One or More Theory of Competitive Advantage - Case Study Example

Discuss the Strengths and Weaknesses of One or More Theory of Competitive Advantage: Porter’s Five Force Model The modern economy is a competitive landscape where firms fiercely battle for competitive advantage. In this scenario, competitive advantage is the strategic advantage one corporation or business achieves over competing industries in a single industry. If a firm is able to achieve competitive advantage then they have a clear path to profits and revenue. While competitive advantage is today recognized as perhaps the primary means of evaluating a firm’s strategic position, it stands in contrast to much traditional economic thought. Specifically, the dominant theoretical mode has long been the notion of comparative advantage. Comparative advantage argued that a firm should concentrate on what they are able to do the best. Through contrasting on what they are able to do the best, comparative advantage theory argued that a firm and the larger economy would benefit. Competitive advantage, however, recognized the economic landscape as prone to creative destruction. The notion of competitive advantage has subsequently come under significant critical examination. While Michael Porter’s five forces model is undoubtedly the most prominent theory, other theories include the VRIN, and evolutionary strategy approach. This research discusses the strengths and weaknesses of Porter’s five-force theory of competitive advantage, ultimately arguing that Porter’s theory is valid in certain contexts. Michael Porter is one of the seminal theorists in the field of competitive advantage. Porter has examined competitive forces in variety business contexts. Porter’s most prominent contribution to the research topic is his establishment of the five forces model. This model specifically argues that the follow five forces determine the extent an organization has a competitive advantage: threat of new competition, threat of substitute products and services, bargaining power of customers, bargaining power of suppliers, and the intensity of competitive rivalry. Porter (1979) establishes a number of strengths of the five-force theory of competitive advantage. One notable example Porter establishes relates to the wine industry in the 1960s. During this period, Porter indicates that wine distribution expanded for local outlets to national conglomerates. This expansion necessitated the company’s establish complex infrastructures, marketing departments, and supply chain and distribution channels (Porter 1979, p. 5). The central recognition here is that with this increased expansion the industry greatly limited the threat of competition and reduced the intensity of the competitive rivalry. For Porter, however, the collective intensity of the five competing forces determines an organization’s ultimate competitive advantage. The notion that competitive advantage in the wine industry is determined by these factors though holds a strong degree of relevancy. Another theoretical consideration related to Porter’s five-force model is the notion of business strategy. Porter (1996) argues that firms are mistaken if they measures organizational achievement solely in terms of organizational efficiency. While Porter indicates that organizational efficiency is a significant factor, he against emphasizes an organization’s competitive advantage. Porter (1996, p. 62) indicates, “A company can outperform rivals only if it can establish a difference that it can preserve.” Undoubtedly, Porter’s perspective here demonstrates a great strength of the five forces model. Namely, the five-force model considers organizational success along a plateau that is unachievable by traditional forms of strategizing. Rather than focusing on the specific corporation, a company must necessarily consider where it stands in relation to the complex competitive totality. Whittington (2000) establishes a number of perspectives that serve to support Porter’s five-force model. Specifically, Whittington argues that traditional forms of strategy are ineffective and that if firms wish to develop constructive theoretical market analysis they must develop new means of considering market conditions. Whittington posits a variety of reasons for his belief in the ineffectiveness of traditional perspectives on strategy. He notes, “strategic management is…an ideology that serves to normalize the existing structures of American society and universalize the goal of its dominant elite” (Whittington 2000, p. 30). From this perspective, the management doctrine that has been established does not examine society in terms of creative destruction, but instead has adopted a view that will allow already established companies to retain their stronghold. Clearly, a strength of Porter’s five-force model then becomes its ability to examine the dynamic nature of economic structures. This ability to transcend traditional ideological boundaries also indicates that the theory contains considerable reach. Whittington’s (2000) perspective on traditional forms of strategic analysis can partly be witnessed in the SWOT – strengths, weaknesses, opportunities, and threats – analysis that continues to dominate much business examination. In this sense, the SWOT analysis, with its primary analytical emphasis on the firm’s internal aspects, does not comprehensively enough a company’s position with the competitive economy. While Porter’s five-force model does not discount the SWOT analysis, there is the implicit understanding that an internal analysis is too limited accurately to determine a firm’s competitive position. Barney (1995, p. 45) supports this critical interpretation of the SWOT analysis and provides a number of instances where only an environmental analysis cold have determined a firm’s success. These examples are significant as they capture the essence of Porter’s theory in action. In terms of Wal-Mart’s success, the research refers to this company’s significant financial position comparable to the rest of the industry, as an example of the effectiveness of the five-force model as an analytical tool. Barney’s (1995, p. 45) research also argues that Southwest Airlines and Nucor Steel demonstrate the effectiveness of this theory, as these companies gained considerable value while the rest of their industry experience significant hardship. Another strength of Porter’s analysis then seems to be these comprehensive analytic characteristic. While the environmental component of Porter’s five-force model is a clear strength, scholars have also criticized the strength of Porter’s model on these grounds. Specifically, there is the converse consideration that Porter’s theory of competitive advantage, while potentially insightful, places too much emphasis on environmental conditions. While Wal-Mart’s success seems to be partly determined by its competitive advantage against competitors, there is also the possibility that endemic to that industry was a series of inefficient organizational practices that Wal-Mart capitalized on. In this way, Porter’s five-force model was less effective in designating the actual conditions for the company’s success than