The dynamic competitive forces framework provides a dynamic counterpart to the Porter competitive forces framework (five forces framework). The conventional Porter framework is concerned only with the static analysis of an industry at a point in time, but this needs to be complemented by a dynamic perspective that views the development of each of the five forces over time.
For example, if the industry is cyclical, then rivalry within the industry will necessarily follow cyclical dynamics, and companies will be forced to strategize in time-sensitive fashion. It is of vital importance for these firms to know whether a downturn is coming, or whether the industry is just leaving a downturn behind and entering the early phases of an upturn. Critical investment and production decisions hang on these issues.
The author is Professor John A. Mathews, who is currently the Foundation ENI Chair in Competitive Dynamics and Global Strategy at LUISS Guido Carli university, in Rome. He spent the period 1998-2008 as a professor of strategy at Macquarie Graduate School of Management, Sydney, where the framework for strategizing in disequilibrium dynamics of industries was developed. The dynamic competitive forces model was introduced in 2005 in an article in California Management Review, where empirical support was offered from industries with cyclical dynamics, such as the global flat panel display industry and the semiconductor industry.
The dynamic framework followed the outline of the well-known Porter “five forces” framework, first outlined in his 1979 Harvard Business Review article. Porter conceived competition as involving competitive “forces” that impinge on the focal firm and drive down its profits; these forces emanate from other firms in the industry (rivals), from suppliers, from customers, from potential new entrants utilizing the same technology, and from firms bringing substitutes.
The Porter framework analyzes companies' strategic choices as they apply at any point in time; it is couched in such comparative static terms as whether economies of scale can be captured, or economies of scope, and the scale-related barriers to entry that apply. While these are issues of enduring significance, they do not capture the force of the dynamic issues, which are brought into focus by the dynamic model. The two frameworks may be seen to complement each other—the one capturing strategic issues that apply at any point in time, the other capturing those that depend on time and the dynamic evolution of the industry.
The workings of the dynamic model are best displayed with reference to a particular industry, so the flat panel display industry (FPD) is used as example.
1. FIRM RIVALRY
Within cyclical industries, firm rivalry is framed by the dynamics of upturns and downturns, and particularly by the anticipation of the tipping points that lead from one to another. The TFT-LCD sector between 1990 and 2005 knew five historical cycles. These cycles exhibit certain regularities and repetitions, which create the setting for strategizing by the firms involved.
It is the competitive interplay between rivals that results in cycles of over- and under-capacity—whether the companies will it or not. For that is the key point regarding cyclical phenomena—they are emergent phenomena, and as such, they are beyond the control of any single participant. These fundamental cyclical dynamics are shaped by the strategizing by firms on the demand side as well as the supply side. The upswings might be prolonged, or the downswings cut short, by effective enlargement of the market due to new applications of the product being developed. On the supply side, rival firms strive for productivity and yield improvements, and they work with supplier firms to find ways to gain an edge over their rivals—again accelerating the cycle.
2. DEMAND-SIDE DYNAMICS
In the flat panel display industry, it is the new applications that have driven the market expansion. The first such application was laptop PCs, followed quickly by notebook computers, which moved through several sub-phases as increasingly larger screen sizes were developed. The next application was desktop monitors (replacing CRTs), and now flat panel LCD-TVs. The strategic calculations of rival firms are upset by the entrepreneurial initiatives taken by firms on the demand side, which are finding new applications for the products and thus opening up new markets.
3. SUPPLY-SIDE DYNAMICS
New process generations
On the supply side, there are new process generations—which in the case of flat panels are the successive generations of glass substrate, each one permitting more panels or larger panels to be cut. These successive process generations are driven by strategic entrepreneurial initiative, often in anticipation of new applications before any real market has formed. The process and fabrication equipment that has been developed by specialist suppliers in response to the growth of the market for FPDs has already moved through several generations, driven by changes to the glass substrate on which large TFT-LCD panels are fabricated.
