In his speech accepting his award for topping the 2015 Thinkers50 ranking, Michael Porter told us: “Ideas truly do change the world. I have seen that with my own eyes all throughout my career. I also believe that management thinking unlocks value in every field not just business. We all understand that management thinking allows markets to work better in delivering value to customers. We have also learned that management thinking and deeply understanding competition at the grassroots level reveal the true sources of competitiveness and what really leads to economic development. This is starting to permeate its way through our economic development thinking.
“Based on my recent work, management thinking unlocks value in healthcare. Medical science is not the constraint in healthcare today, it is the ability to think strategically, to organize, to measure the right way, to create new kinds of delivery systems. I also think management thinking and a new conception of how corporations relate to society is one of the most powerful tools we have in the world to address society’s pressing challenges.”
Porter of Harvard Business School is probably the world’s most successful academic. While other management thinkers have compromised their approach in search of popular appeal, in Porter’s seriousness and rationality is all pervasive. “His work is academic almost to a fault,” observed The Economist. “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.”
His approach is based on surgical precision, the dissection of the vital organs of companies and industrial nations. Porter’s books, not surprisingly, have been few in number, but high in their ambition and influence.
“Strategic thinking rarely occurs spontaneously. Without guidelines few managers knew what constituted strategic thinking,” he lamented in a 1987 article. His work has set about constructing the guidelines.
Porter’s first book was Competitive Strategy (1980) which instead of tiptoeing round the edges of management theory went straight to the strategic heart. Porter tackled the apparently imponderable question of how organizations can achieve long-term competitive advantage. He sought a middle ground between the two polarized approaches then accepted — on the one hand, that competitive advantage was achieved by organizations adapting to their particular circumstances; and, on the other, that competitive advantage was based on the simple principle that the more in-tune and aware of a market a company is, the more competitive it can be (through lower prices and increased market share).
Porter managed to absorb both these concepts. From analysis of a number of companies, he developed generic strategies. This was not an instant template for competitive advantage — Porter insisted that though the generic strategies existed, it was up to each organization to carefully select which were most appropriate to them and at which particular time. The four generic strategies are backed by five competitive forces which are then applied to five “different kinds of industries” (fragmented, emerging, mature, declining and global).
The logic behind the five forces framework is that:
- If customers have bargaining power over a supplier (no matter what the reason), they will exercise that power and reduce the supplier’s profit margins.
- If an organization’s suppliers have bargaining power over it, they will exercise that power and sell their products at a higher price.
- If there are substitutes to an organization’s product or service, they will limit the price the organization can charge and, again, limit profits.
- If there is intense rivalry in an industry, it will force organizations to engage in price, R&D and advertising wars, all of which are likely to reduce profits.
- Finally, if new entrants move into an industry, they bring with them resources and the desire to steal market share from existing companies. Rivalry accelerates and profits decline.
“Given the logic of these five forces, a strategist needs to decide what to do about them,” says London Business School’s Costas Markides. “Traditionally, most people assumed that the way to proceed was to assume these five industry forces as given and then try and position their firm towards these forces. This is fundamentally wrong and this is probably the most serious misconception about strategy that has developed since the five forces framework was developed.”
Markides argues that what the strategist ought to do is to creatively break the established rules of the game by actively changing these five forces in the company’s favor. In his view, the essence of strategy formulation is coming up with creative ideas in response to the following five questions:
- How can I reduce the bargaining power of my customers?
- How can I reduce the bargaining power of my suppliers?
- How can I reduce substitutes to my product or service?
- How can I limit rivalry in my industry?
- How can I prevent new entrants from coming into my industry?
Taught at every business school in the world, Porter’s generic strategies framework is persuasive and highly attractive to managers. It is clear and the logic irrefutable. The trouble is that, while Porter suggests that the model should only be used to stimulate thinking, organizations often regard it as a direct route to competitive advantage. There is considerable irony in companies using the same model to differentiate themselves from each other.
Later, in Competitive Advantage (1985) Porter went onto contend that there are three ways by which companies can gain competitive advantage:
- by becoming the lowest cost producer in a given market;
- by being a differentiated producer (offering something extra or special to charge a premium price);
- or by being a focused producer (achieving dominance in a niche market).
To examine an organization’s internal competitiveness, Porter advocates the use of a value chain – analysis of a company’s internal processes and the interactions between different elements of the organization to determine how and where value is added. Viewing everything a company does in terms of its overall competitiveness, argues Porter, is a crucial step to becoming more competitive.
Porter went on to paint on a bigger canvas. The Competitive Advantage of Nations (1990), one of his most ambitious projects, is a detailed study of the competitiveness of the world’s top eight economies which emerged from Porter’s work on the Presidential Commission on Industrial Competitiveness set up by Ronald Reagan. Interestingly, Porter produces a more pragmatic view of the world in this book. He is highly critical of general prescriptions and the worldwide application of management fads such as just-in-time. What works in one country, fails miserably in another, he warns. This runs counter to much of the prevailing wisdom of globalization. Indeed, instead of national differences and characteristics becoming less pronounced, Porter found them to be as important as ever.
Again, Porter’s research produced a tidy checklist. His national diamond framework identified four factors which influence the competitiveness of nations:
- Related and supporting industries
- Demanding home customers
- Domestic rivalry.
While Porter has attracted some criticism for his willingness to boil his mass of theories and ideas down to all-embracing bullet-points, without them it is unlikely that his complex ideas would either be accessible or understood. That they are so influential is a triumph for Porter’s abilities of dissection and logic.
Michael Porter’s books include Competitive Strategy (Free Press, 1980);
Competitive Advantage (Free Press, 1985) and The Competitive Advantage of Nations (Macmillan, 1990).
“Professor Porter PhD”, The Economist, 8 October 1994
This was originally published in What we mean when we talk about strategy by Stuart Crainer and Des Dearlove (Infinite Ideas, 2016).