Chapter 3 Micro Foundations of Firm’s Advantage – Dynamic Capabil.docx

Chapter 3: Micro Foundations of Firm’s Advantage – Dynamic
Capabilities View
In a previous chapter, we learnt about resource-based view
(RBV), knowledge-based view (KBV) and core competence
view (CCV) hypotheses. A major limitation of these hypotheses
is that they are not designed for the VUCA world – the world
that is volatile, uncertain, complex and ambiguous. Therefore,
they do not consider the entropy factors – the factors that act as
disruptive forces in highly dynamic markets. In this chapter,
we will examine three of the most important entry factors:
· mainstreaming of non-consumers, i.e. the rise of new groups
of customers served using alternative sets of resources,
knowledge and/or core competencies.
· political power play, i.e. the role of non-market – often
government-supported - factors in enabling competing firms to
develop alternative sets of resources, knowledge and/or core
competencies.
· globalization games, i.e. the shifts in the advantages of
different national markets, and as a consequence of the firms
having investments in those markets.
Micro foundations of firm’s advantage refer to the structures,
processes and behaviors that help firms navigate the VUCA
world. Development of appropriate structures, processes and
behaviors that are in tune with the VUCA world allows firms to
be dynamic in their capability. Dynamic capability is the
capability for recognizing and responding or adapting to
significant market change. Dynamic capability view (DCV)
hypothesis of strategic action is intended to help firms stay
relevant and is of strategic advantage for larger corporates and
their stakeholders.
In this chapter, we will also learn about different types of

marketplaces, and how to classify these marketplaces using the
niche density (number of firms in a marketplace) and carrying
capacity (size of the market) approaches. It is important to
recognize the link between the concept of dynamic capability
and the type of marketplaces. By operating in different types
of marketplaces across different business divisions or regional
geographies, the firms may be able to gain experience and
develop structures, processes, and behaviors to not only survive
but also thrive in a VUCA world.
Exhibit 3.x illustrates the evolution of DCV, based on the
refinements of RBV, KBV and CCV. KBV distinguishes
capabilities (and knowledge-base of the capabilities) from
resources. CCV distinguishes core competencies (creative
integration and innovative combination of knowledge) from
ordinary capabilities (articulation and replication of
knowledge). DCV distinguishes transforming capabilities, from
core competencies.
Exhibit 3.x: Refinements in RBV, KBV and CCV Bring DCV in
Perspective
Entropy Mechanisms under Dynamic Environments
We need a significant revision in the original elitist
assumptions of the RBV, KBV and CCV, to account for the
success of firms in face of the environmental crisis and
dynamism in the 21st century. RBV, KBV and CCV were all
based on a linear, functional approach, emphasizing acquisition
and possession of resources, knowledge and core competencies.
RBV, KBV and CCV held that if elitist firms developed
increasingly higher-order resources, knowledge, and core
competencies through innovative combinations and creative
integrations, they will be able to stay relevant with a

competitive advantage on a sustainable basis. Central and
common to all these three views is a strong belief in the
isolating mechanism assumption – that complex resources,
knowledge, and core competencies are difficult to substitute and
imitate, therefore giving rise to firm heterogeneity, above-
average returns and a competitive market share.
To motivate the need for the alternatives to RBV, KBV and
CCV, we will use the concept of entropy. In thermodynamics,
entropy is a measure of disorder or information deficit in a
system; valuable knowledge declines in closed systems,
reaching a point when the system lacks any usable valuable
knowledge. By focusing almost exclusively on factors internal
to a firm, RBV, KBV and CCV inherently imply rapid entropy
or loss of valuable useful knowledge of an elitist firm in
dynamic environments. In the chaotic, crisis-driven, and
catastrophe-aware world of the 21st century, the limitations of
these static and elitist perspectives have become evident. The
ability of many emerging market firms to successfully compete
with large elitist MNEs has further precipitated a need for other
alternative, and more inclusive, internal firm-based perspectives
on strategic advantage.
Let’s identify three major factors contributing to entropy
in dynamic environments, and label them as “eroding
mechanisms”. As illustrated in Exhibit 3.x, eroding mechanisms
counter the isolating mechanisms, and have powerful influence
on the ability of the firms to sustain their strategic advantage.
Exhibit 3.x: Entropy Counters RBV, KBV and CCV in Dynamic
Environments
Entropy in Competitive advantage

Non-consumer Mainstreaming: Research on innovation shows
that new entrants often succeed using alternative sets of
resources, knowledge and core competencies to address the
needs of those presently not consuming a product, being
underserved and/or overlooked. Christensen’s (1997) work
Innovator’s dilemma finds most dramatic innovations occur
when firms strive to design products addressing the needs of
those who are not currently consuming a product. Christensen
shows that in a number of industries, firms who introduced such
innovations for non-consumers eventually gnawed into the
advantage of firms who were focused on former consumers.
Examples include the small off-road motorcycles introduced by
Honda in the 1960s, Apple's first personal computer, and
Intuit's QuickBooks accounting software. Though they seemed
to be niche products initially, eventually they all created
massive growth.
Entropy-effects of non-consumer mainstreaming have increased
in the industrial markets, as firms have shifted their focus from
empowering and sustaining innovations, to efficiency
innovations (Christensen, 2013). The income inequity level has
risen sharply worldwide, with nearly 80% of the world
population – residing primarily in Africa and South and
Southeast Asia – earning less than $2 / day. With increased
globalization, there is an inter-firm rivalry jostling for
capturing the left out 80% consumers.
Empowering innovations translates into transforming complex
and costly products into simpler, cheaper, and redesigned
products for a wider range of consumers. In the computer
industry for example, there have been several waves of
empowering innovations, which have expanded the consumer
base from governments (mainframes, priced at $100,000+), to
businesses (desktops), to urban consumers (laptops), and to
even rural users (tablets – such as the $40 Akash tablet designed
by the scientists in India and the US). Exhibit 3.x tells the story

of Sony, once a pioneer in empowering innovations, who later
became entrapped when even more empowering innovation
became possible.
Exhibit 3.x: Sony – An Empowering Innovator Gets Entrapped
In the 1950s, Akio Morita, the founder of Sony, launched a
series of miniature products, ranging from portable players,
portable radio, portable television, and portable video
recording. They had resounding success each time, as the
established leaders failed to notice the disruptive effects until
they lost the market totally. For Sony, each new wave of
miniature products offered more attractive margins, and offered
the motivation to invest in miniaturization core competence and
its new application.
In 2000s, with the rise of internet, downloadable music became
a reality. Sony had a really big CD business, and had little
motivation to invest in this business. That allowed Apple’s
entry and rise in the music industry, using first the iPod and
then the iTunes.
Source: Adapted from Christensen & Raynor (2003)
Sustaining innovations improve the performance of established
products and services along the dimensions that customers in
major markets are willing to pay a premium for. They
contemporize products to be in sync with the needs, aspirations
and lifestyle of today’s consumers for which they have much
greater interest and willingness to pay. Examples include
microprocessors enabling personal computers to operate faster;
and battery enabling laptops operate longer. Overall with
globalization, the number of firms pursuing sustaining
innovations has increased; whereas, the ability of all firms to
make meaningful sustained innovations, without undue cost
increases, on a continuing basis has decreased drastically.
‘Efficiency’ innovations improve the cost-effectiveness of
existing products, so that the consumers get greater value for
their money with even superior quality. These are the types of

innovations that many emerging market firms like Patanjali
Ayurveda are following very successfully, to cater to the left
out 80% market. Other examples of efficiency innovations
include organizational innovations such as just-in-time
manufacturing, online insurance underwriting by GEICO, and
technological innovations such as the mini-steel. Exhibit 2x
highlights the case of ministeel and dramatic efficiency
innovations, that allowed greater mass access for cars and other
steel-intensive products.
Exhibit 3.x: Ministeel as a disruptive efficiency as well as
sustaining innovation
Minimills were a major efficiency innovation in the steel
industry in the mid-1960s. Minimills, that used recycled steel
for making steel, enjoyed a 20 percent cost advantage over
integrated mills that instead used iron ore. Ministeels initially
offered low quality steel and targeted a market underserved by
the integrated mills. They offered rebar - small steel bars made
from scrap – to create reinforced concrete. Rebar business
accounted for only 4% of the integrated mills’ tonnage, and
offered a gross margin of only 7%. The integrated mills were
therefore happy to exit rebar business, and focus on higher-
margin steel products. As the last integrated mill exited from
the rebar business, and the growth opportunities in rebar
business diminished, cut-throat competition among the
minimills dropped the rebar price by 20%.
To sustain their profitability and growth, the ministeels had to
pursue sustaining innovations, to make better-quality steel in
larger shapes, such as thicker bars and rods. For the integrated
steels, this market tier was twice as large as the rebar market,
and offered profit margins of 12%. The ministeels invested in
equipment to make the larger shapes, and improved the quality
and consistency of their steel. Again, the integrated steels had
to exit this market, to focus on more profitable products. As
the last integrated mill exited, the price of these thicker bars
and rods also collapsed.

