Michael Porter's Competitive Advantage and Business History
Robert E. Ankli 1
University of Guelph
Strategic planningas a formal discipline originated in the 1960sand early 1970s.It soonbecamea fad, but faded equallyquicklywhen the promisedsuccesses did not materialize[See 3, 13, 14, and 17 for recent examples]. Japanese success did not seem to depend on planning asmuchas it did on quality, corporate andnational culture, and management itself. Yet the needfor planning remains, for, asPeterDruckerreminds us: Managementhas no choicebut to anticipatethe future, to attemptto mold it, and to balanceshort-range and long-range goals....Theidea behind long-rangeplanning is that [the question] "Whatshould our business be?"can and shouldbe worked onanddecided by itself, independent of thethinking on
"What is our business?" and "What will it be?" There is some
senseto this. It is necessary in strategic planningto start separately withall threequestions. Whatis thebusiness? What
will it be? What should it be? These are, and should be
separate conceptual approaches. With respect to "WhatshouM our business be?"the first assumption mustbe that it will be
Long-range planning should prevent managers from uncritically extending presenttrendsinto the future,from assuming that today's products, services, markets, andtechnologies will be the products, services, markets, and technologies of tomorrow,and aboveall, from dedicating their resources and energies to the defense of yesterday [2, pp. 121-2]. As business historians youwould, of course, agreewith the lastsentence, but you might be wondering why I think it necessary to even repeat it. Nevertheless I do so for goodreason.
1Iwould liketo thank Kris Inwood and James Ingham forhelpful comments.
BUSINESS AND ECONOMIC HISTORY, Second Series, Volume Twenty-one, 1992.
Copyright (c) 1992by the Business HistoryConference.ISSN 0849-6825.
Competitive Advantage . and TheCompetitive Advantage of Nations . Michael Porter is one of the hottest(international) consultants to business farms andgovernments. Third. Second. is an exhaustive lookat strategy. Thus. but. His context is the worldof the late 1970s. even when a success factor has been diagnosedto be relevant. 5-6]. 2 The same case canbe madefor writinghistory. it wouldbe reassuring if the success factor approach to strategycontainedsome self-justification: a reason why strategicthinking is necessary in the first place. This paperwill look at his threebooks: Competitive Strategy . the implications for the leversmanagers mustpull are not completely concrete. the success factor approach lacks generality becauseit implicitly assumesthat success factors are undervalued.I find MichaelPorter's workuseful. makesthe commonsense observation that success factors are a shaky foundation for strategy [3. This is exactly whatthe business historian should be doing.in view of its other defects.but.I have asked several (non-Harvard) peopleat these meetings if theyhadreadPorter andmostrepliednegatively.however. we will miss intriguing possibilities or leadsbecausewe alreadyhave our hypothesis. While theimplications for present policy will continue to be debated.
2The reasons arethat "t isusually difficult toidentify success factors relevant toa particular
situation. Yet in the past coupleof years. unlesswe are very careful.publishedin 1980.With this explanation let us go on to look at Porter'swork. "Whatdo we haveto do todayto preparefor tomorrow?" Part of what we have to do is to understand how we got to where we are todayandthereinliesmy interest in history. like manyof you.Of course. Porter's farst book Competitive Strategy. we do knowthe outcome in a certain sense. Porter's workdoes provide thebusiness historian witha powerful paradigm andsetof toolsfor considering business in history. It doesnot2
. yetmanyof uswritehistory asif we know the outcome.
What intrigues me aboutstrategic planning is thatoneplans in a world in whichoutcomes are not certain. It mightseemstrange that a person like myself wouldbe giving sucha papersince eachyear there are severalpeoplehere eachyear from Harvard who havebeen students and/or have workedwith Porter. "Theessence of formulating competitive strategy is relating a company to its environment" [11. 3]. whileothernations do not seemto knowthat an industry exists? Porterprovides ways of thinking aboutthese types of questions. His latestbookTheCompetitive Advantage of Nations hasbeencalled "brilliant" by some and"nothing new" by others.Why are somefirmssuccessful and othernot? Why do somenations seemto specialize in certainindustries with lotsof competitors.p. pp.Finally. but the structure that he setsout is a veryuseful vehicle for the business historian.229
My interest in business andbusiness history follows the question that PeterDruckerasks.I am also deeplyinterested in the futureand so I try to read the currentliteraturein thisarea. Ghemawat. I thinkthatis a shame because he provides many
tools for the business historian.
