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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