The Porter Thesis

The Porter Thesis

As we have seen (Lecture 1), Michael Porter in Competitive Advantage of Nations argues that the fortunes of economies rest on the competitive advantages held by their firms and industries. National factor and demand conditions encourage the development of specific competitive advantages and specialization, and, therefore, also the development of specific types of industry. Variations in specialization, output and expertise explain differences in the competitive advantages of nations and in levels of value added and living standards. Porter contends, furthermore, that these national advantages may be difficult to replicate elsewhere, and that they may be embedded in a specific geographical location or cluster offering advantages in the acquisition of technology, knowledge, capital, skills, support structure, and so on.

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Porter seeks to explain why companies and industries have emerged in some countries and not others, and why certain economies have expanded in recent decades while others have stagnated or declined. In Competitive Strategy, published in 1980, he dealt with matters of industrial structure, competitor behaviour and the formulation of corporate strategy (M.E.Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors, Cambridge, Massachusetts, 1980). Successful firms, he contended, have to guard against the activities of existing rivals, buyers, suppliers, new entrants, and potential providers of substitute products. They must, furthermore, acquire a position within each industry where they gain the greatest profit from the value added to a product as it goes through each process stage to reach the consumer. They must adopt strategies of price competitiveness, product differentiation, or the application of either in specialist markets, and so gain the necessary competitive advantage over rivals and an effective barrier against market entry. Porter’s work was distinguished by a rigorous analytical framework and detailed investigation of various competitive scenarios.

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His reputation was enhanced by Competitive Advantage, which appeared in 1985, and it expounded further on the three strategies of price, differentiation and focus (M.E.Porter, Competitive Advantage: Creating and Sustaining Superior Performance, New York, 1985). It discussed in addition the ability to sustain a competitive advantage. His description of the value-chain was a useful conceptual advance. All firms engage in the primary activities of inbound logistics, operations, outbound logistics, marketing and sales, and in secondary activities such as management, technological upgrading, or accounting. Each firm is a sum of all these activities, and, whenever it performs these activities better than its competitors, it gains a competitive advantage. Through efficient management, it can win cost leadership; by adding higher value for buyers, it can create premium price products. In any profitable firm, it follows that the cost of primary and secondary activities is less than the value of its output, and long-term success requires the creation and maintenance of organizational capabilities, whether they are human, technical, financial or physical.