CHAPTER 1 INTRODUCTION
1.2 RESEARCH MOTIVATION
since goods transported by trucks captures a large proportion of goods used and consumed domestically compared to other means of transportation, it paints a clear picture of consumers’ confidence and hence the domestic economy. In short, a research in strategic dominants of trucking companies primarily hauling steel should prove beneficial to both the steel industry and Taiwan’s economy.
1.2
RESEARCH MOTIVATION
The transportation industry as a whole has been facing numerous challenges over the past few years. During the aftermath of the 2008 financial crisis, domestic business environment began to worsen. In addition to the decrease in consumption demand, a lot of manufacturers originally located in Taiwan opted to move to China and other
Southeast Asian countries where labor costs were cheaper. As consumption dropped and the relocation of traditional labor-intensive industries sped up, the volume of goods needed to be transported also plunged, and that included the volume of steel as well. As a result of market size shrinkage, a lot of companies went out of business. Assistance from the government was needed more than ever, but with no avail. Companies desperately needed a strategic direction in order to survive in the trucking industry.
A major complaint from the industry besides receiving no assistance from the government is that transportation policies have been unclear, incrementing unnecessary cost to many companies’ daily operation. As an industry regulated significantly by the government, the for-hire trucking industry is required to follow an abundance of
regulations, ranging from capital requirements to pricing and parking. However, most of the regulations were made in the 60s and have not been updated significantly since. Not only was economic environment considerably different compared to the ones faced by the industry today, but the advancement of technology has also drastically changed the scenes of operation. For example, a particular regulation required trucks to park in industrial areas, but due to the limited amount of lands in Taiwan, trucking companies often have to seek the assistance of brokers for lands that may or may not qualify for industrial areas. Consequently, many companies in the industry today have to operate in gray areas similar to the example shown. Although the government has made promises to
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improve for-hire trucking industry’s operating conditions through deregulation, execution has rarely been followed through. As a result, the industry grows even more dissatisfied with the government.
As Taiwan rides the wave of globalization through the accession into the World Trade Organization (WTO) in 2002 and the signing of Economic Cooperation
Framework Agreement (ECFA) in 2010, the operation of for-hire trucking industry will inevitably be affected by the integration. Even though both agreements aimed to increase trade in goods and services for the country, they also created opportunities for new players in the economy. These factors will not only change the cost of acquiring trucks, the wages of drivers, and safety risks to the society, but also transform the dynamics of competition in the industry. Since it is the government’s job to ensure fair competition, the government also has the responsibility to update regulations and reduce uncertainty in the environment. Obsolete regulations will no longer have any place but impede the development of the for-hire trucking industry. Nonetheless, often times the government is only interested in enforcing the regulations without realizing the regulations are obsolete.
And the corollary to that is that incumbents will miss the real benefits brought about by the international treaties.
1.3 RESEARCH QUESTION AND PURPOSE
Based on the importance of for-hire trucking industry in Taiwan and the
challenges faced by the industry, there would seem to be more researches on this topic.
However, researches on trucking companies were mostly dedicated to freight forwarder and parcel services. Literally none of the researches pays attention to the for-hire trucking industry with a focus on steel. Nevertheless, the author believes an improvement in the industry will yield benefits to the society. Using the method of qualitative research, the objective of this paper is to approach the for-hire trucking industry through the
perspectives of firm CEOs and study how their experiences determine their strategic making process. Through the understanding of the industry-based view, the resource-based view, and the institution-resource-based view, the author will investigate factors
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contributing to firm competitiveness and what they imply for firms wishing to achieve long-term profitability and mortality.
1.4 DEFINING KEY CONCEPTS
As mentioned before, the frameworks of the industry-based view, resource-based view, and institution-based view will be drawn upon regularly to enhance the author’s understanding of firm owners’ personal experiences. Here the author will briefly define each framework and list questions usually asked in each analysis. Further explanations will be clarified in Chapter 2: Literature Review.
