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

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My interest business business in and history follows question the that PeterDruckerasks, "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 but, like manyof you,I am also deeplyinterested the futureand so I try to read the currentliteraturein in thisarea. Thus,I find MichaelPorter's workuseful. 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,I have asked several (non-Harvard) peopleat these meetings theyhadreadPorter if andmostrepliednegatively. thinkthatis a shame I because provides he many
tools for the business historian.

What intrigues aboutstrategic me planning thatoneplans a world is in in whichoutcomes not certain, manyof uswritehistory if we know are yet as the outcome. Ghemawat,however, makesthe commonsense observation that success factors a shaky are foundation strategy pp. 5-6]. The same for [3, 2 case be madefor writinghistory.Of course, do knowthe outcome can we in a certain sense,but, unlesswe are very careful, we will miss intriguing possibilities leadsbecausewe alreadyhave our hypothesis.With this or explanation us go on to look at Porter'swork. let Michael Porter is one of the hottest(international) consultants to business farms andgovernments. latestbookTheCompetitive His Advantage of Nations hasbeencalled [10] "brilliant" some "nothing by and new" others. by While theimplications present for policy continue be debated, will to Porter's workdoes provide business the historian witha powerful paradigm setof and toolsfor considering business history.Why are somefirmssuccessful in and othernot? Why do somenations seemto specialize certainindustries in with lotsof competitors, whileothernations not seemto knowthat an industry do exists? Porterprovides ways thinking of aboutthese types questions. of This paperwill look at his threebooks: Competitive Strategy [11], Competitive Advantage and TheCompetitive [9], Advantage Nations of [10]. Porter's farst book Competitive Strategy,publishedin 1980, is an exhaustive at strategy. context the worldof the late 1970s, the look His is but structure that he setsout is a veryuseful vehicle the business for historian. "Theessence formulating of competitive strategy relating company its is a to environment" p. 3]. This is exactly [11, whatthe business historian should be doing.

2The reasons that isusually are "t difficult identify to success relevanta particular factors to
situation. Second, even when a success factor has been diagnosedto be relevant, the implications the leversmanagers for mustpull are not completely concrete. Third, the success factor approach lacks generality becauseit implicitly assumesthat success factors are undervalued.Finally,in view of its other defects, wouldbe reassuring the success it if factor approach to strategycontainedsome self-justification: a reason why strategicthinking is necessary the first place. It doesnot2 in

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POTENTIAL ]
ENTRANTS

BUYERS ]

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

231

Industries: An Exit/Voice Approach"[4], demonstrates how differing supplier/manufacturer bargaining powermay lead to differentresults. Competitive strategy should lead a firm to either a cost or differentiation target. A firm may also seek a niche basedon cost or differentiation. Porterargues verystrongly a firm should attemptto that not bothdifferentiate be a low cost and leader. The danger thata firm maybe is caughtin the middle and loseto thosefirms that do specialize.He also considers pitfalls adopting of these the of any generic strategies pp. 41-4]. [9, While the material seems exhaustive, have the impression I that his informationcannotbe usedfor developing strategy the way that he a in suggests. seems be saying, It to "Whatworks, works."But because hasset he out sucha complete taxonomy, business the historian givenexhaustive is tools for evaluating successes failures particular the and of businesses a historical in
context.

The next book, Competitive Advantage, written in 1985,setsout the concept the valuechain. "Everyfirm is a collection activities of of that are performedto design,produce,market, deliver, and supportits product." Figure 2 illustrates the chain. Primary activities the value chain are in inboundlogistics, operations, outbound logistics, marketingand sales,and service. Support activitiesinclude firm infrastructure, human resource management, technology development, procurement. and Porterdemonstrates that a firm may develop competitive a advantage anyone of theseareas. in For example, dispute the between O'Brienandothers overthe rivalry between GM and Ford in the 1920s is an argumentabout where GM gained competitive advantage 8]. O'Brien arguesthat it was in product [7, (operation, technology development), whileChandlerand othersthink that it wasmorein process (infrastructure, marketing, sales).JohnRae [15,p. and 33] doesnot evenmentionFord's officeoperations other than to saythat Couzenshandledthe business affairs of the companyand with Norval Hawkins organizedthe Ford dealer network. Chandler's work virtually ignores howFord organized increase to production the Model T. His Giant of Enterprise pp. 141-5]includes section [1, a from Ford'sMy Life and Work whichderides systematic organization. Allen Nevins' firsttwovolumes his of Ford work [5, 6] also ignores organizational questions exceptto say that Couzens in charge. ChapterX in the second was volumedisucsses dealers, research, Henry Ford'sdistrust formal administration, it doesnot and of but reallyexplain howthe organization run. 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.He considers competitive advantage the context in of technology, competitor selection (there are goodand bad competitors), industry segmentation, substitution. and Problems "synergy" a strategic with as