This process of moving to the next upward tier continued, until
the integrated mills ran out of markets to flee to.
Source: Adapted from Christensen & Raynor (2003)
Political powerplay: Non-market factors, including
governments and other social actors, play an important role in
enabling competing firms to develop alternative sets of
resources, knowledge, and core competencies. Let’s consider
three types of political powerplays – predatory, regulatory, and
reputation. At times firms experience predatory powerplay, i.e.
regulators may be blindsighted by rivals who lower prices and
assume losses for a temporary period in order to capture
customers and vendors, away from existing firms. Conversely,
regulators might impose very high taxes, liability and insurance
costs, or audit and reporting requirements, thereby making an
existing firm’s operations financially unviable. Finally,
reputation erosion occurs as established firms become a target
of reputation powerplay. Here, the consumers may choose to
boycott large successful firms who are highly visible to various
stakeholders and media, as they seek to push corporates to align
more with their values of conscious capitalism, including green
environment, human rights, and reasonable profits.
Globalization Games: We identify three types of globalization
games that may erode the advantage of established firms:
Development Games – governments in emerging markets may
support the development of their firms using a variety of means
- e.g. they may compel foreign firms to transfer intellectual
properties with limited compensation, and/or they may be lax on
issues of human and environmental rights. They may also use
public investments for acquiring raw materials from around the
world and then offer them to their domestic firms at below
market costs; and/or, they may manipulate their exchange rates
if they are an export-driven economy. As a matter of fact, the

Chinese government is known for aggressively pursuing all
these means. Thus, when governments focus on these
development efforts for specific sectors with large emerging
markets, firms in other nations may suffer rapid erosion of their
strategic advantage.
Trade Games –governments in industrial markets may promote
industries that are capital and technology intensive as these
require specialized skills, offer scope for improving
productivity in their nations, and sustain well-paying jobs both
in production and service offerings. They may use state-funded
enterprises and defense initiatives for the initial development of
the industry, offer fiscal incentives, R&D and training
subsidies, and state partnership to their domestic firms. For
instance, the Canadians supported aircraft development through
state-run Canadair, supported Technology Partnerships Canada
(a form of R&D assistance), Export Development Canada, and
military contracts for maintenance and training. Similarly, many
governments in Europe came together to promote and support
Airbus in order to create a viable European aircraft alternative
to Boeing of the USA. Boeing had to lobby hard with the US
government in order to regulate and contain the European
government support for airbus, and to sustain its strategic
advantage.
Industry Games – in a global environment, every national region
looks to offer different types of strategic advantages to the
domestic firms, because of their industry base, education and
skill base, innovation initiatives, and investments involving
enhancement of productivity of the local workforce including
places where an affordable cost of living allows labor costs to
be dramatically low. Due to this, global production and service
patterns are subject to rapid change; and these changing patterns
in turn offer new opportunities for trade and exchange, enabling
even new or less known firms to dramatically improve the cost-
effectiveness, design, and value of their products over the

established firms.
In the 1990s, the PC market was mostly a corporate market
(roughly 75% of volume). Corporate buyers wanted a
commodity. They were buying 500 or 5000 boxes, they wanted
them all the same and they wanted to be able to order 500 or
5000 more roughly the same next year. They wanted to compare
4 vendors on price with the same spec sheet. They didn’t care
what they looked like (and they were going under a desk
anyway) and they didn’t care how easy it was for non-technical
people to set them up because the users would never touch the
configuration. Nor did they care much about the user interface,
because most of the users were only going to be running 1 or 2
apps anyway. That resulted in what Christensen & Raynor
(2003) referred to as low-end disruption of the personal
computer market – the profits of desktop manufacturers fell
dramatically, and they were forced to change their business
model to essentially assembly. The industry changed from
being integrated into disintegrated, and the products evolved
into modular architecture, that offered users freedom to
customize their computer using off-the-shelf parts and software.
Source: Adapted from Evans, 2013
The Dynamic Capability View under Dynamic Environments
With a greater understanding of the risks of entropy
mechanisms, there has been a huge interest in developing new
intrinsic perspectives of strategic advantage that are sensitive to
environmental dynamism. One of the most important of these
perspectives is the Dynamic Capability View (DCV), which is
an outgrowth of the previous research on resources, knowledge,
and core competencies (Teece, Pisano & Shuen, 1997). The
purpose of DCV is to explain how competencies are transformed
over time so as to provide innovative responses to market
changes (Helfat et al, 2007), and also focus on how firms invest
in, trade, and exchange their resource and knowledge base, so as

to maximize organizational fit with the environment at large.
The term ‘dynamic’ connotes agility, speed, and timeliness in
addressing the changing external market conditions (Teece,
Pisano & Shuen, 1997).
Baretto (2010: 171) offers the following definition of dynamic
capability based on his synthesis of the literature: “A dynamic
capability is the firm’s potential to systematically solve
problems, formed by its propensity to sense opportunities and
threats, to make timely and market-oriented decisions, and to
change its resource base.”
We discuss below three major perspectives on DCV: the process
perspective, the structural perspective, and the behavioral
perspective.
The Process perspective of DCV has its origins in the scholarly
work of Cyert and March (1963), who presented the sense-
making process within a firm emphasizing how certain codes
are more or less likely to be learnt by a firm according to
whether or not they generate positive consequences under
conditions of external shocks. This outcome-based sense-
making process helps a firm adapt to its environment and build
its adaptive capability.
A major factor in the challenge for sense-making process is the
amount of disruptive change experienced in a market (Collis,
1994). Based on the amount of disruptive change, the sense
making process requires different types of dynamic capabilities,
as illustrated in Exhibit 3.x.
Exhibit 3.x: The Process Perspective of DCV
Classification of Dynamic Capabilities
Organizational outcomes

-Enhanced strategic advantage
· First-order change and improvement (or operational)
capabilities: In less dynamic environments, the pace of change
is slow and the extent of change is also limited. These changes
call for continuous, micro adjustments and improvements in a
firm’s resources and how they are deployed (Ambrosini,
Bowman & Collier, 2009).
e2v is a waste management company that is engaged in constant
improvement of their waste management and energy use. They
keep tinkering with their processes and systems so that they
reduce energy consumption; they work on being able to recycle
more and more waste in terms of quantity e.g. tons of
cardboard, and types e.g. paper, oils, and solvents.
Source: Adapted from Ambrosini, Bowman & Collier, 2009
· Second-order change and reconfiguration (or renewing)
capabilities: Instead of simply seeking to improve existing
resources, knowledge and core competence, they focus on
evaluating whether the organization is performing the right
activities (Teece, 2007). They contribute to new business
development, by reconfiguring the resources, knowledge and
core competencies of a firm. For instance, Virgins’
reconfiguration capabilities helped it to apply its core
competence in brand value into new domains, including airlines,
mobile phones, cosmetics, bridal wear, cola, railways. Sony’s
reconfiguration capabilities helped it apply its core competence
in miniaturization into new domains, including radio, hi-fi,
computers and personal navigation.
Founded in 1979, International Greetings (IGR) is one of the
world's leading manufacturers of greetings products. Over the

years, it has pursued three vehicles for reconfiguration
capabilities:
Product line extensions, in the form of new types of greetings
card; gift wrapping, crackers, stationery and accessories.
Asset leverage, in the form of the acquisition of character
licenses, such as Shrek, The Simpsons, and Harry Potter.
Geography extension, by moving production from UK to Eastern
Europe and China, to alleviate pressures on its margins and to
ensure surplus to sustain new product line extensions and asset
leverage options.
· Third-order change and reconstruction (or regenerative)
capabilities: This may require firms to creatively destroy their
resource endowments and portfolios, reconstruct an entirely new
form and to move into an entirely new market space. For
instance, after the World War II, McDonald’s destroyed its
earlier and successful full-service car hop restaurant, and built
the fast food format. People then thought that the founder-
owners of McDonald’s have gone insane, but McDonald
brothers were convinced that in the post-war era, people were
seeking the thrill of everything on the go. Ray Kroc, a multi-
mixer salesman, became so enamored by the success of the sole
McDonald restaurant in San Bernardino city, California that he
decided to first license the McDonald format in 1954, and then
bought the global rights on that format in 1961 for $3.7 million
in cash (equivalent to $16.2 million in 2013).
Exhibit 3.x illustrates the case of GlaxoSmithKline, which
embarked upon building dynamic capabilities after its industry
experienced a significant crisis.
Exhibit 3.x: Reconstruction Capabilities in the Pharmaceuticals
Industry
Historically, pharma companies hired a large number of
scientists, and invested a large amount in R&D trying to

discover and test thousands of chemical entities for their
efficacy in treating a range of illnesses. Over time, the
pipeline of new chemical entities began drying up, with major
pharmas restricted to the introduction of only one or two new
drugs per year. The increasing costs of drugs created a crisis
like environment and rising threat of intellectual piracy
especially in the emerging markets that could not afford these
costly drugs. That forced a series of major mergers and
acquisitions and rapid consolidation of the pharma industry
during the 1980s and early 1990s. Glaxosmithkline emerged
after Glaxo merged with Smith Kline, who had earlier combined
with Beecham. In the mid 1990s, GlaxoSmithKline acquired
hundreds of much smaller biotechnology and other firms, many
of whom had never sold any products, and who operated with
quite different technologies and science bases. It followed up
with a series of divestments, and outsourcing activities
traditionally performed in-house.
The Structural perspective of DCV emphasizes the role of
social and organizational structures in guiding the knowledge
management processes, especially for supporting higher-order
dynamic capability (Zollo & Winter, 2002; Macher & Mowery,
2009). Social and organizational structures include
technological paradigm, ecological context, and organizational
design.
New technology structures may foster higher-order dynamic
capability. For instance, in an interesting study, Barley (1986)
demonstrated that the introduction of medical imaging devices,
such as the CT scanner, challenged traditional role relations
among radiologists and radiological technologists, and this
changing social structure spurred changes in organizational
processes, depending on the individual-level factors.
Similarly, new ecological structures, such as new space and
institutions, may foster higher-order dynamic capability. For

instance, open offices and competitive conditions facilitate open
administration and organic interaction, while closed offices
with regulated institutional conditions may perpetuate a
bureaucratic logic with rigid administrative structures and
processes over time (Baron et al, 1996).
Finally, organizational design (e.g. tall vs. flat, functional vs.
multidivisional, matrix vs. network) also impacts the
development of higher-order dynamic capability (Felin et al,
2012). For instance, a multi-divisional organization design
might give rise to gaps in shared knowledge about different
functional competencies across parts of the organization, and, in
turn, compromise integration, innovation and change (Hoopes
and Postrel, 1999). Inter-organizational structures are also
important. Using data on acquisitions in the banking industry,
Zollo & Singh (2004) found that the dedicated organizational
structures for improving the process of codification of
acquisition-specific knowledge contributed to post-acquisition
performance. Similarly, using data on alliances among the US-
based firms, Kale & Singh (2007) found that the dedicated
organizational structures for improving the process of alliance
learning contributed to firm-level alliance success.
Exhibit 3.x illustrates the structural view of DCV, and shows
how it complements the process view of DCV.
Exhibit 3.x: The Structural View of DCV and its complementary
with the Process View
The behavioral perspective of DCV
The concept of corporate-level dynamic capability faces the
challenge of reconciling human agency (i.e. freedom of people
to make choices), with the tendency of all collectivities to
suffer from inertia. The human agency provides this new
energy, by directly influencing the development and operation
of organizational and social processes and structures. Human

