakes are comparatively lower as it can change suppliers with low switching costs (at least in the initial stages). Also, the buying company represents potential sales in future for the suppliers.
On a domestic level, for example, one of the OEM suppliers (tyres) to Maruti Suzuki India Ltd. (MSIL) - J.K Tyres has low bargaining power vis- a-vis the automobile manufacturer as the latter represents a huge part of its business whereas it per se is just one of the many existing (and potential) suppliers dealing with MSIL. Considering that MSIL enjoys the advantages of increasing returns to scale by manufacturing the automobile parts in bulk, it may easily switch suppliers (of tyres) to CEAT by only having to pay up a marginal cost, but for J.K Tyres this could mean a huge loss.
At a global scale, consider the example of Wal- Mart. Wal-Mart store in Florida can add an additional rack of “Pickles from India” without incurring much cost, the returns from which may be much greater than the input costs assuming there are many Indian students in the University of Florida. Even otherwise, even if the number of students is not significant, sales of these bottles may still materialize through the principle of Market Penetration.6
Although the retail model of Wal-Mart may not be theoretically applicable to the concept of economies of scale, its strong distribution network and inventory management systems provide it with a significant advantage (at par with that of the concept) over other stores. So much so that, it may not be wrong to contend that Wal-Mart could be one of the largest companies in the world with revenues enough to build a country of its own!
Having said that, the suppliers of Wal-Mart have little choice but to adhere to the terms and conditions set by such a giant retailer with a seemingly massive clout. In the event of any non compliance by the supplier (say, P&G), Wal-Mart
8 Journal of Management Research
can shift its entire order for products to another supplier (say, Colgate Palmolive), hence cancelling all prospective chances for further business with that supplier. Here, the supplier has a lot at stake, and Wal-Mart, not so much. Another instance from the past of such leverage is when the retail behemoth was attempting to migrate from bar code technology to RFID (Radio Frequency Identification) in 2004 to streamline its supply chain management. Wal-Mart could nonchalantly arm-twist its 100 top suppliers to place RFID tags on all merchandise in less than one year. Its many suppliers, each with very little bargaining power, chose to meet the deadline issued by the firm, fearing the loss of potential business with it.7
A look outside the purview of the quintessential product market would also reflect a similar scenario. Consider the Indian e-commerce service provider - Flipkart, which started its deals with just books and has catapulted into becoming one of the most popular e-retailing sites across myriad product segments in India. Its growth timeline which coincided with the ‘e-tailing enlightenment’ of the Indian consumer has helped it scale a considerable size of operation in the recent years. So, when it ventured into an additional segment of durable furniture earlier this year, it was actually getting ready for proportionately larger revenues in return vis-a-vis a small augment in resources required for the same (as per increasing returns to scale). However, this would have resulted in enlargement of its already huge pool of suppliers. What would then happen to the share of each supplier in the company’s revenues? It would obviously reduce to effect that each one would have relatively less relevance for the company individually, and hence result in comparatively diminished supplier bargaining power.
Threat of Potential Entrants will: Decrease The concept of learning curve is typically inherent during increasing returns to scale. Only with time and experience, can the inputs (labour and capital) produce an exponentially increasing output. For
instance, the Bhilai Steel Plant, a unit of an integrated steel company – SAIL, undertakes manufacture of a wide spectrum of products ranging from semis, wire rods (TMT, Plain and ribbed), rail and heavy structural, plates and merchant products (angles, channels, round and TMT bars). Conducting work within such massive manufacturing concerns across such wide gamut of products is quite exhaustive and hence involves a very steep learning curve.
In practice, the initial cost of training the employees at the plant is quite substantial as the programme is comprehensive (spans across 2 years), detailed and involves development of specific skills ranging from handling of machinery and equipment (cranes, hoists, etc.) to safety procedures. Achieving economies of scale in such production hence seems relatively more difficult.
However, as one proceeds along the learning curve, experience increases and learning starts remaining constant which facilitates higher level of production at a relatively low marginal cost. By tapping on this learning/experience curve of its personnel, SAIL is able to attain economies of scale. Presence of such large levels of operation and resultant operational benefits create barriers to entry of potential entrants. The historically undisputed leadership position held by SAIL is a testimony to this fact.
The world’s leading automobile manufacturer, Toyota, is an example of how undeterred adherence to excellent management practices including concepts of lean manufacturing (such as Kaizen, Jidoka and 5s) lead to robust foundation of organizational learning facilitating attainment of economies of scale. Due to Toyota’s stronghold in mass manufacture of automobiles, it is deemed almost impossible for a potential entrant to envisage emulating the firm’s scale of operations and cost competency.
