Michael Porters Contribution to the Field of Strategic Management - Essay Example

? A Critical Assessment of Michael Porter’s Contribution to the Field of Strategic Management Outline Introduction A Critical Assessment of Michael Porter’s Contribution to the Field of Strategic Management Overview of Competitive Advantage A Critical Assessment of Competitive Advantage Overview of Five Forces Model A Critical Assessment of Five Forces Model Overview of Generic Strategies of Cost Leadership, Product Differentiation and Focus A Critical Assessment of Generic Strategies of Cost Leadership, Product Differentiation and Focus Conclusion References Introduction The contributions of Michael Porter have had a very profound and all – encompassing influence in the field of strategic management. As a matter of fact, his works have received special attention not only in the business theory but most especially in the practice of the business field. Generally, what he has offered to the field is how a business can establish a competitive advantage through emerging a competitive strategy (Porter, 1980; Porter, 1985; Porter, 1987; Porter, 1991; Porter & Kramer; 2006). In particular, Porter has contributed mainly the following: five forces model (1980); generic competitive strategies of cost leadership, product differentiation, and focus (1980; 1985); competitive advantage (1985; 1987); four corners model (1980); value chain (1985); diamond model (1990), and market positioning strategies. Since Porter’s contributions have created a pervasive influence on business theory and practice, a lot of strategists from different fields have considered examining, recommending or applying his ideas. Nonetheless, given that his contributions have received widespread attention, it is the case that his ideas have been subject to criticisms. As a matter of fact, despite the fact that it made his 1980 book entitled “Competitive Strategy” the ninth most influential management book of the 20th history (Bedeian & Wren, 2001: 223), Porter’s five forces model received criticisms. In this regard, this paper delves mainly at critically analyzing and evaluating Michael Porter’s contribution to the field of strategic management. In order to give more focus and attention to the works of Porter to the strategic management area, this paper is limited to evaluating only three contributions. Basically, it aims at answering three points. First, it plans to look at Porter’s concept of competitive advantage. After analyzing the concept, second, this paper examines one of the specific types of strategies, his five forces model. The consideration of choosing this particular contribution is because of the fact that despite this model made his book the ninth most influential management book of 20th history, still, it received criticisms. Third, it also intends to assess his generic competitive strategies of cost leadership, product differentiation and focus. This work is selected because he considers such strategies to be generic. Meanwhile, the exigency to critically assess Porter’s contribution is because there is a need to understand why he has happened to be one of the most influential characters in the field of strategic management. This paper is of significance because it offers a deeper understanding of key concepts, ideas and debates in the said field. Likewise, the importance of this paper is that it can offer a critique of Porter’s work. To pursue the objective of this paper, this paper is structured in giving initially an overview of each contribution of Porter which is then followed by a particular critique of his work: competitive advantage, five forces model, and generic competitive strategies of cost leadership, product differentiation and focus. Lastly, it discusses the outcomes of this critical assessment. A Critical Assessment of Michael Porter’s Contribution to the Field of Strategic Management Overview of Competitive Advantage As a concept, competitive advantage is meant by Porter (1980) as a competence achieved via attributes as well as resources in order for higher level performance relative to others in the market. Basically, Porter’s competitive advantage theory proposes that businesses must consider engaging in strategies which make and sell high – quality goods at an expensive rate in the market. From this perspective, it assumes an idea that universality of cheap labor. It also considers that having natural resources are not really advantageous for a good economy. On the overall, the concept suggests that it is the capacity to be at a frontrunner of the competition through superior performance. Hence, competitive advantage builds up and reinforces the better positions of businesses within the market. A Critical Assessment of Competitive Advantage Basically, the concept of competitive advantage is criticized for its circularity (Klein, 2001: 3 – 4). In other cases, the concept is reduced to an advantageous performance in the market which is usually measured through its financial performance. Similarly, Kay (1993) equated competitive advantage with superior financial performance. In addition to that, the concept of competitive advantage has an ontological confusion (Kleins, 2001: 5). According to Kleins (2001: 5), a