Contributions of

Michael Porter

By

Fahad Bilal SheikhReg # 2092076MBA-Exec (B)

A critical examination of the central contributions of Michael Porter to the development of management thought and Sharp went against Hooley’s findings and felt that Porter’s generic competitive strategies were of little use in the interpretation of the clusters identified.Further they felt it provided no evidence that these generic strategies were routes to superior profit.

Porter’s later work too has been criticized. It has been suggested by many that Porter developed a ‘theory of strategy’. However, economists and marketers tend to dispute this (Harfield, 1998). Foss (1996) used Porter as an example of the field becoming too pluralistic and that the later Porter is adding nothing to the ‘foundations’ of the field (Harfield, 1998). Hammonds believes that strategy has suffered simply because people tried it, had problems with it and turned instead to the fads of the time. While many people acknowledge Porter’s contributions but found them extremely difficult to implement. There has been a view that if you had a strategy it was rigid, inflexible and out of date by the time that you used it. In an increasingly changing technological environment these issues were extremely important. Although Porter always pointed out that ‘technology changes, strategy doesn’t a lot of organizations got very confused about strategy and how to address it.Mintzberg (1990) and Bartlett and Ghoshal (1991) criticized Porter for narrowing the focus of strategic management by focusing on the industry and the situation confronting the firm regarding the position. Mintzberg also felt that the scientific approach to strategic management felt so wrong and that many managers favor intuition when making strategies (Mintzberg, 1994).

Finally Porter acknowledged that there are four principle issues that challenge a theory of strategy (Porter, 1991). The four principles issues include: approach to theory building; chain of causality; time horizon and empirical testing. The main problem behind these issues is that they are all situation/organization specific where as Porter’s frameworks and models are generic and suited to all. Therefore a company can not simply implement Porter’s ideas without being faced with some seriously difficult questions.

Porters theories do not relate to practice as well as they do to theory for many. However, despite these criticisms Porter was amongst the first with the ability to analyze management in the competitive economic context. His highlighting the need to focus on external entities confronting organizations and how to gain a competitive edge in business has lead to scholarly thought and critical review of business, profit and context. The implementation of his theories and strategies by business has assisted many in the western world to gain the competitive edge for their company. As is always the case theories will continue to be critically examined and evolved within the changing economic context. At this stage, despite criticism, Porters contribution to management theory continues to have relevance for many in business practice.

However, Porter’s five forces model has been a huge success. In this, he states,

“An industry’s profit potential is largely determined by the intensity of competitive rivalry within that industry.”

Strategy at the time (1970s) was focused on two dimensions of the portfolio grids

Industry Attractiveness Competitive Position

Business Strength Matrix

Structural Reason: Why were some industries profitable:

* Firm concentration* Established cost advantages* Product differentiation * Economies of scale

These all represented barriers to entry in certain industries, thus allowing those industries to be more profitable than others. But Economists generally concerned them-selves with the minimization rather than maximization of what they viewed as excess profits (i.e., Public Policy).

Business policy objective

The business policy objective of profit maximization, Porter developed his elaborate framework for the structural analysis of industry attractiveness within the framework of Business Policy. By using a framework rather than a formal statistical model, Porter identified the relevant variables and the questions that the user must answer in order to develop conclusions tailored to a particular industry and company.

Porters Five Forces

The five forces according to Porter are :

* Threat of Entry* Bargaining Power of Suppliers* Bargaining Power of Buyers* Development of Substitute Products or Services* Rivalry among Competitors

Barriers to Entry:

The main concerns with Barriers to entry are as below:

1) Large capital requirements or the need to gain economies of scale quickly.2) Strong customer loyalty or strong brand preferences.3) Lack of adequate distribution channels or access to raw materials.

Power of Suppliers

This is high when:

1) A small number of dominant, highly concentrated suppliers exist.2) Few good substitute raw materials or suppliers are available.3) The cost of switching raw materials or suppliers is high.

Power of Suppliers

This is high when:

1) Customers are concentrated, large or buy in volume.2) The products being purchased are standard or undifferentiated making it easy to

switch to other suppliers.3) Customers’ purchases represent a major portion of the sellers’ total revenue.

Substitute products

Competitive strength is high when:

1) The relative price of substitute products declines.2) Consumers’ switching costs decline.3) Competitors plan to increase market penetration or production capacity.

Rivalry among competitors

The intensity of this highly increases when:

1) The number of competitors increases or they become equal in size.2) Demand for the industry’s products declines or industry growth slows.3) Fixed costs or barriers to leaving the industry are high.

As rivalry among competing firms intensifies, industry profits decline, in some cases to the point where an industry becomes inherently unattractive. As an entry barrier Unit costs associated with economies of scale, the learning curve for labor, and capital-labor substitution decline with “experience,” and this creates a barrier to entry, as new competitors with no “experience” face higher costs than established ones. However, If a new entrant has built the newest, most efficient plant, it will not have to “catch up.” Technical advances purchased by new entrants – free from the legacy of heavy past Investments – may provide those companies a cost advantage over the leaders.

The experience curve barrier can be nullified by product or process innovations that create an entirely new experience curve – one to which leaders may be poorly positioned to jump, but to which new entrants can alight as they enter the market.

Strategic Groups

Firms that face similar threats or opportunities in an industry but which differ from the threats and opportunities faced by other sets of firms in the same industry (e.g., in the beverage industry: soft drinks group versus alcoholic beverages).Rivalry generally is more intense within strategic groups than between them because members of the same group focus on the same market segments with similar products, strategies and resources.

Industry & Product Life Cycle

Bibliography

Dawes, J & B Sharp (1996) ‘Independent Empirical Support for Porter’s Generic Marketing Strategies?: A re-analysis using correspondence analysis’ Journal of Empirical Generalizations in Marketing Science, 1