Management with Emphasis on Porter’s Theories as Applied In Current Decision Making Abstract This review provides an overview of a few of the key topics that have defined the strategic management field since the later twentieth century. Strategic planning, strategic planning frameworks and strategy implementation issues are discussed both from a historical and modern perspective. Michael Porters frameworks and generic strategy provide an excellent backdrop for formulation of strategy but scholars argue that the current environment of business may require new or altered frameworks.
A blended strategy of differentiation plus cost leadership may be possible within the new technology platforms afforded via e-commerce. Mega sized corporations nearing 500 billion in revenue are redefining the rules of strategy and using their massive scope and scale in new and unique ways. Regulation, diversity and shared value are Important to consider In developing strategy and can contribute to differentiation If properly managed. Strategy Implementation Is an area where further research Is needed and special attention needs to be focused on the Internet and mega corporations as they seem to defy all historical strategy audience.
Keywords: Strategic management, strategy implementation, Michael Porter Porters Theories as Applied in Current Decision Making Introduction The single most important intellectual asset in any company outside of its employees is its strategy. Leaders are defined by the strategies they create and hard work can disintegrate when strategic plans are not properly implemented. Developing consistency in strategy is very important to proper implementation of the core elements. Ultimately the strategy must become centrally integrated and externally oriented in order to define how the business will achieve its objectives.
One of the most common reasons for firm bankruptcy is improper implementation of strategy (Hosiery, Chambermaids, Onerous, & Saudi, 2013). Strategy is largely defined by adaptation to a constantly changing marketplace which seems to get more and more complex. True strategy is about making complex bets and following up with hard choices (Martin, 2014). Historically stable markets allowed managers to rely on complex strategies that were built on future predictions (Eisenhower & Soul, 2001). But in the current fast moving marketplace and with the rise of the millennial billionaires, opportunity seizure may require a different approach.
The review contained herein will take a shallow dive into a few of the endless strategic management models along with the challenges and typical faults with implementation. The e-commerce world and mega sized corporations will be explored as they present special challenges to strategy makers. The internet seems to defy many of the historical perspectives on business strategy. Diversity and regulation are highlighted as these issues stand out in the literature as being an ongoing consideration for strategy makers. A special focus is on the perspectives of Michael Porter both historically and in the present.
Countless reviewers have dissected and applied Porter’s academic work. Many arguments have been made both for and against Porter’s frameworks held up against a modern business landscape. This paper will serve to challenge Porter’s generic strategies and the applicability in today’s business world. Managers can learn much from Porter, but to survive in the age of millennial billionaires, leaders may need to develop new frameworks. And those who do will have a good chance at building a firm foundation for responding to competition and reacting to market opportunities in a fast moving global economy.
Strategic Management Overview The word strategy is often improperly used by managers as an industry buzzword in hopes of gaining credibility for their management priorities. This often results in confusion and can undermine the credibility of the leader. The word strategy is derived from the Greek strategies, which means the art of the general. The business general must form a coherent strategy which is the sum of the parts of the organization. If this is not accomplished then mid level managers will focus time on their own priorities and the organization will risk fragmentation (Humpback & Frederickson, 2005).
The origin of the subject of strategic management is heavily abated but H. Igor Insofar is commonly noted as having significant influence in the field prior to Michael Porter whom took center stage in the asses (Martinet, 2010). Insofar bestselling book titled Corporate Strategy was published in 1965 and started to transition the mindset from strategic planning to strategic management. Much of the current understanding of strategic management can be traced back to Porter’s (1985) low cost, differentiation, focus framework.
His concepts marked a key transition point in the strategic management field by integrating organization specific factors into a model of firm performance (Parallel, 2006). According to Porter’s producer or differentiating its products or services from other businesses. Either of these strategies can be accomplished by focusing the organizations efforts on a segment of the market. Porter believes that businesses that attempt to employ both strategies simultaneously will end up “stuck in the middle” and will not be successful. This issue is hotly debated in the literature and especially as related to e-commerce.
