Michael Porter's Competitive Advantage and Business History

Robert E. Ankli 1

University Guelph of

Strategic planningas a formal discipline originated the 1960sand in early 1970s.It soonbecamea fad, but faded equallyquicklywhen the promisedsuccesses not materialize[See 3, 13, 14, and 17 for recent did examples]. Japanese success not seem depend planning muchas did to on as it did on quality, corporate national and culture, and management itself[12]. Yet the needfor planning remains, asPeterDruckerreminds for, us: Managementhas no choicebut to anticipatethe future, to attemptto mold it, and to balanceshort-range long-range and goals....Theidea behind long-rangeplanning is that [the question] "Whatshould our business be?"can and shouldbe worked anddecided itself, on by independent thethinking of on
"What is our business?" and "What will it be?" There is some

senseto this. It is necessary strategic in planningto start separately all threequestions. with Whatis thebusiness? What
will it be? What should it be? These are, and should be

separate conceptual approaches. With respect "WhatshouM to our business be?"the first assumption mustbe that it will be
different.

Long-range planning should prevent managers from uncritically extending presenttrendsinto the future,from assuming that today's products, services, markets, technologies be the and will products, services, markets, and technologies tomorrow,and of aboveall, from dedicating their resources energies the and to defense yesterday pp. 121-2]. of [2, As business historians would, course, you of agreewith the lastsentence, but you might be wondering why I think it necessary even repeat it. to Nevertheless do so for goodreason. I

1Iwould to thank Inwood James like Kris and Ingham helpful for comments.
BUSINESS AND ECONOMIC HISTORY, Second Series, Volume Twenty-one, 1992.
Copyright 1992by the Business (c) HistoryConference.ISSN 0849-6825.
228

5-6]. unlesswe are very careful. latestbookTheCompetitive His Advantage of Nations hasbeencalled [10] "brilliant" some "nothing by and new" others. like manyof you.I am also deeplyinterested the futureand so I try to read the currentliteraturein in thisarea.I have asked several (non-Harvard) peopleat these meetings theyhadreadPorter if andmostrepliednegatively.Of course. Thus. thinkthatis a shame I because provides he many tools for the business historian. Ghemawat.Finally. The same for [3. we will miss intriguing possibilities leadsbecausewe alreadyhave our hypothesis. let Michael Porter is one of the hottest(international) consultants to business farms andgovernments. the implications the leversmanagers for mustpull are not completely concrete. in but. whatthe business historian should be doing. context the worldof the late 1970s. What intrigues aboutstrategic me planning thatoneplans a world is in in whichoutcomes not certain. 2 case be madefor writinghistory.I find MichaelPorter's workuseful. Competitive Advantage and TheCompetitive [9]. Third. even when a success factor has been diagnosedto be relevant. This is exactly [11. "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 history.in view of its other defects. It doesnot2 in .229 My interest business business in and history follows question the that PeterDruckerasks. will to Porter's workdoes provide business the historian witha powerful paradigm setof and toolsfor considering business history. the look His is but structure that he setsout is a veryuseful vehicle the business for historian.publishedin 1980. 2The reasons that isusually are "t difficult identify to success relevanta particular factors to situation.Why are somefirmssuccessful in and othernot? Why do somenations seemto specialize certainindustries in with lotsof competitors. 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. Yet in the past coupleof years.but. is an exhaustive at strategy. of This paperwill look at his threebooks: Competitive Strategy [11]. wouldbe reassuring the success it if factor approach to strategycontainedsome self-justification: a reason why strategicthinking is necessary the first place. do knowthe outcome can we in a certain sense. Second. 3]. whileothernations not seemto knowthat an industry do exists? Porterprovides ways thinking of aboutthese types questions. the success factor approach lacks generality becauseit implicitly assumesthat success factors are undervalued.With this or explanation us go on to look at Porter'swork. by While theimplications present for policy continue be debated. "Theessence formulating of competitive strategy relating company its is a to environment" p. Advantage Nations of [10]. Porter's farst book Competitive Strategy.however. manyof uswritehistory if we know are yet as the outcome. makesthe commonsense observation that success factors a shaky are foundation strategy pp.