232

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policy leadhimto promote importance horizontal the of strategy p. 319] [9, 3
and a discussion how to achieve of interrelationships amongbusiness units. Finally, he examines offensiveand defensive strategy. These final three chapters especially are useful because, again, setsoutscenarios he which the business historian can usefully appropriate their ownwork. for Finally, mostrecent ambitious his and book,TheCompetitive Advantage of Nations, published yearsago,seeks determine two to hownations become economically successful. nation's A industrial firmswillbesuccessful more the rivalstheyhave. Openthe borders foreign to competition, enforce anti-trust laws,and do not favourmergers.Oncefirmsin an industry stopcompeting, the industry undoubtedly will stagnate, leastrelativeto theirforeign at rivals. The recentUnited Statesautomobile industry a perfectexampleof this. is

3"orizontal strategy conceptgroup, isa of sector, corporate and strategy oncompetitive based
advantage, not on financialconsiderations stockmarket perceptions. Corporatestrategies or built on purely financialgroundsprovide an elusivejustificationfor the diversifiedfirm. Moreover,the benefits evensuccessful of financialstrategies often temporary. Without a are horizontal strategy thereis no convincing rationale theexistence a diversified for of firm because it is little more than a mutual fund. Horizontal strategy-not portfolio management--is the essence corporatestrategy." of

233

Don't think a nationcan succeed the longrun usinglow wages a cost in as advantage.It will neverbecomecompetitive it will not becomerich. and Porter comes theseconclusions focusing whynations to by on become homebases successful for international competitors various in industries and services. doesthisby examining countries--the He ten United States, Japan, Germany,Switzerland, SouthKorea, Great Britain, Sweden, and Italy. He alsolookedat Singapore Denmark,but did not report on them. and He arguesthat the term "competitive nation"has little meaning. Instead,theeconomic of a nation goal should to produce highandrising be a standard livingfor its citizens. do thisa nation,or ratherthe industries of To of a nation, mustbecome moreproductive. Hencehe studies whatmakes an industryand then later an economy productive. Upgradingis the key. Improving factor productivityallows firms to compete in sophisticated industrial segments new industries, and while maintaining employment. full A failure to upgrade results in slower productivity growth, declining competitiveness, eventually and unemployment. Porter usestheseconcepts createa "diamond," four forcesthat to the determine success an industry. for Figure3 illustrates diamond.The first the is factorconditions that includehuman,physical, knowledge, capital and resources well asinfrastructure. goodsupply physical as A of resources not is essential economic for growthas the caseof countries Japanand South like
Korea show. In fact, he believesthat countriessuchas Canada and Australia

have too "many" resources and this has prevented them from becoming internationally competitive industrial in products. The second point of the diamondis demandconditions.By this he doesnot mean "aggregate demand" the economist's in sense, rather the but dynamic effects.The qualityof demand moreimportant is thanits quantity. North Americansaccepted low qualityautomobiles the 1960sand 1970s in from domestic suppliers thisopened marketto foreign and the producers. 4 He is interested the composition homedemand, sizeandpatternof in of the growthof home demand, and the mechanisms whicha nation'sdomestic by preferences transmitted foreignmarkets. For example, are to countries like Sweden West Germany, and whichrestrictadvertising, not internationally are competitive consumer in industries because theydo not knowhowto market. On the otherhand,the United States developed competitive a advantage in medical products because thereis still a privatemarketfor medicalservices in thatcountry.Government-sponsored programs health tendto be morecost
conscious than results oriented.

Third is the presence absence relatedand supporting or of industries (clusters) that are world competitive.The computer industry locatedin SiliconValley is an example. Finally, firm strategy, structure, and rivalry complete diamond. This point of the diamond the formedthe core of his
earlier books.

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.n

234

The context which firms are created,organized, in and managed, as well asthe natureof homecompetition varies among nations plays role and a in determining successful andindustries be. 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. "Chance" such in formsaswar,oil shocks, acts pureinvention or of will havean influence, they are ultimatelysecondary.Government but will also be important, not as a frith determinant.Rather government's is to but role influence four pointsof the diamond. the

PlIM ITI/EEO?
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The "diamond" becomes methodof analysis mostof the book. the for Porterstresses dynamic interdependent the and natureof the four pointsof the diamond.He demonstrates the absence anyof theseelements how of can lead to a lossof nationaladvantage.But he particularly stresses domestic rivalryasthe mostimportant element thisanalysis. of Firmsmaynotrespond