agency that shapes corporate-level dynamic capability may be
set among all members (e.g. in fully decentralized
organizations), or led by a few influential formal or informal
leaders (e.g. senior executives or decision-makers).
In practice, individuals demonstrate varying degrees of agency
(i.e. true freedom of choice). When the degree of agency is low,
individuals may act in a passive, fast, automatic, habitual or
regularized fashion. The degree of agency tends be low when
the members involved have limited amount of resources,
knowledge, and skills to cope with change, such as in highly
turbulent situations. Thus, the behavioral perspective regarding
human agency complements the process and structure
perspectives on the development of dynamic capability.
Exhibit 3.x portrays two alternative models of how behavioral
factors may interact with the structural and process factors of
DCV and contribute to organizational outcomes. In model 1,
structures guide processes to shape behaviors for effective
decision-making. In model 2, behaviors shape structures, which
in turn moderate how behaviors shape processes that generate
organizational outcomes.
Exhibit 3.x: Behavioral Factors Interact with the Structural and
Process Factors of DCV
Model 1: Structures Guide Processes to Shape Behaviors for
Effective Decision Making
Model 2: Behaviors Guide Processes, moderated by Structures,
for Effective Decision Making
The behavioral perspective expands the focus of DCV from the
‘doing” aspect, to the “deciding” aspect (Helfat et al, 2007:
115). This ‘deciding’ aspect is a function of cognitive,

emotive, and social/ relational factors, as discussed below.
Cognitive factors and Organizational decision-making
Strategic decision-making involves cognitive factors such as
planning, attention, and problem solving. Leaders seeking to
promote a distributed model of strategic decision-making may
shape enabling organizational processes and structures by
asking questions such as: How to sensitize planning to
opportunities emerging in the distant horizon? How to filter
critical issues for attention? How to afford requisite support to
members for their problem solving strategies?
Eesley and Roberts (2009) find that leaders and change agents
who bring experiences with a broader set of responsibilities and
functions allow firms to build more valuable and cognitive
representations of market opportunities. However, under
conditions of highly novel technology and rapidly changing
industry, over-reliance on the prior experience of key
executives can have negative effects (Eesley and Roberts,
2010). Under these conditions, it is important that the
organizational processes and structures also support forward-
looking cognitive efforts, such as envisioning novel scenarios
and discovering innovative options as part of the problem-
solving behaviors (Gavetti and Levinthal, 2000). But the flip
side points to firms or individuals who rest on previous laurels,
thereby tending to rely more on historical path-dependencies
(Laamanen and Wallin, 2009); this in turn orients individuals
and firms more towards reaffirming and reproducing existing
resources and routines, as opposed to spurring new sets of
activities for driving change. Therefore, as alluded by model 2
of behavioral factors above, corporate-wide organizational
structures that trigger early warnings and sensitize members
about the seriousness of the actual or impeding crisis may be
helpful in breaking historical path-dependencies (Felin et. al.,
2012).

Firms may also be able to design structures to guide process
that in turn shape behaviors (model 1 above). Corbett & Neck
(2010) identify three types of organizational attributes through
which corporate executives may help shape cognitive or mental
maps for the decision-making processes and enable major
innovative breakthroughs. These organizational attributes are
structures and processes related to
(1) the ‘arrangements’ an organization needs to make or secure
to bring about changes in the organizational processes
(2) the ‘willingness’ to change current organizational practices
(3) the ‘ability’ to execute change in organizational practices.
Arrangements structures and processes include culture,
coaching, and top management support. To elaborate, an
entrepreneurship-supportive culture encourages experimentation
and thereby accepts minimal losses. Coaching is important for
members when they have limited experience with a novel
technology or market. Top management support is compulsory
to protect members from being a scapegoat while working on
innovative efforts. Without this ‘vital’ support from the top
management, innovative efforts are often found wanting, lack
continuity and focus.
Willingness structures and processes address issues such as
career conflicts. Research shows that many individuals are
unwilling to take international postings, because of a fear that
this will take them away from the top managers at their home-
base and exclude them from future advancement opportunities.
Under these situations, willingness structures and processes
guide individuals to pursue those opportunities, and stay
committed to them (Mitchell et al., 2000).
Ability structures and processes enhance the abilities and
build confidence. An example of such abilities is bricolage,
defined as ‘making do by applying combinations of the
resources at hand to new problems and opportunities’ (Baker
and Nelson, 2005: 333); that bricolage relies on scavenging
various resources so as to extract usefulness from resources that

others do not value or do not intend to use. Therefore, it banks
on experimentation or improvisation and in doing so, breaks
down or reconfigures resource combinations. Individuals and
firms who target bricolage for addressing particular issues
(selective bricolage) are more likely to be successful.
Corbett and Neck (2010) conclude that firms with great
entrepreneurial ability tend to show a greater cognitive balance
with emphasis on all three types of mental maps (arrangements,
willingness and ability) and thereby enjoy better dynamic
capability. In contrast, firms showing cognitive imbalance tend
to experience lower dynamic capability and eventually lose out
on the strategic advantage with new initiatives.
Emotive Factors and Organizational Decision-making
Strategic decision-making also involves emotive factors, i.e.
moods and motives. Cognitive psychology based on neuro-
scientific evidence shows that in practice, cognitions work
interactively as well as conjointly with emotions in regulating
thought and behavior (Duncan & Barrett, 2007). Emotions may
manifest as either transient moods (e.g. fear, anger) generating
temporary change in mental states, or intense motives or drives
(e.g. pride, envy) generating a more sustained modification in
mental states. As mood and/or motives are activated, a change
in behavior is triggered; this could either be deliberate
involving new strategic decisions rooted in a systematic
evaluation of the stimuli; or could be ‘adhoc’, such as involving
a routinized emergent choice response, based on a general sense
or gut feeling about the nature of the stimuli and its potential
impacts. Exhibit 3.x portrays this emotion-based organizational
decision-making.
Exhibit 3.x: A model of emotion-based organizational decision-
making

Emotion-based ability has generated a considerable interest
among scholars of human behavior. Known also as emotional
intelligence, it refers to an individual’s ability to recognize and
regulate one’s emotions, so that desired decisions that are taken
are in the best interests of all parties concerned (Salovey &
Mayer, 1990).
Huy (2012) identifies the need for organizations to develop
their own emotional capability comprising of the ability to
recognize, monitor, discriminate, and attend to emotions of
employees at both individual and collective levels. His
organizational emotional capability theory posits that
“organizations that develop procedures related to emotion
management and that provide systematic training on this subject
to various managers likely reduce the need to rely on the innate
competence of individuals’ emotional intelligence.”
The role of emotional intelligence and organizational
knowledge structures (i.e. emotional capability) in enhancing
emotion-based organizational decision-making for enhanced
strategic advantage, and in the process developing dynamic
capability in the form of improved knowledge structures, is
illustrated in Exhibit 3.x
Exhibit 3.x: A model of developing emotion-based dynamic
capability
Knowledge structures
Emotional intelligence
Dynamic Capability

Examples of organizational events eliciting strong
emotions among large groups include any radical change, be it
in the organizational identity, change in the executive
leadership team, mergers and acquisitions, strategic alliances or
joint ventures, and/or outsourcing and downsizing. Different
sub-groups within the organization experience different
emotional responses to any such event, and may have multiple
ways to deal with their emotions (Huy, 2012). For instance,
when key executives leave after a hostile takeover by another
company, for some it may be beneficial in terms of individual
growth, while for others it may be malefic due to the individual
connect that they possibly had with those employees.
Huy (2012) studied a large technology firm, where top
executives emphasized structure and process perspectives of
DCV. The study showed that strategy implementation faced
significant group-focus emotional issues related to the social
identities of the middle managers, such as newcomers vs.
veterans, and English- vs. French- speaking. These group-
focused emotions led middle managers to support or covertly
undermine a particular strategic initiative, even when their
immediate personal interests were not impacted.
Relational factors and Organizational decision-making
Finally, relational factors also play a significant role in
strategic decision-making. In dynamic markets, individuals
often lack the capacity and capability to enact the full range of
competences necessary to make and execute effective
organizational decisions. They must seek complementary
resources, knowledge, and skills via their social network of
relationships, both within the firm, as well as outside the firm
such as consultants or alliance partners (Jones et al, 2011; Dyer
& Singh, 1998).
Scholars emphasize the need for the organizations to develop
their social capital, a term connoting cognitive and emotive
connections (e.g. “goodwill, fellowship, sympathy among
individuals and families) with key groups (Hanifan, 1920).

