Business Leaders: Michael Porter
We look at the non-profit founder that Fortune calls "the most famous and influential business professor who has ever lived" and his business strategies
Name: Michael Eugene Porter
Expertise: Leading authority on competitive strategy and the concept of competitive advantage. Currently a professor at the Harvard Business School
Known for: Porter has made several pivotal contributions to management thinking, the most famous being competitive advantage
Best-known titles: Competitive Strategy: Techniques for Analyzing Industries and Competitors (1980); Competitive Advantage: Creating and Sustaining Superior Performance (1985); The Competitive Advantage of Nations (1990); On Competition (1998)
Who is Michael Porter?
Michael Porter is regarded by many as the leading business guru of modern business strategy. Over the past three decades he has continued to break new ground and win accolades. In addition to his academic work, Porter founded Monitor Company, one of the world’s very best strategic management consultancies, where he continues to work. He has advised business, government, and the social sector, serving as strategy adviser to leading international companies including Caterpillar, Procter & Gamble, and Royal Dutch Shell.
What is Porter known for?
Porter’s 1980s work was revolutionary. It provided truly practical frameworks for thinking strategically. His first book, Competitive Strategy (1980), focused on industry and brought the analytical rigor of microeconomics to strategy. It introduced structures to enable managers to analyse industry attractiveness and competitive positioning. Put another way, it enables business people to scratch deep beneath the surface of their marketplace to uncover real and under-exploited opportunities. Competitive Strategy substantially increased awareness of the subject among academic and business communities, and continues to provide the foundation of strategic thinking to this day.
His second book, Competitive Advantage, published in 1985, was equally influential. This companion to Competitive Strategy looked at how a firm can create and sustain competitive advantage in its marketplace. In it Porter set out a system he had developed to look ‘inside the firm’ at what resources it had and how they were used, for identifying advantages against the competition. In the 30 years plus of widespread acceptance since, these fundamental concepts of competitive advantage and sustainable competitive advantage have become the established methods in this area.
Together, these books transformed strategic thinking by developing three linked concepts: the ‘five forces’, ‘generic strategy’ and ‘value chain’ frameworks. Today these concepts remain at the heart of most business school strategy courses. Beyond these two seminal works, Porter has made other lasting contributions to strategy, increasing both its academic rigor and its accessibility to managers. This impressive accomplishment has not been equalled before or since, so Porter’s work continues to provide remarkable insights into the nature of competition and strategy.
The concept of competitive advantage identifies and defines the strategic goals of an organisation. Porter suggests that the goal of every firm is to achieve a competitive advantage over its rivals. To do this it either sells at a lower cost or differentiates its product from that of its competitors.
By obtaining a competitive advantage, Porter argues, a firm can earn profits that are higher than the average profit earned by competitors within the industry (what he calls ‘excess profits’). However, he suggests that achieving a competitive advantage is one thing, but to sustain this advantage is more difficult. A sustainable competitive advantage is one that cannot be duplicated or imitated by other firms entering the industry in the long run and allows a company to compete for the excess profits enjoyed by existing firms.
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Porter proposes that business strategy is the fundamental basis of sustainable competitive advantage for a business. A business’s strategy is a deliberate search for a plan of action that will develop its competitive advantage and compound it. To enable an organisation to devise such a strategy Porter developed the following frameworks five forces, generic strategies and value chain.
Together these frameworks help to understand where the organisation is in its lifecycle and where it might seek to develop in the future. Here’s a quick summary, with the key points for you to apply in today’s business world.
Porter’s five forces is a simple yet powerful framework that helps organisations identify the strength of the five market levers: suppliers, customers, potential new entrants, substitutes (being alternative products that serve the same purpose) and existing competitive rivalry. By knowing the strength of each force, management can decide how to influence or exploit particular characteristics of their market. For example, if the bargaining strength of customers is high (same product offered by a number of companies), to reduce this, a company could consider partnering with other competitors or perhaps provide incentives enticing new customers.
The five forces framework
Source: Adapted from Porter (1980)
When evaluating what strategy to follow, Porter has three generic options organisations can pursue for achieving above average performance. These can be seen as an extension to the five forces analysis, and help determine where a business should position itself against competitors.
Porter suggests achieving competitive advantage requires a firm to make a choice about which type of advantage it should try to achieve, as well as how. Being ‘all things to all people’ is a recipe for strategic mediocrity and below-average performance, and often results in a firm having no competitive advantage at all. He suggests advantage can accrue by choosing one of the following generic strategies.