related problem with the concept is also causal ambiguity. He said that the declaration of the association between something which is owned and the competitive results yields the problem of included implied causalities. On the other hand, the problem with competitive advantage as a concept is also relativity (Kleins, 2001: 5). It is the case that the firms are understood to own such competitive advantage. Given this, it may offer a consequence of thinking of the firm’s objective qualities as characteristics of owning the competitive advantage. Nonetheless, the relative nature of competitive nature is assumed naturally by Kay (1993). To whom competitive advantage is made reference to is a question. According to Kleins (2001: 6), competitive advantage is also vague because it is not known whether if it applies to product or firm. However, this ambiguity was attempted to resolve by different authors. In 1993, Kay pointed out the differences on capabilities and competitive advantage. Capabilities are said to be characteristics of firm while on the one hand, competitive advantage is a product of such applied capabilities in the market arena. In 2000, Hunts attempted to address the vague nature of Porter’s competitive advantage concept. For him, competitive advantage is applied to outline and define the market position while comparative advantage is used in order to express the advantage in firm resources (Hunts, 2000: 136). Overview of Five Forces Model Porter’s five forces framework is a strategy used for analyzing industries which basically derive the five forces which are considered to be the elements of competition in the market. This framework of pure competition can be applied to further understand the industry context of its particular industry. The application of this strategic tool offers the determining factor for profitability (Porter, 1980). Moreover, his five forces model is made up of three external sources and two internal threats. These forces which determine the industry’s profitability include the following: rivalry, threat of substitutes, bargaining power of the suppliers, bargaining power of buyers, and threats of new entrants. According to Grundy (2006:215), this proposed model by Porter is valuable because of a number of reasons. First, it provides an illustration of how competitive rivalry takes place. Second, it aids in the prediction of the rates of return in the long run. Third, it assists in merging together the input – output analysis of a particular industry through the said forces. Fourth, it highlights the significance of looking for imperfect markets. Fifth, it offers not just a simplistic focus on relative market growth rate in establishing market profitability. Sixth, it enables to take the external environments into consideration which is far better than SWOT analysis. Seventh, it is an efficient tool for applied systems of thinking. Last, it presents a simplified micro – economic theory via the five main forces. A Critical Assessment of Five Forces Model Despite the case that the five forces model can be considered the most influential model in theory, Grundy (2006: 213) claimed that in practice, it is not likely applied by managers. This is for the reason that the model is no longer applicable with the market environment today given its major limitations (Recklies, 2001a: 6). On the overall, its weakness has originated in its historical context (Recklies, 2001a: 6). When Porter has developed his ideas based on the economic situation characterized by recurrent developments, strong competition and moderately stable market structures (Recklies, 2001b: 1). In Recklies’s (2001a) review of the five forces model, he pointed out a number of reasons that have caused the reduced importance of applying the said model in strategic management. First, he suggested that the assumption of Porter’s model is that there is a classic perfect market (Recklies, 2001a: 5). However, it is the case that in reality, the market environment is complex as compared to his assumption. Second, the said model is most appropriate to apply in simple market structures (Recklies, 2001a: 5). Analyzing a more complex market structure happens to be problematic in his five forces model since the focus on particular elements of industries can be missed out. Third, it is also limited in a sense that it assumes a relatively static market structures (Recklies, 2001a: 5). Nevertheless, the case of today’s market is not static but dynamic. Hence, the business model is not most applicable to use in the real world for the reason that it barely offers much important advice for preventive mechanisms (Recklies, 2001a: 6). Last, five force analysis is limited due to its context of competition (Recklies, 2001a: 6). Having the assumption of companies trying to achieve competitive advantages, his model takes for granted the strategic measures like electronic linking of information systems, virtual enterprise – networks, and others (Recklies, 2001a: 6). In general, given its historical context, the new business models as well as dynamic market structures are not taken into consideration in his five forces model. This is basically its major limitation. Given this, it cannot analyze or explain the changes of the