1.4.1 The Industry-Based View
The industry-based view states that the average level of profitability in the medium to long run will be determined by the intensity of competitions. The intensity of competitions will be driven by industry structure, which is most famously consisted of five forces. They include the forces of suppliers, buyers, new entrants, substitutes, and rivalry among existing firms. Firms position themselves better in relation to the five forces in the industry will find themselves more profitable and less susceptible to attacks.
To achieve a sound position, firm should ask themselves the following questions:
Which of the five forces control profitability?
What determines the level of profitability? What are the underlying causes?
Are firms more profitable when they stand in better position relative to the five forces?
How can firms reshape the five forces to their advantages? How should firms position themselves?
What are the recent changes in each force?
1.4.2 The Resource-Based View
Under the assumptions of resources heterogeneity and immobility, the resource-based view asserts that a firm’s internal resources and capabilities ultimately decide the profitability it can reap. A firm that is able to convert its resources and capabilities into
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competitive advantages will have a higher chance of being profitable than those that do not. In addition, long-term profitability is only viable when a firm possesses sustained competitive advantages, which may require the firm’s resources and capabilities to be valuable, rare, inimitable, and non-substitutable. To build sustained competitive advantages, a firm should ask themselves the following questions:
Do the firm’s resources and capabilities allow it to exploit an external opportunity or neutralize an external threat?
Are valuable resources and capabilities only controlled by a few firms?
Will there be substantial cost disadvantage to obtain, develop, or copy the resources and capabilities? What are the causes?
How are the resources and capabilities used to develop competitive advantages and create value?
How should firms build their resources?
1.4.3 The Institution-Based View
Focusing on institutions rather than a firm’s task environment, the institution-based view stresses the importance of background and contexts in a firm’s strategic making process. By defining the rules of the game, institutions reduce uncertainty in the environment and make society operate more smoothly. However, institutions also limit a firm’s profit potential by setting boundaries on the strategies a firm can make. Since every country and industry has different cultures and ways of doing things, assessing both the formal and informal institutions becomes a priority to see how they affect a firm’s profitability. To assess a given institutional framework, firms should ask themselves the following questions:
How do the coercive, mimetic, and normative isomorphic forces make firms resemble one another in the trucking industry? How do they impact the profitability in the industry?
Are formal institutions fully developed? Do informal institutions need to be given more weight?
How do formal and informal institutions reduce uncertainty that results in cost saving?
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LITERATURE REVIEW
2.1 WHAT IS STRATEGY?
The term “strategy” traditionally has a very strong root in military, originally used by generals in battles as an elaborate plan to achieve a specific goal under uncertain conditions or environments. In the history of China, work can be found as early as 500 B.C. by the famous Sun Tzu, who wrote the renowned military strategy book, The Art of War. As business competition began to incorporate more and more of the principles of military strategies, “strategic management” had brought about the attention of scholars.
Nevertheless, the definitions of “strategy” have been constantly debated.
A distinguished professor of business history at Harvard Business School, Alfred Chandler (1962) argued that strategy is “the determination of the basic long-term goals and objectives of an enterprise, and the adoption of course of action and the allocation of resources necessary for carrying out these goals” (p. 13) Coinciding with Chandler’s view, Michael Porter also supports the deliberate strategy with his Three Generic Strategies and Five Forces Model, which describes how a firm pursues competitive advantage within its chosen industry.
As opposed to deliberate strategy, however, Henry Mintzberg and James Waters (1985) advocate the importance of emergent strategy, which is a “realized pattern” of actions, or decisions that was “not expressly intended.” It is of the view that strategy emerges over time as the result of a stream of smaller decisions that accommodates to changing reality. As Figure 2-1 illustrated, emergent strategy is realized despite absence of deliberate planning whereas intended strategy may or may not be realized.
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Figure 2-1. Relationship Between Intended and Realized Strategies
Source: Mintzberg and Waters (1985, p. 140).
