Porter's Competitive Advantage

This chapter focuses on the existing literature and will give an overview of Michael E. Porter’s generic strategies and its criticism. It will mainly focus on Porter’s books Competitive Strategy (Porter, 1980) and Competitive Advantage (Porter, 1985). The chapter will be complemented by business strategy textbooks as well as peer-reviewed journal articles.

1.1 Generic Strategies

Michael E. Porter is an economics and business strategy academic and a professor at the Harvard Business School in Boston, Massachusetts. In 2012, the Fortune Magazine named him “the most famous and influential business professor who has ever lived” (Colvin, 2012, p. 1). Porter was the first to provide a clear guide for analyzing competitive strategy in his 1980 book

According to Rothaermel, competitive advantage is based on the difference between the perceived value of a firm’s product or service (V) and the total cost (C) (Rothaermel, 2012, p. 9 ff.). The perceived value of a product or service can be described as how much consumers are willing to pay for it. By increasing the economic value created, defined as V – C, the firm can increase its competitive advantage. Managers can both influence value (V) and costs (C), which leads to different strategic positions (Rothaermel, 2012, p. 155). Industry effects can be determined by Porter’s Five Forces or the strategic groups concept. Firm effects are driven by a company’s value and cost position, which have an impact on business strategy. Since there is a positive correlation between value and costs, some trade-offs have to be made between the two (Rothaermel, 2012, p. 147). What Rothaermel calls business strategy is basically the same as Porter’s generic strategies, complemented by the integration strategy, which will be discussed in detail in chapter

688; see also Andrews, 1971). This view described each firm’s strategy as unique, which would not enable researchers to make generalizations (Hambrick, 1983, p. 688). Initially, Porter developed three generic strategies that might lead to outperforming competitors. He called them “overall cost leadership”, “differentiation” and “focus” (Porter, 1980, p. 35). They are called generic strategies, due to the fact that they can be used and implemented by any organization (Rothaermel, 2012, p. 166). In addition, Porter states that an effective implementation of one of these strategies “usually requires total commitment and supporting organizational arrangements that are diluted if there is more than one primary target” (Porter, 1980, p. 35). Furthermore, Porter states that it is not generally the case that a firm can only be successful with one of the generic strategies. Due to the industry’s structure, it can be that all competitors earn high returns, whereas in others, a firm is required to adopt a certain one of the generic strategies in order to be successful (Porter, 1980, p. 35). Which strategy a firm can adopt is also determined by its abilities. A firm that can perform certain activities differently to their competitors is more likely to succeed with a cost leadership strategy, while a firm that is able to perform