Blomqvist & Seppänen (2003) observe that in dynamic markets,
people must learn how to establish, manage, and dissolve
relationships, while also maintaining a good reputation as a
potential partner in the market. The capability to build trust, to
collaborate and to simultaneously manage them becomes critical
for effective decision-making under uncertain and crisis-laden
situations. Social networks are important because friendship
and kinship ties can provide access to resources at less than
market price (Starr and Macmillan, 1990), or even provide
resources that are simply not available via market transactions
(Baker, Miner & Eesley, 2003). Networks strongly shape the
trajectory of a firm because they allow people to bootstrap
resources, knowledge and insights, when such assets are not
available to them directly based on their own historical paths of
experiences, and thus improve the dynamic capability of the
firms to respond more effectively to crises or new opportunities
(Jones, Macpherson & Jayawarna, 2011). An additional benefit
of social relationships in the contemporary knowledge economy
is its potential to generate large amount of data, referred to as
“Big Data”. Companies such as Google and Facebook are
essentially Big Data businesses, whose staggering market
valuation and profitability steps from analyzing data about
those connected to their products, and applying that to
advertising.
In dynamic markets, high levels of solidarity, i.e. strong
long-term exclusive relationships within a small group, can be
counterproductive as well (Portes and Landolt, 1996). Burt’s
(2005) research demonstrates that optimal network value is
created by structural holes, i.e. by brokering connections
between segments that would be otherwise unconnected. High
levels of solidarity with a small group is referred to as within-
group or bonding social capital, as opposed to “weak ties” for
strategic and need-based exchange of resources, knowledge and
insights, which are referred to as across-group or bridging
social capital (Woolcock, 1998). Therefore, in dynamic markets,
bridging social capital based on weak ties have been found to be

more effective in giving individuals flexibility of innovative
action and access to new, creative knowledge structures that are
more pertinent for dealing with change.
Dynamic Capabilities and Firm Performance
Having discussed the process, structural, and behavioral
perspectives on the development of dynamic capabilities, an
obvious follow-up question is how dynamic capabilities are
related with organizational performance outcomes. There are
three schools of thought in this regard.
The first school contends a direct effect of (stronger) dynamic
capabilities on performance outcomes such as competitive
advantage (Teece et al., 1997; Zollo & Winter, 2002).
The second school contends an indirect effect, whereby the
firm’s resource-base mediates the influence of dynamic
capabilities on performance outcomes (Protogerou et al., 2011).
Thus, Ambrosini, Bowman & Collier (2009) suggest a two-step
process through which dynamic capabilities influence a firm’s
performance. In the first step, dynamic capabilities contribute to
the development of resources, knowledge and core
competencies, and in the second step, these resources,
knowledge and core competencies contribute to a firm’s
performance.
The third school contends an interaction of both direct and
indirect effect, emphasizing these direct effects represent
influence on organizational decision-making (Eisenhardt &
Martin, 2000; Helfat et al., 2007). Schilke (2014) used a
sample of R&D alliances to show that the alliance learning
(interpreted as dynamic capability) influences firm’s
performance mostly indirectly, i.e. by increasing the firm’s
alliance management capability (interpreted as an ordinary
knowledge asset). However, the alliance learning also had a
direct positive impact on firm’s performance, indicating that the

dynamic capabilities also enable ad-hoc problem-solving
decision-making strategies in addition to building knowledge
assets (Schilke, 2014). Further, dynamic capabilities may also
shape the direct influence of knowledge assets on a firm’s
performance. In fact, sometimes this influence can be negative –
for instance, when dynamic capabilities generate undue or
disproportionate disruption in existing knowledge assets
(Schilke, 2014).
The relationship between dynamic capabilities and firm
performance is moderated by three major contingency factors,
including market dynamics, organizational attributes, and
human agency. As previously observed, market dynamics
influence whether a firm’s knowledge assets generate sufficient
functional energy to offset entropy pressures, and are able to
assure and sustain strategic advantage. Drnevich & Kriauciunas
(2011) find that market dynamism negatively impacts the
contribution of ordinary knowledge assets and positively
impacts the contribution of dynamic capabilities to firm
performance. Similarly, organizational attributes, such as
strategic intent, history, scale and scope may also influence how
organizational decisions for continuity or change are translated
into newknowledge assets. Baretto (2010) underlines how
strategic commitment to significant future market growth might
provide an impetuous to dynamic capability development.
Finally, human agency or freedom may accept the processes,
structures, and behaviors triggered by past developments of
dynamic capability, or may reject or modify that.
Exhibit 3.x portrays the influence of the three contingency
factors in the relationship between dynamic capability and firm
performance. The exhibit includes not only the feedforward
relationship between dynamic capabilities and firm
performance, but also how firm performance generates a
feedback loop, triggering executives to re-evaluate processes,
structures and behaviors undergirding current dynamic

capabilities. This re-evaluation process in turn triggers
organizational decisions for strategic and/or adhoc
developments in their knowledge assets, which include
resources, knowledge, and core competencies/ insights.
Exhibit 3.x: A Contingency model of Dynamic Capability and
Firm Performance
Human agency dynamics
Organizational attributes dynamics
Market dynamics
Dynamic Capability Development Trigger
Marketplace Characteristics and How to Develop Dynamic
Capability
Marketplace characteristics is an important factor in the
behavior of the firms. When firms operate in multiple
marketplaces that have differing characteristics, that can be a
powerful way to develop dynamic capability. The behavior of
participants in a marketplace depends on the characteristics of
the marketplace in which they operate. As shown in Exhibit 6.5,
there are two typologies of market structures – one based on the
niche density (i.e. the number of competitors), and the other

based on carrying capacity (i.e. the industry lifecycle). In
economic theory, four major types of traditional markets are
identified based on the number of competitors: (1) Monopoly
(single firm), (2) Oligopoly (a few firms), (3) Monopolistic
competition or niche markets (many firms), and (4) Perfect
competition (numerous firms). Another important structural
characteristic is the industry lifecycle. In strategy literature,
four types of markets are identified based on the industry
lifecycle: nascent markets, hyper-competition, dominant firm,
and fragmented market. Each of these market structures offers
differing constraints, opportunities and incentives to the firms.
Therefore, each market structure encourages distinctive types of
behavioral capability, and when the firms operate across
different market structures, they could develop higher-order
change capabilities.
Exhibit 6.5: Typologies of Market Structures
Market Structures based on Niche Density, and Strategic
Behaviors
Monopoly: Monopoly refers to a market structure with only one
firm. The monopoly firm is largely free to decide its own price,
output, and other product and service features. However, if the
monopolist overtly restricts the output, over-prices its products,
and fails to offer high quality services, then it faces a risk of
new firms entering the market and trying to cater to the market
segment left unsatisfied by the monopolist. Traditionally,
monopolistic firms are viewed in a bad light – they tend to be
complacent, bureaucratic, inefficient, not very innovative,
loathsome to new entrants, and lastly keep their prices
exorbitantly with poor service quality. The basic assumption on
which a monopolistic firm conducts its business is that it will
be able to profit from its exclusive position in the market just
by preventing new competition. With the profits being huge at

the onset, it induces other firms to try and replicate the same,
even if other rivals exist. Historically, several large firms have
been known to act in this manner, such as Microsoft using its
domination in the personal computer industry in the 1990s to
drive out Netscape, once a leader in the web navigation market.
Alternatively, if all other rivals of a large firm are roughly
equal to its size and are few in numbers, the players may seek to
collude and coordinate their actions. OPEC for example – the
association of the oil and petroleum exporting countries – has
been known to act in this behavior striving to keep the oil prices
high.
Monopolists are known to engage in a range of tactics, or
games, to impede the entry and success of other entrants. One
such game is “predatory pricing”, wherein the firm charges a
price below its costs with the intent to drive out other entrants.
Another game is “essential facility denial”, wherein the firm
denies the use of essential facilities, such as refrigerated
freezers given by an ice-cream company to the retail outlets, to
other entrants. “Vaporware” is the third game, wherein the firm
makes fake announcements intended to stop customers from
switching to a better product of other entrants. Governments try
to check the negative behaviors of monopolists using anti-trust
and fair competition laws.
As discussed in Exhibit 6.6, in the Internet era, new
types of monopolies – referred to as creative monopolies – have
emerged, which are actually helping to cut the monopoly power
of suppliers, and transfer value back to the consumers. A great
example is Amazon, which in 2014 in the US alone held a 67%
share in the e-book market, a 41% share in the new books
market, and a 15% share in the total e-commerce market. Since
then it has strengthened its eBook market position by
introducing a highly successful eBook reader. It has used its
monopoly power in the eBook market to create a business model
where it asks all publishers to make the new eBooks available to
the consumers for $9.99. It advocates sharing 30% of this value
with itself, and the rest being split equally between the authors

and the publishers. Amazon flexed its monopoly power muscles
in this case as it noticed that legacy publishers are increasingly
becoming like irrelevant middlemen whose presence in reality is
keeping book production costs unreasonably high; therefore it
offers an option to the authors to publish directly with it. On the
other hand, the traditional publishers hated this approach, as it
undercut their ability to sustain their profitable business
models. As a counter response, many major publishers colluded
with Apple to force a model on eBook sellers where the
publisher sets the prices for books and retailers simply take a
commission. They also tried hard lobbying with the government
to introduce regulations to break Amazon’s monopoly on eBook
distribution. However, in 2012, the Justice Department found
the major book publishers at fault for colluding to prevent the
creative entrepreneurship of Amazon.
Exhibit 6.6. A new golden age of creative monopoly
Since Google leapt ahead of Microsoft and Yahoo in internet
search in the early 2000s, it has maintained a near monopoly
position. In 2013, Google owned 67% of the global search
market followed by Microsoft at 18% and Yahoo at 11%.
Google owns less than 3% of the global advertising market and
less than 0.24% of the global consumer tech market. Instead of
defining itself as a search company, Google has framed itself as
"just another tech company," which according to Peter Thiel,
the founder of PayPal, has allowed it to sidestep scrutiny.
Theil refers Google as a creative monopoly one that is “so good
at what it does that no other firm can offer a close substitute.”
In contrast with “illegal bullies or government favorites,” he
observes, “creative monopolies give customers more choices by
adding entirely new categories of abundance to the world.”
Google’s motto "Don't be evil" is a characteristic of new
Internet era monopolies that take ethics seriously, so that a
monopoly status does not jeopardize their existence, but allows

