Competitive Strategy by Michael E. Porter

8/12/2019 Competitive Strategy by Michael E. Porter

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Competitive Strategy by Michael E. Porter; Competitive Advantage by Michael E. PorterReview by: William B. GartnerThe Academy of Management Review, Vol. 10, No. 4 (Oct., 1985), pp. 873-875Published by: Academy of ManagementStable URL: http://www.jstor.org/stable/258056 .Accessed: 20/03/2014 14:31

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agement Function Fails. California Management Review,26(4), 95-110.

Miles, R. E., & Snow, C. C. (1984) Designing Strategic HumanResources Systems. Organizational Dynamics, 13, 36-52.

Mintzberg, H. (1973) A new look at the chief executive's job.Organizational Dynamics, 1(3), 20-30.

Peters, L. H., & O'Connor, E. J. (1980) Situational constraintsand work outcomes: The influences of a frequently over-looked construct. Academy of Management Review, 5,391-397.

Snell, S. A., & Wexley, K. N. (1985, April) Performance diag-nosis: Identifying the causes of poor performance. Per-sonnel Administrator, 117-127.

Competitive Strategy, by Michael E.Porter. New York: Free Press, 1980, 396pp., $19.95 cloth.

Competitive Advantage, by Michael E.Porter. New York: Free Press, 1985, 557pp., $23.95 cloth.

Reviewed by William B. Gartner, GeorgetownUniversity, School of Business Administration,Washington, D.C.

Two central questions underlie the choice ofcompetitive strategy. The first is the attractive-ness of industries for long term profitability andthe factors that determine it. Not all industriesoffer equal opportunity for sustained profitability,and the inherent profitability of its industry is

one essential ingredient in determining profit-ability of a firm. The second central question incompetitive strategy is the determinants of rela-tive competitive position within an industry. Inmost industries, some firms are much more prof-itable than others, regardless of what the averageprofitability of the industry may be. (Porter, 1985,pp. 1-2).

These two questions are the focus of Porter'sbooks. While it was Porter's intention to orientthe books toward the practitioner, they both offermany theories about the nature of strategic choicein an environmental context and should be ofgreat interest to scholars in strategic management,organizational theory and behavior, particularlythose individuals who believe that strategicchoice exists (Child, 1972) while also recogniz-

ing the deterministic influences of the popula-tion ecology perspective (Aldrich, 1979; McKel-vey, 1982).

Porter conceived his ideas within the contextof industrial economics. He presents these ideasin a manner that is easy to understand. There areno mathematical formulas, no supply and de-mand curves, and he always provides an exam-ple from an actual business situation to supporta point of view. Since Porter does not engage inthe flights of obtuseness of most microeconomists,or overburden the reader with references to theacademic literature in industrial economics, hedevelops some very interesting and compellingideas about industry structure and the nature ofcompetition and makes a powerful case for theusefulness of his ideas for strategic decisionmakers.

At the center of each book is a framework uponwhich Porter builds more complicated and elabo-rate ideas

about industries and competitionamong firms. An industry is defined loosely asthe group of firms producing products that are

close substitutes for each other (p. 5). In Conm-petitive Strategy, where he addresses the ques-tion of industry structure and its influence onprofitability of firms, Porter describes a frame-work of the structure of an industry comprised offive competitive forces: suppliers, buyers, sub-stitutes, potential entrants, and industry rivals.Industry attractiveness, that is, the profitabilityof all the firms competing in the industry, will bea product of the influences of the five forces.Porter analyzes how particular characteristics ofeach of the five forces will influence industryattractiveness. For example, suppliers to an in-dustry will exert powerful influences on anindustry's attractiveness if the suppliers do nothave to contend with other substitute productsfor sale to the industry.

Porter identifies three generic strategies (overallcost leadership, differentiation, and focus) bywhich firms in an industry may attempt to gain acompetitive advantage over their rivals. He pres-ents various techniques for using the industryframework for analyzing industries and for

deter-mining competitive moves of industry rivals, rec-ognizing market signals, identifying strategicgroups, and recognizing changes in an industry'sstructure over time (industry evolution).