access distribution to channels. Susan Helper's "Competitive SupplierRelationsin the U. the the typesof competitors.and expected retaliation.230 POTENTIAL ] ENTRANTS BUYERS ] The structuralanalysis industries of includesdescriptions rivalry of among existing competitors. Startingwith the threat of new entrants. The intensity rivalryamongexisting of competitors depends the on balance competitors. switching costs. minimumsizeof investment. of government policy. The bargaining powerof buyers depends the volume purchases on of relative the sellers to capacity. the importance its and of quality. the bargaining and power of buyers. disadvantages cost independent scale. sizeof fixedor storage the costs. bargaining the powerof suppliers. Substitute products offeralternatives limit the sizeof profits. The bargaining powerof suppliers mirrorsthat of buyers. threatof backward the integration. and Japanese Auto . Figure 1 illustrates theserelationships. strategic the stakes. threatof newentrants. and Substitutes depend priceandthe easeof switching also on costs. fraction cost purchase the of the represents. of capitalrequirements. the levelof profits. and the size and type of exit barriers. level of switching of the costs. threatof substitute the the productor services.S. of industry growth.productdifferentiation.Porter considers barriersto entry which include economies scale. the degreeof standardization the purchase. the amountof differentiation switching or costs.

and Porterdemonstrates that a firm may develop competitive a advantage anyone of theseareas. marketing. deliver. 41-4]. a from Ford'sMy Life and Work whichderides systematic organization. His Giant of Enterprise pp. it doesnot and of but reallyexplain howthe organization run. works. industry segmentation. technology development. operations. demonstrates how differing supplier/manufacturer bargaining powermay lead to differentresults. [9.and service. dispute the between O'Brienandothers overthe rivalry between GM and Ford in the 1920s is an argumentabout where GM gained competitive advantage 8]. research. competitor selection (there are goodand bad competitors). Primary activities the value chain are in inboundlogistics. The danger thata firm maybe is caughtin the middle and loseto thosefirms that do specialize.He considers competitive advantage the context in of technology. outbound logistics. and Problems "synergy" a strategic with as . Support activitiesinclude firm infrastructure. 6] also ignores organizational questions exceptto say that Couzens in charge. human resource management."But because hasset he out sucha complete taxonomy.He also considers pitfalls adopting of these the of any generic strategies pp. was Individual firms'chains alsobecome linkedwithbuyers and sellers and it becomes important a firm to tap into these for valuechains.Porter returns to his earlywork on costadvantage differentiation showthat the value and to chainaffects thesegoals. and supportits product. The next book. Henry Ford'sdistrust formal administration. business the historian givenexhaustive is tools for evaluating successes failures particular the and of businesses a historical in context.p. written in 1985. procurement. and 33] doesnot evenmentionFord's officeoperations other than to saythat Couzenshandledthe business affairs of the companyand with Norval Hawkins organizedthe Ford dealer network. Competitive strategy should lead a firm to either a cost or differentiation target. While the material seems exhaustive. O'Brien arguesthat it was in product [7. marketingand sales. "Everyfirm is a collection activities of of that are performedto design.market." Figure 2 illustrates the chain.231 Industries: An Exit/Voice Approach"[4]. 141-5]includes section [1. It to "Whatworks. whileChandlerand othersthink that it wasmorein process (infrastructure. have the impression I that his informationcannotbe usedfor developing strategy the way that he a in suggests. Porterargues verystrongly a firm should attemptto that not bothdifferentiate be a low cost and leader. (operation. sales). ChapterX in the second was volumedisucsses dealers. Competitive Advantage. substitution. Chandler's work virtually ignores howFord organized increase to production the Model T. A firm may also seek a niche basedon cost or differentiation.setsout the concept the valuechain. technology development). Allen Nevins' firsttwovolumes his of Ford work [5.produce. seems be saying.JohnRae [15. in For example.

TheCompetitive Advantage of Nations. not on financialconsiderations stockmarket perceptions. again. mostrecent ambitious his and book.the benefits evensuccessful of financialstrategies often temporary. Horizontal strategy-not portfolio management--is the essence corporatestrategy. Moreover.232 ' i FIRM INFRA. is 3"orizontal strategy conceptgroup. 319] [9. corporate and strategy oncompetitive based advantage. the industry undoubtedly will stagnate. isa of sector.Oncefirmsin an industry stopcompeting. Finally. published yearsago. Without a are horizontal strategy thereis no convincing rationale theexistence a diversified for of firm because it is little more than a mutual fund." of . enforce anti-trust laws. for Finally. Corporatestrategies or built on purely financialgroundsprovide an elusivejustificationfor the diversifiedfirm.and do not favourmergers. 3 and a discussion how to achieve of interrelationships amongbusiness units. Openthe borders foreign to competition. These final three chapters especially are useful because. setsoutscenarios he which the business historian can usefully appropriate their ownwork.seeks determine two to hownations become economically successful.qTRUCTURB HUMAN Ri•OURCB MA•AGBMBNT TRCHNO! OGY DBV•L•plaMlaNT PROCUREMENT ZNBOUND LOGI•TIC• OPBRATION S DUTBOUND ß SALBS PRIMART ACTIVITIES policy leadhimto promote importance horizontal the of strategy p. leastrelativeto theirforeign at rivals. The recentUnited Statesautomobile industry a perfectexampleof this. nation's A industrial firmswillbesuccessful more the rivalstheyhave. he examines offensiveand defensive strategy.