Threat of Substitutes will: Decrease As a company attains cost competencies due to increased learning, efficient manufacturing and
Volume 16, Number 1 • January–March 2016 9
larger output levels, it may resort to lowering prices without forgoing its profit margins. In such a situation, assuming that quality does not vary substantially between products, the threat of substitutes is low as consumers prefer the product which is priced lower than the substitutes.
Ghari Detergent, a product of Rohit Surfactants Private Limited (RSPL) is priced much below other substitutes in the market such as Wheel and Nirma (in the lower segment) and Surf excel and Ariel (in the upper end). This is a clear example of decrease in the threat of substitutes due to cost leadership (as a result of economies of scale and increasing returns to scale) which translates into price leadership. In 2012, Ghari detergents clocked a market share of 17.4% as compared to that of Wheel (16.9%)8. Visibly, the humble brand Ghari overtook the FMCG giant HUL and still manages to give it a run for its money, a feat that was hitherto was perceived impossible.
McDonald’s is another case in point with respect to increasing returns to scale and resultant price leadership. One of the ways in which the company saves costs is by appointing inexperienced employees and providing them with basic training rather than engaging experienced cooks who might ask for a higher remuneration. This is in turn passed on to the buyer in terms of low prices for basic fast food items.
It can thus be interpreted that increasing returns to scale provides a predominant competitive advantage to companies thus resulting in reduction of jockeying for position among firms. This can also be seen in case of the Swedish furniture retailer giant IKEA. Although it is known more for its innovative DIY (Do it yourself) model, it is also famous for stylish furniture at cheap prices. The competitive edge it enjoys is attributable to cost savings in the former segment which is then passed on to the latter in the form of reduced prices resulting in diminished threat of substitutes in both categories.
Inter-firm Rivalry will: Decrease The introduction of the IRS technology into the
market place will be not unlike the Darwinian Theory of Natural Selection. Firms that will survive will be firms that will be early adopters and shapers. Although the first mover advantage is irrefutable, there may be few firms - the early majority and to an extent the late majority, who may prefer to wait and watch and enter the game only once the stage is set. The consequence of this on the industry structure will be that the total number of firms will come down. Competition will come down, and there will be some evidence of cartelization emerging. The intensity of the “jockeying-for-position” will thus come down.
The AT Kearney, model of the “S” curve is an interesting approach to understanding this. The model assumes time on the horizontal axis and industry concentration or CR3 (specifically, the combined market share of the top three firm), along the vertical axis and proposes that the position of the latter shall form an S-curve shape as the industry moves along its life cycle. Apparently, it accords a typical cycle of growth to the market power of players within an industry, witnessing four stages of deregulation, increase in scale, focus, and trails off with strategic alliances. Essentially this would imply that there will be evidence of IRS (scale economics), segmentation, and cartelization as the industry goes through its life cycle.
Consider the colour TV industry in India. From 1982 (the Commonwealth Games) which was the start of the colour TV revolution in India, till 1990, there was extensive proliferation of firms in eth market. Brands like Dynora, Uptron, Meltron, Maharaja, Hotline etc made their appearance. This was short lived. Post 1991 liberalization, there was consolidation in the market with most of eth smaller form being “gobbled” up by the BPL, Onida etc brands. Later on, with the entry of Sony in the market, signalled segmentation. The recent controversy surrounding Sharp, LG and Samsung (during 2011-12) suggests of similar evidence of cartelization specifically for LCD products, although illegal in nature.
This model also suggests that with the IRS, number
10 Journal of Management Research
of firms will fall, and thus the intensity of competition will decrease. Ideally, firms in such situations may want to avoid price wars, preferring to engage in geographical segmentation and of course price/non-price cartelization. However, sometimes firms may be willing to tsretch themselves thin by offering price discounts in lieu of the potential volumes they wish to scale. In due time, only those firms with the mettle to tolerate thin margins may stay alive to see the light of the day.
Role of Complementors will: Increase (if positive) The role of complementors will increase in case of increasing returns to scale. As the growth progresses, a firm may be more exposed to risks/ rewards triggered by complementors. Firms with excess capacity will lobby for position.
A business that is quite representative of this fact belongs to the fourth estate – the press. Take for instance, ‘The Hindu’, a newspaper that is fairly idiosyncratic of Southern India and also nicknamed as the ‘Maha Vishnu of Mount road’. In fact, the effect of the complementors, viz. Chennai city, increased presence of South Indian editors, informative and high-on-content editorials and excellent usage of English9, is so strong that The Hindu per se represents all of the above.
