Competitive Advantage by Michael Porter

February 2003

In this book Porter shifts his attention from an industry perspective to a company perspective. The author introduces a model for strategy in organizations that emanates straight forward from Industrial Economics (IE). In economics, an industry (market) is defined by supply and demand. The Structure-Conduct-Performance (SCP) Paradigm, from IE, states that an industry structure is determined by these conditions; hence the competitive environment that results shapes the behavior of firms and determines the overall performance of the players in the industry. Porter, as an heir of the design school (Andrews) and the planning school (Ansoff), was able to move beyond them by building on their insights to propose a new model which led to the emergence of a new school of thought: the positioning school. The core concepts of this school are not about planning or special individuals (CEO in Andrews, Planners in Ansoff) but on managers’ ability to think and understand the industry they are in. Where preceding schools advocated an external environment that could be either used or mitigated (i.e. using SWOT) and where firms had no control over their industry structure, Porter’s contribution is on advocating to managers, ways to raise firm value by modifying the industry structure to their firm’s advantage and to find a position to deliver a competitive advantage. What Porter did, was transform IE into Business Strategy by shifting the focus to the firm, strengthening some weaknesses of the SCP paradigm (extended it from a one way causal process into a complex system, allowing feed back loops from P to C and from C to S) which allowed the emergence of a dynamic concept of an industry and its structure. For Porter, “the essence of strategy formulation is coping with competition” and competition in any industry does not stem only from competitors, but is also influenced by the underlying structures of the industry. Additionally, the author stresses competitive advantage - which is created and hence can be controlled by individual firms – and not comparative advantage (access to factors of production, like cheap or natural resources) which is mainly inherited. Consequently, the basic foundations were laid to develop the five forces framework which includes competitors, threat of new entrants, substitute products, bargaining power 2

of suppliers and bargaining power of buyers. For Porter, strategy is about making choices to pursue things a firm wants and overlook things it does not want (no firm can be all things to all people). It is a deliberate and conscious effort to be different1 from all other players in the industry. This means that a firm has to set limits on what it is trying to accomplish to become unique which sometimes requires trade-offs between interconnected options to achieve fit. This is a very confrontational view of the world where companies are fighting constantly against the five forces to fend them off and still be able to deliver value to survive. Essentially for Porter competitive strategy “is to find a position in the industry where the company can best defend itself against these competitive forces or can influence them in its favor.” Porter’s five forces model is the conceptual framework for understanding the realities and forces of the external environment. By analyzing their industry through the proposed toolset, managers could understand their current position, influence the structure positively or could define a position where they can uniquely have a competitive advantage. In short, Porter argues that strategy is a race to one ideal position, the creation of a unique and valuable position, where a firm can differentiate itself for the targeted customer and add value by an asset of activities2 different than those of rivals. Additionally, Porter defines strategy as “a combination of the ends for which the firm is striving and the means by which it is striving to get there.” Thus, the author seems to advocate a concept of strategy that mixes some planning (means to get there) with a dominant position. Porter’s contributions to the field of strategy go without saying. He has established himself as the “Strategy Guru”. He refined strategy beyond what his predecessors were able to achieve by introducing new concepts and tools such as feedback loops within an organization (value chain) and within an industry, by highlighting the importance of the

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“It means deliberately choosing a different set of activities to deliver a unique mix of value”

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“distinctive and mutually reinforcing set of activities tailored to a position”

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structural evolution of the industry as well as the firm’s aspiration to reach a unique position within that industry, and by presenting an organization which needs continuity in its basic position but still advocate a “feverish and ongoing process of change” to adapt to changing circumstances. The author seems to accept the fact that an minor changes can occur and provides ways to deal with these kinds uncertainty. However, as he mentions, Porter does not believe that radical change is frequent, rather it is a very rare phenomenon and managers should focus on incremental changes that can better add value. To cope with uncertainty, Porter advocates the need to institute the goal of learning in organizations and couple it with different generic strategies such as making big bets (to resolve uncertainty in the firm’s favor) and experimentation. So a firm has a consistent strategy, but “continuous improvement in how the strategy is manifested”. For Porter, strategy seems to be like mountain climbing where, even if you had the best climbers (managers) on your team, you need to understand the realities of the mountain (industry) before blindly (without strategy) setting forward. The team will try to identify the best path (position), the ways to follow it (plan) and the tools needed (value chain). Although Porter’s model addresses some of the weaknesses of the models preceding his, it presents weaknesses of its own. To begin with, it is questionable whether the model as presented captures all the essential factors that shape an industry dynamics. Where are the influence of government (or regulatory bodies) and the history of a firm captured? Moreover Porter’s focus on the industry dynamics raises three main questions. How an industry is defined and what are its boundaries - where is the environment beyond the industry. How competitors, not present in the industry today but that might appear tomorrow, are dealt with. And most important firms are treated as black boxes without any explanation on the role of their internal workings. Where are managerial choices and firm characteristics? One of the most popular critiques of Porter’s approach is that “he is forever producing laundry lists of “forces” and “factors” and passing them off as explanations”. He seems to be obsessed with designing somewhat simplistic lists mixed with a cornucopia of facts and factors which sometimes can be extreme. 4

Another popular assertion is that, with the proliferation of information, cheap technologies and worker mobility, it is almost impossible to build any sustainable competitive advantage which cannot be copied by rivals. Wouldn’t it be better for firms to focus on flexibility to catch opportunities when they arise? In other words if Porter’s model allows someone to navigate perfectly in mountain climbing, how will it fare if some unexpected events were added to the model such as rapid changing weather, a snow storm, or even an earthquake that structurally modifies the landscape. It is true that Porter’s vision of strategy calls for some adaptation3 but the framework and its details are inherently rigid. It seems that Porter' s key concepts would best be applied in startups environments since an entrepreneur can make use of these industry-analysis tools to decide which industry to enter in the first place. However it is hardly helpful to him in moving forward founding the company and growing it or even for diversified companies which have already significant investments in a given industry with prohibitive exit costs. This is not to deny Porter’s tremendous influence on all kinds of organizational structure where his model have been and still is being used extensively.

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“Path toward a distinctive approach to value creation that can and must be enhanced as new opportunities

arise.”

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