Question:
Using relevant theories, concepts and examples, critically assess Michael Porter’s contribution to the field of strategic management.
Solution:
Introduction:
In the last three decades, strategic management has established and developed itself as an independent and distinct field of study. The influence and significance of this discipline has been increasing rapidly due to its vital role in an effective and efficient management. This field of management has got attention from two perspectives, for the business leaders or managers it is a discipline that helps in enhancement of their existing level of performance in market place and make them competitive. On the other hand this field of management has great importance for academicians who are looking for the rationality along with the reasons behind a high performance of a firm at marketplace.
This paper aims at identifying and analyzing the contributions of Michael Porter to the field of strategic management. He took born in 1947 and has made a vital contribution to the field of strategic management. His works in this field reflects a major part of this discipline and has got recognition form academicians and professionals across the globe. In this paper, his major contribution to the field of strategic management would be critically analysed. Porter’s major works can be identified as, Porter’s five forces analysis, Cluster management, value chain analysis, generic strategy, Diamond Framework, etc. His domain of work includes very diverse and wide areas of strategic management, as a writer he has authored/co-authored and edited more than17 books. In addition to this, he has made contribution through 100 articles, and has acted as a consultant to the many business organizations and governments around the world. He is regarded as one of founding fathers of strategic management, as a discipline (Raduan 2009).
Aims and objectives:
In order to develop a conceptual framework of this paper that would direct the major discussion and analysis the following aims and objectives can be observed:
- To identify and analyze the major contribution made by Michael E. Porter to the field of strategic management.
- To make a critical analysis regarding the impact of Porter’s contribution on the field of strategic management.
- To critically evaluate the models, theories and frameworks of Michael Porter.
- To examine and determine the extent to which his contributions are critical and significant in prevailing business environment.
Strategic approach of Michael E Porter:
The strategic approach that was adopted during the end of 20th century was largely driven by the context and content rather than the process of strategic management. This period or more specifically the duration of 1980s was largely dominated by the contribution of Michael Porter in the field of strategic management. He proposed, five- forces model (1980), Value Chain analysis (1985) and generic strategies (1985) which are perceived to the most crucial and significant contribution by him.
Porter’s view on business strategy:
It can be observed from the analysis of his writing that they are concerned with the business level strategy. It is because of the perception of Porter that competition occurs at business level unit; he made the center to this level for his discussion. He has published a numbers of meaningful and impressive articles though his books Competitive Strategy and Competitive Advantage. His great work, Competitive Strategy, Techniques for analyzing Industries and Competitors (1980) offers an insight of structural analysis of industries along with the techniques of analysis the nature of competition in this sector. These techniques of analysis can be explained as following:
Five competitive forces model:
This model can be termed as one of the most used frameworks in the field of strategic management. This tool is widely used for identification and determination of potential profitability and risks in any industry. He suggested that an industry does not only compete with the existing players that produce the same good or services to the same target groups but in addition to this, there are other factors that drives the competition in a particular industry. His competitive forces model goes beyond the traditional perception of competition that consists of price, varieties and quality aspect of goods and services and included other dimension of competition that must be taken care for survival and success in marketplace. He introduced the concept of stakeholders group in order to identify and analyze the nature and extent of completion in an industry (Orcullo 2007).
Figure1. Porter’s Five Forces Model
Threats of new entrants:
Porter has suggested that the threats of new entrants refer to the potential competitors, these are the companies which are not conducting their operations in an industry but they have the adequate capability to join the market. It is clear from the analysis of this dimension that the players of a particular industry attempt to discourage the potential competitors from entering the market. This strategy is adopted in order to protect the market share and profit by a firm which is the part of existing business. The increasing numbers of potential entrants’ reflect a high risks to the profitability of the established companies. It can be easily understood by an example; the last two decades have seen a high risk of new entrants to the airline industry in the USA. The introduction of Jet Blue in 2000 and Virgin Airways in the year 2007 have brought down the prices and profit in this industry (Hill and Jones 2012).
Bargaining powers of buyers:
The competitive forces model indentifies the buyers from the perspective of competitors. The buyers may include the end-users or the firms that distribute the product or services to the end users, such as retailers or wholesalers. The bargaining power of buyer represents the capabilities of buyers to force the manufactures to charge low prices for the product or services. The buyer can also raise the cost for the companies for a particular product or service through demanding high quality. In either of the way, lowering the price or raising of costs buyers can squeeze the profit from the industry. Due to this reason, Porter has viewed powerful buyers as competitors. In the contrast of this, if buyers are in weak position a firm can raise the prices or can reduced the cost while providing low quality.