Although the relevance of these strategies changes over time, both perspectives have their merits. Since a firm’s performance is inevitably tied to its strategic actions, we can define strategy as “a pattern of decisions and actions that enables an organization to improve or maintain its performance” (Hill and Jones, 1998, p. 3).
This draws us to the question on what constitutes a good strategy and what constitutes a bad one. While the industry-based view such as the Five Forces Model emphasizes the importance of a firm’s external opportunities (O) and threats (T), the resource-based view calls for the analysis of a firm’s internal strength (S) and weakness (W). Therefore, according to Barney, a good strategy is one that “neutralizes threats and exploits opportunities awhile capitalizing on strengths and avoiding or fixing weaknesses”
(1997, P. 27) The result is the prevalence of SWOT analysis throughout business schools’
syllabi and companies seeking to gain competitive advantages. However, as the
boundaries between industries become thinner and firms begin to operate internationally, managers have found that industry-based view and resource-based view together cannot explain certain phenomenon. For instance, why do some firms continue to underperform albeit the level of industry competition seems ideal for their operations? Also, why are some firms unable to utilize their competitive advantage in different environments? In seeking these answers, a professor from the University of Texas Dallas, Mike Peng proposed a new idea called the “institution-based view” of strategy. In short, the institution-based view suggests that context is important, and both formal and informal institutions play a crucial role. Combined with the industry-based view and resource-based view, it forms a “strategy tripod” that paints a complete picture for a firm’s direction. I will explain in detail below what each one of the views entails.
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2.2 WHAT IS THE INDUSTRY-BASED VIEW?
Porter came up with the Five Forces model in 1980 on how to identify keys to profitability in a company’s local environment, namely, the industry in which it operates.
The model predicts the average level of firm performance in the industry based on the intensity of competition between organizations and their task environments. However, the model was not without faults. In 2008, Porter published an updated version of his
framework to clarify the common misconceptions of his model and extended upon it.
Here we will mainly be talking about the updated model.
The Five Forces model identifies the five most common threats that decrease a firm’s profitability and their determinants. These threats are: (1) the threat of entry, (2) the threat of rivalry, (3) the threat of substitutes, (4) the threat of suppliers, and (5) the threat of buyers. See Figure 2-2 for a summary of the five forces model.
Figure 2-2. The Five Forces Model of Competition
Source: Porter (2008).
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2.2.1 The Threat of Entry
New entrants hurt the profitability of the industry by bringing in additional capacity, subsequently causing an imbalance between supply and demand. The main determinant of the threat of entry is the height of entry barriers, which are defined by Porter as “advantages that incumbents have relative to new entrants” (Porter 2008, p. 26).
Economies of scale are important sources of entry barriers. They force new entrants to enter in a large scale in order to compete with the incumbents in the industry, consequently putting new entrants at a cost disadvantage. Similarly, industry with
learning curve also allows incumbents to have lower cost per unit without requiring firms to size up. Cost decline with experience because workers become more efficient at their jobs as times passes, and it is particularly significant in labor-intensive industries.
Consumer switching costs are also another sources of entry barriers. The higher the customer switching costs, the more expensive it is for new entrants to acquire existing customers from incumbents. Additionally, established brand identification can also raise customer switching costs.
Large capital requirements also discourage new entrants, especially when they cannot be recovered or when investment capital is difficult to obtain.
Finally, government policies have the ability to either increase or decrease entry barriers by imposing more stringent regulations or granting more subsidies, which affects the costs for new entrants.
2.2.2 The Threat of Rivalry
Rivalry can be intense when numerous competitors are equal in size and power.
Since the capacity of the industry is limited, firms will be forced to encroach on one another’s customers to secure profit. Furthermore, when competitors are similar in firm attributes or offer undifferentiated products or services, competition is also fierce because firms attract the same segments of customers.
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When industry growth is slow, a firm wishing to expand will also have to take market share from existing incumbents. As a consequence, incumbents will engage in higher level of competition to avoid being pushed out of the market or eliminated.
