Differentiation Vs. Low Cost: Question Mark on an Originating Myth of Sustainable Growth

Abstract

The study focuses on a founding concept of the approach labelled sustainable growth:” generic strategies” coined by M. Porter. The evolution of the concept is being analysed since its inception in 1980, going through the “competitive advantage in industry” and “the competitive advantage of the nations” stages. Their inferences for the current subsequent “fashionable” concepts are emphasized. A discussion on the impact of this concept, quantitatively reflected in its use as bibliographic references precedes the focus on the pros and cons of the study. Both the standing positions of strategy theorists and the critics by analysts are pointed out. These criticisms are debated in relation to the validity and consistency of the concept as well as the way it is theoretically justified by case studies. The study also discusses several elements shifted from the economy to politics sphere by the globalization of the strategy. The dilemmas associated with this transfer as well as the borderline between the two areas using the concept are interposed with the theme of sustainable development. The research path taken in the study is demystifying. It consists of a friendly approach, mainly using references unanimously rated by the international academic press. The aim is to design a slender filter against the use of inconsistent concepts to build theoretically questionable scales intended to guide long-term societal development – that is – a meta-strategy that goes beyond the will of today’s common entities.

 

Table of Contents:

1. Introduction

2. Sustainability and strategy: micro or macro issues?

3. The current theory of Corporate Strategy: a wasted foundation of economic sustainability

4. Conclusions

 

1. Introduction

In the last decade there has been an explosive growth in the discussions around the concept of sustainability.

These discussions have engendered other associated concepts, ideas and theories, but, more importantly, have grounded broad political approaches reflected in programs and actions that affect hundreds of millions of people. Their development speed is remarkable. The impact is significant both from the point of view of developing the procedures that accompany the basic concepts as well as the material alterations of the affected socio-economic systems. Beyond the political manifestations that prevail, a more educated scrutiny immediately generates a series of questions about the maturation of the mentioned concepts as well as the very short interval of their transposition in practice. The main fear is that the fight against possible developments with irreversible effects is done using tools that in turn have the same effects, due to their dubious consistency and widespread use before stabilization and positive testing.

Such an explosive development of concepts, to be then applied in practice before logical coherence gets validated, can also be observed in many other areas. Given this fear, we are interested in cases where the consequences did not fall within the expected area, “fail” which could have been avoided if the development of the theory had been filtered in a critical manner and would not have become fashionable more than useful. In the big area of the economy, such a case is that of generic strategies, concept coined by the American Michael Porter. The case is associated with the general concept of competitiveness. Both the strategy label and the competitiveness label have gained an excessive use with (otherwise) predictable negative consequences.

At the current level of development of the fundamental concepts in the discussion for the present study, that is sustainability and strategy, a strong logical link between them can be found.

Sustainability, through its current definition, sets a strong root in strategy. This justifies the interest of undergoing a critical retrospective analysis of the rise of the theory around Michael Porter’s generic strategy, by the link between the strategy and sustainability, but also with a view to avoiding the negative consequences of the overly politicized management of an insufficiently mature theory.

 

2. Sustainability and strategy: micro or macro issues?

The idea of sustainable development has two great “roots”: one related to practice, associated with forest management and exposed in works of the 17th and 18th centuries, and another one related to the theory of economic development of society, launched by D. Meadows’ book “Limits of Growth”, which mirrors a report of the Rome Club in 1972. Both “roots” reflect a macro approach, referring to state-owned entities. They are de facto subordinated to the interests of the owners involved, be they landowners or corporations.

Similar for the strategy, the concept has an explicit “root”, but also an implicit, theoretical one. The first is linked with conducting wars in ancient Greece. Etymologically, the term strategy refers to the “strata”, meaning army in Greek. The theoretical one is represented by Sun Tzu’s “Art of War” and is associated with state ruling in ancient China. Without referring to works or the practice of millennium passed to date, it can be said that the strategy refers to a “macro entity”, army or state, characterized by a quasi-total autonomy of action in its own generic interest.

This generic interest may be considered to be primarily related to survival, as a condition for development, welfare or well-being, according to the social standard of the moment.

