ISSN 0908-1666

The Porter Approach

by

Olav Jull Sørensen

No.: 6 1996

Centre for International Studies

Fibigerstraede 2, 9220 Aalborg, Denmark
Tel.: 45 98 15 85 22 Fax: 45 98 15 69 50
Competitive Advantage of

Firms and Nations

The Porter Approach

by

Olav Jull Sørensen

Aalborg University,
Denmark Centre for
International Studies
January 1994
 March 1994
Competitive Advantage of Firms and Nations

by

Olav Jull Sørensen

The aim of this paper is to give an overview of Michael E. Porter's

contribution to the studies of industries with focus
on his work within international industries. The paper is one
of three parts, the other two parts dealing with the contributions
made by John F. Dunning and David B. Yoffie. All three have come up
with conceptual frameworks aiming at understanding the pattern of
trade and investment on a global scale. The ultimate aim of the three
parts is to make a comparison between the three contributions.

3. Competitive Advantage of Firms and Nations

3.1. Introduction

Recently, The Economist (Dec. 25, 1993) nominated Michael E. Porter

as one of a number of gurus with the following marks on a scale from
one (lowest) to five (highest) :

* Influence: 4
* Originality: 3
* Intellectual Coherence 3
* Devotion of Followers 3

Concentrating on the scientific qualities (originality and

intellectual coherence) , Porter beats Tom Peters (2,2) and is
beaten by Kenichi Ohmae (4,3) and especially by Peter Drucker (5,3)
and Milton Friedman (5,5). See annex 1.

Porter - in all his writings - has his feet firmly planted within
Industrial Economics or rather within the concept of "industry",
i.e. he strongly believes in the structures of industry and the
forces of competition. From this meso-level, he branches out to the
micro or firm level and the macro or national and international
level in his search for factors, forces, dimensions, etc which
influence and shape competition.

With his feet firmly planted in the concept of industry, he is

equally firmly committed to the concept of "strategy" with a firm's
strategy based on the creation of competitive advantage In the sense
of devising alternative strategies for companies, he is action
oriented although his research is not normative, but more oriented
towards developing typologies.

To deal with and be fair to the comprehensive writings of

Porter is not easy. As his ultimate aim is to devise company
strategies and as the ways in which firms create and sustain
competitive advantages provide the necessary foundation for the role
of the home nation, his understanding of the concept of a
 2

firm is critical. Consequently, the starting point will be the firm level
followed by the industry, the nation, and the inter-nation levels.

3.2. The Concept of a Firm

Porter has never aimed at contributing to The Theory of the Firm and
hence he has no explicitly stated model of a firm. By and large, he
has a strategic understanding of the firm. He views the firm as one
or a set of strategies. The following profile of Porter's concept of
a firm is based on pieces from different writings of his.

The Obiectives of the Firm

Porter does not discuss explicitly the objectives of the firm,
but he assumes the goal to be the maximization of long-term return
on investments (1980, p. 3) .The objective is only underpinning his
thinking as Porter's models are not of the Micro-Economic type where
the exact profit is calculated.

The goals of the firm are discussed widely in Porter's conceptual

framework for the response profile of competitors (1980, pp. A number of
dimensions are discussed but no clearcut conclusion is made.

Figure 1
 3

In a way, Porter is not, neither does he need to be, very concerned

with specifying the goals of the firm. His main concern is how does a
company create and sustain competitive advantage, i.e. basically an
issue of company survival rather than fulfilling specific goals.
Often Porter is satisfied with working definition. In case of the
firm, it seems safe to state that his working understanding of the
goal of a firm is one of "profit orientation".

The Organization of the firm.

Organizationally, the firm is viewed as nine generic activities
(1990, p. 40) comprising the value chain (figure 1). The activities
form an interdependent system or a network of activities (1990, p.
41) connected by linkages, i.e. the performance of one activity
influences the performance of others.

Due to the connections and linkages, the activities have to be

coordinated in content (e.g. quality), over time, and over space.
(Management task 1).
Competitive advantage is gained by carrying out the activities:

* at lower costs
* better, i.e. creating more value for the customer by
* superior coordination of the activities

Thus, management task 2 is to manipulate the nine generic

activities in order to create a competitive advantage.

