Organizations and Markets

| Peter Klein |

The current issue of HBR features Porter’s “The Five Competitive Forces That Shape Strategy,” a review and update of his famous framework (via Luke). The revision doesn’t include a sixth force, but Porter does add some refinements and clarifications (e.g., the differences between an industry’s underlying structure and observable attributes like the number of firms, industry growth, etc.), and he includes some discussion of dynamics. There’s also a video. Here’s the introductory blurb:

In 1979, Harvard Business Review published “How Competitive Forces Shape Strategy” by a young economist and associate professor, Michael E. Porter. It was his first HBR article, and it started a revolution in the strategy field. In subsequent decades, Porter has brought his signature economic rigor to the study of competitive strategy for corporations, regions, nations, and, more recently, health care and philanthropy. “Porter’s five forces” have shaped a generation of academic research and business practice. With prodding and assistance from Harvard Business School Professor Jan Rivkin and longtime colleague Joan Magretta, Porter here reaffirms, updates, and extends the classic work. He also addresses common misunderstandings, provides practical guidance for users of the framework, and offers a deeper view of its implications for strategy today.

There is of course a huge secondary and practitioner literature on the five-forces framework and its applications. A main complaint is that Porter downplays internal, or firm-specific sources of competitive advantage (resources, capabilities, and the like). On the other hand, the other main framework for strategic analysis, the resource-based view, is said to downplay external or market factors. As one sage put it a decade ago:

On the whole there is now — both within economics and within strategic management — a growing realization that essential firm heterogeneity is surely the most important basic assumption that is needed for building strategically relevant models of the firm.

At the face of it, this may seem obvious, even trivial: of course, firms have to be different in some way in order to obtain a competitive advantage! However, the increasing emphasis on firm heterogeneity should be seen against the intellectual background of almost complete concentration on industriesin economics, rather than on firms — a tendency that has also raised its head in strategy thinking (Porter, 1980). To the extent that firms in an industry-level approach are seen as different, it is because they bear the stamp of the industry they operate in, not because they have themselves created differences relative to other firms in the industry. Therefore, what is crucial in an industry approach is structural differences between industries, not differences among individual firms. The pendulum would seem to have swung in almost the opposite direction.

For more on firm heterogeneity and its relationship to Porter’s industry-based approach see the October 2003 special issue of SMJ edited by Tammy Madsen, Gordon Walker, and former O&M guest blogger David Hoopes. Oh, and for a chuckle, see this “postmodern reading” of Porter in something called the Electronic Journal of Radical Organization Theory.