an internal assessment would have revealed. One considers that a company’s internal value may have strong strategic benefits that evade easily analytical articulation. For instance, what might initially appear as a lack of competitive strength in terms of the intensity of the competitive rivalry might ultimately prove to be an organizational strength, in that these conditions create a strong organizational culture. Barney (1986, p. 791) indicates that there is a need for an integrated framework that combines internal company analysis, such as a SWOT, with environmental considerations, such as Porter’s five force model. While Porter’s five-force model clearly demonstrates a great amount of strengths, a significant amount of criticism has been levied at this approach. Even as Porter’s five-force model is expansive in the way that examines competitive advantage with limited ideological influence, the theory may also suffer from being to Western centric. This criticism of Porter’s five-force model considers that while for a number of companies the five forces are an effective diagnosis of strategic position, in other geographic regions company analysis must necessitate different structural frames of analysis. Harvey (2005; 2009, p. 3) refers to the notion of the neo-liberal state. This perspective considers the importance of the state in creating opportunities for capital accumulation. The distinction of the neo-liberal state against other states speaks to a broad-ranging cultural impact on a firm’s competitive advantage. Whittington (2000, p. 30) indicates that American companies consistently stand-out from foreign competitors; “When asked whether the only goal of a company was for profit, 40 percent of American executives answered yes, against only 8 percent from Japan, and 11 per cent from Singapore.” Within this spectrum of investigation, Porter’s theory of competitive advantage is demonstrated to suffer from some of the very ideological trappings that other theorists have praised the approach for avoiding. Specifically, Porter’s theory of competitive advantage advances with the recognition that the ultimate goal of a company is to improve profit or stakeholder equity. This starkly finance-centered perspective on an organization’s goals is shown to be in direct conflict with the values established by the Japanese and Singapore companies. In the instance of Japan, obviously one considers the country’s strong emphasis on loyalty and family heritage. Within Japanese companies there is an increased loyalty established between the employee and the organization. This government’s increased emphasis on social solutions also positions these companies along a different structural plane. Ultimately, there is the recognition that Porter’s five-force model may not fully encapsulate the complexities of diverse global regions. In addition to having cultural limitations, Porter’s five-force model has weakness in terms of its philosophical and historical limits. While Porter’s model assumes that firms are operating in an easy to understand, capitalist economic structure, other theorists have presented a different outlook on market change. The most prominent such critiques have been in terms of crises of capitalism (Gamble 2009). Critiques have also been levied by Marxist theory (Callincos 2009). Callincos (2009, p. 107) presents a perspective that, “the history of this system is best understood as a succession of overlapping systemic cycles of accumulation each characterized by the leadership of communities and blocs of governmental and business agencies.” The above quote conflicts with Porter’s five forces model on epistemological grounds. First, there is the quote’s reference to ‘cycles of accumulation’. This perspective considers that rather than a firm’s strategic potentials being based on five forces, it is broader ranging cycles that affect a company’s future success. The quote’s further reference to communities and blocs of governmental agencies shaping the business climate also stands in contrast to Porter’s rationalism. While some may view such a Marxist critique as having relevance only under communist or totalitarian regimes, a clear example of the impact of government on business in Western culture can be witnessed in the extensive political contributions that corporations gave to a specific political candidate. The obvious implication is that this swing in political power could have an unexpected shift in competitive advantage. There is the clear challenge for theorists to determine if the competitive advantage theory is truly correlated to a firm’s success, or if it merely provides a contextual account of a company’s. One might considers then that criticisms Porter’s five-force model should emerge from supporters of efficient market theories. Namely, there is the recognition that Porter’s theory of competitive advantage relies heavily on a clinical depiction of market forces. For instance, Porter’s five-force model assumes that if a company can recognize its competitive deficiencies then the organization can work to strengthen the firm’s position relative to competing firms. Efficient market theory, however, contends that such future prognostications are an impossibility because of the market’s random walk. Ultimately, a clear weakness of Porter’s model then is strong reliance on stable market conditions. In conclusion, this research examined the strengths and weaknesses of Porter’s five-force model theory of competitive advantage. Within this context of examination, the research demonstrates that one of the five-force model’s strengths as a theory of competitive advantage is the way it recognizes creative destruction is at the root of American enterprise and innovation. Porter’s model then almost perfectly contextualizes the condition of the Western corporation. Another consideration is that Porter’s model can function in tandem with an internal value perspective. While the research demonstrates that Porter’s model has a number of strengths, the model’s primary weakness is that it does not properly diagnose conditions throughout the entire global economy. Additionally, the model has clear weaknesses in terms of its reliance on stable market forces. Ultimately, Porter’s five-force model theory of competitive advantage is an effective analytical lens when it is used in the proper political context and in conjunction with an internal value perspective. References Barney, J. ‘Looking inside for competitive advantage.’ Academy of Management Executive, 1995 Vol. 9 No. 4 Barney, J. Types of Competition and the theory of strategy. Academy of Management Review. Vol. 11, 4: 1986. 791-800. Callinicos, A. Imperialism and global political economy. Polity. 2009. Gamble, A. Spectre at the feast. Palgrave Macmillan. 2009. Harvey, D. A brief history of neoliberalism. London: Oxford University Press. 2009. Harvey, D. the new imperialism. London: Oxford University Press. 2005. Porter, M. ‘How competitive forces shape strategy?’ Harvard Business Review. Vol 3. 1979. 1- 12. Porter, M. ‘What is Strategy?’ Harvard Business Review. 3: 1996. Whittington, R. What is Strategy and Does it Matter? Cenage Learning, 2000. Read More