Internet firms seem to be employing strategies that exhibit one of more firms of differentiation in unison. Despite all the debate, Porter is widely cited in the iterate and is highly respected by both supporters and critics alike whom all consider him to be a significant contributor to the field of strategic management. Nag, Humpback, and Chin (2007) contended that the field of strategic management is lacking an identity. The researchers conducted an exhaustive large scale survey of academics in the field and came up with the following definition for strategic management. The field of strategic management deals with the major intended and emergent initiatives taken by general managers on behalf of owners, involving utilization of resources, to enhance the performance of firms in their external environments. ” (p. 944). The interface with the external environment, also known as the customer and the community, is a central dogma of the strategic planning process and we will see this theme emerge throughout the literature review. Strategic Planning Strategic planning is normally the first step in the strategic management process and is critical to the success of an organization.
Strategic plans normally have three parts (Martin, 2014). The first is the mission or mission statement that sets the long term goals. The second is a listing of the initiatives that the organization will carry out as art of its fulfillment of the goal. And third is the financial impact of the initiatives. Martin (2014) recommends three rules for strategic planning to prevent from falling into the trap of focusing on internal metrics and not the external customer. Rule one is to keep the strategy simple by focusing on what will attract customers.
Eisenhower and Soul (2001) contend that to survive in a complicated high velocity market space, managers should choose simple rules over complicated plans. The simple rules will allow the managers to move quickly in order to capture opportunities more quickly. Customers will spend their money with the company that has the superior value proposition. Martin (2014) rule two is strategies do not have to be perfect. There should be some risk in the strategy and boards should not prevent management from taking risks in setting strategy. This actually weakens the strategy. And the final rule is to test the logic of your thinking.
Write down the desired outcome when setting strategy. The logic should be compared to real life events in order to identify areas of improvement along the way. Despite the criticality of strategic management o an organization’s success, a McKinney survey found that most executives are not happy with their strategic planning process (Dye, 2006). And companies that have formal strategic planning processes have the highest level of satisfaction with corporate strategy development. Selene (2009) broke strategic management into four different schools including the contemporary school.
The classical school is based on the research contributions of the mid twentieth century and is centered on the fit between internal and external factors. Classical management assumes that internal and external factors have an equal fit. The SOOT analysis is a common model used to assess the classical business environment. The environmental school contends that the external environment plays the most important role in strategy development. And firms that do not respond well to the external environment will eventually die out. The competitive school of strategy is distinguished by competition being the driving force in differentiation.
Porter (1980) noted that the firm must acknowledge and respond to the external opportunities and threats to survive. The contemporary school focuses on understanding the internal firm. Collaboration and differentiation are important to winning with a contemporary strategy. Multicast (2009) provides an interesting perspective on strategic management and its relationship to time. Strategic planning is most often thought of in terms of planning for the long term future of the firm. The author encourages management to also consider history, the present, and the near future in making strategic planning decisions.
When new management enters a firm, history is often seen as a negative since historical perspectives are sometimes viewed as a hindrance to instituting change. But in reality, history can be an asset to strategic planners. For example, if he company has a culture of continuous improvement, good employee loyalty and commitment, and good learning ability, then this is a sustainable competitive advantage that should be retained. If new management is not aware of the firm’s culture then they may make decisions like terminating senior employees therefore damaging the firms culture and competitiveness.
Passage of time can also be a weakness if management has become complacent and they are not questioning the way their firm operates or making suggestions for efficiency gains. Improving the learning capabilities of the firm can help prevent previous strengths from turning onto weaknesses. Generic Strategies According to Porter (1980), differentiation, cost leadership, focus, or a combination of differentiation and cost leadership are the keys to maintaining a competitive advantage. These are known as Porter’s generic strategies and are still relevant in business today.
The below sections will explore some of the applications of Porter’s generic strategies. This section also addresses a blended cost leadership/ differentiation strategy model which has emerged in the literature largely as a result of the success of companies that have seen success using the internet as the primary customer interface. Differentiation. Differentiation or value is defined by having a product or service that is differentiated from the competitor on some stand alone merit.