Another instance is Wal-mart’s recent venture into business to business or B2B model through a virtual platform with the quintessential ‘kirana’ stores in India. Considering that a small re- allocation of resources (technology, labour, transport, etc.) may pave way for a huge return in the form of increased reach and business, what would the firm need to look out for in future? First of all, it is trying to embark on such a project for the first time in the world especially in India due to the evident boom in the region’s e-commerce segment. So, the firm would perceptibly need to adhere to the continuously shifting paradigms and policies of foreign investment in the country, apart from the fact that such seemingly audacious venture would have commensurate operating risks
attached to it as well. The role of the complementors hence escalates.
However, having said that, Wal-Mart’s eponymous price leadership and its positioning of ‘Best Price Wholesale brand’ should certainly help it position itself in the ‘L1’ category (priced lowest or the cheapest source of supply) for the “kirana” (general stores) shop owners. Currently dealing with high transportation costs and bureaucratic delays in their supply chains, they should be more than happy to test this cost effective method of business with a retail giant who has been there done that.
On a different note, this famous firm of bottled sugar water is synonymous with red and happiness. It also operates on increasing returns to scale. The impact of complementors – Celebrities, notions of happiness is so deeply embedded in the psyche of the consumer that Santa Claus, who represents the happy spirit of Christmas, is robed in red apparently on the insistence of none other than Coca Cola! Even now, Coca Cola continues to occupy the mind-share of consumers by playing on varying aspects of the concept of happiness – weddings, family, pizza party with friends, visiting one’s parents after an eternity, etc.
Conclusion
Most of the fundamental conventional theories which have laid the foundations for modern day economics, have offered outstanding, rather idealistic solutions to some crucial problems of the economy. These theories, including those proposed by neoclassical economists such as Marshall, Hicks, etc., were formulated on the assumptions of CRS or DRS. Nevertheless, none strived to break free from these classic assumptions and elucidate the repercussions of such diversions on their hypotheses.
In the new world of Increasing Returns to Scale, this paper argues that the validity of Porter’s 5FM clearly continues to be robust. The five forces in Porter’s model do not undergo any change in case of firms with CRS, nor is there any discontinuity. Under DRS, albeit three (threat of potential
Volume 16, Number 1 • January–March 2016 11
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at tr
ac te
d 1.
A dv
er tis
in g
sp en
d H
er e
ex is
te nc
e of
IR S
w ill
g iv
e D
ec re
as es
en tr
an ts
to th
e in
du st
ry a
s ex
is tin
g fo
rm s
2. T
ak in
g ad
va nt
ag e
of th
e tr
em en
do us
p ow
er to
t he
fi rm
to ar
e m
ak in
g su
pe r
no rm
al p
ro fit
. “L
um pi
ne ss
” of
c ap
ita l.
bl oc
k en
tr y
by “
flo od
in g”
th e
Th is
w ou
ld e
ss en
tia lly
b e
a R
ob er
ts on
, ( 19
15 ).
m ar
ke t w
ith g
oo ds
a t a
lo w
er fu
nc tio
n of
th e
ba rr
ie rs
to e
nt ry
3. P
ol ic
y re
st ric
tio ns
li ke
pr ic
e. A
ls o
de pe
nd in
g on
th e
lic en
si ng
, g ai
ne d
th ro
ug h
te ch
no lo
gy . t
he lu
m pi
ne ss
o f
lo bb
yi ng
w ith
th e
go ve
rn m
en t
ca pi
ta l w
ou ld
a ls
o be
a de
te rr
en t f
or n
ew e
nt ra
nt s.
4. Th
re at
o f
Th es
e ar
e su
bs tit
ut es
to th
e ge
ne ric
1. E
nt ry
b ar
rie rs
U nd
er IR
S , t
he th
re at
o f
D ec
re as
es su
bs tit
ut es
pr od
uc t.
U nd
er th
e C
R S
r eg
im e,
2. B
ra nd
in g
su bs
tit ut
es d
im in
is he
s, a
s th
e th
e ef
fe ct
o f t
he s
ub st
itu te
s ki
ck in
3. R
ed ef
in in
g th
e pr
od uc
t s o
as fil
m w
ill w
an t t
o in
cr ea
se ea
rli er
a s
w ith
d ec
lin in
g m
ar gi
ns ,
to in
cl ud
e pe
rip he
ra ls
th at
m ay
vo lu
m es
, l ow
er p
ric es
, a nd
th er
e is
a n
up w
ar d
te nd
en cy
o n
no t b
e th
er e
in th
e su
bs tit
ut e
m ak
in g
th e
sh ift
to th
e pr
ic es
, w hi
ch m
ak es
s ub
st itu
te s
pr od
uc t.
su bs
tit ut
e pr
od uc
t u nv
ia bl
e. m
or e
vi ab
le .