not internationally are competitive consumer in industries because theydo not knowhowto market. and He arguesthat the term "competitive nation"has little meaning. 4Charles Garfield reported recent inToronto aEuropean did know ina talk that friend not what the word •lemon meantand couldnot believethat we havegenericcategories ' whichare labelled nlemons. doesthisby examining countries--the He ten United States.Switzerland. capital and resources well asinfrastructure.The qualityof demand moreimportant is thanits quantity. In fact. Hencehe studies whatmakes an industryand then later an economy productive. Sweden.The first the is factorconditions that includehuman. eventually and unemployment. goodsupply physical as A of resources not is essential economic for growthas the caseof countries Japanand South like Korea show. On the otherhand. for Figure3 illustrates diamond.n . firm strategy. knowledge.The computer industry locatedin SiliconValley is an example. Improving factor productivityallows firms to compete in sophisticated industrial segments new industries. full A failure to upgrade results in slower productivity growth. do thisa nation. are to countries like Sweden West Germany.physical. and Italy." four forcesthat to the determine success an industry.the United States developed competitive a advantage in medical products because thereis still a privatemarketfor medicalservices in thatcountry. Third is the presence absence relatedand supporting or of industries (clusters) that are world competitive. Upgradingis the key.but did not report on them. mustbecome moreproductive. Porter usestheseconcepts createa "diamond.Government-sponsored programs health tendto be morecost conscious than results oriented. and the mechanisms whicha nation'sdomestic by preferences transmitted foreignmarkets. Japan. he believesthat countriessuchas Canada and Australia have too "many" resources and this has prevented them from becoming internationally competitive industrial in products. and Porter comes theseconclusions focusing whynations to by on become homebases successful for international competitors various in industries and services. rather the but dynamic effects. Finally. 4 He is interested the composition homedemand. and rivalry complete diamond. declining competitiveness. For example. This point of the diamond the formedthe core of his earlier books.233 Don't think a nationcan succeed the longrun usinglow wages a cost in as advantage.It will neverbecomecompetitive it will not becomerich. sizeandpatternof in of the growthof home demand. North Americansaccepted low qualityautomobiles the 1960sand 1970s in from domestic suppliers thisopened marketto foreign and the producers. Germany.theeconomic of a nation goal should to produce highandrising be a standard livingfor its citizens. He alsolookedat Singapore Denmark. Instead. and whichrestrictadvertising. SouthKorea. Great Britain.By this he doesnot mean "aggregate demand" the economist's in sense. The second point of the diamondis demandconditions. and while maintaining employment. structure.or ratherthe industries of To of a nation.

Porteremphasizes how firms will commitment an industry important to as andargues that mobility resources of in the economist's sensemay actuallybe detrimentalsince too rapid a movement humanresources of couldimplya lack of trainedworkers. the PlIM ITI/EEO? •NDITIONI CamplatoDlamomd The "diamond" becomes methodof analysis mostof the book. "Chance" such in formsaswar.But he particularly stresses domestic rivalryasthe mostimportant element thisanalysis. in and managed.He demonstrates the absence anyof theseelements how of can lead to a lossof nationaladvantage. they are ultimatelysecondary. not as a frith determinant.oil shocks.organized.Government but will also be important. of Firmsmaynotrespond .Rather government's is to but role influence four pointsof the diamond. as well asthe natureof homecompetition varies among nations plays role and a in determining successful andindustries be. the for Porterstresses dynamic interdependent the and natureof the four pointsof the diamond.234 The context which firms are created. acts pureinvention or of will havean influence.