Innovation is a key concept in the creation of competitive

advantages. The term is broadly defined (1990, p. 45) to include both
product and process innovations and innovation in relation to all
nine generic activities. Porter does not spell out how to organize a
firm to become so pervasively innovative. However, by means of the
concept of "cluster", he stipulates the innovative qualities, not of
individual firms, but of industrial systems (see section 3.6.).

The Management and Strategy of the Firm.

Not much is said about management. Except for pointing out the need
for sustained commitment on part of management as an important factor
in the creation of competitive advantage
(1990, p. 115-16), management is seen primarily as identical to
strategic planning.
"The essence of formulating competitive strategy is relating a
company to its environment." (1980, p.3.). A competitive strategy is
seen as a broad formula for how a business is going to compete (1980,
p. xvi) and a formula for finding a profitable position in the
industry.
 4

The preoccupation with strategy is clearly demonstrated in the

various typologies for strategies. In the book Competitive Strategy
(1980), Porter defines four generic strategies along two dimensions:
1. Production costs (price) and product quality (differentiation) and
2. Broad or narrow scope, i.e. range of products, buyers,
geographical areas, etc. (figure 2) .Unless a firm adopts one of the
four strategies, it gets stuck in the middle and will run into
difficulties.

Figure 2 Generic strategies

COMPETITIVE ADVANTAGE

Lower Cost Differentiation

I
Broad
Target
Cost Leadership Differentiation

Competitive
Scope

Narrow
Targt Cost Focus Focused Differentiation

Later in the book (chapter 7), 12 strategic dimensions are presented

(1980, p. 127) .The dimensions can be put together in various ways to
form a unique strategy. A closer look at the dimensions reveals that
the majority of them belongs to what is called the 4 Ps in the
marketing textbooks. Thus, Porter's concept of strategy is primarily
a marketing strategy (figure 3) .
 5

Figure 3: Strategic Dimensions and their Marketing Eguivalent

Price Produet Promotion Place

1. Specialization x
2. Brand identific x
3. Push us pull x
4. Channel Selection x
x
5. Produet quality x+
6. Technolog Leadership x+
7. Vertical integret. x
8. Cost position x
9. Service x
10. Price policy
11. Relationship with parent
comp.
12. Relationship with Gost.

+ means that the strategic dimension covers more than what is

normally included in the marketing version of the P.

For a treatment of international strategies, see section 3.5.1

In summary, Porter's concept of the firm is not spelled out and

discussed in any details. He views the firm as comprising nine
generic activities which the firm manipulates (change, innovations)
in order to create and sustain a competitive advantage. He has a
strategic perspective of the firm with the competitive advantages
forming the core of the strategy.

3.3. The Concept of Industry

The concept of an industry is defined as "a group of firms producing

products that are close substitutes for each other." (1980, p.5).
This is a working definition. In practice, a great deal of
controversy over the appropriate definition can be found, but Porter
does not find it fruitful to take part in the debate.

The intensiveness of competition is determined by five basic

competitive forces (1980, p. 3) making up the structure of the
industry (figure 4) .I. e.

* the profit potential of the industry is determined by the five

forces, and
 6

* the strategy of the firms is determined by the five

forces

Figure 4 The Five Competitive Forces that Determine Industry

Competition

THREAT OF NEW
ENTRANTS

BARGAINING
BARGAINING RIVALRY AMONG POWER OF
POWER OF EXISTING
BUYERS
SUPPLIERS COMPETITORS

THREAT OF
SUBSTITUTE
PRODUCTS OR
SERVICES

For each of the five forces, a number of dimensions - as a kind of

check list - are listed and discussed (see annex 2}. The sum total of
all the dimensions is what defines the overall competitive situation
and the intensiveness of competition. No simple formula for how to
sum up the situation is, however, provided to assist the user of the
model.

To use the five forces model, a specific level in the chain of

production is selected, i.e. a specific value chain is looked at. By
adding more value chains, Porter introduces the concept of value
system. In conventional industry analysis, for example following the
S-C-P-model, a specific level is the analytical unit. However, when
forward and backward integration is common in an industry, it is
necessary to include more value chains and perhaps even include the
whole value system in the analysis.