12 Journal of Management Research
5. In
te r-
fir m
U nd
er C
R S
, f irm
s w
ill c
om pe
te F
irm s
at th
is “
im pa
ss e”
p os
iti on
In th
e re
gi m
e of
IR S
, t he
D ec
re as
es co
m pe
tit io
n w
ith e
ac h
ot he
r til
l a ll
ar e
w he
re n
o on
e is
m ak
in g
an y
A C
c ur
ve is
it se
lf di
st or
te d,
op er
at in
g at
th e
lo w
es t p
oi nt
o n
su pe
r no
rm al
p ro
fit s
w ill
w an
t t o
an d
m ay
b ec
om e
a as
ym pt
ot ic
th e
A C
c ur
ve , a
nd w
he re
th e
A R
ch an
ge th
e fla
t d em
an d
cu rv
e to
th e
ab sc
is sa
. If
th e
fir m
s cu
rv e
is fl
at a
nd ta
ng en
tia l t
o in
to th
e do
w nw
ar d
sl op
in g
ha ve
a a
cc es
s to
th is
th e
A C
c ur
ve .
de m
an d
cu rv
e1 0 .
te ch
no lo
gy th
at a
llo w
s IR
S ,
th en
fi rm
s w
ill g
ra du
al ly
ex pa
nd o
ut pu
t, th
us lo
w er
in g
th e
“jo ck
ey in
g fo
r po
si tio
n” in
th e
in du
st ry
.
6. R
ol e
of th
e Th
e co
m pl
em en
to rs
a re
e nt
iti es
If th
e fo
rc e
is n
eg at
iv e,
i. e.
, i n
U nd
er IR
S , t
hi s
po w
er In
cr ea
se s
C om
pl em
en to
rs 11
th at
a re
o ut
si de
th e
in du
st ry
, b ut
th e
ar en
a of
g ov
er nm
en t c
on tr
ol s
be co
m es
m or
e se
ve re
. T hu
s ye
t h av
e th
e po
w er
to in
flu en
ce th
e or
in th
e ar
en a
of m
is in
fo rm
at io
n, if
th ei
r ro
le is
n eg
at iv
e, th
e ba
la nc
es o
f f or
ce s
w ith
in th
e st
ra te
gi es
fo llo
w ed
w ou
ld b
e im
pa ct
o n
th es
e fir
m s
w ill
b e
in du
st ry
( fo
r ex
am pl
e th
e lo
bb yi
ng a
nd a
dv er
tis in
g. If
th e
m uc
h m
or e
as Q
R s
w ill
G ov
er nm
en t)
. U nd
er C
R S
th ei
r fo
rc e
is p
os iti
ve , t
he n
of c
ou rs
e in
hi bi
t t he
ir po
w er
to e
xp lo
it sc
op e
is li
m ite
d to
th ei
r ab
ili ty
to st
ra te
gi es
w ou
ld in
cl ud
e w
ay s
to IR
S .
If th
ei r
ro le
is p
os iti
ve ,
in tr
od uc
e (r
el ax
) qu
an tit
at iv
e en
su re
s us
ta in
ab ili
ty .
th en
o f c
ou rs
e its
a dd
s to
th e
re st
ric tio
ns (
Q R
s) in
th e
pr od
uc tio
n fir
m s
co m
pe tit
iv e
ad va
nt ag
e. pr
oc es
s. A
t t he
e nd
o f t
he d
ay th
e in
te ns
ity o
f t hi
s fo
rc e
w ill
h av
e a
gr ea
te r
im pa
ct o
n th
e fir
m ra
th er
th an
D R
S
Volume 16, Number 1 • January–March 2016 13
entrants, threat of substitutes and inter firm rivalry) out of five forces are impacted, the possibility of alteration of these forces is very low.
In case of firms facing technology of increasing returns to scale, all the five forces will witness a change for the better. While in the ideal utopian
circumstance, firms will migrate towards an industry where all forces are benign (low); and where forces are high, firms will have to develop strategies that convert high forces into low. For example, a high bargaining power of buyers can be converted into a low one by branding or by segmentation. In the case of IRS, the technology
Source: Model adapted from - Douglas, Paul and Charles Cobb, “Theory of Production.” American Economic Review, 1928. Graph – Author’s own construct using hypothetical data points.