Firms that employ differentiation typically can charge a premium for their product or service. The consumer typically sees a superior value in the product or service, whether perceived or real, and is willing to pay a premium. Akin, Allen, Helms, and Sprawls (2006) discovered three tactics that were most commonly employed in differentiation strategy. These included innovative marketing technology or tactics, a culture of creativity and innovation, and an emphasis on avian a significant market share. Marketing research had found that it is eight to (Akin et al. 006). Organizations must have insight into the future in order to manage and drive profitability and this should be a key component of the strategic planning process. This can only be accomplished by developing a culture of innovation. Unfortunately the tactics needed to create a culture of innovation are not well understood and documented in the literature. Many firms seem to be out of touch with the external environment in which they operate. Kim, Name, and Stripers (2004) evaluated differentiation within the context of e-commerce.
Due to the low costs on switching sources via the internet, it is more important that internet companies learn how to differentiate. Differentiation based on distribution is a key area of focus for internet firms. Speed of delivery, online interface, security, and order tracking are all ways that internet firms are differentiating themselves. There are numerous studies that show that internet shoppers are less sensitive to price when the product or service is coupled with information or services. Olio and Fay (2012) noted that innovation is only possible with a good strategy.
Firms should avoid copying other company’s ideas. And instead develop innovation that is relevant to the needs you are trying to serve. Jumping on trends is not always a bad idea as long as it is tailored to your strategy. The firm’s core value proposition should have stability. Successful companies rarely have to go through major changes since they are constantly updating their processes, offerings, and methods. Industry structure is dynamic and structural change is very slow. Having a good understanding of industry stricture will help to identify new strategic opportunities.
Multicast (2009) discussed differentiation as a crucial component of understanding competitiveness. Differential value is an important component of competitiveness and can be created in a number of ways including reliability, product features, quality attributes, and aesthetics. In addition to having differentiating factors, the product will also need to overcome the “hurdle factors. ” These are the characteristics that the customer expects the products to have and are a limiting factor in the initial product selection. Differentiating factors without “hurdle factors” will not position the product or service competitively.
Perception is important since it is important to understanding the customer perspective since it may be different than the firms perspective. If the customer does not have a need for a differentiating characteristic of the products than those characteristics will potentially add manufacturing cost without adding value to the customer. Cost Leadership. Cost leadership requires a accompanied mindset to operate at the lowest cost possible. The company must be willing to walk away from opportunities where they cannot be a cost leader and must choose outsourcing partners whom will provide cost leadership.
All company operations and marketing must be centered on cost leadership. Tactics employed include mass production and distribution, vertical integration, lower input cost from raw materials, and technology. The tactic that has proven to be most beneficial to cost reduction strategy is to lower distribution costs (Akin, Allen, Helms, & Sprawls, 2006). One way that retailers have accomplished this is through cross docking or shipping direct from manufacturer to retailer without storing in warehouses.
Wall-Mart is largely credited with developing cross-docking strategy and this has been widely adopted and refined by retailers since the asses. The internet has been a hotbed for his issue and reported that most online shoppers are using price as their most important buying criteria. The internet provides a format for retailers to quickly access a large volume of customers through a price leadership strategy. Porter (2001) argued that the internet is a very difficult environment in which to differentiate one’s firm since they lack many of the physical attributes of brick and mortar firms like sales people.
In general, most online only brands have not been very successful at brand building and have developed only modest customer loyalty(Papa & Upon, 2000). Kim et al. 2004) recommend that companies avoid cost leadership for internet firms. And instead they recommend using a blended strategy that includes elements of cost leadership as well as differentiation. Porter’s cost leadership framework is often misinterpreted by managers. Competitive advantage for example has come to mean anything that the organization deems as noteworthy. Porter was very specific in defining competitive advantage as price advantage versus rivals.