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Porter uses the industry framework and thegeneric strategies to develop many interestingideas about what he terms the generic industryenvironments : fragmented industries, emergingindustries, mature industries, declining in-dustries, and global industries. He goes on to dis-cuss three important strategic choices facingfirms: vertical integration, capacity expansion,and entry into new businesses.

The framework and the methods for analyzingindustries provide powerful conceptual tech-niques that many individuals have found useful.For example, Kiechel (1981) found:

Businessmen are already making use of Porter'snotions. Indeed, when an executive at a truck-manufacturing concern was asked recently aboutthe plans for his company, he replied simply,'Read Chapter 12 of Porter's book.' Its title:'Competitive Strategy in Declining Industries.'The advice: attain a leadership position and en-courage others to leave, or else be ready to li-quidate your investment quickly. (p. 184)

Appendix B, How to Conduct an Industry An-alysis, is especially useful for applying many ofthe ideas in Competitive Strategy, particularly asa guide for directing students in analyzing in-dustries.

Competitive Advantage uses the industryframework from Competitive Strategy as a jumpoff point for developing ideas about how firmsattain competitive positions within an industry.Porter posits that a firm's competitive position,its competitive advantage, is the value a firm isable to create for its buyers that exceeds the firm's

cost of creating it (p. 3). He presents a newframework for analyzing a firm's comparativeadvantage labeled the value chain, which iscomprised of the primary activities of: inboundlogistics, operations, outbound logistics, market-ing and sales, and service; and the support activi-ties of: firm infrastructure, human resource man-agement, technology development, and procure-ment which span across all five of the primaryactivities. Using the value chain framework, hethen goes on to explore how firms use the threegeneric strategies (overall cost leadership, dif-ferentiation, focus) to create and sustain a com-

parative advantage. The remainder of the book isa melding of the industry framework ideas andthe value chain framework ideas to address suchissues as: the role of competitor selection, indus-try segmentation, determinants of substitution,

corporate strategies for firms diversified intomany different industries, and offensive anddefensive strategies.

Both books are rich in ideas. The appeal andpower of the books come from Porter's frame-works, which can hold on to so many differentideas in a coherent manner and show their inter-relations. The frameworks are highly useful toolsfor organizing our thoughts and experiences aboutcompetition of firms within industries. Theframeworks will continue to gain in strength asboth practitioners and scholars work with them.One will find it very helpful to think throughand assimilate the concepts in both books byusing Porter's case book (Porter, 1983). The casebook provides details for most of the excellentexamples which Porter uses in the other twobooks. The teaching manual, particularly, pres-ents an excellent logic in process and showshow Porter thinks through his ideas and how

they help to clarify specific situations in industry.Both books make accessible some of the ideasoriginating in the industrial economics literature,though Porter does not provide references toground his ideas in the literature. Readers whowant an introduction to industrial economicsshould look at Greer (1984) and Scherer (1980).

Porter's books overflow with ideas which cryout to be borrowed and put to further use. Theseideas (given proper recognition) should be copied,modified, revised, and expanded. The ideas arenot systematically supported, that is, the exam-ples and illustrations are selected to support theideas Porter provides. A suspicion is that otherexamples might be found to make the counter-argument and this could lead to some excellentstudies. And ideas presented in each chapter ofPorter's books could become the bases of manydissertation topics.

Starting with Porter's propositions about thebehavior of firms and industries, one could buildexpert systems to assist in generating competi-tive strategies for specific industry and firmsituations. For example:

A buyer group s powerful if the following circum-stances hold true: It is concentrated or purchaseslarge volumes relative to seller sales. . . The prod-ucts it purchases from the industry represent asignificant fraction of the buyer's costs or pur-chases.. . The products it purchases from theindustry are standard or undifferentiated.... The

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industry's product is unimportant to the qualityof the buyers' products or services. .. It faces fewswitching costs. (Porter, 1980, pp. 24-25.)

Since the propositions are a series of if-thenstatements that are somewhat causally linked toeach other in a complex fashion, these rulesfor competitive behavior could be modeled andtested (Hayes-Roth, Waterman, & Lenat, 1983).