them to play a positive transformative role. It has become a
monopoly by inventing something many times better than any
peer product. Such creative monopolies drive progress, such as
when Microsoft displaced IBM, and Apple challenged
Microsoft’s decades-old operating system dominance. Being a
monopoly then helps these firms focus on caring for the
employees and for the society, unlike the firms who need to be
focused on today’s survival that they can’t possibly plan for a
long-term future. Thiel therefore claims that “monopoly is the
condition of every successful business”.
Many hold that the uncreative kind of monopolies is created not
by markets, but by governments. In the US, government
granted a monopoly status to AT&T in the late 1940s. Even
though AT&T scientists made several great inventions—
automatic dialing, new switchboards, executives make decisions
as a monopolist decided not to use these inventions.
Eventually, government had to force AT7T to license its
technologies to other firms, including a device called the
electronic transistor—which, in the hands of Texas Instruments,
became the basis for the computer. More recently, Uber and
Lyft have given choices to consumers by challenging the
protection of taxis by cities.
Others cite the efforts of the U.S. President Roosevelt whose
government went after many big-time players like Alcoa,
General Motors and the American Medical Association, in
support of its efforts to revive the economy after the Great
Depression of the 1930s.
Source: Adapted from Foer (2014) and Theil (2014)
Oligopoly: Oligopoly comprises of a few large firms that
perceive one another as mutually inter-dependent. Success
requires firms to consider the effects of their actions on the
competitors’ behavior. There is an intense rivalry along several

dimensions, such as price, quality, brand image, and market
share. The actions of one firm influence the performance of
other firms, and require counter-actions from the rivals if they
wish to neutralize or balance the competitive effects on their
performance. Rival firms seek to better understand the
capabilities of the competitor’s along with their strategic
priorities in order to better anticipate the behavior, and thereby
focusing on those specific actions that would prevent
detrimental responses and generating added value instead. Some
actions such as upgrading the product or service quality and/or
reducing the cost using technological breakthroughs that yield
first-mover advantage are difficult to replicate quickly and cost-
effectively – unless firms anticipate and plan for the actions of
their rivals. Therefore, competitive games in an oligopoly
become highly interactive.
According to Porter (1985) a firm in an oligopoly often
faces a dilemma. It can pursue the interests of the industry as a
whole and avoid price based competition, or it can behave in its
own self-interest at the risk of sparking retaliation and
escalating industry competition to a battle. Thereby, it is best
for a firm to strike a balance between industry level cooperation
(to avoid profit eroding warfare) and firm level competition (to
avoid giving up potential revenues and profits). One way for the
firms to do so is to merge with or acquire their rivals. In fact,
Lynn (2011) mentions in his book, “Cornered,” showing the
rising concentration and consolidation of nearly every American
industry since the 1980s. Dominance by two or three firms “is
not the exception in the United States, but increasingly the
rule.” For example, while drugstores seem to offer unlimited
choices in toothpaste, just two firms, Procter & Gamble and
Colgate-Palmolive, control more than eighty per cent of the
market share. Six movie studios receive almost 87% of
American film revenues. Four wireless providers (AT&T
Mobility, Verizon Wireless, T-Mobile, Sprint Nextel) control
about 89% of the cellular telephone service market. In many
industries, all the oligopoly firms collectively engage in the

practice of “parallel exclusion,” i.e. efforts to keep out new
entrants. In the 1980s and 1990s, established airlines like
American and United kept the startup rivals out through their
collective control of the landing ‘slots’ at major airports. Until
they were stopped by the antitrust rules, Visa and MasterCard
created parallel exclusionary policies trying to prevent the new
entrant American Express from succeeding in the credit-card
industry, including blacklisting banks that sought to deal with
American Express.
Others hold that oligopolistic markets may encourage
fierce competition among firms, allowing consumers to benefit
from low prices and high production. The carbonated soft drink
industry, for instance, has long been dominated by two giants -
Coca-Cola since 1886 and Pepsi Cola since 1899. They sell cola
drinks with similar taste and color, and controlled 70% of the
market in 2012 – with Coke at 42% and Pepsi at 28% (Walston,
2014). Both have the most advanced technology for lower costs
and have well-managed distribution channels, suppliers and
bottlers. They exclude new entrants by keeping prices low, so
that the entry is not profitable for the new entrants. They
consider the reaction of each other closely, and when one
reduces its price, the other follows to avoid customers
switching. Knowing that the other will match price-based
competition, they strive to compete on factors other than price.
They invest in extensive advertising to differentiate on
positioning: Coke represents happiness and moments of joy,
while it protects culture and maintains the status quo. Pepsi is
associated with capturing the excitement of life now, for youth
who are energetic, fun loving and daring. Both firms also invest
in research and development to advance their competitive
advantage. Coke has about 500 brands, including Coke, Diet
Coke, Fanta, Sprite, Dasani, and Powerade. Although it leads
Pepsi in most market segments, Pepsi has been quite successful
in developing new segments.
Overall new evidence suggests that most oligopolistic
markets tend to become ineffective, and ripe for creative

destruction by new firms. This is elaborated in Exhibit 6.7.
Exhibit 6.7 The Malaise of Oligopolies
The 2014 Nobel Prize winner for Economics, Jean Tirole, has
conducted an extensive research on market power and regulation
of oligopolies. He studied the break-up of state monopolies in
various industries such as railways, telecom, and healthcare,
into a small group of large firms – i.e. oligopolies. He found
that these private oligopolies colluded to set prices, quantity
and quality of goods, so that the privatization did not yield
anticipated benefits for the society. They engaged in
overinvestment to preempt entry of new firms, because
overinvestment allowed them to increase supply and lower price
to drive out new firms. The regulators had insufficient
information about cost structures and production function of
individual firms. He showed that the regulators who tried to
force oligopolists to lower prices and to accept lower margins
on public contracts created negative incentives for investing in
cost-reducing innovations.
Economic progress in several emerging markets is constrained
because of the presence of oligopolistic entities. In Pakistan,
after its founding in 1947, a cartel of 20 families – referred to
as Bees Gharanay – controlled markets and prices. While
many new families have joined this cartel since then, a small
group of very influential entities continue to exert oligopolistic
control over the nation’s agro-industrial production and
commercial/ retail estate business. They all collude to set
prices, deprive innovations, and create barriers to market entry.
Consumer prices in Pakistan are about 12 percent higher than in
India, and restaurants are 40 percent more expensive. Overall,
the local purchasing power in Pakistan is 48 percent lower than
in India. In July 2014, a McDonald’s burger in Pakistan cost
US$3.04, 74 per cent more expensive than in India (Haider,
2014).

Similarly, progress in several industries has been found to stall
when they are taken over by a few oligopoly firms. Toporowski
(2014) for instance reflects on the state of the media industry in
the US:
“The media has become an oligopoly. From movies to television
to newspapers, a few companies own most outlets. There is less
competition because there is less to choose. A person who reads
The Wall Street Journal and watches Fox News can say that he
is a well-versed person who understands both sides of an issue.
But, Rupert Murdoch owns both outlets, and both outlets are
known to host mainly right-wing conservative editorialists.
Comcast owns not only NBC, which airs NBC Nightly News,
but also AT&T, MSNBC and Time Warner Cable.”
New technology and globalization is allowing new firms to
challenge the lucrative oligopolies. For instance, many players
–Apple, Google, Microsoft, Netflix, HBO, Hulu, CBS and
Amazon — are entering the online media space. Online media
is fast becoming a powerful substitute for traditional media, and
is destroying the profits of cable, satellite and telco distributors.
Niche Markets: consist of market segments within the larger
marketplace that emphasize a particular need, or geographic,
demographic or product segment but that differ along some key
dimensions from other market segments in the marketplace
(Teplensky et al., 1993). Nichemanship is a method of carving
out a small part of the market whose needs are not fulfilled, and
matching these unique needs by specializing along market,
customer, product, or marketing mix lines (Shani and Chalasani,
1992). This allows each competing firm to dominate their
market niche; therefore such market structures are also referred
to as “monopolistic competition.” For instance, in the food
market, there are several alternative niche markets, such as
organics, local products, heritage varieties, biodynamics, and
humanely treated livestock. To develop and sustain competitive

advantage in its niche market segment, each firm invests into
co-specialized set of complementary assets, including brand
name, human capital, vendor relationships, and organizational
culture. These assets allow firms to take actions that do not
materially affect competing firms, thereby mitigating the risks
of customers switching to the firms in other segments. Niche
markets require firms to support their niches through continuous
value differentiation. Repeated, targeted actions allow the firms
to stretch their core competencies to enter into the niches
occupied by their rivals. Similarly, shifts in technology and
demand open opportunities in new niches. For instance, the
organic food market niche is sub-divided into two niches: one
where customers purchase organic food for environmental
reasons and the other where customers purchase organic food
for nutritional reasons.
Firms have two options for value differentiation in niche
markets. The first option, ‘vertical differentiation’, involves
adding high performance or quality features to the
complementary assets. As shown in Exhibit 6.8, vertical
differentiation strategies can be displayed using a cost quality
frontier. In the Indian hotel market for example, the Taj Group
– a five star hotel chain – is perceived by everybody to be
higher in quality and has a higher cost structure. In contrast,
Comfort Inn is a budget hotel, and is perceived by everybody to
be lower in quality and has thereby a lower cost structure;
whereas, Clark Hotels lies somewhere in between as a budget
option.
The second option, ‘horizontal differentiation’, involves
creating a distinctive niche by discovering a unique way of
combining and applying a common set of complementary assets,
and/or by appealing to a distinct customer group. As shown in
Exhibit 6.8, horizontal differentiation strategies can be
displayed using a circular mapping. Consider a city that has
three equally well-stocked grocery stores. The consumers tend
to prefer the one that is closest to their home, and thus
consumers vary in their preferences about the grocery store.