235

to opportunities unless they are pushed. "Competitive advantage emerges from pressure, challenge, adversity, and rarelyfrom an easy life." Porteruses "diamond" look at the Germanprintingindustry, the to the United States patientmonitoring equipment industry, Italian ceramictile the industry, the Japanese and robotics industry somedetail. He emphasizes in the importance domestic of rivalryandhowits absence provecostly may for some these of industries. Mergers seem offeropportunities success to for by developing economies scale, the lackof domestic of but rivalryseems even moreimportant hurting industry.He stresses free trademakesthe in the that domestic homebase the moreimportant.If production takeplace or all can anywhere, homebaseis key. Industry emigrate the will from or not develop in a location whereall four elements the diamond not strong.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. Employing foreigntechnology alsobe a problem will because suchusers will always a generation be behind. More than half the book looksat the eight countries (referred to above) since World War II. His argument that postwar is industrial history is a storyof creating, exploiting, not existing advantage.It is a storyof overcoming disadvantage. High labor costsare a static,or a competitive weakness, but they force f•rms to find new (and better) ways of manufacturing, becoming dynamic thus a advantage.Or, to give a more recentexample, restrictive environmental controls should be viewed a not as costburden, ratherasan opportunity develop advantage a new but to an in
area.

Porter showshow small family f•rms in Italy have been able to overcome debilitating the effects itsnationalgovernment. demonstrates of He howSouthKorea is the oneAsiancountry, otherthanJapan, that hasbeen able to becomecompetitive withoutrelyingon foreign-owned industry.He explains growthand development competitive the of advantage Japanin of
some industries as a result of the "diamond" forces, not the role of

government. 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.Thesecompanies usually not put their most did productive researchers such in government-sponsored research. It would be fair to say that Porter sees importantand perhaps devastating problems all of thecountries examines. course does for he Of this not meanthat anyoneof themwill losetheir present advantages. After all, he arguesthat presentsuccess often been the result of overcoming has disadvantages, it does mean that their are opportunities other but for industries and countries gain advantage. to His message governments to develop "diamond." for is the Thismeans usinggovernment an aid, but not as the primaryforce. He doesnot as believe that industrialpolicies(targeting)will be ultimatelysuccessful.

.Targeting market distorts signals alters incentives tocompete and the off•rms
m an industry. When this happenspressure placed on government is bureaucracies pick industries to wherethe diamondcan be developed and

236

exploited. Suchcountries SouthKorea, whichhave practised as targeting, havehadmixedresults.Despite targeting machinery chemical and industries, SouthKorea hasnot becomecompetitive theseindustries. in Porter emphasizes nearlyeveryindustry studied almostall that he in of thecountries responsibility creating improving took for or human resources. Firmsthattraintheirworkers keepthembecause will employees wantto work for suchemployers. alsoemphasizes role of education trainingfor He the and all of the successful postwar economies studies.A nationwill not havethe he ability respond opportunities to to unless human resources the abilityto have exploit them. Indirect targetingby government this area shouldprove in beneficial because provides it moreopportunities firmsto be successful. for Briefly concluding, Porter's work, especially the first two books, provides importantchecklists the business for historian, while the last offers intriguing hypotheses aboutmanufacturing growthsinceWorld War II that demand moretesting, bothfor the periodhe discusses for earierperiods. and
References

1. 2. 3. 4.
5. 6. 7. 8.

Alfred D. Chandler, GiantEnterprise Jr., (New York, 1964) Peter F. Drucker,Management: Tasks, Responsibilities, Practices (New York 1973,1974). PankajGhemawat, Commitment: Dynamics Strategy The of (New York, 1991). Susan Helper, "Competitive SupplierRelations the U.S. and Japanese in Auto Industries: An Exit/Voice Approach," Business Economic and History,Second Ser., 19 (1990),153-62. Allen Nevins,Ford: The•7mes, Man, the Company the (New York, 1954). , Ford: Expansions Challenge: and 1915-1933 (New York, 1957). AnthonyPatrickO'Brien,"Developing Modem Manufacturing the Corporation: The Early
Years at Ford," unpublished, August 1991. , "How to Succeed Business: in Les•ons from the Struggle BetweenFord and General Motors during the 1920s and 1930s," Business Economic and History,SecondSet., 18 (1989). Michael E. Porter, Competitive Advantage: Creatingand Sustaining Superior Performance

9.

10. 11. 12. 13. 14. 15. 16. 17.

(New York, 1985). , TheCompetitive Advantage Nations of (New York, 1990). , Competitive Strategy (New York, 1980). , "Thestateof strategic thinking," Economist, The May 23, 1987,19-22. , •I'he Core Competence the Corporation, of HarvardBusiness Review, (MayJune,1990). C.K. Prahaladand Gary Hamel, "Strategic Intent,"Harvard Business Review,May-June, 1989). JohnB. Rae, TheAmerican Automobile Industry (Boston,1984). RobertB. Reich,TheWorkof Nations (New York, 1991). GeorgeStalk,PhilipEvans,and Lawrence Schulman, E. "Competing Capabilities: on The New Rulesof CorporateStrategy, HarvardBusiness Review, (March-April,1992).

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