thethreatof substitute productor services. the strategic stakes.230
The structuralanalysis of industries includesdescriptions of rivalry among existing competitors.S. thethreatof backward integration. Substitute products offeralternatives andlimit the sizeof profits.and expected retaliation. thesizeof fixedor storage costs. and Japanese Auto
. industry growth. access to distribution channels. the amountof differentiation or switching costs. Figure 1 illustrates theserelationships. The bargaining powerof buyers depends on the volume of purchases relative to the sellers capacity. The intensity of rivalryamongexisting competitors depends on the balance of competitors. Startingwith the threat of new entrants. the level of switching costs. thefraction of cost thepurchase represents. andthe importance of its quality. and the bargaining power of buyers. costdisadvantages independent of scale. and the size and type of exit barriers. The bargaining powerof suppliers mirrorsthat of buyers. capitalrequirements.productdifferentiation.Porter considers barriersto entry which include economies of scale. the bargaining powerof suppliers. the typesof competitors. switching costs. the levelof profits. government policy. the minimumsizeof investment. Susan Helper's "Competitive SupplierRelationsin the U. thethreatof newentrants. the degreeof standardization of the purchase. Substitutes alsodepend on priceandthe easeof switching costs.
It seems to be saying. ChapterX in the second volumedisucsses dealers. Allen Nevins' firsttwovolumes of his Ford work [5."But because he hasset out sucha complete taxonomy. O'Brien arguesthat it was in product (operation.and service. A firm may also seek a niche basedon cost or differentiation. marketing.p. Chandler's work virtually ignores howFord organized to increase production of the Model T. andprocurement. andsubstitution. pp. Competitive strategy should lead a firm to either a cost or differentiation target. written in 1985.He considers competitive advantage in the context of technology. Porterargues verystrongly that a firm should not attemptto bothdifferentiate andbe a low cost leader. demonstrates how differing supplier/manufacturer bargaining powermay lead to differentresults. While the material seems exhaustive. competitor selection (there are goodand bad competitors). Primary activities in the value chain are inboundlogistics. research. pp. For example. I have the impression that his informationcannotbe usedfor developing a strategy in the way that he suggests. technology development). outbound logistics. Competitive Advantage. the business historian is givenexhaustive tools for evaluating the successes andfailures of particular businesses in a historical
context. and Henry Ford'sdistrust of formal administration.
The next book. Support activitiesinclude firm infrastructure. marketingand sales. industry segmentation.setsout the concept of the valuechain. 8]. His Giant Enterprise [1. technology development. andsales). 33] doesnot evenmentionFord's officeoperations other than to saythat Couzenshandledthe business affairs of the companyand with Norval Hawkins organizedthe Ford dealer network. 6] also ignores organizational questions exceptto say that Couzens wasin charge." Figure 2 illustrates the chain. Porterdemonstrates that a firm may develop a competitive advantage in anyone of theseareas. and supportits product. but it doesnot reallyexplain howthe organization wasrun. "Everyfirm is a collection of activities that are performedto design.He also considers the pitfalls of adopting anyof these generic strategies [9. Individual firms'chains alsobecome linkedwithbuyers and sellers and it becomes important for a firm to tap into these valuechains.market. the dispute between O'Brienandothers overthe rivalry between GM and Ford in the 1920s is an argumentabout where GM gained competitive advantage [7. human resource management.Porter returns to his earlywork on costadvantage and differentiation to showthat the value chainaffects thesegoals. operations.produce. 141-5]includes a section from Ford'sMy Life and Work whichderides systematic organization.JohnRae [15. 41-4]. deliver.231
Industries: An Exit/Voice Approach". The danger is thata firm maybe caughtin the middle and loseto thosefirms that do specialize. whileChandlerand othersthink that it wasmorein process (infrastructure. works. Problems with"synergy" asa strategic
he examines offensiveand defensive strategy. Corporatestrategies built on purely financialgroundsprovide an elusivejustificationfor the diversifiedfirm.Oncefirmsin an industry stopcompeting. 319] 3
and a discussion of how to achieve interrelationships amongbusiness units. Without a horizontal strategy thereis no convincing rationale for theexistence of a diversified firm because it is little more than a mutual fund. again. and corporate strategy based oncompetitive
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policy leadhimto promote theimportance of horizontal strategy [9. published twoyearsago. A nation's industrial firmswillbesuccessful themore rivalstheyhave. enforce anti-trust laws. at leastrelativeto theirforeign rivals.
3"orizontal strategy isa concept ofgroup. These final three chapters are especially useful because. Openthe borders to foreign competition. hismostrecent andambitious book.the benefits of evensuccessful financialstrategies are often temporary. he setsoutscenarios which the business historian can usefully appropriate for their ownwork. sector.232
INFRA. Finally. The recentUnited Statesautomobile industry is a perfectexampleof this. Moreover. Finally.and do not favourmergers.p. not on financialconsiderations or stockmarket perceptions."