dynamic market of today which have the control of changing the entire industries (Recklies, 2001b: 1). Nonetheless, the significant contribution of this particular idea is that it provides a starting point of further analysis: it allows to think and to know about the present - day condition and position of the industry in a systematic way (Recklies, 2001a: 6). On the one hand, Larry Downes claimed that Porter’s assumption is no longer viable because of the three new forces that are affecting the current operations and planning (Flower, 2004: 406). The role of information technology (IT) is no longer an instrument for implementing change as it is before in Porter’s world but its role today is the most significant key driver for change (Recklies, 2001: 2). Given this, digitalization, globalization and deregulation are the identified by Downes as the three new forces that play a significant impact in the new business environment of having the world of global computer network, hence the internet (Flower, 2004: 406). First is the digitalization. According to Downes, the power of IT intensifies making all market players have access to far more information (Flower, 2004: 406). As a result of such information explosion, the market will be altered massively involving unfamiliar and unpredictable competitors as well as partners (Flower, 2004: 406). According to Recklies (2001b: 1), this creates a totally new business models in which even the external market players can change vastly based on the existing competition in the market. As an example of digitalization is the rise of electronic shopping malls run by credit card organizations or even by telecom operators (Recklies, 2001b: 1). Hence, using this five forces model in this new market set – up will not likely perceive the changes that lie ahead (Recklies, 2001b: 1). As for the second force, globalization has enabled the world despite the borders of the country become interconnected, distribution logistics as well as communications have significantly improved, thus, allowing almost all businesses to transact on a global scale level (Recklies, 2001b: 1). According to Flower (2004: 406), the information seekers can obtain massive information regarding the resources that they find to be cost efficient, reliable and accurate over time. Customers can now border less shop on almost about anything as they measure up prices globally. As a result, even the locally oriented mid – sized companies find themselves competing in a global market (Recklies, 2001b: 1). Likewise, the new business environment powered by IT has enabled the global and networked market to impose new conditions on business strategies (Recklies, 2001b: 1). On the one hand, deregulation also is seen as a new force affecting the business environment because it frequently leads to new ventures that has very little consideration for the conventional enterprises or traditional relationships (Flower, 2004: 406). Instead, the open market that embraces IT faster has become a practical option (Flower, 2004: 406). The consequences of this change are the radical shrinking, outsourcing and even restructuring of the conventional enterprises (Flower, 2004: 406).Generally, the new opportunities brought by IT has fuelled the organizations to completely restructure their business as they search for viable alternatives (Recklies, 2001b: 1). Meanwhile, in his review of five forces model, Grundy (2006: 215) pointed out several limitations to Porter’s framework. Despite of having an evaluation of more specific micro level relationship of product – market segments, it is more likely to overemphasize macro analysis such as at the industry level. Apart from that limitation, the said framework overgeneralizes industry value chains. Likewise, it is limited on its failure to directly connect to such possible management actions. In addition to that, it promotes the perception of industry as a specific entity having on - going boundaries though in today’s reality, this is less applicable because industry borders seem to be far more fluid. Also, it looks as if the framework is self – contained and not specifically related to dynamic growths or PEST factors in a specific market. Lastly, Grundy argued that the framework is over – branded since it s jargon is understood in theory and less in practice. With such limitations, Grundy (2006: 227) proposed that Porter’s five forces framework can be further developed by: combining it with other strategic tools like PEST factors and growth drivers; focusing on it together with other competitive force field sort of analysis; inspecting the sub - forces at work evaluating other interdependent relationship of the system;; examining the impacts and dynamics of the industry mind – set; and segmenting markets in order to analyze differences variations within the competitive environment. Overview of Generic Strategies of Cost Leadership, Product Differentiation and Focus According to Porter (1980), if attractiveness in the industry is the main key determining factor in profitability of a market, then the position it holds in a particular industry is its secondary determinant. By means of positioning, he said that it is obtained through leveraging its strengths. Meanwhile, he suggested