Walmart - Porter's Five Forces & Stategy
Michael Porter: What is Strategy?
Thinkers
In an age when management gurus are both lauded by the faithful and hounded by the critics, Michael Porter seems to be one of the few who is well-accepted both academically and in the business world. Though he has his critics, Porter has generally been viewed as at the leading edge of strategic thinking since his first major publication, Competitive Strategy (1980), which became a corporate bible for many in the early 1980s.
Life and career
Born in 1947, Porter completed a degree in aeronautical engineering at Princeton and took an economics doctorate at Harvard, joining the faculty there as a tenured professor at the age of 26. He has acted as consultant to companies and to governments and, like many academics, he set up a consulting company - Monitor.
Porter's Thinking
Porter's thinking on strategy has been supported by precision research into industries and companies, and has remained consistent as well as developmental. He has concentrated on different aspects at different times, spinning the threads together with a logic that is irrefutable.
Before Competitive Strategy, most strategic thinking focused either on the organization of a company's internal resources and their adaptation to meet particular circumstances in the marketplace, or on increasing an organization’s competitiveness by lowering prices to increase market share. These approaches, derived from the work of Igor Ansoff, were bundled into systems or processes which provided strategy with its place in the organization.
In Competitive Strategy, Porter managed to reconcile these approaches, providing management with a fresh way of looking at strategy - from the point of view of industry itself rather than just from the point of view of markets, or of organizational capabilities.
Internal capability for competitiveness - The Value Chain
Porter describes two different types of business activity - primary and secondary. Primary activities are principally concerned with transforming inputs (raw materials) into outputs (products), and delivery and after-sales support. These usual line management activities include Inbound Logistics (materials handling, warehousing), Operations (turning raw materials into finished products), Outbound Logistics (order processing, and distribution), Marketing and Sales (communication and pricing), and Service (installation and after-sales service).
Secondary activities support the primary and include Procurement (purchasing and supply), Technology Development (know-how, procedures and skills), Human Resource Management (recruitment, promotion, appraisal, reward and development), and Firm Infrastructure (general and quality management, finance, planning).
To be able to survive competition and supply what customers want to buy, the firm has to ensure that all these value-chain activities link together and fit, as a weakness in any one of them will impact on the chain as a whole and affect competitiveness.
The Five Forces
Porter argued that in order to examine its competitive capability in the marketplace, an organization must choose between three generic strategies: cost leadership - becoming the lowest-cost producer in the market; differentiation - offering something different, extra or special; and focus - achieving dominance in a niche market. The question is to choose the right one at the right time. These generic strategies are driven by five competitive forces which the organization has to take into account:
* The power of customers to affect pricing and reduce margins
* The power of suppliers to influence the organization’s pricing
* The threat of similar products to limit market freedom and reduce prices and thus profits
* The level of existing competition which impacts on investment in marketing and research and thus erode profits
* The threat of new market entrants to intensify competition and further impact on pricing and profitability.
In recent years, Porter has revisited his earlier work and emphasizes the acceleration of market change that means companies now have to compete not just on a choice of strategic front, but on all fronts at once. Porter has also said that a company that tries to position itself in relation to the five competitive forces misunderstands his approach, since positioning is not enough. What companies have to do is ask how the five forces can help to re-write industry rules in the organization’s favor.
Diversification
Instead of going it alone, an organization can spread risk and attain growth by diversification and acquisition. While the blue-chip consulting companies such as Boston Consulting Group (Market growth/market share matrix) and McKinsey (7-S framework) have developed analytical models for discovering which companies will rise and fall, Porter prefers three critical tests for success:
1. The attractiveness test. Industries chosen for diversification must be structurally attractive. An attractive industry will yield a high return on investment but entry barriers will be high, customers and suppliers will have only moderate bargaining power and there will be only a few substitute products. An unattractive industry will be swamped by a range of alternative products, high rivalry and high fixed costs.
2. The cost-of-entry test. If the cost of entry is so high that it prejudices the potential return on investment, profitability is eroded before the game has started.
3. The better-off test. How will the acquisition provide advantage to either the acquirer or the acquired? One must offer significant advantage to the other.
Porter devised seven steps to tackle these questions:
1. As competition takes place at the business unit level, identify the interrelationships among the existing business units.
2. Identify the core business which is to be the foundation of the strategy. Core businesses are those in attractive industries and where competitive advantage can be sustained.
3. Create horizontal organizational mechanisms to facilitate interrelationships among core businesses.
4. Pursue diversification opportunities that allow shared activities and pass all three critical tests.
5. Pursue diversification through transfer of skills if opportunities for sharing activities are limited or exhausted.
6. Pursue a strategy of restructuring if this fits the skills of management or if no good opportunities exist for forging corporate partnerships.
7. Pay dividends so that shareholders can become portfolio managers.
National Competitiveness
Why do some companies achieve consistent capability in innovation, seeking an ever more sophisticated source of competitive advantage? For Porter the answer lies in four attributes which affect industries: These attributes are: Factor Conditions (the nation's skills and infrastructure to enable a competitive position), Demand Conditions (the nature of home-market demand), Related and Supporting Industries (presence or absence of supplier/feeder industries), and Firm Strategy, Structure and Rivalry (the national conditions under which companies are created, grow, organize and manage).