Exhibit 6.8 Horizontally and Vertically Differentiated Niche
Markets
From a strategy perspective, niche markets are attractive
when they have the following characteristics (Cuthbert, 2011:
4):
a) The niche is of sufficient size and has the purchasing power
to be profitable.
b) The niche has growth potential.
c) The competitors have put low priority or attention to that
niche.
d) The firm has the required skills and resources to exploit the
niche.
e) The customers in the niche have a distinct set of needs.
f) The customers prefer the firm that best satisfies their needs.
g) The firm gains certain economies through specialization.
h) The firm is able to defend its niche by constructing some
barriers to entry.
Consider the case of Household Insecticides sector in India, in
Exhibit 6.9. Godrej has identified several niches in this
Household Insecticide market, to capture an overall 50% share
across categories during the 2000s:
Exhibit 6.9 Godrej in India’s Household Insecticide Industry
The Household Insecticide industry of India in early 2000s was
about Rs. 10 billion (~$225 million). It was a market with huge
potential, attracting a large number of multinationals and local
firms. While 95% of households in India had an insect problem,
only 18% of rural households and 80% of urban households
used insecticides. Most of the players in the sector sourced
products from the smaller local firms to gain cost efficiencies

and to be able to expand market further into the rural areas
through alliances with the rapidly growing organized retail
sector.
The oldest player in the market was Balsara Hygiene,
who introduced Odomos brand in early 1960s as a personal
application cream for protection against the mosquitoes, but did
not expand its early franchise much. In 1984, Godrej launched
household insecticide in a new “electrical mat” category with its
brand Goodknight. Godrej became world’s largest producer of
household insecticide electrical mats, which by early 2000s
constitute 40% of the Indian household insecticide market, and
captured 70% share of the mat category.
In 1980s, Bombay Chemicals entered the market with
“tortoise” brand by inventing the “coil” category, which
constituted 25% of the Indian household insecticide market by
the early 2000s. However, Bombay Chemicals was slow to
seize the opportunities offered by the liberalization of Indian
economy. In 1994, the British MNC, Reckitt & Colman,
wrested the initiative, and became the leader in coil category
with its Mortein brand. Godrej also saw the opportunity; it
extended the Goodknight brand into the coil category, which
displaced Mortein brand to gain leadership in the coils with a
34% market share by late 2000.
Similarly, Karamchand Appliances pioneered the
“electrical vaporizer” category with its All-Out brand, gaining
70% share of the fastest growing segment of the market;
however, Godrej extended Goodknight into the vaporizer
category also, gaining a 25% share.
In 1992, Godrej entered the “aerosol spray” category with
a new brand “Hit”, gaining around 25% share. It also sought to
enter into the stagnant personal application category, based on a
new “gel” form developed through internal R&D.
These niche strategies allowed the household insecticide
market to grow rapidly, reaching about Rs. 40 billion by 2013.
Godrej decided to sustain its growth by going global. In 2010, it
acquired the Indonesia based Megasari group, a leader in

household insecticides, air fresheners and baby care. Indonesia
now contributes 40% to its household insecticides global sales.
It has plans to grow to other emerging markets in Asia, Africa
and Latin America, and to succeed by offering value products to
middle and low-income customers.
Adapted from Equitymaster (2000) and Chatterjee (2002)
A key success factor in the niche markets is the establishment
of close relationships with customers. An effective strategy is
usually based on the principles of differentiation and customer
service. Niche markets offer an opportunity to firms having
limited resources to establish a more stable long term market
position through relationship marketing, and the development
and maintenance of barriers to entry through product,
organizational and market innovations. Parrish (2003), studying
large firms in the textile business, found that these firms
developed niche domestic markets as a means of competing
against multinational lower cost producers. Exhibit 6.10
illustrates the strategies for identifying opportunities and
competing in a niche market.
Exhibit 6.10 Thinking Niche Markets
Niche markets are excellent platforms for startups to launch
their business successfully, and to grow into major players in a
larger market. They defy the logic that the probability of
success is directly correlated with the size of a target market.
They have been the basis for the rise of several niche players,
some of who have gone to become household names. To
succeed in niche markets, firms need a deep understanding of
their customers and their customers' needs and the ability to
stay engaged with those customers. They also need to
consistently produce quality, innovative products and possess a
genuine regard for the well-being of their employees. They
need to focus on meeting the needs of a smaller group of

customers without compromising their chance to increase the
appeal to a broader market. Household iron and luxury resorts
are examples of niche markets.
Household iron is a commodity product that generally retails for
less than $30. Since 1990, Switzerland-based Laurastar has
approached the household iron industry as a niche market, and
targeted a specific niche where irons can be priced from $900 to
$2,500. This is a niche of customers interested in pressing their
clothing professionally at home. Over a period of two decades,
from 1990-2009, it sold more than 2 million ultra high-end irons
to households in 40 countries. It has responded to competition
by hiring a team of high-caliber engineers to create the world's
smartest iron. Its new home pressing system is lighter, easy to
handle and features sensors which produce steam automatically
as the iron is pushed forward and stops immediately as the iron
is halted or moved backward. An active board assists with
pressing the garment as soon as the iron moves, thereby
reducing ironing time and effort by half and saving energy.
Further, it has sustained its growth by deciding to become
global, after its reached 25% penetration in Switzerland.
Luxury resorts are a premium product that generally caters to
sophisticated, wealthier travelers. Aman Resorts has
approached the luxury resort industry as a niche market, by
thinking small, intimate, and involving. Each of its resorts in
Asia, Europe and the Americas are quite different in location,
look, mood and guest experience. Yet they share the value of
environmentally friendly and aesthetically pleasing. They are
all romantic places in beautiful envrions, to offer a
contemporary lifestyle experience of the world around that
excites, shapes and nourishes. The strategy is anchored around
its staff - chambermaids, drivers, cooks, cleaners, gardeners and
guides – who perform invaluable small roles, pleasing the
customers and offering cultural authenticity in faraway places.
Instead of the over-the-top pretentions associated with other

luxury brands (think marble reception areas), it favors small,
distinct establishments that are designed to be in harmony with
their surroundings and the prevailing local architecture.
Source: Adapted from Bellisario (2009).
Perfect Competition: is characterized by the lack of significant
fixed costs or investments, and running business largely on
variable costs. Firms tightly monitor their variable costs, and
compete on efficiency. A most efficient use of the resources –
in particular the labor and effort of the entrepreneur implies that
the firms that use their labor less productively are forced to exit
the competitive game. The firms do not invest in developing
new technologies in-house or in expensive outside technologies
– instead they rely on affordable and accessible technology.
This allows newer firms to enter and survive, with limited
barriers to entry. A perfectly competitive industry is analogous
to a fish market near a fishpond open for public fishing, where
any person may catch and sell fish. With free entry, new firms
find it easy to set up shop and start producing and selling.
These firms also have the flexibility to shut shop at any time
without making any losses. This often invites fly-by-night
players to make a fast, extra buck by free riding on the public
goods and social infrastructure. Such predatory economic
conditions often challenge the ethics and the sense of social and
ecological responsibility of the players. Though the basic
economic theory considers perfect competition to be the ideal
state for social welfare, it does not provide effective conditions
for the growth of the firms or the industry. Exhibit 6.11
illustrates the challenge of a perfectly competitive market, and
the need for regulating this market to ensure at least some level
of commitment from the firms to build trust and success.
Exhibit 6.11 Perfect competition in India’s capital markets

In the 1990s, as the government of India embarked on
liberalization and globalization, India’s capital market rapidly
became more perfectly competitive. It became easy for all the
firms to raise capital, and the differences in reputation based
purely on accumulated family wealth became less salient. This
perfectly competitive market also encouraged fly-by-night
operators to access the capital market for making a fast buck for
themselves, and then purposefully declaring bankruptcy to avoid
all obligations for repayments of principal or interest and
dividend. Consequently, the sentiment of the primary suppliers
of capital was seriously hurt. In order "to keep fly-by-night
operators at bay," the government had to introduce appropriate
measures. It barred willful defaulters from making debt issues
and introduced the concept of `net tangible asset' to ascertain a
"minimum tangible existence of the company seeking to access
the capital market".
Source: The Hindu Business Line (2003)
The costs of government regulation must eventually be
borne by each of the players. Post the Enron corporate scandal
for instance, the US government imposed several stringent
regulations on financial and accounting firms in the US, which
severely limited their flexibility to service the competitive
needs of clients, and had added to their costs of due diligence
and monitoring the transactions.
The utility of the perfect competition market is greater as a
standard for promoting healthy competition. A major insight
from this concept is that when the access to infrastructure,
technology and knowledge is based on the pay per use model,
then more firms are likely to enter the market with limited risks
of huge losses if they fail. Such pay per use model can bring
about several creative endeavors and promote innovation and
growth. eBay and Amazon marketplaces are one of the closest
examples of perfectly competitive markets. They allow any
seller to offer their product without investing significantly in

the fixed costs of technology or inventory. Yet, for success and
growth on these marketplaces, individual sellers need to build a
history of positive reviews, trust and reputation, which in turn
enables them to charge a premium and have an edge as
compared to their rivals that lack such history.
Market Structures based on Industry lifecycle and Strategic
Behaviors
Based on the carrying capacity or industry lifecycle, market
structures may be classified as nascent (emerging cycle),
hypercompetitive (growth cycle), dominant (maturity cycle),
and fragmented (decline cycle).
Nascent Competition Market: are usually spurred by
technological innovation, newly emerging customer needs,
along with economic and sociological shifts. A distinguishing
characteristic of the nascent competition market is the lack of
any “rules of the game.” These markets are characterized by a
competitive race among the firms to establish their own
technologies, and to create a dominant market paradigm
centered at the use of their technologies by all the players. The
firms tend to make huge upfront investments for rapidly
commercializing their technologies. It is however, difficult for
most firms to make profits as technological, operational and
other logistics are not fully functional. This in turn jeopardizes
the entire cycle involving, vendors, stakeholders, customers and
investors alike. Thus, for a new entrant tasting success would
mandate it to right on top on several fronts: improved
technology, forging advantageous relationships with channel
partners, acquiring a core group of loyal customers, accessing
patient venture capitalists and entrepreneurial human capital A
firm first to introduce a commercial technology, gains a lead,
and might develop a “first mover advantage”. However, a
failure to cement the early lead may cede the window of
opportunity to the competitors. Exhibit 6.12 illustrates the vast
opportunities for the nascent commercial drone industry, made

