Training Executives to Use Porter’s Model of Generic Strategies

Training Executives to Use Porter’s Model of Generic Strategies

Abstract

The strategic models that Porter (1980) has provided are often too abstract for effective application by practitioners. The purpose of this paper revolves closely around Maital’s (1994) imperative that the various academic disciplines look carefully for opportunities to integrate their research with practical implications of recognizable utility to the real world of business. This paper seeks to provide a refined, integrated model of Porter’s (1980) generic strategies against the structural backdrop of Porter’s (1980) industry analysis model and his (1985) value chain model. The study concludes with discussions and implications for future research.

 

Training Executives to Use Porter’s Model of Generic Strategies

Porter (1980) developed a thorough theoretical basis for achieving competitive advantage via a variety of complex processes, driven by a set of powerful theoretical tools, all based in economic assumptions. These tools include an industry analysis model, value chain model, and generic strategies. Unfortunately, practitioners may underestimate the validity of these models, due to their abstract nature. Strategy textbooks are useful, but they may cover too much ground to present Porter’s generic strategies effectively. Ultimately, practitioners may often dispense with thinking strategically, due to a lack of smart training.

Porter’s (1980) generic strategies address logical differences in how to position supplier and buyer development into different economic structures. In this model, the cost leader operates on an assumption of perfect competition and therefore specializes in moving the marginal-cost curve rightward as its way to improve profitability. The differentiator operates on an assumption of monopolistic competition and specializes in tilting the marginal-revenue curve upward, by strengthening customer loyalty. Finally, the focused firm specializes in cutting the customer’s implicit transaction price, which encourages seeking substitutes. The purpose of this paper is therefore to show that training executives in Porter’s (1980) generic strategies is valuable for improving decisions applied to the value chain.

The next section will provide a review of the literature related to these questions. The main area of focus in the literature review will consist of prior studies that have tested the empirical validity of Porter’s (1980) model of generic strategies.

Literature Review

Dess and Davis (1984) developed a survey of competitive methods and sought responses from top corporate executives. Using standard factor analysis and specifying three factors, Dess and Davis’s study finds clear support for Porter’s (1980) generic strategies. To be sure, the factor analysis reveals whether top executives tend to pursue competitive methods as integrated sets of practices, rather than mixing them randomly, and moreover whether those integrated sets of practices appear to correspond to Porter’s typology. The outcome therefore supports Porter’s framework as a matter of actual practice. Had Dess and Davis (1984) specified a larger number of factors, of course, they would have found a larger number of candidates for generic strategies, given the nature of factor analysis.

Allen and Helms (2006) followed Dess and Davis (1984) by updating the latter’s lists of strategic practices. However, they specified four factors instead of three in their study (which surveyed mid-career business students, rather than executives). While their study thus supports a particular interpretation of Porter’s (1980) generic strategies (i.e., four, including cost leadership, differentiation, cost-focus, and focus-differentiation), it fails to rise to the level of evidentiary power of that of Dess and Davis (1984).

Parnell (2006) provided some useful arguments for inferring microeconomic relevance from Porter’s (1980) generic strategies. To do this, he interpreted the competitive environment as consisting of market control on one axis, as a representation of differentiation, and economic value on the other, as a representation of cost leadership. Parnell (2006) deviated from Porter’s (1980) arguments by suggesting that a successful organization will move from one generic strategy to another over time, eventually covering all of them. Parnell’s significant insight lay in his recognition of differentiation as a variety of quasi-monopoly in the form of achieving strong customer loyalty.

Based on the foregoing observations, the next section will provide the logical associated with this paper’s primary purpose. In the case of the present project, this logic mainly focuses on adjusting Porter’s (1980) model to a more abstract, symmetrical structure than was possible over 30 years ago, to fit today’s experience more aptly than is otherwise the case.

Main Thesis

The literature reviewed in the previous section emphasizes the contending sides to the debate over the relevance of Porter’s (1980) generic strategies to practical business questions. It simultaneously reveals the inconsistency of approaches taken by prior researchers to assess the validity of Porter’s models. The primary contention of the present study is that the literature to date has neglected to give priority to explicating Porter’s model theoretically before attempting to subject it to statistical tests. Consistent with the goal of this paper, this section will present the essential logic of the economic conceptualization of Porter’s (1980) generic strategies to permit empirical testing according to stable criteria.

The critical observation that the modified value chain promotes is the difference between the assumption of perfect competition for the cost leader, and the assumption of monopolistic competition for the differentiator. The cost leader must work hard on the supply chain (supplier cultivation and inbound logistics) to reduce the unit costs of value chain supply components constantly. Over time, this practice pushes the marginal-cost curve in the firm’s microeconomic model toward the right, as the quantity produced (or sold) by the firm increases over time, along with its overall productive capacity.