A single disappointment with both of thesebooks is their somewhat myopic or selective viewof the strategic management literature. No recog-nition of other views of strategic typologies wasgiven, though many thoughtful, empirically gen-erated studies have been undertaken (Miller andFriesen, 1984; Miles and Snow, 1978). Given thatthe books are practitioner oriented, one mightexcuse this as simply a decision to omit lengthyor boring discussion of the academic literature.Yet Porter does discuss the literature generatedby the Harvard Business School, and he doesthis very much to the exclusion of the literaturedeveloped at other schools, inclusion of whichcould have improved these books. This is partic-ularly the case for Chapter 13 in CompetitiveAdvantage, Industry Scenarios and CompetitiveStrategy under Uncertainty. Porter presentssome rather weak scenario building strategies,yet he had only to look across the Charles Riverto see that M.I.T. has been studying scenariobuilding (system dynamics) for the last twentyyears, and has developed a very rich literatureon this subject. As an introduction to scenariobuilding for industry settings, readers might lookat Forrester (1961) and Lyneis (1980). A very

goodexample of applying system dynamics to under-standing complex situations is Hall's analysis ofthe Saturday Evening Post (Hall, 1976). A simpleyet powerful methodology for building scenariosfor policy issues is available in Hall (1978).

Yet, even though there are few specified con-nections (a couple of footnotes would have suf-ficed) to the strategic management and industrialeconomics literature, Porter's two frameworks(industry structure and value chain), will be-come central methods by which we explore thenature of organization behavior in environmen-

tal contexts.

ReferencesAldrich, H. E. (1979) Organizations and environ-nents. Engle-

wood Cliffs, NJ: Prentice-Hall.

Child, J. (1972) Organizational structure, environment andperformance: The role of strategic choice. Sociology, 6,1-22.

Forrester, J. W. (1961) Industrial dynamics. Cambridge, MA:The MIT Press.

Greer, D. F. (1984) Industrial organization and public policy.(2nd ed.). New York: Macmillan.

Hall, R. I. (1976) A system pathodology of an organization:The

rise and fall of the old Saturday Evening Post. Admin-istrative Science Quarterly, 21, 185-211.

Hall, R. I. (1978) Simple techniques for constructing explana-tory models of complex systems for policy analysis. Dy-namics, 4, 101-114.

Hayes-Roth, F., Waterman, D. A., & Lenat, D. B. (Eds.) (1983)Building expert systems. Reading. MA: Addison-Wesley.

Kiechel, W. III. (1981) Three (or four, or more) ways to win.Fortune, 104 (8), 181-188.

Lyneis, J. M. (1980) Corporate planning and policy design: Asystem dynamics approach. Cambridge, MA: The MITPress.

McKelvey, B. (1982) Organizational systematics. Berkeley,

CA: University of California Press.Miles, R. E., & Snow, C. C. (1978) Organizational strategy,

structure, and process. New York: McGraw-Hill.

Miller, D., & Friesen, P. (1984) Organizations: A quantumview. Englewood Cliffs, NJ: Prentice-Hall.

Porter, M. E. (1983) Cases in competitive strategy. New York:The Free Press.

Scherer, F. M. (1980) Industrial market structure and eco-nomic performance (2nd ed.). Boston: Houghton Mifflin.

Strategic Management of Industrial R&D,edited by Barry Bozeman, Michael Crow,and Albert Link. Lexington, MA: Lexing-ton Books, 1984, 227 pp., $25.00.

Reviewedby Warren B. Brown,Graduate choolof Management, University of Oregon, Eugene,Oregon.

The management of industrial technologyclearly has become a major area of interest foracademics nd practicingmanagers like.A widevariety of current oncerns ie behind this phe-nomenon, all connected o technological devel-opments: for example, the increased attentionpaid to economic development and job creationat the national evel; the increased competitionfrom nternational irms; hefrequent roduct ndmarket hifts buffeting ndividual irms; and the

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Competitive Strategy by Michael E. Porter