possible because of rapid advancements in technology and
reduction in component costs.
Exhibit 6.12 Unmanned Aircrafts On a Commercial Flight
Drones are the unmanned aircrafts. The nascent lightweight
commercial drone industry is poised to transform industries
from exploration and farming to film and photography and even
online retailing. AeroVironment in the US has been a leader in
the small military drones, and is gearing up for first-mover
advantage in the commercial arena. It won an agreement with
BP to offer its military drone Puma AE to conduct day-to-day
operations like 3-D mapping of oil reserves in Alaska’s harsh
environment, in order to improve safety and efficiency. Puma
AE has a relatively long range, and was designed for
surveillance. Conoco Phillips oil company has also flown two
kinds of unmanned aircraft in unpopulated areas of Alaska and
over the Arctic Ocean. Aviation leaders like Lockheed Martin
and Northrop Grumman are watching the nascent drone market.
Boeing even acquired drone maker Insitu for $400 million in
2008, but decided to focus on making larger drones with law
enforcement and search and rescue applications.
The development in the commercial drone industry is
driven by the rapid improvements in sensor technology, and the
pressures from excited potential clients. The cost of the
components, technologies as well as the platforms that drones
run on is dropping dramatically to make development of
commercial drones feasible. In September 2014, the US
government gave permits to seven movie and television
production companies to fly drones, yielding to the multi-year
lobbying by these companies.
The government is still trying to spell out what is legal
and what is not. For use by the film studies, the US government
has mandated that the unmanned aircraft be used only on closed
sets and be operated by a three-person team, including a trained
drone operator.
Globally, several experiments are underway for using

commercial drones. The oldest commercial use was by Japan’s
Yamaha Motor Company. Its radio-controlled helicopter
drones weighing 140 pounds have been used since 1990s to
more precisely apply fertilizers and pesticides. Flying closer to
the ground, their spray is able to reach the underside of leaves.
In 2010, these drones were introduced in South Korea, and in
2013, in Australia. In Australia, television networks have
started using drones to cover cricket matches. Zookal, a Sydney
company that rents textbooks to college students, began
delivering books via drones in 2014. The United Arab Emirates
is working to deliver government documents like driver's
licenses, identity cards and permits using small drones. The
British energy companies are using drones to check the
undersides of oil platforms for corrosion and repairs. British
real estate agents are using them to shoot videos of pricey
properties. As a public relations stunt, a Domino's Pizza
franchise in the U.K. posted a YouTube video of a
"DomiCopter" drone flying over fields, trees and homes to
deliver two pizzas in June 2013. In the US, Amazon and
Google want to use drones to deliver packages. In 2014, the
California-based Matternet began selling a package of one drone
and two landing pads to government and aid organizations. It
sees tremendous potential of drones in emerging markets with
limited infrastructure, to deliver medicines and other critical,
small packaged goods, and to bring blood samples bound for
labs on return. It also believes that urban drones will replace
truck deliveries of single express packages. Germany's express
delivery company Deutsche Post DHL is testing a "Paketkopter"
drone to deliver small, urgently needed goods in hard-to-reach
places. Facebook is looking to acquire Titan Aerospace, a maker
of solar-powered drone-like satellites, to provide Internet access
to remote parts of the world. Because of all this, the drone
industry is expected to reach about $89 billion in 2020s, and
commercial drones are expected to capture 12 percent share of
that.

Source: Adapted from Lowy (2014)
Hyper-competitive market: it is turbulent and fast changing
where the rules of game are continually shifting, spurred by the
processes of globalization and information economy. It is
characterized by shrinking product life cycles, growing demand
for mass customization and individualized personalization of
products and services, increasing complexity of organizational
architecture, and intensifying pressures for controlling process
costs while sharing more value with the strategic vendors,
channel partners, knowledge workforce, and institutional
investors. In contrast to the nascent competition markets, huge
upfront firm-specific investments may not be sufficient and can
even be counter-productive if the firm is unable to recoup the
costs within a short period, given the high turbulence and
velocity of the market. Firms therefore seek to distribute up-
front investment requirements, either across a network of firms
or over time. On the one hand, they collaborate with key
reliable participants in the game to reduce risks and to pool
capabilities; on the other, they phase investments over time for
an early and timely achievement of key competitive milestones,
such as generating a positive cash flow. A strategic priority is
needed on developing a learning organization that continuously
discovers, generates, and applies knowledge for added value in
subsequent milestones, including additional product
development and market commercialization.
A firm competing on the edge of hyper-competition thrives on
the “guerilla advantage,” referring to skills, experiences, and
competencies to rapidly and repeatedly forming new sneak
competitive advantages based on different rules and resource
combinations than the existing strategies being used, and in the
process keeping the competitors on their toes. It does not
necessarily imply reinventing the wheel, rather making it better.
In a hyper-competitive market, it enables the firms to generate
“increasing returns” from their organizational learning, because

of a focus on the constant discovery of new ways to apply
technological endowments for added value. Consider the case of
Domino’s Pizza in the USA in Exhibit 6.13:
Exhibit 6.13: Domino’s Pizza and Hyper-competition
Domino’s Pizza was certainly not the first to offer home
delivery of pizza, but it was the first to give a free product
guarantee for the delivery of a piping hot pizza to customer’s
door in 30 minutes or less. Once most pizza retailers offered
home delivery, Domino’s initial advantage was gone. Domino’s
second action was to distribute direct mail coupons, its third
was to give its customers handy magnets for easy access to
Domino’s phone number, and fourth was to launch new
Heatwave hot bag technology to keep product at optimal heat on
delivery. These string of actions have allowed Domino’s to
keep its leadership of home delivery pizza market and keep
rivals off guard.
Adapted from Grimm & Smith (1997)
Without appropriate collaborations and/or without a long-
term strategy, firms find it difficult to succeed in
hypercompetitive markets, as illustrated by the case of
Radioshack in Exhibit 6.14.
Exhibit 6.14 - Radio Shack Grappling with the Hyper-
competitive Market
During the 20th century, RadioShack reinvented itself time and
again as the consumer electronics retail industry moved from
radio kits to sophisticated audio equipment, and then computers
and wireless phones. In 1977, RadioShack mass-marketed the
first fully assembled personal computer, and established itself
as the go-to store for personal computers and for do-it-yourself
consumer electronics hobbyists. In the 1990s, “The Technology
Store” RadioShack became the first-to-mass market an early cell
phone, even as it phased out computers in 1993.

In the 21st century, RadioShack has found itself being
attacked at many fronts, from Amazon and Wal-Mart at one end
to wireless providers at the other. In 1991, one of the
RadioShack ads offered a calculator, a computer, a camcorder, a
CB, speed dial, a portable CD player, a scanner, an answering
machine, a tape recorder, and a radar detector – altogether
costing $3,134.77 in 1991, the equivalent of $5,200 in 2014.
Today, Apple iphone and its apps can perform all these at a
fraction of cost. The only item not replicated by an iphone app
was a $149.95 three-way speaker with a 15 –inch woofer.
RadioShack is struggling to find a future for its 4,000 company-
owned stores, down from 7,000 a decade earlier. It has seen its
sales dropping 33 percent between 2005 and 2013. The record
net profits of $267 million in 2005 turned to record losses of
$400 million in 2013. In the age of digitalization and cloud
storage, each new app cuts RadioShack’s ability to sell a
product.
Unfortunately, RadioShack has failed to adapt to the
hyper-competitive marketplace, even though it operates in the
fastest-growing segment of retailing – consumer electronics.
From 2004 to 2012, it paid out $300 million in dividends and
spent $1.7 billion buying back stock. It also invested $200
million into a new Texas headquarters, opened in 2005. In the
1990s, RadioShack capitalized on the market for wireless
phones using a creative business model, which allowed it to
secure lucrative residual payments from two big carriers on
selling their two-year wireless phone contracts. However,
since then, Verizon, AT&T, Sprint, T-Mobile and smaller
players set up many company-owned stores, and Apple also set
up stores to sell the smartphones. Online and rival authorized
dealers fill in any gaps. All this competition has cut margins on
handsets to just about 20 percent.
RadioShack could have taken numerous successful
paths, to be Best Buy, Amazon, or Dell, but it instead sought to
respond to the hypercompetitive marketplace of the late 1990s
by investing into ill-conceived retail concepts, Computer City,

Energy Express Plus for batteries, McDuff appliance stores,
Video Concepts and the Incredible Universe megastore. None
of these worked, and all were either closed or sold off by the
late 1990s.
The challenge for RadioShack now is how to repurpose
its company-owned stores. Its new CEO, Magnacca, hired in
2013, is seeking to collaborate with tech developers and
connecting with the growing movement of tinkerers to bring
unique products and private-label brands into its stores. He is
seeking to set aside a section of each store as an Apple-like
genius bar where its staff can help people use devices, and has
rolled out Fix It Here, a mobile-device repair service there. He
is betting on the convenience of “having a ‘genius bar’ 10
minutes from your home rather than having to drive [long
distances] to an Apple Store.”
Source: Adapted from Slachter (2014).
Illustrating Nascent competition vs. Hyper-competition:
Exhibit 6.15 shows that firms may be able to gain and sustain
their first mover advantage for a substantial period during the
nascent competition stage. However, once several new entrants
enter, and the market becomes hyper-competitive, firms need to
continuously identify new sources of advantage to create and
sustain their performance.
Exhibit 6.15: Nascent vs. Hyper-competitive Markets
Dominant Firm: A dominant firm’s structure comprises of a
single large firm at the core, and several smaller firms at the
periphery of the market. The dominant firm functions as the
market leader or the focal point for fixing prices, and defines
the basic benchmarks for input costs, product value, and service

