Michael E. Porter
b. 1947
The five forces framework, generic strategies, the value chain, and strategy as trade-off.
- 1947LifeBorn
- 1980WorkCompetitive Strategy
- 1985EventCompetitive Advantage (1985) introduced the value chain: the sequence of activities through which a firm creates value.
Michael Porter (born 1947) is a Harvard Business School economist who gave competitive strategy a formal structure. His work explains why some industries are more profitable than others and why, within an industry, some firms sustain higher returns.
The five forces
Competitive Strategy (1980) argued that an industry's profitability is set by five forces: rivalry among existing competitors, the threat of new entrants, the threat of substitutes, and the bargaining power of suppliers and of buyers.
The practical consequence is that industry structure, not effort, explains most of the variation in returns. A well-run firm in a structurally poor industry can work harder than a mediocre firm in a good one and earn less. Strategy begins by assessing the forces and then choosing a position that is defensible against them.
Generic strategies and the value chain
Porter argued that a firm sustains advantage either by cost leadership or by differentiation, and that attempting both leaves a firm stuck in the middle with neither. Focus — applying one of the two to a narrow segment — is the third option.
Competitive Advantage (1985) introduced the value chain: the sequence of activities through which a firm creates value. Advantage comes from performing activities differently or performing different activities, which locates strategy in operations rather than in a statement of intent.
Strategy as choice
His most quoted claim is that the essence of strategy is choosing what not to do. A position that involves no trade-offs can be copied by anyone, so sustainable advantage requires accepting some disadvantage. Competitors who want the benefit must give up something they are unwilling to give up, which is what makes the position hold.
Criticism
Critics argue the framework suits stable industries better than fast-moving ones, and that it describes how to defend a position more convincingly than how to create one. Both objections are widely accepted without displacing the framework, which remains the standard vocabulary for the subject.
Questions
What are Porter's five forces?
Rivalry among existing competitors, threat of new entrants, threat of substitutes, supplier bargaining power and buyer bargaining power. Together they determine how profitable an industry can be.
What are Porter's generic strategies?
Cost leadership, differentiation and focus. Porter argued that attempting cost leadership and differentiation at once leaves a firm stuck in the middle, competitive on neither.
What did Porter mean by 'strategy is choosing what not to do'?
That a defensible position requires trade-offs. If a position involves giving nothing up, competitors can copy it freely, so sustainable advantage depends on accepting disadvantages others will not accept.