Porter’s generic strategies
Source: Porter (1980)
• Cost leadership: This is being the lowest-cost producer in the industry. This does not necessarily mean having the lowest price. The price can be the same as competitors’, but by earning higher profits these can be plowed back into the business.
• Differentiation: This market position is where customers are willing to pay a premium price for goods or services offering added value from design, quality and service. This is often a strategy adopted by organisations that recognise they are unable to compete on price.
• Focus: This refers to the market focus, either directed at a niche market or aimed at a wider audience in a range of market segments.
While these generic strategies relate to competitive positioning externally, Porter suggests the advantage stems from the distinct activities a firm performs. To understand a firm’s internal resources and capabilities for leveraging competitive advantage, Porter developed the value chain analysis.
Porter’s value chain identifies sources of competitive advantage from within the organisation itself. He sees this chain as a collection of processes which create value. Examining firms’ activities and how they interact helps to identify where differences lie. Quite simply, an organisation creates value by performing its activities more cheaply or better than its competition. His value chain, including examples of value creating activities, comprises the following.
Five primary activities
- Inbound logistics: quality of components and materials.
- Operations: defect-free products or operational excellence.
- Outbound logistics: fast delivery or efficient order processes.
- Marketing: building brand reputation.
- Sales services: building brand reputation.
Four support activities
- Procurement: purchasing efficiently.
- Technology development: rapid, innovative new product development.
- Human resource management: training to support customer service experience.
- Firm infrastructure: management information system that supports fast response capabilities.
This approach can provide a greater awareness of where costs are incurred, where differences are created and how a business can make them work together. Using this analytical tool to formulate a strategy offers insight into a firm’s strengths and where opportunities may be exploited (from Porter’s five forces analysis) as a basis for competitive advantage.
In summary, it is clear that Porter’s frameworks enable organisations to formulate and develop the most appropriate strategy to achieve competitive advantage. These analytical tools provide insight from both external (five forces) and internal (value chain) perspectives. When embarking on this process these insights are invaluable. If an organisation’s business strategy is to achieve a competitive advantage it must possess a clear strategic direction (generic strategies), as in today’s dynamic marketplace being ‘all things to all people’ is not sustainable in the long run.
How real companies use Porter’s concepts
Dyson Ltd is an excellent illustration of the practicalities of Porter’s concepts in the business world. With an ethos that promotes ‘thinking outside of the box’, its focus on innovation has resulted in the creation of many products which improve on the status quo.
First came the dual cyclone bagless vacuum cleaner. Then the Air Blade hand dryer introduced the first significant improvements in both drying time and hygiene for decades. This product alone meant Dyson broke into the commercial market with large orders from institutions such as hospitals and service stations. To this day innovation continues to build competitive advantage for Dyson.
This success story rings true with Porter’s theory of ‘sticking to’ one generic strategy for creating advantage. In this case, being different by offering unique quality products consistently has enabled Dyson to gain an edge in its marketplace. As Porter suggests in the five forces, by effectively reducing customers’ buyer power as Dyson has done by being the only company offering its products has created advantage.
Not surprisingly, Porter’s (1980) five forces model has some major limitations in today’s business world. It is not easily able to take into account some new business models and the very rapid pace of change in certain markets such as digital technology. The value of Porter’s model is more that it enables managers to think about the current situation of their industry in a structured, easy-to understand way – and remains a very useful starting point for further analysis.
With Porter’s (1980) generic strategies he states that successful organisations will select and concentrate their efforts on implementing just one of the strategies. However, it does appear that while cost leadership and differentiation may be seen as mutually exclusive, successful strategies can be based on a mix of the two. Although Porter’s ideas have been questioned and debated, they nevertheless provide an extremely useful structure for analysing industries and competitive strategy.
The concept of competitive advantage was an attempt by Porter to identify and define the strategic goals of an organisation. To achieve competitive advantage Porter (in 1985) suggests analysing the activities within the organisation through the value chain. However, to succeed in today’s extraordinarily fast-moving business environment it is important not to take too static or unified a view of either the environment or an organisation’s capabilities.
To this day, Porter’s concepts are used in academic and business communities alike. His tools ensure consistency and an appropriate level of rigor and, when applied, the concepts sharpen the focus and ensure a methodical, balanced approach for making sense of this changing marketplace.
Business Gurus, edited by Ian Wallis and published by Crimson Publishing, is available to order now.