Following the overall determination of the competitiveness of

an industry, Porter has developed a tool to analyze the rivalry among
the firms of the industry. By means of the concept strategic group,
the firms within the industry are sub-divided into groups pursuing
the same strategy. The basis for grouping the firms is the 12
strategic dimensions. companies with the same set of strategic
dimensions form a group of their own. To make the analysis easy,
emphasis is put on the two key strate- gic dimensions in the industry
which provides the opportunity to visualize the groups in so-called
strategic group maps (see annex
 7

The size of the circle indicate the market share and the distance etween the groups
indicate how much the strategies resemble each other.

If the strategies can clearly be identified, the strategic mapping exercise

is a valuable way of getting an overview of an industry. It should be noted
that Porter turns a basically conductual concept, namely strategy, into a
structural concept. This indicates that he views a strategy as having some
permanency.

3.4. The Relationship between Generic strategies and the Five Forces. 1

As stated, Porter is primarily concerned with strategic thinking within a

industry, but the question is: How does he view the relation between the
structure of the industry (the five forces) and the strategies - the
conduct - of the firms ?

A first answer to the question can be given by confronting the generic

stratgies with the five forces. How should the five forces look like, if a
firm follows the cost leadership strategy. An answer is given in
annex 4.

Looking more losely at Porter's reasoning, it is obvious that he

puts a lot of emphasis on the five forces as the determinants of the
strategies: "Structural analysis is the fundamental underpinning for
formulating competitive strategy." (1980, p. 5).

The reasoning can be spelled out as follows:

Five forces Defines

constitute intensity
the struc- of compe-
ture of tition and Generic strategy Perfor-
industry the profit mance
potential

However, Porter is not a pure "strategy follows structure -

believer": While industry structure constrains the range of strategic
options available, I have yet to encounter an industry in which only
one strategy can be successful." (1990, p. 39. Thus, Porter's
starting point is the S-C-F-model which he has extended primarily by
focusing on the concept of strategy but also by introducing the
concepts of strategic group and generic activities.
 8

3.5. Adding the International Dimension

Having outlined the basic concepts and conceptual frameworks

for the analysis of industries, the next issue is to add the
international dimension to the analysis. The basic question is: Can
the same basic concepts and frameworks be used or is it necessary to
develop some new ones. The presentation of Porter's thinking will
follow the same structure as when the basic concepts and frameworks
were presented.

According to Porter (1980, p. 276), there are many differences in

competing internationally versus nationally, e.g. factor
cost differences; role of government; differences in management
style, etc. "However, the structural factors and market forces
operating in global industries are the same as those in domestic
industries." (1980, p. 276).

3.5.1. The Firm and its Global Strateqy

On goals, Porter has nothing new to add. In the book Competitive

Advantage of Nations, the concept of goal is not clearly specified.
As the book spans over many nations, it is realized that the goals
vary from one country to another and that the goals are an integral
part of the diamond. (1990, p. 110).

The starting point is the nine generic activities. What happens to the
activities in the course of internationalization ? Are they re-located? Are
they coordinated differently? Obviously, sales become export when a firm
enter foreign markets, but is this all to it?

To deal with the new situation, Porter has developed the

Confiquration-coordination Matrix (figure 5). In principle, a matrix
is drawn for each of the nine generic activities showing the extent
to which it is concentrated and the extent to which the activity is
coordinated.
 9

Figure 5 Types of International strategy

High Foreign Simple

Investment Global
High with Extensive Strategy
Coordination
Among Subsidiaries

Coordination
of Activities

Country-Centered Export-Based
Strategy by Strategy with
Multinationals Decentralized
Low or Domestic Marketing
Firms operating in
Only One Country
Geographically Geographically
Dispersed Concentrated

Configuration of Activities

The pure exporter has concentrated all his activities in one

country except the marketing activity. The marketing activity may
be tightly or loosely coordinated, i.e. the marketing programme may
be adapted to each country or the exporter may use the same basic
marketing programme in all countries.

Similarly, a firm with numerous plants in different countries has

most of the nine activities dispersed. If each plant is specialized,
the activities may be tightly coordinated on a global scale. The
other extreme situation is that each plant is autonomous and cater
primarily for the local market in which the plant is located.

Using the matrix, Porter defines four international strategies:

* The Pure Global Export Strategy, i.e. the global exporter using
standardized marketing programmes

The Export-Based Strategy, i.e. the international ex-

*
 10

porter adapting the marketing programme to each and every

country

* The Pure Global FDI Strategy, ieee the multi-plant firm with
tight coordination among the plants
* The Country Centered FDI Strategy, i.e. the multi-plant firm
with each firm operating in only one country.

