Competitive Advantage

by Michael Porter

February 2003

In this book Porter shifts his attention from an industry perspective to a company
perspective. The author introduces a model for strategy in organizations that emanates
straight forward from Industrial Economics (IE). In economics, an industry (market) is
defined by supply and demand. The Structure-Conduct-Performance (SCP) Paradigm,
from IE, states that an industry structure is determined by these conditions; hence the
competitive environment that results shapes the behavior of firms and determines the
overall performance of the players in the industry.
Porter, as an heir of the design school (Andrews) and the planning school (Ansoff), was
able to move beyond them by building on their insights to propose a new model which
led to the emergence of a new school of thought: the positioning school. The core
concepts of this school are not about planning or special individuals (CEO in Andrews,
Planners in Ansoff) but on managers ability to think and understand the industry they are
in. Where preceding schools advocated an external environment that could be either used
or mitigated (i.e. using SWOT) and where firms had no control over their industry
structure, Porters contribution is on advocating to managers, ways to raise firm value by
modifying the industry structure to their firms advantage and to find a position to deliver
a competitive advantage.
What Porter did, was transform IE into Business Strategy by shifting the focus to the
firm, strengthening some weaknesses of the SCP paradigm (extended it from a one way
causal process into a complex system, allowing feed back loops from P to C and from C
to S) which allowed the emergence of a dynamic concept of an industry and its structure.
For Porter, the essence of strategy formulation is coping with competition and
competition in any industry does not stem only from competitors, but is also influenced
by the underlying structures of the industry. Additionally, the author stresses competitive
advantage - which is created and hence can be controlled by individual firms and not
comparative advantage (access to factors of production, like cheap or natural resources) which is mainly inherited.
Consequently, the basic foundations were laid to develop the five forces framework
which includes competitors, threat of new entrants, substitute products, bargaining power
2

of suppliers and bargaining power of buyers. For Porter, strategy is about making choices
to pursue things a firm wants and overlook things it does not want (no firm can be all
things to all people). It is a deliberate and conscious effort to be different1 from all other
players in the industry. This means that a firm has to set limits on what it is trying to
accomplish to become unique which sometimes requires trade-offs between
interconnected options to achieve fit.
This is a very confrontational view of the world where companies are fighting constantly
against the five forces to fend them off and still be able to deliver value to survive.
Essentially for Porter competitive strategy is to find a position in the industry where the
company can best defend itself against these competitive forces or can influence them in
its favor. Porters five forces model is the conceptual framework for understanding the
realities and forces of the external environment. By analyzing their industry through the
proposed toolset, managers could understand their current position, influence the
structure positively or could define a position where they can uniquely have a
competitive advantage.
In short, Porter argues that strategy is a race to one ideal position, the creation of a unique
and valuable position, where a firm can differentiate itself for the targeted customer and
add value by an asset of activities2 different than those of rivals. Additionally, Porter
defines strategy as a combination of the ends for which the firm is striving and the
means by which it is striving to get there. Thus, the author seems to advocate a concept
of strategy that mixes some planning (means to get there) with a dominant position.
Porters contributions to the field of strategy go without saying. He has established
himself as the Strategy Guru. He refined strategy beyond what his predecessors were
able to achieve by introducing new concepts and tools such as feedback loops within an
organization (value chain) and within an industry, by highlighting the importance of the

It means deliberately choosing a different set of activities to deliver a unique mix of value

distinctive and mutually reinforcing set of activities tailored to a position

structural evolution of the industry as well as the firms aspiration to reach a unique
position within that industry, and by presenting an organization which needs continuity in
its basic position but still advocate a feverish and ongoing process of change to adapt to
changing circumstances. The author seems to accept the fact that an minor changes can
occur and provides ways to deal with these kinds uncertainty. However, as he mentions,
Porter does not believe that radical change is frequent, rather it is a very rare phenomenon
and managers should focus on incremental changes that can better add value. To cope
with uncertainty, Porter advocates the need to institute the goal of learning in
organizations and couple it with different generic strategies such as making big bets (to
resolve uncertainty in the firms favor) and experimentation. So a firm has a consistent
strategy, but continuous improvement in how the strategy is manifested.
For Porter, strategy seems to be like mountain climbing where, even if you had the best
climbers (managers) on your team, you need to understand the realities of the mountain
(industry) before blindly (without strategy) setting forward. The team will try to identify
the best path (position), the ways to follow it (plan) and the tools needed (value chain).
Although Porters model addresses some of the weaknesses of the models preceding his,
it presents weaknesses of its own. To begin with, it is questionable whether the model as
presented captures all the essential factors that shape an industry dynamics. Where are the
influence of government (or regulatory bodies) and the history of a firm captured?
Moreover Porters focus on the industry dynamics raises three main questions. How an
industry is defined and what are its boundaries - where is the environment beyond the
industry. How competitors, not present in the industry today but that might appear
tomorrow, are dealt with. And most important firms are treated as black boxes without
any explanation on the role of their internal workings. Where are managerial choices and
firm characteristics?
One of the most popular critiques of Porters approach is that he is forever producing
laundry lists of forces and factors and passing them off as explanations. He seems to
be obsessed with designing somewhat simplistic lists mixed with a cornucopia of facts
and factors which sometimes can be extreme.
4

Another popular assertion is that, with the proliferation of information, cheap

technologies and worker mobility, it is almost impossible to build any sustainable
competitive advantage which cannot be copied by rivals. Wouldnt it be better for firms
to focus on flexibility to catch opportunities when they arise?
In other words if Porters model allows someone to navigate perfectly in mountain
climbing, how will it fare if some unexpected events were added to the model such as
rapid changing weather, a snow storm, or even an earthquake that structurally modifies
the landscape. It is true that Porters vision of strategy calls for some adaptation3 but the
framework and its details are inherently rigid.
It seems that Porter'
s key concepts would best be applied in startups environments since
an entrepreneur can make use of these industry-analysis tools to decide which industry to
enter in the first place. However it is hardly helpful to him in moving forward founding
the company and growing it or even for diversified companies which have already
significant investments in a given industry with prohibitive exit costs. This is not to deny
Porters tremendous influence on all kinds of organizational structure where his model
have been and still is being used extensively.

Path toward a distinctive approach to value creation that can and must be enhanced as new opportunities

arise.