These are the chief determinants which create the environment in which firms flourish and compete. The points on the diamond constitute a self-reinforcing system, where the effect of one point often depends on the state of the others and any weaknesses at one point will impact adversely on an industry's capability to compete.
The New Strategic Wave
Somewhere between 1980 and 1990 strategic planning came unstuck. Old theories no longer worked as customers became more demanding and changeable, and markets and technologies rose and fell ever more rapidly. Even industries that were once distinct with definable products and services now converged and became blurred. A new wave of more subversive strategic thinking - with Gary Hamel and Strategy as Revolution, and Mintzberg with The Fall and Rise of Strategic Planning - emerged to replace the old rule-book. Porter's main contribution to date - What is strategy? - argues that strategic planning lost its way because managers failed to distinguish between strategic and operational effectiveness and confused the two. The old strategic model - which still held up in the 1980s - was based on productivity, increasing market share and lowering costs. Hence total quality management, benchmarking, outsourcing and re-engineering were all at the forefront of change in the 1980s as the key drivers of operational improvements. But continuing incremental improvements to the way things are done tend, over time, to bring different players up to the same level, not differentiate them. To achieve differentiation means that:
* Strategy rests on unique activities based on customers' needs, customers' accessibility or the variety of a company's products or services.
* The company's activities must fit and link together. In terms of the value chain, one link is prone to imitation but with a chain, imitation is very difficult.
* Making trade-offs: excelling at some things means making a conscious choice not to do others - a question of being a `master of one trade' to stand out from the crowd as opposed to being a `jack of all trades' and lost in the crowd. Trade-offs purposefully limit what a company offers. The essence of strategy lies in what not to do.
The Internet
In 2001 Porter addressed the assertion that the Internet renders strategy obsolete. He admits that the Internet is in its infancy, but observes that lack of strategy and reliance on Internet technologies to gain market penetration is already proving not to be a sound approach. In a Harvard Business Review article in March 2001 Porter says:
`In our quest to see how the Internet is different, we have failed to see how the Internet is the same' (pp63-78)
Porter argues that many Internet companies are competing through unsustainable, artificial means, usually propped up by short-term capital investment. He also argues that while the excitement of the Internet appeared to throw up new rules of competition, the first wave of excitement is now clearly over, and the old rules and strategic principles appear to be re-establishing themselves. He gives examples such as:
1. The right goal - healthy long-term return on investment.
2. Value - a company must offer a set of benefits which set it apart from the competition.
3. A company's value chain has to do things differently or do different things from rivals to reflect, produce and deliver that value.
4. Trade-offs - make conscious deliberate sacrifices in some areas in order to excel, or even be unique, in others.
5. All the different components in the value chain must fit together, reinforcing each other to create uniqueness and value: it is this which makes a core competence - something that is difficult to imitate.
6. Continuity - not only from a customer perspective but also in order to build and develop skills that bring competitive edge.
Porter foresees that, as most businesses embrace the Internet, it will become nullified as a source of advantage, while traditional strengths such as uniqueness, design and service relationships will re-emerge. For Porter the next phase of Internet evolution will be more holistic, with a shift from e-business to business, from e-learning to learning, within which the Internet will be a communications medium and not necessarily a source of advantage.
In Perspective
It is a mark of Porter's achievement that much of his work on Competitive Strategy, researched in the 1970s, still has high value and relevance in the late 1990s, and still shapes mainstream thinking on competition and strategy.
Although now much quoted, the following was intended to be as much a compliment as the Economist would muster: "His work is academic to a fault ... Mr. Porter is about as likely to produce a blockbuster full of anecdotes and boosterish catch-phrases as he is to deliver a lecture dressed in bra and stockings." (Professor Porter Ph.D., Economist, 8 October 1994, p97)
While his work is academically rigorous, his ability to abstract his thinking into digestible chunks for the business world has given him wide appeal to both the academic and business worlds. It is now standard practice for organizations to think and talk Value Chains, and the Five Forces have entered the curriculum of every management programmed. Porter's later thinking on strategy rides the new wave of revolutionary strategic thinking led by Hamel and links consistently with his earlier work. One suspects that there is not only more to come from Michael Porter, but also that it will be wholly consistent with what he has said in the past.
Key works by Porter
Books
Competitive strategy: techniques for analyzing industries and competitors New York: Free Press, 1980
Competitive advantage: creating and sustaining superior performance London: Collier Macmillan, 1985
Competitive advantage of nations London: Macmillan, 1990
Cases in competitive strategy London: Collier Macmillan, 1983
Competition in global industries (ed) Boston, Mass.: Harvard Business School Press, 1986
Journal Articles
From competitive advantage to corporate strategy Harvard Business Review, May/June 1987, vol. 65 no 3, pp43-59
The competitive advantage of nations Harvard Business Review, Mar/Apr 1990, vol. 68 no 2, pp73-93
What is strategy? Harvard Business Review, Nov/Dec 1996, vol. 74 no 6, pp61-78
Corporate strategy: the state of strategic thinking Economist, 23 May 1998, pp21-22,27-28.
Revised Apr 2002
Full Text:
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Source Citation:
"Michael Porter: What is Strategy?" Thinkers. London: Chartered Management Institute, 2002. Business Insights: Essentials. Web. 29 Aug. 2016.
URL
http://bi.galegroup.com.ezproxy.snhu.edu/essentials/article/GALE%7CA85608624?u=nhc_main
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GALE|A85608624