Lastly, the intensity of rivalry is great when exit barriers are high. Sometimes a firm will choose to stay in the market because exiting is simply too costly. However, the excess capacity usually causes the profitability of the industry to dip as a whole.
In order to combat against the aforementioned factors, firms often engage in a price war. Moreover, they might also be inclined to spend a lot on advertisement to stand out. However, both of these actions hurt the profitability of firms. Porter (2008)
mentioned “rivalry is especially destructive to profitability if it gravitates solely to price because price competition transfers profits directly from an industry to its customers” (p.
32)
2.2.3 The Threat of Substitutes
Substitutes threaten the profitability of the industry when they offer lucrative trade-off to the industry’s products or services, on the condition that they provide similar functions. Likewise, low customer switching costs also allow substitutes to create more threats. It is important to pay attention to change in other industries’ products or services when switching costs are low in case technological improvement causes them to become substitutes.
2.2.4 The Threats of Suppliers
Suppliers have the ability to take away profitability of the industry when they are powerful. Suppliers are powerful when a significant of their revenue does not depend on the industry and when they are larger in scale. Hence, they have little to lose from charging the highest price they can.
In addition, suppliers also have more bargaining power when they are more concentrated compared to the firms in the industry because the firms only have a limited number of options to choose from.
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A firm also faces more threats from suppliers if the products or services offered by the suppliers are highly differentiated or if there are no substitutes for them. Since a firm cannot get such supplies elsewhere, suppliers command a great degree of power.
Finally, if a firm has invested extensively to particular suppliers, it would find it difficult to bargain with the suppliers since its switching costs have become very high.
Nevertheless, sometimes a firm has no choice but to cooperate with suppliers in order to survive, as most of the factors affecting supplier bargaining power are beyond a firm’s control.
2.2.5 The Threat of Buyers
Powerful buyers are able to decrease the profitability of the industry by demanding price reductions and asking for better quality products and more services.
Buyers are able to make these demands based on a few factors. First, when they are relatively few in numbers or when their purchased volume represents a significant portion of the industry’s outputs. Since the buyers’ businesses are very attractive in these cases, rivalry among firms would be more intense and buyer would have more leeway.
Moreover, when buyers have the ability to integrate backward and produce the products or services themselves, firms also face more pressure to lower their prices, consequently causing the profitability to be squeezed out.
Buyers also command great bargaining power when the industry’s products or services are undifferentiated or standardized. When buyers are able to find equivalent alternatives easily and there are no switching costs, it is in their best interests to play firms against one another in order to achieve the maximum cost reduction.
Buyers have more intention to negotiate down price when they are not earning significant economic profits as consumers do during economic downturn. The same can be said when the products or services represent a huge portion of the buyers cost structure.
Obviously buyers would want to save as much as possible when opportunity costs are high.
Finally, assuming buyers eventually plan to sell the outputs they purchase from the industry, they can be especially price sensitive when the impact of the industry’s
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products or services do not affect the quality of their own products much. Since the buyers do not depend heavily on the industry, their main focus would be on price.
In conclusion, the five forces model predicts the average level of firm performance within an industry and elucidates the root causes of competition and profitability.
2.2.6 Other Industry Dimensions
In line with Porter’s popular five forces model, Dess and Beard (1984) inspected different dimensions of organizational task environments under the assumption that resources available in the task environments have a significant effect on the populations and characteristics of organizations, similar to that of resource-dependence theory and population-ecology theory developed by Aldrich and Pfeffer (1976) and others. Using the inter-item and factor analyses on resource transactions of organization, they found that survival rate of organizations can be contributed to at least three dimensions –
In line with Porter’s popular five forces model, Dess and Beard (1984) inspected different dimensions of organizational task environments under the assumption that resources available in the task environments have a significant effect on the populations and characteristics of organizations, similar to that of resource-dependence theory and population-ecology theory developed by Aldrich and Pfeffer (1976) and others. Using the inter-item and factor analyses on resource transactions of organization, they found that survival rate of organizations can be contributed to at least three dimensions –