Contrarily, the differentiator must concentrate its primary attention on the market-side operations (outbound logistics and buyer cultivation). This effort includes heavy emphasis on the marketing function per se and constant attention on the goal of strengthening brand identity and buyer loyalty. It is most common in the business literature to refer in some depth to marketing, sales, and service as significant corporate functions, while implicitly diminishing the importance of what are conceivably equally key components on the opposite side of the value chain (which depicts operations in the middle). By implication, the standard model underestimates the natural importance of these functions. Nevertheless, the intent is rather to raise the level of importance of the supplier-side functions, rather than diminish those that operate on the market side.

In summary, Porter’s (1980) model of generic strategies is threefold precisely because they correspond to generalizable strategic actions and their supporting organizational structures as applicable in Porter’s (1980) industry analysis model. To be sure, the industry analysis model depicts five industry-level forces, rather than three, for consideration in any comprehensive analysis of an industry. The reason for the existence of only three generic strategies is that each generic strategy targets one force, but for two forces, no generic strategy is feasible. Those two forces are competitive rivalry itself and the threat of new entrants. Specifically, any action that an organization in the industry might take to increase its leverage vis-à-vis either competitive rivalry or a prospective new industry entrant must do so in a way that affords it a sustainable advantage over other industry participants. However, because neither new entrants nor existing competitors depend on the firm in question, but rather only compete with it, no leverage is obtainable and hence no generic strategy is practicable.

The next section will enumerate recommendations for business practice based on the foregoing discussion. In so doing, it will provide logic in support of each recommendation. This paper will subsequently conclude with a discussion and implications for future research.

Recommendations

This paper advances the following recommendations to support management’s role as the shaper of behavioral interaction in an organization. The first recommendation involves the fact that behavioral patterns will change over time, consistent with the constraints and enablements that the database management system naturally creates.

R1.      Instruct the IT staff to track database usage patterns and report on trends.

Database administrators must consider ways to adjust system settings over time. In the early period of usage, the difference between off-peak and peak intensity may correspond simply to night and day usage.

R2.      Instruct the IT staff to recalibrate periodically to adjust to changing usage trends.

As overnight activity intensifies over time, IT should consider setting locking protocols against critical scheduling junctures. This supplements gauging usage patterns as they change.

R3.      Instruct the IT staff to set locking protocols on a timer.

To conclude, business managers may react with trepidation when considering the variety of counter-pressures that strong visualization of chaotic dynamics may elicit. The reaction may be to shut off decision-making avenues to control the system. In reality, shutting off the flow of information in a chaotic system may result in worse repercussions elsewhere in the system.

Discussion

This paper reported a pattern of errors in the Oracle® DBMS and attempted to address them from the perspective of managerial, rather than technical, decision-making resources. In so doing, the paper reviewed concepts from the body of science of self-organization, from the three historical vernaculars of systems theory, complexity theory, and chaos theory. The objective was to provide a coherent view of the interaction between users and the database management system that managers could adopt in approaching technical questions without strong technical training.

Future research should consider the possibility of modeling the growth and development of an organization around its database management system. This task may seem daunting, given the fact that chaotic systems characteristically consist of large numbers of interactive agents that interact according to a small number of rules and high level of stochastic error, a fact that makes modeling exceedingly difficult. Nevertheless, constraints and enablements, which constitute an important part of the essence of complex adaptive systems, may accommodate modeling without the need for such large numbers of interactive agents.

References

Allen, R. S., & Helms, M. M. (2006). Linking strategic practices and organizational performance to Porter’s generic strategies. Business Process Management Journal, 12, 433-454. doi:10.1108/14637150610678069

Dess, G. G., & Davis, P. S. (1984). Porter’s (1980) generic strategies as determinants of strategic group membership and organizational performance. Academy of Management Journal, 27, 467-488. doi:10.2307/256040

Maital, S. (1994). Executive economics: Ten essential tools for managers. New York, NY: The Free Press.

Parnell, J. A. (2006). Generic strategies after two decades: A reconceptualization of competitive strategy. Management Decision, 44, 1139-1154. doi:10.1108/00251740610690667

Porter, M. E. (1980). Competitive strategy: Techniques for analyzing industries and competitors. New York, NY: The Free Press.

Porter, M. E. (1985). Competitive advantage: Creating and sustaining superior performance. New York, NY: The Free Press.