The price may be low or high depending on the choices made in the value chain. These choices shift relative cost or relative price to the advantage. This ultimately leads to sustainable reference (Olio & Fay, 2012). Price competition is more about developing a value chain than it is about low prices. This value chain should be differentiated and not easily reproduced by competition. When companies imitate each other’s products and value chain then price becomes the only dimension that customers utilize. This results in a very destructive environment.
Competition should be thought of more in terms of profits rather than competing to win. Competitors are competing to capture the value an industry creates. The value is being captured by customers, suppliers, rivals, potential new rivals, and producers of replacements. Creating economic value results in sustained profitability by using resources effectively to meet customer needs. Focus Strategy. Focus strategy is when firms decide to focus on a specific segment of the market. The company may focus on specific customer demographic, product range, or service line.
Often the focus strategy is used to grab market share that may have been overlooked or is not large enough for larger competitors. The segment must have good growth potential but be small enough to not be of great importance to competitors. Firms may utilize focus strategy as a standalone or they may bundle low cost with focus strategy. Common tactics that are employed in low cost/focus strategy include providing outstanding customer service, improving operational efficiency, quality control of products, and extensive training of front line sales and technical personnel(Akin, Allen, Helms, & Sprawls, 2006).
The key to success with low cost/focus strategy is to reduce cost by creating a happy customer. Customer complaints and a failure to meet customer expectations result in higher costs through corrective actions. Low cost/focus firms must be masters of preventative action and create quality procedures that drive customer satisfaction through consistently meeting customer expectations. Customer service is typically the first point of a customer engagement and can be an important component in standardizing procedures and preventing problems.
If services are done right the first time the firm will save a significant amount of costly managerial time in solving problems in the future. Men’s Warehouse is an example of where price and focus strategy and successfully employed. The store offers a with a high level of customer service and on site services such as tailoring. Kim et al. (2004) note that focus strategy can be very effective with online commerce. The internet allows companies to customize their products and offerings to meet the specific wants and needs of a select group of customers.
Customers see value in being directed to the specialty retailer on the internet and will pay a premium for the products or services. The internet has the ability to service both broad markets and very niche markets. Consumers have instant access to price information and product information. Internet retailers would be wise to consider focus or focus/ differentiation strategy as their primary strategic development platform. Focus/ Differentiation Strategy. Firms may also employ a focus/differentiation strategy when the firm has a unique quality focused product aimed toward a specific market segment.
Common tactics employed by these firms include the production of specialty products and producing products for higher priced market segments (Akin, Allen, Helms, & Sprawls, 2006). Specialty retailers like Pier 1 accomplished the first tactic by focusing on unique high quality specialty products. These are often times imported goods that have a unique differentiator. The second tactic is employed by luxury car companies like Cadillac that can only afforded by the highest income segment of the population. Blended Strategy.
An integrated strategy of price leadership and differentiation was strongly opposed by Porter (1980). He argued that these two generic strategies are fundamentally contradictory and that any firm attempting to fluctuate between the two would fail to realize the full potential of their performance. On one extreme, cost leadership requires standardization and building low cost in the value chain. One the other extreme is differentiation which almost always drives up marketing and production costs. But there is a large proportion of the literature which challenges Porter on this issue (Kim et al. 004). Most scholars agree that Porter’s incompatibility argument will hold up in a stable business environment, but in the rapidly changing competitive environment that reflects the modern business world, a flexible combination of multiple strategies may be required. The internet is especially challenging in that it can disassemble traditional value chains. For example, several online companies are successfully employing a diversified business strategy such as Amazon and Backbone. This issue will be discussed in more detail later in this literature review.
Strategic Management Frameworks The multitude and complexity of issues facing organizations has resulted in a wide variety of strategic management frameworks that are referenced in the literature. Each model attempts to organize issues in a way that makes management decision making more comprehensible. With each framework comes a myriad of academic scholars that have created, critiqued, or built the frameworks in positive ways. This literature review will cover two well known strategic management frameworks, SOOT and Porter’s five forces.
