Competitive20 advantage


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Competitive20 advantage

  1. 1. Competitive Advantage by Michael Porter February 2003
  2. 2. In this book Porter shifts his attention from an industry perspective to a companyperspective. The author introduces a model for strategy in organizations that emanatesstraight forward from Industrial Economics (IE). In economics, an industry (market) isdefined by supply and demand. The Structure-Conduct-Performance (SCP) Paradigm,from IE, states that an industry structure is determined by these conditions; hence thecompetitive environment that results shapes the behavior of firms and determines theoverall performance of the players in the industry.Porter, as an heir of the design school (Andrews) and the planning school (Ansoff), wasable to move beyond them by building on their insights to propose a new model whichled to the emergence of a new school of thought: the positioning school. The coreconcepts 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 arein. Where preceding schools advocated an external environment that could be either usedor mitigated (i.e. using SWOT) and where firms had no control over their industrystructure, Porter’s contribution is on advocating to managers, ways to raise firm value bymodifying the industry structure to their firm’s advantage and to find a position to delivera competitive advantage.What Porter did, was transform IE into Business Strategy by shifting the focus to thefirm, strengthening some weaknesses of the SCP paradigm (extended it from a one waycausal process into a complex system, allowing feed back loops from P to C and from Cto 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” andcompetition in any industry does not stem only from competitors, but is also influencedby the underlying structures of the industry. Additionally, the author stresses competitiveadvantage - which is created and hence can be controlled by individual firms – and notcomparative 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 frameworkwhich includes competitors, threat of new entrants, substitute products, bargaining power 2
  3. 3. of suppliers and bargaining power of buyers. For Porter, strategy is about making choicesto pursue things a firm wants and overlook things it does not want (no firm can be allthings to all people). It is a deliberate and conscious effort to be different1 from all otherplayers in the industry. This means that a firm has to set limits on what it is trying toaccomplish to become unique which sometimes requires trade-offs betweeninterconnected options to achieve fit.This is a very confrontational view of the world where companies are fighting constantlyagainst 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 thecompany can best defend itself against these competitive forces or can influence them inits favor.” Porter’s five forces model is the conceptual framework for understanding therealities and forces of the external environment. By analyzing their industry through theproposed toolset, managers could understand their current position, influence thestructure positively or could define a position where they can uniquely have acompetitive advantage.In short, Porter argues that strategy is a race to one ideal position, the creation of a uniqueand valuable position, where a firm can differentiate itself for the targeted customer andadd value by an asset of activities2 different than those of rivals. Additionally, Porterdefines strategy as “a combination of the ends for which the firm is striving and themeans by which it is striving to get there.” Thus, the author seems to advocate a conceptof 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 establishedhimself as the “Strategy Guru”. He refined strategy beyond what his predecessors wereable to achieve by introducing new concepts and tools such as feedback loops within anorganization (value chain) and within an industry, by highlighting the importance of the1 “It means deliberately choosing a different set of activities to deliver a unique mix of value”2 “distinctive and mutually reinforcing set of activities tailored to a position” 3
  4. 4. structural evolution of the industry as well as the firm’s aspiration to reach a uniqueposition within that industry, and by presenting an organization which needs continuity inits basic position but still advocate a “feverish and ongoing process of change” to adapt tochanging circumstances. The author seems to accept the fact that an minor changes canoccur 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 phenomenonand managers should focus on incremental changes that can better add value. To copewith uncertainty, Porter advocates the need to institute the goal of learning inorganizations and couple it with different generic strategies such as making big bets (toresolve uncertainty in the firm’s favor) and experimentation. So a firm has a consistentstrategy, but “continuous improvement in how the strategy is manifested”.For Porter, strategy seems to be like mountain climbing where, even if you had the bestclimbers (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 identifythe 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 aspresented captures all the essential factors that shape an industry dynamics. Where are theinfluence 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 anindustry is defined and what are its boundaries - where is the environment beyond theindustry. How competitors, not present in the industry today but that might appeartomorrow, are dealt with. And most important firms are treated as black boxes withoutany explanation on the role of their internal workings. Where are managerial choices andfirm characteristics?One of the most popular critiques of Porter’s approach is that “he is forever producinglaundry lists of “forces” and “factors” and passing them off as explanations”. He seems tobe obsessed with designing somewhat simplistic lists mixed with a cornucopia of factsand factors which sometimes can be extreme. 4
  5. 5. Another popular assertion is that, with the proliferation of information, cheaptechnologies and worker mobility, it is almost impossible to build any sustainablecompetitive advantage which cannot be copied by rivals. Wouldn’t it be better for firmsto focus on flexibility to catch opportunities when they arise?In other words if Porter’s model allows someone to navigate perfectly in mountainclimbing, how will it fare if some unexpected events were added to the model such asrapid changing weather, a snow storm, or even an earthquake that structurally modifiesthe landscape. It is true that Porter’s vision of strategy calls for some adaptation3 but theframework and its details are inherently rigid.It seems that Porter key concepts would best be applied in startups environments since san entrepreneur can make use of these industry-analysis tools to decide which industry toenter in the first place. However it is hardly helpful to him in moving forward foundingthe company and growing it or even for diversified companies which have alreadysignificant investments in a given industry with prohibitive exit costs. This is not to denyPorter’s tremendous influence on all kinds of organizational structure where his modelhave been and still is being used extensively.3 “Path toward a distinctive approach to value creation that can and must be enhanced as new opportunitiesarise.” 5