Critically assess porter’s contribution to strategic thinking
Henry Mintzberg, Abraham Maslow and Michael Porter are renowned gurus whose hard works have left a footprint on management. Some of their works has helped in explaining the success and failure of big businesses over the past few decades and question marks have been raised in recent years if their work can still be applied to our present environment considering the rapid rise in globalisation and technological innovations.
Few of the works done by these management experts have been on significant topics such as leadership, strategy and motivation, but this essay will focus on the effort of Porter in elucidating how businesses can gain competitive advantage in our growing competitive environment. The essay aims to assess Porter’s contribution to the way in which people in an organization think about, assess, view, and create the future for themselves and their associates. However, given the space available the essay will only take a detailed look at the most criticised work of Porter and only few of his other works will be described.
This essay will be based on previous researches by academics and strategists, and all information should not be judged as accurate but as a springboard since they are mostly based on historical theories. In order to get a grip of the essay; it is necessary to highlight the key words related to the topic of the essay as any precise delusion can de delusive. To start with, Wit and Meyer (2002) defined strategy in terms of organisational objective as a course of action for achieving an organization’s purpose.
For Kay (1996), strategy is the match between the organisation’s internal capabilities and its external relationships, describing ‘how it responds to its suppliers, its customers, its competitors, and the social and economic within which it operates’ (cited in Boddy, 2002 page 165). Both definitions are acceptable but assessing various strategies is the theme of the essay that is why a well defined structure of the essay is required. The first part will introduce Porter’s works, the major assumptions of five forces analysis and Resource Based View.
The second part will detail the fundamental differences between Porter’s work and recent works such as RBV before highlighting key areas of debate principally those presented by D’Aveni, Hamel and Downes. The third part will give a brief evaluation on how Porter’s work has developed our understanding of Strategy which will help develop a conclusion to the essay. From the eighties, Porter has developed a number of models for businesses on how to gain competitive advantage.
Porter developed models such as three generic strategies, five forces analysis, Porter’s diamond and value chain. In his three generic strategies model, Porter (1980b, 1985) identified two basic types of competitive advantage namely low cost or differentiation (cited in Wit & Meyer, 2002 page 350). He developed a third generic strategy from this called focus and proposed that an organization that hopes to achieve a sustainable competitive advantage must implement one of the three strategies.
This is not the first and the very last of Porter’s works and another model he developed was value chain analysis (1985) where Porter argued that it is necessary to examine activities separately in order to identify sources of competitive advantage (Boddy 2002, page 166-167). The value chain provides a way to identify a firm’s sources of differentiation where it results from actual uniqueness in creating buyer value and from the ability to signal that value so that buyers perceive it (Toby Harfield, Strategic Management and Michael Porter: a postmodern reading).
However, it is five forces analysis that has attracted the most number of criticisms. The model, developed by Michael E. Porter in his book “Competitive Strategy: Techniques for Analyzing Industries and Competitors” in 1980 (www3) pointed out that the state of competition in an industry is determined not only by the existence of competitors but also by the strength of buyers (customers) and suppliers, by the existence of substitute products or services and by the ability of new competitors to enter the industry which he collectively referred to Porter’s five forces.
However, he argued that whatever the collective strength, the corporate strategist’s goal is to find a position in the industry where his or her company can best defend itself against these forces or can influence them in his favour (Mintzberg et al, pg 61). Thorelli 1977; Masson & Quall 1976 explained that forces mentioned above determine the conduct of firms, which in turn determines firm performance (Toby Harfield, Strategic Management and Michael Porter: a postmodern reading).
Although the five forces analysis has become an important device for analyzing strategy the vast number of criticisms received consequently led to the development of a different approach called the Resource Based View (RBV). RBV, which has received the highest number of plaudit since the evolution of Porter’s work was first spotted in Wernerfelt’s article in 1984 before further development by Rumelt 1984, Barney (1986a; 1986b; 1988; 1991) (power point).
RBV explains how a company’s resources drive its performance in a dynamic competitive environment (David J. Collis et al, 1995, pg 118-128). The idea behind the development of RBV is to state the importance of resources to gaining competitive advantage over rivals where resources are heterogeneous in nature. In clarifying the prerequisite of resources Barney (1991) explained that a firm resource must be valuable, rare, and imperfectly imitable and substitutable in order to be source of a sustained competitive advantage (cited in Henderson and Mitchell, 1997).