that success in the generic strategy can be achieved via cost leadership or differentiation. When these two strengths are applied acquire and retain the competitive advantage, it results to three strategic tools that are not dependent to any firm or industry. These generic strategies are namely cost leadership, differentiation and focus. First is the cost leadership strategy which indicates that having a competitive advantage can result from attracting the price – sensitive or cost – conscious customers through the low – priced product for a given level of quality. Basically, its premise states that firms must offer lower cost that it rivals to attract more customers that will lead to market profitability and high rates of return for the industry. Next, differentiation strategy suggests that firms should go for developing unique products and services that can be seen as more valuable and better than the other existing products in the market. Given its value, it can be a strategy for the firms to sell it in a premium price. Last, the focus strategy considers a principle that the needs of a segment can be addressed better through completely focusing on their needs. A Critical Assessment of Generic Strategies of Cost Leadership, Product Differentiation and Focus Porter’s generic strategies of cost leadership, product differentiation and focus have received prevalent recognition. Nonetheless, this specific contribution to the field has also been subject to numerous criticisms by a number of scholars. It is the case that Porter (1980: 36, 43) identified cost leadership strategy as the reason behind General Motors’ (GM) success. However, for Datta (2006: 10), this claim must be questioned because differentiation can also be regarded as a contributor to the accomplishment of GM. Aside from that, while Porter regarded cost leadership and differentiation as two separate strategies, Mintzberg (1988) described cost leadership as a differentiation strategy in itself. While Porter (1980: 37) equated product differentiation with uniqueness, Mintzberg perceived differentiation as more in correspondence with its practice in the marketing area. Since Dickson and Ginter (1987: 4) claimed that a differentiated product is seen by the customer to differ from competition based on its product characteristics whether physical or non – physical, Mintzberg had considered cost leadership to be a differentiation strategy grounded on the premise that differentiation is based on lower price and not on higher quality. On the overall, Mintzberg (1988) believed that there are only two dimensions in business strategy such as differentiation and scope. On the one hand, Speed (1989) agreed with Mintzberg’s (1988) review of Porter’s strategy of cost leadership. For him, a cost leader should match its price equivalent to the competition when not willing to compete on a lower price. That is to say, it must maintain a parity or proximity in this sort of differentiation strategy. Likewise, Sharp (1991) had this same point of view when he argued that to have a cost advantage is merely a driving force for differentiation which generally happens on price. In this regard, he pointed out that how Porter explained low cost cannot be reduced to a strategy. Basically, cost leadership is not a detached, unconnected and independent strategy (Partridge and Perren, 2004). In terms of differentiation strategy, while it is the case that cost and leadership are two equal generic strategies that can lead to overtaking the competition (Porter, 1980: 35), there are some scholars who rejected this claim of Porter (Hambrick, 1983; Peters & Waterman, 1982). For Peters and Waterman (1982: 186), instead of being oriented to the cost, the high – performing companies in various industries are more concerned with customer value. On the one hand, Hambrick (1983) suggested that differentiation strategies result to more profits than the cost leadership strategies because the basis of competition of market share leaders is on differentiation and not on low cost. Generally, what we are seeing here is that for the others, cost leadership and differentiation are two unequal generic strategies in business for the reason that differentiation strategy is based on offering superior quality relative to the competition. Contrary to Porter’s idea, Hill (1988) argued that what differentiation strategy usually offers is a low – cost position due to growth in sales volume, learning curve as well as economies of scale and scope. In 1996, Pitelis and Taylor also agreed that through higher volume in sales, the differentiation as well as cost leadership can be achieved. Basically, the critics of Porter suggested that cost leadership and differentiation strategies are not separated but function as portion of its wide – ranging continuum. For Hill (1988), cost leadership and differentiation strategies can be combined together in order to obtain a competitive advantage. In this regard, it can be said that Porter’s basic premise which links differentiation with uniqueness and premium prices is in a point of fact, flawed. So, there is a need to redefine Porter’s narrow idea on differentiation. Differentiation is not just about uniqueness and premium price (Datta, 2009). Conclusion