Who is Michael Porter?
Michael Porter is Professor of Business Administration at Harvard Business School, and has also consulted with major corporations extensively. In 1983 he was appointed to the President’s commission on industrial competi- tiveness. Michael Porter is a prolific author, best known for his two seminal works:
‘Competitive Strategy’ and ‘Competitive Advantage’.
What is he famous for?
Porter is famous for a number of major innovations in strategy, particularly:
• Porter’s five competitive forces.
• The value chain.
• the generic strategies: differentiation and cost leadership, focus.
• A critique of Internet strategies.
‘Competitive Strategy’ (1980) contains not just Porter’s five competitive forces but also a comprehensive account of the evolution of markets throughout their life cycles.
Porter’s five competitive forces address the question of ‘why are some markets more attractive (in terms of long-term profitability) than others?’ The answer is that they are more attractive than others because of structural reasons.
This is down to (according to Porter), five key forces, namely:
• The bargaining power of the buyers.
• Entry barriers.
• Competitive rivalry.
• Substitutes.
Porter advises that each force should be appraised in terms of its relative attractiveness (high, medium or low). Porters five forces can give you a number of outputs:
• A better prioritisation of markets by their inherent attractiveness.
• A list of the critical success factors in the market, i.e. what things has anyplayer got to get right/avoid getting wrong strategically to succeed.
• Providing insights for the criteria for judging yourself against competitors.
Ideas for changing the rules of the game (e.g. by reducing rivalry by acqui- sitions, shortening the value chain by going direct etc to the end-market) of value-creating activities.
THE VALUE CHAIN
Porter’s value chain splits company operations into a number of generic components, namely:
• In-bound logistics.
• Manufacturing.
• Servicing.
• Sales and marketing.
• Administration.
• Out-bound logistics.
Essentially Porter’s value chain is an (economists) ‘input-output’ model of how value is created in a business. It draws our attention to the internal choices which a company makes in determining how it is going to compete.
The model can also be applied to an industry level, to look in particular at different ways of distributing products or services.
In its modern form it has been called ‘the business model’ – to indicate that it is specific to a particular business – Porter’s headings above (like in-bound logistics) are not terribly helpful. Also it has been subsumed into the ‘Business
it is depicted as more of a ‘system’ (Senge 1990). (See Figure 16) In more recent years his value chain has probably waned in popularity on business school courses. Not only is it perhaps one of the least exciting strategy tools to teach, but it does not often tell you an awful lot without a good deal of tailoring effort – to a specific industry context.
FIGURE 16: BUSINESS VALUE SYSTEM – FOOTBALL INDUSTRY
Porter’s generic strategies comprises of: differentiation, cost leadership, and focus.
A ‘differentiation’ strategy is one where you set out to add more value to your target customers (perceived and real) than your competitors do. This
Sponsorship
Merchandising
Brand
Satellite TV Pay TV
Gate takings Match performance
Player disposal
Player acquisition
Training New player
attraction Net transfer
fees
A ‘focus’ strategy is where you have narrowed your competitive strategy to concentrate only on your target customers and their specific needs, and potentially also your product range. This aims at recouping the advantage of specialisation, either through more appropriate targeting of needs or by economies of scale within a narrower area of the market, thereby achieving lower costs.
Porter suggested that you must choosewhich generic strategies you should focus on, and that if you don’t, then your strategy will not succeed and you will ‘get stuck in the middle.’ (Like Rover Group, which aimed to be differ- entiated in some products, cost leadership in others, covering a wide area of the market and yet sometimes focusing on niches within the organisa- tional structure within different strategic business units.)
The arguments for supporting this prescription are that:
• there are good empirical case studies to support it (like Rover Group).
• culturally, it is very hard to have a differentiation and cost leader- ship mind-set simultaneously, even where activities are semi-insulated from each other.
The arguments against it are that:
• More flexible operations can sometimes fine-tune the delivery or competitive strategies.
• An organisation may have a mixture of superior value creating competencies (leading to ‘motivator factors’ (Grundy 1998b, 2002) along with those more basic standards (or the customers’ ‘hygiene factors’), and that you may therefore just need to juggle these when prioritising how to compete.
Porter has also contributed to our thinking on Strategy and the Internet.
Unsurprisingly Porter’s thoughts on the Internet were that:
‘The five forces would be generally worse, as the Internet made infor- mation more freely available (helping buyers, and increasing rivalry). The Internet also, potentially, reduces long-term barriers to entry.’
But, there might be temporary advantages through simplifying the industry value chain, helping to reduce costs, until customers and competitors bargained that value away.
What are his links to the other gurus?
Porter’s work on competitive advantage is very similar to that of Kenichi Ohmae (1982). Also his competitive forces are an extension of Ansoff’s environmental scanning (1975). Indeed ‘competitive strategy’ is a much more powerful and comprehensive model/process than that developed by Ansoff in the 1960s. Porter’s five forces are also linked with the author’s own idea of ‘the industry mind-set’ as the underpinning competitive force which Porter missed.
What are his main works?
1 ‘Competitive Strategy’, The Free Press, Macmillan, New York, 1980 – a thorough account of the life-cycle dynamics of industries incor- porating the five competitive forces; and of the critical success factors of different phases.
2 ‘Competitive Advantage’, The Free Press, Macmillan, New York, 1985 – Porter’s generic strategies and the value chain.
3 ‘From Competitive Advantage to Corporate Strategy’, Harvard Business Review, pp 43-59, May-June 1987 – an account of how acquisitions should be managed for corporate value.
4 ‘Strategy and the Internet’, Harvard Business Review, March-April 2001: an after-the-event analysis of why the Internet has been disap- pointed in commercial terms.
What are his main concepts?
• Industry life-cycles;
• Porter’s five forces;
• the value-chain;
• competitive advantage;
• sustainability;
• the generic strategies; and
• the competitive advantage of nations.
Ease of reading– ‘Competitive Advantage’ is relatively difficult but well worth it. ‘Competitive Strategy’ is probably still a ‘must read’.