However, both frameworks have received appraisals but conflicting assumptions have been made by both theories which further developed more theoretical views. Porter 1980 assumes that understanding the external environment and decision making (or “moves”) according to the five forces is the primary role of strategy, thus opposing the argument of Barney 1986a who argued that analyzing internal skills and capabilities produces more accurate information on the potential value of strategic resources than does environmental analysis (www2).
Barney’s argument wasn’t wholly accepted by Priem and Butler (2001 a & b) but argued that Barney’s (1991) statement “if a resource is valuable and rare, then it can be source of competitive advantage” is necessarily true if the concepts ‘valuable’ and ‘competitive advantage’ are defined in the same terms (cited in Henderson and Mitchell, 1997). It is obvious from this point that Porter’s assumptions have developed other strategist notions which are cited further.
Another underlying assumption made by Porter is the homogeneity of firms which revealed that all firms have the same ability to implement the right strategy, which contradicts the basic premise of the RBV that all firms are different and consequently do not have the same ability to implement a given strategy (www1). Even though both theories have been applauded, theorists have not been totally overwhelmed by the five forces analysis and RBV; different strategies are still in constant development which they deem useful for our current environment.
D’Aveni (1995) in his article “Coping with hypercompetition” claimed that no organization can build a competitive advantage that is sustainable in our dynamic environment as any advantage gained is only temporary, therefore companies must actively work to disrupt their own advantages and the advantages of competitors by employing a new 7S’s framework. IBM is an example mentioned to have suffered from ignoring this approach.
Firstly, this view opposes that of Porter and RBV as its strategy does not believe in a sustainable competitive advantage. Secondly, it can be deduced from D’Aveni’s article that Porter’s model assumes a relatively static market structure (Porters five forces article www3) by saying that the forces mentioned by Porter such as buyer and supplier power (Five forces analysis) that raises barrier to entry and leadership in price and quality (three generic strategies) are not enough to guarantee success.
Downes (2001) saw a similar argument in his article “Beyond Porter” where he quoted that “Porters theories base on the economic situation in the eighties and the period was characterised by strong competition, cyclical developments and relatively stable market structures”. He condemned the view made by Porter that competitive advantages develop from strengthening the own position within the five forces framework and stated that three new forces namely digitalization, globalization and deregulation should be taken into context has the main driver for change today is technology.
Hamel (1996) also conducted a work on strategy in an article called “Strategy as Revolution” where he categorised companies based on their successes into rule makers, rule takers and rule breakers. Logically, IBM whose strategy was also questioned by Downes (2001) was tagged as a rule maker because they have shaped their industry but subsequently failed. Tagged with rule breakers (the industry revolutionaries) is Dell Computer whose intent is to overturn the industrial order with the support of the crumbling oligarchy under the weight of deregulation, technological upheaval, globalization and social change.
It is evident that Porter’s five forces analysis is extremely influential in the field of strategic management as it has developed other strategic views and further improved our understanding of strategy. Porter’s work has been the basis for recent strategic notions and his work has received more criticism than RBV which followed suit. Referring back to the question, Porter has developed numerous strategic frameworks with the most criticised work being the five forces analysis which has the most impact on strategic thinking.
His work mystified many strategists because of the one-sided approach of the model where it made certain assumptions such as external environment is the primary role of strategy, homogeneity of firms and market structures are relatively stable. These assumptions led to the development of RBV whose main unit of analysis was the internal environment. RBV claimed that the key to sustaining competitive advantage is to have resources which are valuable, rare, imperfectly imitable and substitutable.
Briem and Butler debated this approach where they said it is the way the concept are defined that determines if it is a source of competitive advantage. Other strategists were not left in the cold and they voiced out their criticisms of Porter’s work. D’Aveni stated that there is no sustainable competitive advantage and market structures are dynamic. Downes claimed that three new forces namely digitalization, globalization and deregulation should be taken into context has the main driver for change today is technology and not just the forces mentioned by Porter.
Lastly, Hamel in his article explained that companies can either be a rule taker, maker or breaker. In order to give a valid conclusion to the essay, it is important to reconsider the definition made by Kay (1996) where strategy definition was given has the match between the organisation’s internal capabilities and its external relationships. It would be correct to state that a successful strategy will take both the internal and external environment into consideration when developing its strategy.
It is obvious that neither the five forces analysis nor the RBV has done so in this case; none of the theories can be considered capable of achieving competitive advantage but will only be valuable if both approaches are combined. Based on the level of knowledge of this essay it would be interesting to see a strategist which will develop a strategy that will link the internal resources with the external environment.