.seeks to determine hownations become economically successful.TheCompetitive Advantage of Nations. Horizontal strategy-not portfolio management--is the essence of corporatestrategy. the industry will undoubtedly stagnate.
but did not report on them. This point of the diamond formedthe core of his
earlier books. and Italy.or ratherthe industries of a nation. In fact. SouthKorea. are not internationally competitive in consumer industries because theydo not knowhowto market. He arguesthat the term "competitive nation"has little meaning. and rivalry complete the diamond. He doesthisby examining ten countries--the United States. while maintaining full employment.The computer industry locatedin SiliconValley is an example. Sweden. North Americansaccepted low qualityautomobiles in the 1960sand 1970s from domestic suppliers andthisopened the marketto foreign producers.Government-sponsored health programs tendto be morecost
conscious than results oriented.Switzerland. and capital resources aswell asinfrastructure. whichrestrictadvertising. but rather the dynamic effects. declining competitiveness." the four forcesthat determine success for an industry.
4Charles Garfield reported inarecent talk inToronto that aEuropean friend did not know what
the word •lemon ' meantand couldnot believethat we havegenericcategories whichare labelled
Don't think a nationcan succeed in the longrun usinglow wages as a cost advantage. Figure3 illustrates the diamond.The first is factorconditions that includehuman.theeconomic goalof a nation should be to produce a highandrising standard of livingfor its citizens. He alsolookedat Singapore and Denmark. A goodsupply of physical resources is not essential for economic growthas the caseof countries like Japanand South
Korea show. Finally.physical. Porter comes to theseconclusions by focusing on whynations become homebases for successful international competitors in various industries and services. and eventually unemployment. and the mechanisms by whicha nation'sdomestic preferences are transmitted to foreignmarkets. Improving factor productivityallows firms to compete in sophisticated industrial segments and new industries.
Third is the presence or absence of relatedand supporting industries (clusters) that are world competitive.the United States developed a competitive advantage in medical products because thereis still a privatemarketfor medicalservices in thatcountry. The second point of the diamondis demandconditions.n
. knowledge. Hencehe studies whatmakes an industryand then later an economy productive. Upgradingis the key. firm strategy. 4 He is interested in the composition of homedemand.By this he doesnot mean "aggregate demand" in the economist's sense. structure. For example. countries like Sweden andWest Germany. Germany.The qualityof demand is moreimportant thanits quantity. the sizeandpatternof growthof home demand. mustbecome moreproductive. A failure to upgrade results in slower productivity growth. To do thisa nation. Great Britain.It will neverbecomecompetitive and it will not becomerich. On the otherhand. Porter usestheseconcepts to createa "diamond. he believesthat countriessuchas Canada and Australia
have too "many" resources and this has prevented them from becoming internationally competitive in industrial products. Instead.
But he particularly stresses domestic rivalryasthe mostimportant element of thisanalysis.
The "diamond" becomes the methodof analysis for mostof the book.organized.oil shocks. as well asthe natureof homecompetition varies among nations andplays a role in determining howsuccessful firmsandindustries will be. but not as a frith determinant. and managed. Porterstresses the dynamic andinterdependent natureof the four pointsof the diamond. or acts of pureinvention will havean influence. "Chance" in such formsaswar.234
The context in which firms are created. but they are ultimatelysecondary.Rather government's role is to influence the four pointsof the diamond. Firmsmaynotrespond
.He demonstrates howthe absence of anyof theseelements can lead to a lossof nationaladvantage.Government will also be important. Porteremphasizes commitment to an industry asimportant andargues that mobility of resources in the economist's sensemay actuallybe detrimentalsince too rapid a movement of humanresources couldimplya lack of trainedworkers.
to opportunities unless they are pushed. andthe Japanese robotics industry in somedetail.
." Porteruses the "diamond" to look at the Germanprintingindustry. restrictive environmental controls should notbe viewed as a costburden.