Each of these new product generations creates strategic issues for incumbents in that they have to change over their established process technology— and this creates opportunities for fast followers who are nimble enough to assemble the required capital, technology, and markets in time to catch the new generation. The entrepreneurial behaviors that drive the supply-side dynamics are those involved in the search for new ways to improve productivity and efficiency through changing the configuration of the production system and its supply chain arrangements.
4. CLUSTERS OF NEW ENTRANTS
Strategizing around the downturns
The cyclical dynamics governing competition amongst the rivals assumes a stable technological trajectory. However, challenger firms will be looking to enter the market with either the current technology or an improved version of it. Thus, there will be competitive pressure from new entrants who are willing to breach the entry barriers—where again, timing is everything. For if the new entrant seeks to enter during an upswing, the challenger is faced with rising investment, rising production, and rising prosperity on the part of the established firms—the very worst time to mount a challenge. On the other hand, during a downswing the opportunities of resource leverage are being generated—provided the challenger can act in time to take advantage of them. In this setting, new entry is not just a matter of deciding whether the profits are attractive enough to sustain a new entrant given existing barriers to entry. The issue again is timing. There is clear evidence in the TFT-LCD industry that new entrants have clustered in each of the downturns.
5. ALTERNATIVE TECHNOLOGIES
Strategizing around new combinations
In firms employing alternative or substitute technologies, the strategizing consists of entrepreneurial decisions about altering the dominant technological trajectory. Incumbents, in turn, must make choices as to the importance of the threat posed by these alternatives. Again, timing is everything; it is not enough to recognize the threat, a firm must know when to respond to the challenge because of imminent mass production, and when it is safe to ignore it. In FPDs, the alternatives are already well known, including plasma displays, organic displays and others. The critical strategic issue is how fast these approach mass production.
The dynamic framework is of benefit in every industry, but particularly in an industry where dynamics are obviously of prime significance —as revealed by the cyclical character of the industry. In this way, the dynamic model opens up a line of academic research and business analysis that will look for cycles and dynamic behavior patterns in other industries, where the object is to analyze these patterns for their strategic significance.
The dynamic competitive forces framework focuses attention on time-sensitive matters such as what to do during upturns or downturns. The comparative static framework compares the situation in the industry at any two points in time or compares two industries at the same point in time. Barriers to entry are considered in terms of characteristics such as existing economies of scale, but how these were built and how strategy entered into the building of such barriers are not the concern of the Porter framework. The dynamic framework, by contrast, captures the competitive forces generated by the cyclical industrial dynamics of the sector being studied. Firms have to respond to these forces, or work through them, in order to prosper.
The dynamic competitive forces framework works well in all industries, bringing out the strategic significance of the industry dynamics. But it works particularly well in industries where the dynamics are explicit and clearly significant, like cyclical industries.
The dynamic model opens up a line of research that will look for cycles and dynamic behavior patterns in other industries, where the object is to analyze these patterns for their strategic significance. These patterns have been followed up by Dr Hao Tan, who completed his doctorate under Professor Mathews (Tan and Mathews 2009a; b).
The dynamic competitive forces framework is applicable in real situations of disequilibrium. It is embedded in a wider approach to strategy that is grounded in disequilibrium dynamics rather than the equilibrium approach that underpins the conventional approaches to strategy, encompassing the Porter competitive forces view or the Resource-based view. This wider approach is given ample justification in the 2006 book by Professor Mathews, Strategizing, Disequilibrium and Profits (Stanford University Press, 2006).
The model does not capture the comparative static forces that operate at any point in time in an industry; this is the domain of the conventional Porter framework. Thus the dynamic framework and the conventional (comparative static) framework complement each other, and both need to be applied to obtain strategic insight into the workings of an industry.
The DCF framework is a qualitative tool, and so does not lend itself to a methodology based on scoring, or quantifying options. It is more a way of setting options within an historical, time-bound context.