In SOOT analysis, internal strengths and weaknesses as well as external opportunities and threats are considered. Some of the most widely preferred frameworks in the literature are credited to Michael Porter. The framework that will be reviewed in this section is Porter’s five forces. SOOT The originator of SOOT is somewhat unclear from the literature but it was first first tool of choice for decision makers assessing alternatives and complex decisions. The use of SOOT to group external and internal business issues is a logical starting point for most management decisions.
Helms and Nixon (2010) provide a more recent analysis of SOOT as a strategic planning tool and some of the limitations. SOOT is commonly used in academia and business largely due the simplicity of SOOT as well as its catchy well known name. The literature reveals that SOOT is most commonly used for business strategic planning both for individual organizations as well as for comparing two or more companies. SOOT analysis consists of examination of internal strengths and weaknesses as well as external opportunities and threats.
The analysis can be quickly constructed and multiple viewpoints can be combined to perform a brainstorming exercise (Helms et al, 2010). Internal strengths and weaknesses may include branding, organization structure, access to raw materials or natural resources, production capacity, or capital for investment. External opportunities and threats could include customers, rivals, market trends, contractors, vendors, or technology. Various environmental, political, and regulatory issues are often examined as well. The literature revealed that SOOT was the most commonly utilized strategic management tool well into the late nineties.
After the year 2000, the literature is conflicted as to the value of SOOT although there are multiple researchers both for and against (Evans and Wright, 2000). Sherman, Rowley, and Armband (2007) added steps to SOOT and came up with a seven step strategic management process to assist firms n the pre planning stages. Many researchers have coupled SOOT with various mathematical models to give it a quantitative basis versus qualitative. Most supporters of SOOT admit that it should be combined with other strategic management tools like Porter’s five forces and not used in isolation.
But as with any strategic management tool, SOOT is only as good as the experts whom use it. Its greatest weakness is probably that it is a snapshot of time. The business environment is constantly changing and firms will need to constantly scan the environment and update their SOOT analysis (Helms et al. , 2010). In the next section e will explore another widely used strategic management model developed by Michael Porter. Porter’s Five Forces Porter is most well known for the association of competition with the firm and its external environment.
Porter felt that corporate strategy should meet the threats and opportunities in the external environment Ellen, 2009). Porter identified five competitive forces that he claims are the key to shaping every industry and every market (Porter, 1980). By studying and understanding these forces, a firm should be able to determine the level of competition and therefore the attractiveness and potential profitability of a market. Porter’s five forces analysis framework is primarily used for industry level analysis Ellen, 2009). Five forces were first discussed by Porter in his publication titled Competitive Strategy (Porter, 1980).
The five forces are threats from competitors, buyer power, supplier power, threat of new entrants, and alternative products. The strength of these collective forces decides the amount of profit potential available to rivals in an industry. Unfortunately the literature reveals that the application of the five forces may not be straight forward and even Porter only be used to determine if an industry is attractive or not, but it should be a remarry tool to unravel the complexity of competition and improve performance (Olio & Fay, 2012).
Dobbs (2014) discusses some of the challenges that are faced by managers when they attempt to apply the five forces. These include a lack of depth, lack of structured analysis, lack of strategic insight, and millennial generation preferences. Many people use the five forces analysis in a superficial way and this leads to inaccurate and incomplete analysis. This may largely be due the lack of in depth study given to MBA students. The lack of quantitative measures in the five forces framework may be a limiting factor in many cases.
Most applications of five forces consist of lists which make poor substitutes for in depth analysis. Olio and Fay noted that five forces analysis should not only be used to determine if an industry is attractive or not, but it should be a primary tool to unravel the complexity of competition and improve performance. With the rise of the millennial generation in 2010, Dobbs (2014) noted that the five forces framework must be modified in order to accommodate the technology vigor and analysis preferred by this generation.