Regarding the sustainable development concept, the outbreak of the Brundtland report occurs in 1987. It builds up the current ideology of the sustainable development approach. Even if clarifications of the definition of sustainability only appear in 2014, the concept has already acquired customizations for different areas of socio-economic life. The one who is particularly interesting for the current endeavour is the one applicable to business.

Although there is no explicit reference to the time or period of the sustainability concept, both in the general and in the case of business, it is understood that it reveals an important dimension in time, in terms of years. That is to emphasize that anything related to the concept of sustainability involves a consistent number of years. This range of time, combined with the reference to a large entity, builds up the characteristic of a strategy. It can then be concluded that a comprehensive strategy, a company-wide plan for a decades-long period, is needed to achieve sustainable development. Targeting the goals of sustainability is to critically analyse the theoretical support associated with the tool called strategy.

Starting from the concept of sustainability, several related notions have been added over the last 3 decades to enable the operationalization of a global policy with a theoretical basis that claims consistency. The concept of sustainable development has been enacted, and then associated with a few major areas: energy, agriculture, etc. These include business.

In business, the concept was introduced as corporate sustainability with reference to a corporate entity. For corporations, even ratios that relate to sustainable growth have been established.

Corporate referral sets the discussion at a micro-economic level. The issue of principle arises when the corporation is defined and implicitly appears to be oriented towards achieving a positive situation reflected by annual profitability. Both the time horizon and the vague border of the corporation in many national economic systems fragilizes a focus on sustainable development as a theme of interest for the whole society in a given State.

On the other hand, the sustainability attribute was associated with the concept of economic growth and was firmly established in the economic theory. In this case, it refers to a state entity, that is, it is associated with the macro level. A theoretical inconsistency between sustainability and economic growth concepts might arise in relation to the time horizon to which the latter refers to in the current practice. Assessments are done annually, and the entire activity is strongly focused on achieving satisfactory results the following year. The long-term orientation is diluted by the governance practice which aims at achieving results in a larger interval, of 2-3 years, allegedly by being granted a new mandate.

Long-term intervals are only discussed in a post-factum approach to obtain explanations for past developments. If these concepts – sustainability and economic growth – are added to other attributes, then the overall consistency of the theoretical approach and practice is affected. If sustainable development is also meant to be inclusive, meaning according to the current definition: to be a development that also considers the interests of stakeholders other than shareholders, then the dilemmas of the contradictions between the macro level and the micro level become more prominent. An essential dilemma is the freedom of action of economic agents on the market, the so-called free market versus compliance with the benchmarks of a State plan that targets a set of industries or the whole economy/society. It is assumed that the achievement of sustainability in a State is based on the correlated mode of action of the economic agents. But correlation seems to be contrary to market freedom and, in particular, to any corporate strategy, bearing in mind that the latter is designed to capture and secure a favourable position for the entity’s logic.

Simply translating the concept of sustainable development into the micro-level of corporations already generates a conflict between their routine annual orientation and the essential idea of the concept. Bansal and Des Jardine [1] highlight “short termism is a bane of sustainability” because “sustainability is about time”.

On this line of reasoning, sustainability becomes a target or a characteristic of long-term development for a corporation. As this development can only be the result of a rational strategy approach, it will result that (expected) coherence and consistency of sustainability is given by the quality of the instrument. In short, sustainability, including growth or inclusion, is the consequence of a strategy with the appropriate characteristics.

 

3. The current theory of Corporate Strategy: a wasted foundation of economic sustainability

We have previously found that there is a relative incoherence associated with concepts of interest, at large. At the same time, we have found that the concept of sustainability stands in a logical connection with the concept of strategy, based on current definitions that are most favourably positioned to the original meaning of both mentioned concepts. Consequently, it is logical to study the coherence of the tool, i.e., the strategy, in the hope that a positive result will arise in the practice, generated by everything that is associated with sustainability. As this latter is centred on material transformations induced by the economic growth, whose agents are States and profit-oriented companies, one shall be interested in the strategy of business, in particular.