Porter showshow small family f•rms in Italy have been able to overcome the debilitating effects of itsnationalgovernment. the United States patientmonitoring equipment industry. Employing foreigntechnology will alsobe a problem because suchusers will always be a generation behind. He believes thatthe impactof MITI's research groups wasthat it forcedindividual companies to devote research effortsfor the particular projects they workedon because they knew that their domestic rivalswere working on the same things.He explains the growthand development of competitive advantage of Japanin
some industries as a result of the "diamond" forces.Targeting distorts market signals and alters the incentives off•rms tocompete
m an industry.Thesecompanies usually did not put their most productive researchers in such government-sponsored research. but the lackof domestic rivalryseems even moreimportant in hurting the industry. After all. Mergers seem to offeropportunities for success by developing economies of scale. but they force f•rms to find new (and better) ways of manufacturing. but ratherasan opportunity to develop an advantage in a new
area.He stresses that free trademakesthe domestic or homebase all the moreimportant. not exploiting." Thismeans usinggovernment as an aid. otherthanJapan. challenge. His message for governments is to develop the "diamond.Reliance on a competitive advantage basedon factor costswill not be successful because somewhere therewill always be a location or country wherefactor costs are cheaper.Or. Industry will emigrate from or not develop in a location whereall four elements of the diamond are not strong.If production cantakeplace anywhere. and adversity. rarelyfrom an easy life. He demonstrates howSouthKorea is the oneAsiancountry. he arguesthat presentsuccess has often been the result of overcoming disadvantages. High labor costsare a static. Of course thisdoes not meanthat anyoneof themwill losetheir present advantages. "Competitive advantage emerges from pressure. to give a more recentexample. When this happenspressure is placed on government bureaucracies to pick industries wherethe diamondcan be developed and
. He doesnot believe that industrialpolicies(targeting)will be ultimatelysuccessful. His argument is that postwar industrial history is a storyof creating. existing advantage. but it does mean that their are opportunities for other industries and countries to gain advantage. the Italian ceramictile industry. that hasbeen able to becomecompetitive withoutrelyingon foreign-owned industry. More than half the book looksat the eight countries (referred to above) since World War II.or a competitive weakness. thus becoming a dynamic advantage. He emphasizes the importance of domestic rivalryandhowits absence mayprovecostly for some of these industries. the homebaseis key. not the role of
government. but not as the primaryforce.It is a storyof overcoming disadvantage. It would be fair to say that Porter sees importantand perhaps devastating problems for all of thecountries he examines.
and Lawrence E.
5. He alsoemphasizes the role of education andtrainingfor all of the successful postwar economies he studies. AnthonyPatrickO'Brien.K. Allen Nevins. Susan Helper.19-22. 1980). "Strategic Intent. 1985). 12. (MayJune.SecondSet."Developing the Modem Manufacturing Corporation: The Early
Years at Ford. Firmsthattraintheirworkers will keepthembecause employees wantto work for suchemployers. 8. especially the first two books. HarvardBusiness Review. Porter emphasizes that nearlyeveryindustry he studied in almostall of thecountries tookresponsibility for creating or improving human resources. HarvardBusiness Review. Reich. May 23. Commitment: TheDynamics of Strategy (New York. bothfor the periodhe discusses andfor earierperiods. Michael E. 1990).Despite targeting machinery andchemical industries." unpublished. August 1991. Competitive Advantage: Creatingand Sustaining Superior Performance
9. C. whichhave practised targeting.
. 1957). 6.. TheCompetitive Advantage of Nations (New York."Harvard Business Review. theMan. 14. Competitive Strategy (New York. Briefly concluding. 1964) Peter F. 19 (1990). Drucker. 1991)." TheEconomist. Jr.1992).S.A nationwill not havethe ability to respond to opportunities unless human resources havethe abilityto exploit them. . 1989). 16." Business andEconomic History. "Competitive SupplierRelations in the U. ." Business andEconomic History. . "Competing on Capabilities: The New Rulesof CorporateStrategy.Ford: The•7mes. "Thestateof strategic thinking. Suchcountries as SouthKorea. GiantEnterprise (New York.1990). Chandler. 4. 18 (1989)..May-June. Practices (New York 1973.. (March-April. Prahaladand Gary Hamel.
(New York. PankajGhemawat. 1987.TheWorkof Nations (New York. Rae. the Company (New York. . JohnB. 7.PhilipEvans. RobertB. Responsibilities. Porter's work. havehadmixedresults.
1. Schulman. 15. 2.1984). Indirect targetingby government in this area shouldprove beneficial because it provides moreopportunities for firmsto be successful.
Alfred D. 17. 13.Second Ser. 1991). .Management: Tasks.
10. 11. Porter.1974). TheAmerican Automobile Industry (Boston. provides importantchecklists for the business historian. while the last offers intriguing hypotheses aboutmanufacturing growthsinceWorld War II that demand moretesting. Ford: Expansions andChallenge: 1915-1933 (New York. . SouthKorea hasnot becomecompetitive in theseindustries. "How to Succeed in Business: Les•ons from the Struggle BetweenFord and General Motors during the 1920s and 1930s. 1954). 3.153-62. GeorgeStalk. and Japanese Auto Industries: An Exit/Voice Approach.236
exploited. •I'he Core Competence of the Corporation.