Bargaining power of suppliers:
The suppliers refer to those individuals or companies which provide input into the industry. These inputs can be in terms of raw materials, services, labor, etc. If the suppliers are in strong position they may raise the cost of inputs that would eventually result into a higher cost for manufactured products. In addition to this, they can also reduce the existing level of demand for a particular product though providing a poor or sub-standard input. In both the ways the companies have to compromise with their market share and ratio of profit.
Threats of substitute and alternatives:
One of the competitive forces by Michael Porter has been identified as threats of substitute and alternative. He clearly pointed out that a firm of a particular industry has to compete with the firms in other industries as well, if the products of another industry are seen as an alternative or substitute by the consumers. It is worth noticing here that the industry might have a completely different characteristic but can fulfill the same need of consumers (Parnell2003).
Existing rivalry:
Porter has seen rivalry among the existing players as a result of pressure to improve their competitive position at marketplace. The competition among the existing companies is based upon reduction of prices, enlargement of product line, increasing promotional efforts, and development and commercialization of new products. The numbers of competitors and their strengths determine the nature and intensity of competition in any industry (Phadtare 2011).
Limitations of Five Forces Model:
The recent developments in global business environment have brought many significant changes and due to the rise in internet economy during last decade the five forces of Porter have come under criticism. He has been criticized for adopting a macro view and conducting analysis with respect to industry specific rather than acquiring a micro-view of market centric analysis. In the present time, where the customization has been increasing and markets have given impetus to consumerism, his analysis would not be very effective. It has also been indicated by many of the researchers that he overemphasizes on the content and context, components of strategic management and almost ignores the action. His logical explanation provides ample information regarding identification and analysis of competition and competitive forces in any industry but does not suggest what action should be taken by the mangers of the company in order to consolidate their position in the marketplace (Grundy 2006).
This model is based upon the perfect competition in a market through which market forces are regulated but in present circumstances these kinds of market are hardly found. The model focuses at enhancing competitive position along with the profitability of the firms in an industry. The model only focuses on the behavior of firm in any industry but does not recognizes the role of partnerships with respect to competitive position and profit function of a firm. Further, the model suggests that the determinant of profit and competencies of a firm are industry factors rather than the internal resources of a firm.
The Value Chain Model:
The other major contribution of Porter in the field of strategic management is the introduction of the Value Chain Model. This model was first introduced by him in his book “Competitive Advantage: Creating and sustaining superior Performance” in 1985. Michael Porter proposed this model with the aim of providing a framework by using which an organization can analyze and manage itsdifferent activities to get superior performance and gain the competitive advantage.
The value chain model is targeted towards the analysis of various activities within and around the organization, and used it to define the competitive strength or position of the organization. Thus it helps the organization to measure the impact and importance of different activities and prioritize their role in the performance of organization in the market in comparison to its competitors. This model shows that Porter an organization is just not a mere combination of machinery, people and money, but it is larger than this and it is necessary to consider each and every aspect of the business to include in the framework for the better and effective strategy formulations.
Porter argued that it is important for any organization to develop a system that facilitate and allow the management to connect the machine, money and people in a synchronized manner to produce the products what customers need. He said that it is very important for the management to control and manage all different activities and their linkages will be act as a source of competitive advantage. This approach of Porter shows that he understands the importance of every aspect of the business in the strategy formulation and treated the organization as a system.
In his model, Porter divided all activities in two major categories- primary activities and support activities, primary activities are those activities which are directly associated with the production and delivery of the products or service. There are five major areas- inbound logistics, operations, outbound logistics, marketing and sales, and service (Recklies 2001).
All these primary activities play an important role in the creation of image of the organization in the market and directly impact the satisfaction level of the customers. For the effective and efficient completion of these primary activities there are certain support activities. These support activities are linked with the primary activities and fulfill the basic requirements which are required to improve the effectiveness and efficiency of the primary activities. The four main support activities defined by in the Value Chain model are- procurement, technology development, human resource management, and infrastructure. The basic structure of Porter’s value chain model is as follows:
Figure2. Value Chain Model:
The term “margin” in the above figure shows the ability of the organization to earn the profit by managing the linkage between the primary and support activities. Managing linkage which include information flow, transfer of good or services is very important for the success of the organization.
In different literature it is said that success of any organization depends on its internal structure and process, but it is also get affected by the external environment in which it is working. With the changes in the external environment, organizations need to make changes in its internal processes and structure. It is also known that in any industries it is not possible for any organization to perform all activities which ranges from product designing to its assembly and delivery. So it will be not possible for the organization to make value chain analysis by excluding from the other components of the industry. For the more positive results it is important for the organization to consider them as an element of value system and should analyze the whole system to formulate better strategies and increase their profit margin. The other major impact of the value chain model is that it made organization it understands the importance of each activity and their linkage, thus transformed them into more synchronized systems.