14 Journal of Management Research
itself will automatically reduce the intensity of the forces to a more attractive level.
It must be pointed out that the analysis is based on a single product in single markets, focussing main on achieving IRS through economies of scale. It is theoretically possible that IRS may also be achieved through economies of scope, which may not yield the same results of the impact on the 5 forces. This will have to be examined in more detail.
The overall conclusion that we would like to assert here, is that a firm may actually improve its competitive positioning by moving to technology
that is based on IRS, as all the forces would become favourable. This would be a tremendous advantage to the firm. Not only would this result in a better market stance vis-a-vis its competitors, but also refresh the brand presence among customers and increase the company’s value in the eyes of other stake holders such as the suppliers, shareholders, etc. It is essential to note that while such technological up-gradation may certainly lead to a competitive advantage, how the firm withholds its edge over others and sustains this position depends entirely on how it strategizes its future growth.
NOTES 1. Ajit Prasad is Director at Indian Institute of Management, Lucknow; the paper was written during his stay at SP Jain Institute
of Management, Mumbai. The usual organizational disclaimer applies. The author is grateful to contributions made by the student community group in general, and Ms H Pavitra (PGP student at IIM Raipur) in particular, for an earlier draft.
2. It may also be interesting to reflect on Houthakker (1955) work on the aggregation of the Leontief type production function with zero elasticities of substitution, results through a large sample aggregation into the Cobb Douglas type production function with built in non-zero elasticities.
3. Grove, Andrew, Only the Paranoid Survive (New York: Crown Business, reprint edition 1999) has attempted to introduce a sixth force, that of the complementors, which are factors / institutions outside the industry, yet have the power to alter the forces within the industry; Government is one such factor.
4. A production function (initially proposed by Knut Wicksell) statistically tested by Charles Cobb and Paul Douglas in 1928, widely used to represent the relationship between output and inputs. The model assumes a simple economy with only two factor inputs – labour and capital invested.
5. The firm, while trying to reduce the per unit cost and utilize the efficiencies, would want to aim for higher output (not necessarily the same level or a level that fully utilizes the inputs required previously at a lower level) and thus require higher levels of inputs.
6. One of the four growth strategies propounded by Igor Ansoff (1957), projected across a 2-by-2 matrix popularly known as the ‘Ansoff ’s Matrix’, which aids managers in deciding on avenues for growth through products and markets (both existing and new), by assessing the subjective risks and returns attributable to each approach. Other three strategies are Market Extension, Product Development, and Product Diversification.
7. Schwartz, Ephraim, “Wal-Mart promises RFID will benefit suppliers,” Infoworld, June 17, 2004, http:// www.infoworld.com/t/data-management/wal-mart-promises-rfid-will-benefit-suppliers-160 , accessed May 2014.
8. Malviya, Sagar, “Ghari moves out Wheel to be No 1 in laundry market,” The Economic Times, January 10, 2012, http:// articles.economictimes.indiatimes.com/2012-01-10/news/30611850_1_bimal-kumar-gyanchandani-ghari-laundry-market , accessed May 2014.
9. It is a popular notion that for improving their spoken/written English, people should be habitual of reading editorials of The Hindu.
10. Prasad, Ajit, “The Technology Strategy Nexus,” Management Review, IIM Bangalore, 2006.
11. Grove, Andrew, Only the Paranoid Survive (New York: Crown Business, reprint edition 1999)
Volume 16, Number 1 • January–March 2016 15
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Schwartz, Ephraim (2004) “Wal-Mart promises RFID will benefit suppliers.” Infoworld, June 17, 2004, http:// www.infoworld.com/t/data-management/wal-mart-promises-rfid-will-benefit-suppliers-160, accessed May 2014.
Contents
3 Mr. Porter and the New World of Increasing Returns to Scale Ajit Prasad and Lekha Warrier
16 Managerial Interventions in Redesigning Resource Flows: A Study on the State Cooperative Banks in the NE Region Chinmoy Roy and Sujit Das
25 Scaling Service Quality in the Tourism Industry with Special Reference to Uttar Pradesh Sana Moid and Aftab Alam
44 Coordination Practices in Supply Chain Management: An Empirical Study of Indian Manufacturing Firms Rajendra Kumar Shukla
Volume 16, Number 1 • January–March 2016
Journal of Management Research
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