quality. The dominant firm generally enjoys a competitive
advantage based on lower costs deriving from an early entry and
“learning-by-doing”, large economies of scale, and proprietary
technology; but it may also offer a better product, especially for
customers seeking a low cost standardized offering. Smaller
firms focus on niches that are not profitable or attractive for the
dominant firm, due to factors such as smaller scale,
idiosyncratic resources and knowledge bases, and customized
services of the smaller firms in their target markets.
The dominant firm may partner with the smaller firms, such as
by making them its subcontractors in areas where they can offer
lower costs and/or greater variety-on-demand. However, the
smaller firms may be concerned about the power of the
dominant firm, or may not be able to scale up to meet the needs
of the dominant firm. Some of the smaller firms may be very
successful in growing their niches, and may be willing to be
acquired by the dominant firm in order to achieve more rapid
expansion. But, if the market is relatively mature and saturated,
then the growth of smaller firms may hurt the dominant firm,
increasing their motivation to either keep out or acquire smaller
rivals. However, if the smaller firms open new segments, the
dominant firm may not retaliate. For instance, consider the
German steel industry Pre-World War II in Exhibit 6.16.
Exhibit 6.16: Dominant Firm in German Steel Industry
Most of the major firms in the German steel industry had
emerged during the nineteenth century as suppliers of railroad
expansion and the large scale construction attendant to rapid
industrialization. As demand for rails and structural shapes
began to level off, a turbulent competition ensued. In the
aftermath of the recession of the post-World War I decade, the
four largest steel producers merged into a new firm, the Vestag,
in 1926, with more than 50% share of the market. Where Vestag
concentrated on more standardized fare and larger volumes
across finished-steel markets, the steel operations of the newly-
formed Konzerne produced specialty and customized finished

products. Though mostly regional entities, Konzerne’s acquired
downstream manufacturing interests (heavy engineering and
shipbuilding), to facilitate exchanges of information and gain
expertise for custom steel production. During the 1930s,
additional Konzerne-like firms entered by acquiring smaller,
non-integrated pig iron, steel and rolling mills that were broadly
dispersed throughout Germany and organized their output
completely around the specialized demands of the military-
related sectors. These firms remained viable even after the
German government formed Hermann Göring Werke as the
second largest steel producer in Germany, which offered high
levels of mostly standardized products.
Source: Adapted from Herrigel (2000).
A dominant firm generally poses significant policy and social
responsibility questions for business strategy. One of the major
issues is whether a dominant firm has the legal, ethical or social
responsibility to collaborate and support smaller firms and their
innovations or innovative potential, and/or whether it is
appropriate for it to learn from the innovative smaller firms and
render them unviable. Manishen (2014) observes,
“Could Uber be required as an antitrust matter to open its
system to Hailo drivers? Is Twitter liable to TwitPic for
integrating its own photo-posting function into the 140-
character tweet service, thus effectively putting some third-
party companies out of business? Are Microsoft, or Google, or
Apple required to open their APIs to competitors or, once
opened, legally prevent them from reverting to a closed
ecosystem?”
A special form of the dominant firm is the vertical dominance,
where a dominant firm forms captive vertical relationships with
vendors and distributors. Vertical dominance is often motivated
by a desire to promote mutual investments, and learning among
the partners. Exhibit 6.17 illustrates the pros and cons of

vertical dominance by Toyota and its suppliers, referred to as
Keiretsu, in the face of global competition.
Exhibit 6.17 Pros and Cons of Vertical Dominance of Toyota’s
Keiretsu
In Japan, the competitive advantage of some of the dominant
firms is based not only technology and process expertise, but
also faster innovations and radical cost reductions through
vertical relationships with suppliers – referred to as keiretsu.
Until the 1980s, the dominant firms relied on exclusive,
decades-old relationships with key suppliers, in which they held
equity stakes and from whom they bought parts using just-in-
time system. As the Japanese currency appreciated, the prices
of these parts were no longer most competitive. That hurt the
success of the dominant firms, and put pressures on them to
shift towards a more open relationship with the suppliers.
Toyota Motors has used the open model to strengthen
trust and collaboration with its vertical supplier base. Instead
of sourcing exclusively from suppliers with which it has long-
term relationships, Toyota also sources from the global vendors,
including from megasuppliers such as Magna, Johnson Controls,
and Valeo who offer very low prices to players around the
world and have the ability to provide sophisticated component
systems rather than just individual parts. At the same time,
Toyota reviews prices offered by alternative vendors worldwide,
in order to set price targets for long-term suppliers. To reduce
costs and development time, it encourages its long-term
suppliers to provide integrated value-added systems of
components, and to develop their capability to provide these
integrated systems. To help achieve cost, time, and quality
targets, it offers support to these long-term suppliers for
operational improvements, organizes study groups, and sends its
engineers to help vendors improve efficiency and quality and
reduce costs. It looks for opportunities in new models, if the
supplier is still not competitive in an earlier model. As a
result, by 2011, it ceased relationships with fewer than 20 of

about 200 suppliers as of 1991. For a group of 44 top
suppliers, their average revenue dependence on Toyota
remained about 80%, even as Toyota added new suppliers.
The vertical domination allows Toyota Motors to bring
its long-term suppliers to work with it at the planning stage to
develop new products. The suppliers are invited to Toyota’s
meeting rooms, where they work with its design, engineering,
production, quality, and purchasing teams. The experts from
suppliers sometimes work for about six months to three years at
Toyota, under a residential-engineer program. These meetings
have helped cut product development lead time, such as of bB
small wagon, from three years to as little as one year.
One of the limitations of the vertical dominance is
difficulty in succeeding in affordable automotive segments for
the emerging markets, which require the simpler, cheaper parts.
Toyota’s rival Nissan has surpassed it in China in sales growth,
because of its more open policy to tap local suppliers in
emerging markets. Nissan cut its long-term Japanese suppliers
by half in 2010. Toyota has found it difficult to open foreign
local suppliers, who are concerned that their knowledge will be
transferred by Toyota to its long-term suppliers. As a result,
after a surge of its operational margins from 5.1% in 1991 to
9.3% in 2007, Toyota has suffered a decline to 2.5% by 2011.
As it tried to drive deeper cost reductions at its long-term
vendors, it faced several quality problems and had to recall 9
million vehicles worldwide during 2009-10.
Source: Adapted from Aoki & Lennerfors (2013).
Fragmented: a fragmented structure is one in which no firm has
a significant market share for influencing the market outcomes.
The name of the game in here is “local responsiveness, wherein
repeat, local customers form the majority or often the totality of
business. While the products tend to be expensive and not very
well developed, the success depends on keeping the costs low

using a “bare bones” approach with low overheads, minimum
wage employees, and tight cost control. The prices are forced
down by limited demand; in fact just enough so that the firm
can cover its overheads, stay afloat, and generate some earnings
for the owner-managers of the firms to live. The budgets for
product development, market promotion, information
technology, and employee training tend to be non-existent or
very limited.
A fragmented structure often arises when the government
breaks-up a monopoly, or deregulates entry into an erstwhile
monopoly market. The telecom sector in the US for example
became highly fragmented after breaking up AT&T and
deregulation of entry of other players. Similarly, the
broadcasting business in India became fragmented after the
government allowed private entrants into a sector monopolized
earlier by Doordarshan.
Mergers and acquisitions is a dominant approach for
consolidating a fragmented market. Another way of connecting
the fragmented markets is through codification and franchising
of the business formula: food and motel chains, for instance,
offer standardized, efficient, low-cost “formula” facilities at
multiple locations. Finally, verticalization – developing deep
relationships with channel partners, customers and the vendors
– can also allow the firms to restructure the local, fragmented
markets, and to align with the globalizing marketspace. Many of
the fragmented structures are currently being transformed into
vertically networked and horizontally consolidated global
operations. The use of information technology for supply chain
management, quality assurance, and customer relationship
enrichment is a major force underpinning success in this new
competitive game, as illustrated in Exhibit 6.18.
Exhibit 6.18. Wal-Martization of Fragmented Grocery Market
The fresh produce industry has been traditionally characterized
by a fragmented, daily sales orientation. The firms typically
market seasonal products, with considerable quality and

quantity variation depending on the weather and crop condition.
Paradoxically, when the crop is poor and quality is low, the
prices in the industry tend to be higher. The products are
generally unbranded and undifferentiated commodities.
Supermarket chains, led by Walmart in the US, are changing the
rules of this game by developing partnerships with service-
oriented suppliers, who can provide fresh cut and processed
products year-round through investments in refrigeration
technology and in multiple fruit varieties that mature at
different times of the season. The vendors automatically
replenish the products, and share the responsibility for growing
the category through merchandising and quality control. The
products are branded using private labels, as well as by
developing new client accounts that may launch their own
brands based on the reliable year-round delivery. As a result
the market is rapidly becoming consolidated: sales by the 20
largest food retailers totaled $449.3 billion in 2013, accounting
for 63.8 percent of U.S. grocery store sales, an increase from
39.9 percent in 1993. Wal-Mart alone accounted for 26.1% of
the US grocery store sales in 2013.
Source: Adapted from Cook (2003) and USDA (2014)
Conclusions
In this chapter, we learnt about the entropy factors that make
firm’s existing resources, capabilities, and core competencies
irrelevant. In order to prepare themselves for the entropy
factors, the firms need to develop dynamic capability. That
requires firms to invest in appropriate structures, processes and
behaviors. It is not easy to make these investments, because the
firms existing resources, capabilities and core competencies do
not prepare them for the VUCA world that may be entirely
unanticipated and different. One effective tactics to foster the
experience and the environment where alternative structures,
processes and behaviors thrive in an organization is to

understand the different types of market structures a firm may
operate in. The firm may find these different types of market
structures in different business divisions and/or in different
regional geographies. Awareness and mastery of how to
operate effectively across these multimarket scenarios, will help
firms develop dynamic structures, processes, and behaviors to
not only survive but also thrive in the VUCA world.
References
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Amit, R. & Schoemaker, P. J. H. 1993. “Strategic Assets and
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Argyris, C. and Schön, D. (1978) Organizational learning: A
theory of action perspective, Reading, Mass: Addison. Wesley.
Arora, I. (July 11, 2016). What Gives Baba Ramdev’s Patanjali
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http://www.youthkiawaaz.com/2016/07/patanjali-ayurveda-why-
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Arthur, B.W. (1994). Increasing Returns and Path Dependence
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