According to Porter, a firm can gain a competitive advantage by re-

locating the portfolio of activities and by changing the
mode of coordination. It is indicated that much has already
been gained by re-locating and especially by exploiting economies of
scale and the economies of learning, leaving a better coordination as
the primary source of competitive advantages in the future (1986, p.
35).

With flexible production systems becoming more popular as well as

the increase in the catering for specific demands, competitive
advantage may, in the future, have to be derived from tightly
coordinated dispersed activities -a real challenge to an
organization.

The strategies following the rational of the configuration-

coordination matrix are not in line with the four generic strategies
presented earlier. In other works (1980, p. 294 and 1986, pp. 46-
48), Porter has made an attempt to build upon the four generic
strategies (figure 6) .

Figure 6 Strategic Alternatives in a Global Industry

Geographic Scope

Global Country-Centered
Strategy Strategy

Many
Segments Global Cost Protected
Leadership or Markets
Differentiation
Segment
Scope

Few Global National

segments Segmentation Responsiveness
 11

A distinction is made between a geographic scope and the scope of segments.

The firm may pursue a global strategy or a country centered strategy and
each of the two strategies may cater for many or few segments in the market.

A global strategy is defined as one fol:lowing which a firm

sells its product in many nations and employs an integrated world wide
approach to doing so (1990, ]? 54) .A firm may opt for a global strategy
which serves many segments worldwide by pursuing global cost leadership or
differentiation. Or it may opt for a global segmentation strategy catering
for the special needs worldwide for a specific group of customers.

In some instances, although the industry is global, economic

and political impediments prevent the firm from using a global strategy.
Then, the firm has the options to serve many segments in a few protected
markets or serve a few but large segments with unusual needs and
requirements in a few markets and hence prevent other global players to
enter the market.

3.5.2. The Concept of a Global Industry

At international industry level, the same five structural

forces are at work and the same strategic group mapping will be
carried out as in the domestic industry.

However, moving from the domestic to the international level

complicates the demarcation of the industry. Porter makes a
distinction between the multi-domestic industry and the global
industry (1980, p. 53).

A global industry is defined a an industry in which a firm's competitive

position in one country significantly affects its position in other
nations, i.e. the domestic industries are linked.

A multi-domestic industry is defined as an industry in which competition in

one country is essentially different from competition in another.

In a global industry, it is necessary to use the five forces model at the

global level and add particularities in individual countries and regions to
the analysis. In a multi-domestic industry, an international analysis of the
industry means conducting a set of individual country analyses.
 12

3.6. The Concept of Competitive Advantage of Nations

Just as Porter's starting point was the S-C-P-model when he developed

his model of industry analysis, so was the theory of comparative
advantages his starting point when he developed his ideas of the role
of the nation in the creation and sustaining of competitive
advantages.

Based on the comparative advantage concept, he developed the concept

of a global platform (1986, p. 27) and defined it as follows: "A
country is a desirable global platform in an industry if it provides
an environment yielding firms domiciled in that country an advantage
in competing globally in a particular industry."

A global platform comprises the factor endowment and demand

endowment, i.e. Porter added the demand side to the traditional
supply side dominated theory of comparative advantage. The two
endowments gave the firms a competitive advantage and hence formed
the platform for the firms which in turn, through their strategies,
could be used to go international.

In 1990, Porter developed his thinking further. To explain why firms

from a specific nations create and sustain a competitive advantage in
a specific industry, Porter developed a conceptual framework
comprising four attributes of a nation that shapes
the environment in which local firms compete that promote or impede
the creation of competitive advantage (see figure 7).

The four attributes are (1990, p. 71):

* "Factor conditions. The nation's position in factors of

production, such as skilled labor or infrastructure, necessary to
compete in a given industry.

* Demand conditions. The nature of home demand for the

industry's product or service.

* Related and supporting industries. The presence or absence in

the nation of supplier industries and related industries that
are internationally competitive.

* Firm strategy, structure, and rivalry. The conditions in the

nation governing how companies are created, organized, and
managed, and the nature of domestic rivalry.
The determinants, individually and as a system, create the context in
which a nation's firms are born and compete.."