Cluster Management
In his different studies, Porter has focused on each dimension which can directly or indirectly impact the success or growth of the organization. To show the role of external factors on the growth of an organization, he proposed a model known as Cluster Management. Porter said that the competitive advantage of any organization is mainly determined by the factors which lie outside of the company or even beyond its industry. So it is can be assumed that if an organization is trying to gain competitive advantage, then it cannot solely rely on its managerial and internal process development. It has to study its related external environment and develop accordingly (Porter 2000).
For this concept of cluster management can be used. A cluster can be defined as the “geographically proximate group of interconnected companies and associated institutions in a particular field, linked by commodities and complementarities.”(Kersten, Blecker and Flaming 2008). Mostly cluster include end product or service companies, suppliers of specialized raw material, financial institutions, and various other institutions which directly or indirectly influence the strategies of the organization. In the beginning the cluster theory was more economic based and talks about the role of location and cluster irrespective of the management literature. But with the time it has been realized that cluster theory has direct implication on the different strategies of the organization like global strategies, supply chain management, partnerships and alliance decisions etc. This theory made the organization to consider the role of “public” in the strategy formulation and today geographic locations are one of the important aspects of the management.
Diamond framework
Diamond framework is considered as one of the most important models developed by Michael E. Porter. This framework has a significant contribution in strategic management. The prime motive of developing this framework is to ascertain the various factors that are responsible for strengthening or weakening the economic competitiveness of any country. There are four main elements of this framework that determines the level of competitiveness of a country. These four elements are: demand conditions, factor conditions, firm strategy, structure and rivalry and related and supporting industries. According to Porter, each element has a great influence on success of any business and may influence each other to create a better and competitive business environment. Given below is the basic structure of Diamond framework:
Figure3. Diamond Model
As we can see that in this framework, Porter has clearly interlinked all the elements that are responsible for organizational effectiveness. Through this model, Porter has portrayed that an organization must focus on these elements to identify the viability of business in a particular country. Apart from this, Diamond framework also helps an organization to evaluate its strategic competitiveness and further growth viability (Kuroiwa and Toh, 2008).
Several people have criticized this model stating this was developed by Porter, focusing on American economy and it may not be good for developing economy.
Generic Strategies
One of the most significant contributions of Porter in the field of strategic management is development of generic strategies. These generic strategies have slightly grabbed the attention of all the businesses, institutions and academicians and they have applied these strategies to sustain their growth in this competitive world. Porter has closely related these strategies with performance of any organization. Those organizations who adopted these generic strategies performed much better than those who did not. These strategies are adopted and appreciated across globe by the different organizations for competing each other. According to Porter, there are three generic strategies that need to be taken into consideration by a firm in order to outperform other firms in the industry. These generic strategies are: Cost Leadership, Differentiation and focus. Each generic strategy has a significant role in sustaining growth of a firm and combating the competition.
Cost Leadership:
Porter has suggested that cost leadership refers to producing the goods at low cost within a broad market without compromising with quality. In this approach, a firm gives more value to the customers by keeping the price lower than its competitors. The firm gets benefits through mass sales of products to the customers. This strategy gives a strategic advantage to firms who have plenty of resources. Low prices enable a firm in acquiring major part of market share. According to Porter, a firm can get cost leadership benefit by reducing the cost at each level of value chain (Graham 2008).
Differentiation:
According to Porter, differentiation refers to offering additional or unique benefits in product that is perceived as differentiating factor by the customers. There are many ways to differentiate a product from others for example, introduction of new technology, new image, better customer service, excellent distribution channel and so on. This is the best strategy to earn more than average profit because it is really hard for the competitors to imitate that differentiating factor easily. In order to adopt this strategy, a firm must have strong research and development department and coordination of this to other functions like marketing, product development etc (Porter 2000).
Focus:
One of the most significant generic strategies that have been identified by Michael Porter is focus strategies. He clearly explained that a firm can get competitive advantage over other firms by focusing on a specific segment of market and acquiring a cost leadership and/or differentiation position in that segment. This strategy enables a firm to get the most out of specific segment and develop a competitive advantage which is hard to imitate by other firms in the industry. Companies with limited resources can also have a competitive advantage using this strategy by focusing on specific market rather than overall market (Besanko, et.al. 2009).