In this critical evaluation of Michael Porter’s contribution, it is the case that his ideas are significant and advantageous to the field of strategic management. Though it can be said that his ideas and works may not be that much relevant, applicable and suitable in this day and age business market environment, Porter's contributions have been so much influential that it just needs to be updated and reinvented. From improving his ideas, the other thinkers within the field of strategic management have developed their own frameworks and theories. Through assessing his competitive advantage, I can say that despite the fact that there are areas of the said concept to be problematic, it has still given a general idea of how businesses can obtain advantage over the others in the industry. In the five forces analysis, I cannot agree less on the criticisms that the said framework received. It may have several limitations but still, its values are even more that its imperfections. Its values are manifold including: an illustration of how competitive rivalry takes place; the prediction of the rates of return in the long run; merging together the input – output analysis of a particular industry through the said forces; emphasis on the significance of looking for imperfect markets; offering not just a simplistic focus on relative market growth rate in establishing market profitability; taking the external environments into consideration which is far better than SWOT analysis; serving as an efficient tool for applied systems of thinking; and offering a simplified micro – economic theory via the five main forces. Its main limitation can be based on its historical context. However, reinventing the framework would just add up other new forces that are relevant with today’s business environment. On the one hand, for his generic strategies, I actually concur with the criticisms they received. There is really a need to redefine his rigid idea concerning differentiation since it is not just about uniqueness and premium price. Hence, in this review of the selected main contributions of Porter, I consider his five forces analysis to be the greatest. References Bedeian, Arthur G. &Wren, Daniel A., 2001. Most influential management books of the 20th century. Organizational Dynamics 29 (3), pp. 221–225. Datta, Y., 2009. A critique of Porter’s cost leadership and differentiation strategies. 2009 Oxford Business & Economic Conference Program. ISBN: 978-0-9742114-1-9 Dickson, P. R., & Ginter, J. L. , 1987. Market segmentation, product differentiation, and marketing strategy. Journal of Marketing, April, pp. 1-10 Flower, E., 2004. Competition, technology, and planning for libraries and information services. International Journal of Knowledge, Culture and Change Management 4, 403-408. Grundy, T., 2006. Rethinking and reinventing Michael Porter’s fiver forces model. Strategic Change 15, pp 213 – 229. Hambrick, D.C. , 1983. High profit strategies in mature capital goods industries: A contingency approach. Academy of Management Journal, December, 26, 687-707. Hill, C. W., 1988. Differentiation versus low cost or differentiation and low cost: A contingency approach. Academy of Management Review, 13, 401-412. Hunt, S. D., 2000. A general theory of competition. Thousand Oaks: Sage. Kay, J A., 1993. Foundations of corporate success. Oxford: Oxford University Press. Kleins, J., 2001. A critique of competitive advantage. Critical Management Studies Conference, July 2001 Manchester [pdf]. Available at: Accessed [12 July 2012] Mintzberg, H., 1988. Generic strategies: Toward a comprehensive framework. In R. Lamb, & P. Shrivastava (Eds.), Advances in strategic management (Vol. 5). Greenwich, CT: JAI Press. Partridge, M., & Perren, L., 1994. Developing strategic direction: Can generic strategies help? Management Accounting (London, England), 72 (5), pp. 28-29Porter, M.E., 1980. Competitive strategy. New York: Free Press. Peters, T. J., & Waterman, R. H., Jr., 1982. In search of excellence. New York: Harper & Row. Pitelis, C., & Taylor, S., 1996. From generic strategies to value for money in hypercompetitive environments. Journal of General Management, 21 (4), pp. 45-61. Porter, M.E., 1985. Competitive advantage. New York: Free Press. Porter, M.E., 1987. From competitive advantage to corporate strategy. Harvard Business Review. May/June, pp. 43–59. Porter, M.E., 1990. The competitive advantage of nations. New York: Free Press. Porter, M.E., 1991. Towards a dynamic theory of strategy. Strategic Management Journal, 12 (Winter Special Issue), pp. 95–117. Porter, M.E. & Kramer, M.R., 2006. Strategy and society: The Link between competitive advantage and corporate social responsibility. Harvard Business Review, December, pp. 78–92. Recklies, D., 2001a. Porter 5 forces [pdf]. Available at: Accessed [12 July 2012] Recklies, D. 2001b. Beyond Porter – A critique of the critique of Porter [pdf]. Available at: < http://www.themanager.org/pdf/BeyondPorter.PDF> Accessed: Accessed [12 July 2012] Sharp, B., 1991. Competitive marketing strategy: Porter revisited. Marketing Intelligence and Planning, 9 (1). Speed, R. J., 1989. Mr. Porter! A reappraisal of competitive strategy. Marketing Intelligence and Planning, 7 (5-6), pp. 8-11. Read More