Whatever way we examine the current business strategy theory, a few question marks cannot be avoided. These are all the more disturbing as the business practice offers a significant number of cases where deviations from theory (in the “certified” academic and mediatic sense of it) are so substantial that they come to question it.

A first problem is related to the late 1973 birth of the strategic management theory. In fact, discussions about business strategy had not started long before, only around 1960. The fact is surprising if we take note that large corporations had been developed 150 years before that, as well as elements of industrial economics theory.

In practice, various state entities and large organizations have implemented coherent strategies, even with sustainability characteristics, hundreds of years before. As a fact, Sun Tzu’s “Art of War” was theorizing on the government of a State, on its edification and persistence over time, more than on the idea of war, meaning enemy’s momentary destruction.

Concerning the military field, which the original domain of the strategy concept, the theory has reached a remarkable degree of development in 19th  century, a period when large corporations appeared. The reference pillar is Carl von Clausevitz’s “About War”. Among other valuable ideas in this book, there are also some that can be related to sustainability. For example, the idea that Napoleon was a weak strategist despite his brilliant victories in various battles is maintained with the observation that there is no long-term viable vision for the French state [2].

All these theoretical elements of military strategy, which can be easily translated at the business level, are almost uninvited in the bibliographies of the most publicized current business strategy publications. Going over the establishment of the theory of business strategy, it is interesting to follow the consistency of the most cited publications, meaning the ones with the widest acceptance. The approach is natural because a long-term project, such as any related to sustainability, should have a strong theoretical base associated with the strategy for all the reasons outlined  above.  That  solidity  would  also  be  meant  to  compensate for the coherence and consistency flaws in the sustainability area.

In terms of business, construction starts unfavourably due to the lack of convergence of authors in defining the concept. Paradoxically, it seems that the vague or problematic definitions in line with the etymology of the term are the most popular. Many authors solve the problem by questioning the need for a definition [3] or choosing to deliberate avoid it [4]. On the foundation of a vague definition, different from an author to another, a lot of other concepts of structured business strategy have been added over the last four decades. Additions were not even made like in the case of certification of the strategic management label in 1973 at a conference, but through author’s books. Obviously, the most important impact was connected with these books that for some reason had the highest passage to non-academic and non-professional audiences. The emotional and artistic effect given by the text of the books was more important than the consistency of the concept given by the arguments in that text. The highest point of launching impacting labels can be estimated as being reached between 1980 and 1990. For the logical connection between sustainability and strategy, the most prominent example is the so-called generic strategy. The concept is a label for the most popular taxonomy of firm strategies [5]. Porter in his works from 1976, 1980 and 1985 produces several impressive labels as well. These works have a fabulous number of citations, in the order of hundreds of thousands, cumulatively. Using Porter’s labels is enough to stir interest worldwide, no matter what the idea may be behind them.

A bizarre element related to the use of these labels can be noticed: authors who have been overly strident in questioning or criticizing the labels have a particularly demanding filtering on publishing their works, unlike those who display support in line with the “official” media tone. A star label and concept are the competitive advantage. A similar notoriety is enjoyed by the labels for the so-called generic or competitive strategies: differentiation and low-cost. On both it is built the monumental competitive advantage concept and the rest of Porter’s theory of company strategy. Porter’s most cited work reveals a controversial introduction to the concepts: in 1980 “Competitive Strategy” mentions them on several pages, while 95% of the paper discusses the industry and competitors, and in 1985 “Competitive advantage” recycles the label of generic strategies by reference to the so-called competitive advantage – a concept that does not have a valid definition in the same book. It seems that the second book seeks to clarify the concepts of the first one, but the effect is not the one expected.

By examining the concepts of differentiation and low in connection to the theme of sustainability, we find that they refer to a level inferior to that of a corporation, and that their explicit purpose is to obtain a competitive advantage. While not clearly defined, it is desired for it to have a positive impact on profitability. Therefore, it is recalled that profitability concerns the exclusion of stakeholders other than shareholders and a short-term orientation that ignores sustainability claims even at the corporate level. Obviously, a positive impact on the economy of a State in a hope for sustainable economic growth is out of the question.