Limitations of Generic Strategies:
Due to recent advancement in global economy, there are a lot of changes are taking place in market place and a company cannot stick to one particular strategy in this dynamic environment. Hence, Michael Porter’s generic strategies have also come under the criticism. The critics have said that Porter’s generic strategies are too general and can be imitated by any firm and it is a very simplified approach. Apart from theoretical criticisms, these generic strategies have also been criticized for its applicability with real world and critics have said that these strategies are not applicable for fragmented markets (Haberberg and Rieple, 2008).
Many researchers have considered Porter’s generic strategies as insignificant because these strategies avoid the importance of collaborative strategy. One of the most significant criticisms which these generic strategies have attracted is “stuck in middle”. Critics have said that Porter’s generic strategies suggest that if a company is unable to make a choice between cost leadership and differentiation then that company may have to suffer severely but there are instances where some top notch companies have adopted both the strategies simultaneously and have been hugely successful (Haberberg and Rieple, 2008).
Summary:
On the behalf of above discussion and analysis it can be said that Michael Porter has made a prominent and pivotal contribution to the field of strategic management. He has not only developed a conceptual framework with the help of empirical and rigorous theories but has also made this discipline accessible and useful to the practicing managers. As an economist he has developed completely new and comprehensive theories in order to assess the level of competition at company, industry and national level.
Michael Porter has made a momentous contribution in the field of strategic management by developing various models pertaining to competition at micro and macro level and formulated various strategies to combat that competition. As discussed above, these major contributions are: Five Forces Model, Value Chain Model, Cluster Management, Diamond Model, and Generic Strategies Model.
The models which were developed by Michael E. Porter have drastically changed the thought process of not only business men but also made significant changes in the mindset of researchers, academicians, students etc. These models are used across globe to understand the level of competition and to face the competition. Eventually, we can state that the contributions which have been made by Porter in the field of strategic management are incomparable and should be adopted by companies across globe to create and sustain the competitive advantage.
References:
Besanko, D. 2009. Economics of Strategy. John Wiley & Sons
Haberberg, A. and Rieple, A. 2008. Strategic Management: Theory and Application. Oxford University Press.
Finne, S. and Sivonen, H. 2009. The Retail Value Chain: How to Gain Competitive Advantage Through Efficient Consumer Response (Ecr) Strategies. Kogan Page Publishers.
Graham, T. 2008. CIMA Official Exam Practice Kit Management Accounting Business Strategy. Elsevier.
Grundy, T. 2006. Rethinking and reinventing Michael Porter’s five forces model. [Online]. Available at http://mis.postech.ac.kr/class/MEIE780_AdvMIS/paper/General%20Concepts/42_Rethinking%20and%20reinventing%20Michael%20Porter’s%20five%20forces%20model.pdf. [Accessed on: 9 June 2012].
Gurau, C. 2007.Porter’s generic strategies: a re-interpretation from a relationship marketing perspective. The Marketing Review, 2007, Vol. 7, No. 4, pp. 369-383
Haezendonck, E. 2001. Essays on Strategy Analysis for Seaports. Garant.
Hill, C. W. L. and Jones, G. R. 2012. Strategic Management Theory: An Integrated Approach. Cengage Learning.
Integrating Economies in Southeast Asia. Institute of Southeast Asian Studies.
Kersten, W., Blecker, T. and Flaming, H. 2008. Global Logistics Management: Sustainability, Quality, Risks. Erich Schmidt Verlag GmbH.
Kuroiwa, L and Toh, M. H. 2008. Production Networks and Industrial Clusters:
Orcullo, N. 2007. Fundamentals of Strategic Management’ 2007 Ed. Rex Bookstore, Inc.
Parnell, J. A. 2003. Strategic Management: Theory and Practice. Dreamtech Press.
Phadtare, M. T. 2011. Strategic Management Concepts and Cases. PHI Learning Pvt. Ltd.
Porter, M.E. 2000. Location, Competition, and Economic Development: Local Clusters in a Global Economy. Economic development quarterly, Vol. 14 No. 1, pp. 15-34.
Raduan, C. R. et. al. 2009. Management, Strategic Management Theories and the Linkage with Organizational Competitive Advantage from the Resource-Based View. European Journal of Social Sciences, 11(3),pp 402-418.
Recklies, D. 2001. The Value Chain [pdf]. Available at http://www.fao.org/fileadmin/user_upload/fisheries/docs/ValueChain.pdf [Accessed on: 8 June 2012].
LI26
But you can order it from our service and receive complete high-quality custom paper. Our service offers MARKETING essay sample that was written by professional writer. If you like one, you have an opportunity to buy a similar paper. Any of the academic papers will be written from scratch, according to all customers’ specifications, expectations and highest standards.”
