Volume 18, Number 4 Article by Ajit Prasad December, 2006
The Technology-Strategy Nexus — Leveraging Market Imperfections :
The purpose of strategy is to gain competitive advantage, that is to beat one’s competitors and to show profits over and above the industry average. As a corollary, the purpose of strategy is to examine the ways in which market perfections can be converted into market imperfections.
Ajit Prasad’s paper starts with an understanding of Porter’s Five Forces model and its application and validity under different market conditions. The central thesis that emerges is that to maintain the existing level of industry attractiveness, firms must play a pro- active role in terms of changing the intensity of the forces. What the consumer considers as utopian market conditions — a large number of producers, undifferentiated products, the inability of individual producers or consumers to fix prices, the technology being constant returns to scale, and symmetric information flows – a producer would consider the worst. The entire objective of the producer would be to introduce imperfections in the market that can be taken advantage of and the most effective way to introduce them is through the use of technology.
In a series of seven propositions, the paper looks at the intrinsic nexus between technology and strategy and how technology can support strategy by introducing distortions in the market. Imperfections in the market can be introduced by lowering the average cost curves and erecting entry barriers; segmenting the market through product differentiation, which can be done either physically or perceptually; allowing cost leadership to be translated into price leadership through the back-up of reserves and surpluses; using the Internet to generate asymmetric information flows; thwarting the cross elasticity of substitution in the case of homogenous goods through product differentiation; and introducing super normal profits not only in the short run, but also in the long run through rent seeking behaviour.
Reprint No 06405