Akin, Allen, Helms, and Sprawls (2006) contend that the literature is missing information on the tactics that are needed in order to implement Porter’s strategies. Several researchers have proposed models to be used to better apply the five forces. In Akin et al. ‘s (2006) study, the authors researched over 200 companies to develop a set of key tactics that could be used to implement Porter’s generic strategies and drive organization performance. Dobbs (2014) provides a practical template that provides good comprehension and ease of use.
The models have proved very beneficial in the classroom setting in terms of driving higher levels of strategic insight and industry analysis. Diversity and Shared Value Building market share can also be influenced by diversification in the workforce and acknowledgement of a preference for products that are made and sold by companies with similar cultural heritage. This is largely due to the diversification of the customer base which crosses many borders, cultures, and ethnic groups. Hiring a diverse workforce and drawing in a culturally diverse customer base is critical to success.
This group of consumers is growing at a much faster rate than the rest of the US population. The US welcomes nearly one million new immigrants into the country every year. These people come from different backgrounds, nationalities and ethnicities and they are learning how to work in an unfamiliar culture. Ramifies (2010) reported that the challenges are immense for immigrants as they try and maintain a nation connection to their home country as well as try and adapt to their host country. The pressure that results drives individuals to be more inventive and productive.
The force is very powerful and one of the reasons why immigrants do so well in start up businesses in the US. They develop a comfort level with uncertainty and risk that allows them to drive performance. Despite the advantages of diversity most companies fall short on diversity thought and leadership. In fact, half of companies operating in 25 countries or more, reported only having one or two foreign nationals on their boards. Yet they cited global experience as one of the most important factors in terms of selecting board members.
Managers that understand and take advantage of diversity into their strategy will have a distinct competitive extremely important in developing strategy. In work done by Watson and Wright (2000), the authors looked into the country of origin effect. This “made in” concept as to do with the attitudes and buying behaviors of consumers for foreign made goods. This is also known as ethnocentrism. Research has proved that the “made in” concept has as a very strong influence on buying behaviors. These behaviors can override other more practical factors such as brand name, quality, or price.
A tactic that is commonly employed is to market the country of origin information with the product. For example, a Chinese American may have a preference for Chinese manufactured products over US manufacturing products. Shared Value Porter and Kramer (2011) discuss the concept of the shared value which focuses n improving the connections between society, the economy as well as corporate growth and profitability. The economic collapse of the last decade contributed to frustration with corporations as companies in the banking sector were largely blamed for causing the failed economy though risky lending practices.
Firms have begun to realize that social harms and weaknesses frequently create internal costs for the firm in wasted energy costs and costly accidents. As a result many large firms have begun to embrace the concept of shared value and have started to see some rewards in terms of public opinion and profitability. Companies and their immunities are intertwined since companies need the consumers and the raw materials from their communities, while the people in the communities need the wages and opportunity offered by the firm.
This interdependence or shared value has the potential to unlock the next wave of growth and innovation for companies if incorporated into their strategic plans. Regulation and the Porter Hypothesis No review of strategic management would be complete without a discussion on the impact of regulation on business. Regulation has become an increasing concern for business leaders as they develop strategy and decide on how best to allocate resources. There are also political implications since government regulators have the power to influence market dynamics between rivals as well as between countries.
Generally economists, politicians, and business leaders see increasing regulation as an economic challenge which erodes global competitiveness. But Porter (1991) argued that well designed regulation could be a competitive advantage if properly managed. This concept is frequently referenced in the literature as the Porter Hypothesis. Researchers frequently use the Porter Hypothesis to help understand the links between regulation, competitiveness, and innovation. Porter (1991) and
Class van deer Lined (Porter & van deer Lined,AAA) argued that pollution was an example of wasted resources and that by reducing pollution, productivity could be improved. They felt that properly designed environmental regulation would help drive innovation and would more than offset the additional cost of implementing regulation. Porter brought these concepts to mainstream businesses and policy and has revolutionized how strategic management deals with the impact of environmental or other regulation. Porter et al (AAA) explained five reasons why they thought innovation offsets any negatives created by regulation. First, regulation
