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Copyright 1999 Faulkner
& Gray, a Division of Thomson Information Services, Inc., a New York Corporation
JOURNAL OF BUSINESS STRATEGY
September 1999
/ October 1999
SECTION: COVER STORY
LENGTH: 848 words
HEADLINE: Michael E.
Porter (b. 1947): A Man with a Competitive Advantage
BYLINE: By Pamela Goett
BODY:
"Almost no consensus exists about what corporate strategy is, much less about
how a company should formulate it," Michael
Porter wrote in 1987. By then, he'd taught at Harvard Business School for more than a
decade, having received tenure at the tender age of 26, and had formed his own,
very definite, opinions about what strategy is.
Porter argued that
"the essence of strategy formulation is coping with competition" and that competition in an industry comes not simply from direct competitors,
but from the underlying economics of the industry. After careful research and
thoughtful analysis, he arrived at a practical model of competition, based on
economic principles.
Porter described that model, his famous
"five forces" framework of competition, in Competitive Strategy: Techniques for Analyzing
Industries and Competitors, published in 1980.
Porter's study of industry groups revealed five determinants of long-term
industry profitability. The first is the character of the rivalry among
competitors in an industry, which can range from vicious and warlike to
gentlemanly and subdued. Obviously, the more intense the rivalry, the more
difficult it is to compete in an industry. Second is the threat of new
entrants. If there are substantial barriers to entry, the companies in the
industry will do better than if the barriers are weak. Another factor is the
threat of substitute products or services. If customers have numerous
alternatives from which to choose, the industry's profitability decreases. The
last two forces are the bargaining power of suppliers and the bargaining power
of buyers. If suppliers have the ability to force up the price of what the firm
has to buy, or buyers can force the company to lower prices, provide extra
services, or store inventory, profitability can be difficult or even impossible
to sustain.
Porter maintains that businesses can,
by the way they choose to compete, influence each of the five forces. What they
must do is search for a sustainable competitive advantage, which comes
developing a distinctive way of competing. Simply speaking, an advantage comes
from either by having consistently lower costs than rivals have or by
differentiating a product or service from competitors'. But choosing one or the
other is not enough, and choosing both may lead to disaster. The best
competitors are those that have more than one or two key strengths and
integrate a number of business activities in a way that is
"consistent, interconnected, and mutually reinforcing." Competitors can't just match one source of advantage, they have to match the
entire system.
That Porter's ideas struck a resounding chord with businesspeople is clearly
evident. His consulting services have been sought by firms such as AT&T, DuPont, Procter
& Gamble, and Royal Dutch Shell, and
newly appointed CEOs of billion-dollar companies regularly trek up to Cambridge
to participate in a workshop he runs. He also serves on the executive committee
of the Council on Competitiveness, an organization of business and academic
leaders.
And, especially after the 1990 publication of The Competitive Advantage of
Nations, in which he presented a new theory of how nations, states, and regions
compete, Porter's influence has grown beyond the private sector. Porter
maintains that national competitiveness doesn't rest on natural endowments, but
depends on the nation's industries' ability to innovate and upgrade, and he
rejects the thesis that the rise of global business will lead to the decline of
nationalism. Rather, he believes the creation of competitive advantage is a
localized process and that it is in the company's home base that the essential
competitive advantages are created and sustained.
Porter posits four determinants of national competitive
advantage: factor conditions, demand conditions, related and supporting
industries, and firm strategy, structure, and rivalry. This model has
implications for both government and business: Government policies can
influence all four of the determinants, and businesses can harness locational
advantages while also reaping network advantages.
Not surprisingly, Porter has become an advisor to regions and nations as well
as businesses. He has served on the President's Commission on Industrial
Competitiveness and has led major studies for the governments of India, New
Zealand, Canada, and Portugal, and has assisted state and local governments in
enhancing competitiveness. He has taken a special interest in inner-city
business development and in 1994 founded the Initiative for a Competitive Inner
City (ICIC), a national organization formed to catalyze inner city development.
Critics of Porter's theories have argued that it is
no longer possible for a company to develop a sustainable competitive
advantage, they can only hope to develop enough flexibility so that they can
seize opportunities for temporary advantage when they arise. But until someone
develops a model for strategy that is as elegant as Porter's, the five forces
will continue strong.
LOAD-DATE: September 27, 1999