Defined and localized in this way, generic strategies not only exclude a corporate orientation to generate an inclusive and sustainable economic growth support but generate a counterproductive effect. In addition, such a strategy adversely affects the corporate strategy line.

Deepening the analysis of the features of the strategies with the labels in question can quickly determine that there are background issues. For example, Allaire and Firsirotu claim that Porter confuses differentiation with segmentation [6], while Mintzberg prefers to discuss low price instead of low-cost strategy [7], including it in the differentiation strategy family. It is remarkable that critics use a reserved approach, but even so, the counter-reactions are quick and certify the “construct validity” of the Porter typology [8].

It should be noted that popular typology around the world is exemplified almost entirely by American companies operating in a specific context in the 1980s. It would have been expected that a rational success strategy associated with these strategies would lead corporations and the entire US economy towards a sustainable growth model. Instead, the US public debt, as well as trade deficits have reached incredible proportions, and in 2017 the US withdrew from the environmental agreement.

In a more detailed approach, the foundation of these strategies becomes inconsistent. Their pillar role in supporting the sustainability of the corporation and the national economy becomes problematic. Differentiation seems to be a general feature of a strategy, with low price approach as provision [9]. One reason would be linked to a basic element of industrial economics: the products to which differentiation is not applicable are homogeneous, and these are extremely few compared to the rest. On the other hand, the low-cost strategy is just a label that suggests that behind a low-price approach there is a real efficiency-based success. In fact, low price is an option for the whole corporation, not only for a section of it, as part of a plan to obtain a larger market segment by sacrificing profits and supporting dumping costs through the contribution of the rest of the corporation or the State.

Porter argues that a combination of the two generic strategies leads to stuck in the middle situation, but other authors consider that there is a continuum of combinations [10], where the two strategies can blend [11] and even that mixing them is a condition of success [12]. By combining previous opinions, it is concluded that a strategy is based on differentiation because it has the role to surprise competitors and will always pursue an effective approach that translates into obtaining the lowest cost for its characteristics.

Either way, the major problem of these strategies as sustainability support components is that they do not have this effect even at the corporate level without an integrative approach. In other words, the sustainability of the corporation is achieved if the autonomy of a subdivision is sacrificed and it pursues results that serve the ensemble.

This way of conceiving the strategy is observable in the case of large diversified Western corporations with consolidated balance sheets and structures comprising myriad of offshore subsidiaries. More obvious even is the correlated operation for overall outcomes for the dominating groups in the Japanese economy. In the case of China or Russia, the active involvement of the state is notorious, which deprives of any sense the alleged contribution of a generic strategy to gaining a competitive advantage for a segment of a private or a state-owned company.

 

4. Conclusions

From the relative chaos of concepts associated with sustainability, one can infer in a positive approach that for society, a long-term vision of the development of the economy, would be of great interest. It would be desirable for this development to maintain a series of overall balances and a series of encouraging circumstances. Among these positive scenarios, it is hoped to find out the experience of the long-term development of corporations, an experience synthesised in a rationality-based projection tool: the strategy.

The study of the most popular business strategies in relation to sustainability shows that there are issues of principle related to the compatibility of the two concepts, in fact, the development approach guided by these concepts.

In addition, an analysis of the most popular strategy binomen, the so-called generic strategies, reveals not only their incompatibility with the “big project” of sustainable economic growth but also a content inconsistency. The role of founding myths of sustainability attributable implicitly to generic strategies as a result of their long-standing rationality claim is questioned by both the content of the concepts and the way they connect to each other and with the basic ideas of sustainability. A myth is broken!

 

Contributo selezionato da Filodiritto tra quelli pubblicati nei Proceedings “3rd International Conference Inclusive and Sustainable Economic Growth. Challenges, Measures and Solutions - 2019”

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Contribution selected by Filodiritto among those published in the Proceedings “3rd International Conference Inclusive and Sustainable Economic Growth. Challenges, Measures and Solutions - 2019”

To buy the Proceedings click here.