The DIAMOND, as Porter has baptized his conceptual framework,

constitutes a mutually reinforcing system and, depending on the
industry, competitive advantages can be created and sustained based
on two, three or four of the components.
In addition: "The basic unit of analysis for understanding
national advantage is the industry. Nations succeed not in
isolated industries, however, but in clusters of industries
connected through vertical and horizontal relationships." (1990,
p. 73).
Using his conventional style, Porter proceeds by enumerating
numerous dimensions describing and qualifying each of the
components in the diamond.
Finally, two additional components are added, namely "chance" and
"government". Chance comprises events outside the control
of the firms such as a new invention, a. war etc. The government is
an actor who, through policies, can improve or detract from the
national advantage.

To sum up:
The diamond model has its roots in 1. the S-C-P-model which
* was developed into the five forces model and 2.
 14

the theory of comparative advantages which was developed into a

factor and demand endowment: model.

* The firm is the basic actor (the creator and exploiter of

competitive advantage) ; the industry (and its strategic
groups) are the basic analytical unit, and the cluster is the
setting in which it is determined whether a competitive
advantage will be created or not.

* The diamond model is an interaction model with the four

components mutually reinforcing each other positively or
negatively.

The cluster goes beyond a single industry and comprises closely

connected industries both vertically, horizontally, and
diagonally. Competitive advantage is created when a nation's
successful industries are connected and one competitive
industry helps to create another in a mutually reinforcing
process (1990, p. l49). "National competitive advantage
...resides as much at the level of the cluster as it does in
individual industries. This carries important implications for
Government policy and company strategy." (1990, p. 152). A
cluster is characterized by geographical and cultural
proximity; an innovative and entrepreneurial atmosphere;
competition, and dialogue.

* The home base - the cluster - forms the platform upon which a firm
can go international (step 1}. To become global, the firm must play
around with the generic activities in the configuration-coordination
matrix (step 2}, making sure that the organization looks for or
create the similarities (the global dimension} rather than the
differences (the country dimension} (1986, p. 33}.

* The government has an exogenous position in relation to the

diamond. It is not an integrated part of the diamond because
it constitutes no source of its own for sustainable
competitive advantage: "Successful policies work in those
industries where underlying determinants of national
advantage are present and where government reinforces them."
(1990, p. 128).

Overall it can be concluded that Porter has created many valuable

concepts and put them together in conceptual frameworks (based on
interaction among the concepts) and various typologies, primarily in
four cell matrixes. Normally, each of the concepts are described
using a number of dimensions.

The conceptual frameworks are not theories in the sense of

specifying the exact relationship between concepts.

Porter has contributed to the creation of new views on industry

analysis. His world view is primarily one of "structure leading
strategy" with industry structure being objectively defined.
 15
In addition, his models are, at times, a confusing mix of
actors (visible hands) and forces, factors, functions, and
chance, i.e. more invisible hands.

References

Works by Michael E. Porter:

Changing Pattern of International Competition (1986). California Manaqement

Review, vol. XXVIII, no.2 (Winter).
Competition in Global Industries (1986). Boston, Mass.: Harvard
Business School Press.
Competitive Advantage. Creating and Sustaining Superior Per-
formance. New York: The Free Press.
The Competitive Advantaqe of Nations (1990). London : The MacMillan
Press.

Competitive Strategy. Techniques for Analyzing Industries and

competitors (1980). New York: The Free Press.

Others:
Miller A. and G.G. Dess (1993): Assessing Porter's (1980) Model in Terms of
its Generalizability, Accuracy and Simplicity. Journal of Manaqement
Studies. Vol. 30, no.4 (July)

kode: Porter.tre(IIA)
kode: Porter.tre(IIA)
 17

Annex 3

Strategic Group Map for the Wordwide Ship Building Industry

Product
specialization

Full
product
line

Narrow/
specia-
lized
product
line

Low High Cost position

 18

Annex 4

Generic x) Competitive Strategies and

the 5 forces of competition.

Generic Cost Differentiation

Strategy Leadership (marketing
(production orientation)
Competitive orientation)
Structure
1. Intensive same offer Brand loyalty
rivalry at lower price (less price sensi-
tivity)
2. Powerful Price down on- No better
buyers ly to next alternatives
most efficient
competitor

3. Powerful can cope with No better alter-

suppliers cost increases native
(relatively) due to high
margins

4. Entry bar- Scale econo- Customer

riers mies loyalty and
unigveness

5. Substitu- The last to customer

tes be affected loyalty
x) simplified and generalized description of the strategic
options