but they force f•rms to find new (and better) ways of manufacturing. challenge. becoming dynamic thus a advantage. the Japanese and robotics industry somedetail.Thesecompanies usually not put their most did productive researchers such in government-sponsored research. His argument that postwar is industrial history is a storyof creating. Industry emigrate the will from or not develop in a location whereall four elements the diamond not strong. ratherasan opportunity develop advantage a new but to an in area. Mergers seem offeropportunities success to for by developing economies scale. More than half the book looksat the eight countries (referred to above) since World War II. believes the impactof MITI's research He that groups that was it forcedindividual companies devote to research effortsfor the particular projects they workedon because they knew that their domestic rivalswere working the same on things. and rarelyfrom an easy life. Employing foreigntechnology alsobe a problem will because suchusers will always a generation be behind. the lackof domestic of but rivalryseems even moreimportant hurting industry. the to the United States patientmonitoring equipment industry. He doesnot as believe that industrialpolicies(targeting)will be ultimatelysuccessful. otherthanJapan. not the role of government. restrictive environmental controls should be viewed a not as costburden.Targeting market distorts signals alters incentives tocompete and the off•rms m an industry. After all.Reliance of are on a competitive advantage basedon factor costswill not be successful because somewhere therewill always a location country be or wherefactor costs are cheaper.If production takeplace or all can anywhere. It would be fair to say that Porter sees importantand perhaps devastating problems all of thecountries examines.It is a storyof overcoming disadvantage.Or. exploiting." for is the Thismeans usinggovernment an aid. that hasbeen able to becomecompetitive withoutrelyingon foreign-owned industry. Italian ceramictile the industry. to give a more recentexample. it does mean that their are opportunities other but for industries and countries gain advantage. High labor costsare a static. he arguesthat presentsuccess often been the result of overcoming has disadvantages. When this happenspressure placed on government is bureaucracies pick industries to wherethe diamondcan be developed and . but not as the primaryforce. to His message governments to develop "diamond. course does for he Of this not meanthat anyoneof themwill losetheir present advantages.He explains growthand development competitive the of advantage Japanin of some industries as a result of the "diamond" forces." Porteruses "diamond" look at the Germanprintingindustry. adversity.He stresses free trademakesthe in the that domestic homebase the moreimportant. Porter showshow small family f•rms in Italy have been able to overcome debilitating the effects itsnationalgovernment.235 to opportunities unless they are pushed. homebaseis key. . "Competitive advantage emerges from pressure.or a competitive weakness. He emphasizes in the importance domestic of rivalryandhowits absence provecostly may for some these of industries. demonstrates of He howSouthKorea is the oneAsiancountry. not existing advantage.

Suchcountries SouthKorea. 1987. 16.TheWorkof Nations (New York.1974). 1964) Peter F. whichhave practised as targeting. August 1991.Second Ser. 1954). Chandler.19-22. The May 23. and Japanese in Auto Industries: An Exit/Voice Approach. 1980).Despite targeting machinery chemical and industries. GeorgeStalk. 14. especially the first two books. 1989). 18 (1989). Competitive Advantage: Creatingand Sustaining Superior Performance 9. Ford: Expansions Challenge: and 1915-1933 (New York.. Alfred D. Drucker. alsoemphasizes role of education trainingfor He the and all of the successful postwar economies studies.153-62. 1985). (New York. HarvardBusiness Review. 1990). "Competitive SupplierRelations the U. 3. Rae. 13. 19 (1990). 8. while the last offers intriguing hypotheses aboutmanufacturing growthsinceWorld War II that demand moretesting. havehadmixedresults.S.May-June.Management: Tasks. TheCompetitive Advantage Nations of (New York. 1991). . and References 1. 15. RobertB. Michael E. Competitive Strategy (New York. •I'he Core Competence the Corporation. E. . for Briefly concluding. Firmsthattraintheirworkers keepthembecause will employees wantto work for suchemployers. . in Porter emphasizes nearlyeveryindustry studied almostall that he in of thecountries responsibility creating improving took for or human resources. Susan Helper. "Strategic Intent.. (MayJune.Ford: The•7mes. . Indirect targetingby government this area shouldprove in beneficial because provides it moreopportunities firmsto be successful. PankajGhemawat. . 17. 2. (March-April. 10. SouthKorea hasnot becomecompetitive theseindustries. . Practices (New York 1973. TheAmerican Automobile Industry (Boston. 11. 4."Developing Modem Manufacturing the Corporation: The Early Years at Ford. GiantEnterprise Jr.K. "How to Succeed Business: in Les•ons from the Struggle BetweenFord and General Motors during the 1920s and 1930s. Allen Nevins. the Company the (New York. (New York. 1957). "Competing Capabilities: on The New Rulesof CorporateStrategy." Business Economic and History. Prahaladand Gary Hamel. AnthonyPatrickO'Brien.A nationwill not havethe he ability respond opportunities to to unless human resources the abilityto have exploit them. C. 6. Porter's work. Man.1990).236 exploited. of HarvardBusiness Review. Commitment: Dynamics Strategy The of (New York. 7.1984). JohnB..1992). Responsibilities. "Thestateof strategic thinking.and Lawrence Schulman. 5. 1991). Reich." Business Economic and History. ." unpublished.PhilipEvans."Harvard Business Review." Economist. bothfor the periodhe discusses for earierperiods. provides importantchecklists the business for historian. Porter. 12.SecondSet.

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